Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted: Supreme Court

The dispute relates to a plot of land containing a retail petrol pump that was taken on lease by Indian Oil Corporation from Shree Ganesh Petroleum. Indian Oil then entered into a dealership agreement with Shree Ganesh and he was appointed as the dealer of the retail outlet. Under the terms of the lease agreement, the lease rent was fixed at INR 1,750 per month and the period of lease was fixed 29 years and 11 months, after which the agreement contemplated renewal by mutual consent. Dealership agreement was in force for a period of 15 years and was contemplated to continue thereafter for successive periods of one year each, until either party terminated it with three months’ notice.  Disputes arose in 2008, when Indian Oil noticed irregularities in the functioning of the petrol outlet. Indian Oil then terminated the dealership of Shree Ganesh and demanded that it vacate the premises. Shree Ganesh invoked arbitration in 2009 under the dealership agreement.

The lease and the dealership agreement are distinct agreements, independent of each other. Disputes under the lease agreement were referable to the arbitration of the Managing Director of the Appellant who was to be the sole Arbitrator, and only if the Managing Director was unable or unwilling to act as sole Arbitrator the disputes were to be referred to the sole Arbitrator designated or nominated by the Managing Director in his place. If the disputes could not be referred to the Managing Director for any reason, the matter was not to be referred to arbitration at all.

In its statement of claim, as an alternative to seeking the setting aside of the termination of the dealership agreement, Shree Ganesh requested an amendment of the lease agreement to enhance the monthly rent of the premises to INR 35,000 (from INR 1,750), with a 20% increase after every three years.  The sole arbitrator in 2010 appointed by Indian Oil, the arbitrator increased the rent to INR 10,000 with a 10% increase after every three years. He also ruled that the period of lease agreement should be kept as per the dealership period mentioned in the newspaper. The District Court of Pune ruled that the arbitrator was correct in enhancing the rent, on grounds that the terms of an agreement, if wholly prejudicial or capable of causing grave injustice, could be examined not only by a court of justice but also an arbitrator. However, the District Court ruled that it was not within the province of the arbitrator to decrease the lease period to 19 years and 11 months as per the advertisement given in the newspapers for the dealership period. The Bombay High Court ruled that it was “obvious” that Shree Ganesh had agreed to the extended period of lease only because it was coupled with the dealership agreement. Therefore, the High Court ruled that the lower court could not interfere with the arbitrator’s findings on reducing the period of lease.

Section 5 of the 1996 Act provides that notwithstanding anything contained in any other law for the time being in force, in matters governed by Part I of the 1996 Act, no judicial authority shall intervene except where so provided in Part I. Section 34 in Part I of the 1996 Act as it is stood at the material time provided as follows: “34. Application for setting aside arbitral award.—(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

Section 34 in conjunction with Section 5 of the 1996 Act makes it clear that an arbitral award that is governed by Part I of the 1996 Act, can only be set aside on grounds mentioned under Sections 34(2) and (3) of the said Act and not otherwise. The Court considering an application for setting aside an award, under Section 34 of the 1996 Act cannot look into the merits of the award except when the award is in conflict with the public policy of India as provided in Section 34(2)(b)(ii) of the 1996 Act.

A. The arbitrator cannot alter the terms of a valid contract

The court ruled that no arbitral tribunal or even a court could alter the terms and conditions of a valid contract executed between the parties with their eyes open. The court in MD Army Welfare Housing organisation v. Sumangal Service Pvt. Ltd. (2004) 9 SCC 619 the court had ruled that an arbitral tribunal is not a court of law and cannot exercise power ex debito justitiae (by reason of an obligation of justice). In another such eg of In Satyanarayana Construction Company v. Union of India and Others (2011) 15 SCC 101), a Bench of this Court of coordinate strength held that once a rate had been fixed in a contract, it was not open to the Arbitrator to rewrite the terms of the contract and award a higher rate.  In PSA SICAL Terminals Pvt. Ltd. vs Board of Trustees (2021) SCC Online SC 508) this Court clearly held that the role of the Arbitrator was to arbitrate within the terms of the contract. He had no power apart from what the parties had given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction.

In PSA SICAL Terminals Pvt. Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Others this Court referred to and relied upon SSangyong Engineering and Construction Company Limited (2019) 15 SCC 131) and held that this Court has further held that a party to the Agreement cannot be made liable to perform something for which it has not entered into a contract. In our view, re-writing a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.”

B. Arbitral Tribunal is not Court of Law

In PSA SICAL Terminals Pvt. Ltd. (supra) this Court referred to and relied upon the earlier judgment of this Court in MD. Army Welfare Housing Organization v. Sumangal Service (P) Ltd. and held that an Arbitral Tribunal is not a court of law. It cannot exercise its power ex debito justitiae.

C. Award ignoring Terms of Contract would not be in public interest

It is well settled that an Arbitral Tribunal, or for that matter, the Court cannot alter the terms and conditions of a valid contract executed between the parties with their eyes open. In Associate Builders (supra), this Court held that an award ignoring the terms of a contract would not be in public interest.

In Associate Builders (supra), this Court held that an award could be said to against the public policy of India in, inter alia, the following circumstances: –

(i) When an award is, on its face, in patent violation of a statutory provision.

(ii) When the Arbitrator/Arbitral Tribunal has failed to adopt a judicial approach in deciding the dispute.

(iii) When an award is in violation of the principles of natural justice.

(iv) When an award is unreasonable or perverse.

(v) When an award is patently illegal, which would include an award in patent contravention of any substantive law of India or in patent breach of the 1996 Act.

(vi) When an award is contrary to the interest of India, or against justice or morality, in the sense that it shocks the conscience of the Court.

The Arbitral Award is liable to be set aside in so far as the same deals with disputes with regard to the Lease Agreement which are not contemplated by the Arbitration Clause in the dealership agreement and/or in other words, do not fall within the terms of the submission to Arbitration. The Arbitral award is thus liable to be set aside under Section 34(2)(a)(iv) of the 1996 Act. The decision enhancing the lease

1. An Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted. An award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract. However, a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. An Arbitral Tribunal is entitled to interpret the terms and conditions of a contract, while adjudicating a dispute. An error in interpretation of a contract in a case where there is valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within jurisdiction.
2. The Court does not sit in appeal over the award made by an Arbitral Tribunal. The Court does not ordinarily interfere with interpretation made by the Arbitral Tribunal of a contractual provision, unless such interpretation is patently unreasonable or perverse. Where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award, only because the Court is of the opinion that another possible interpretation would have been a better one.
3. An error in interpreting a contract where there is a valid submission of disputes to a tribunal, the Court said, was an error within jurisdiction. It also affirmed that a court cannot interfere with the arbitral award only because there is another possible interpretation.