Arbitral Award will be patently illegal, where Arbitral Tribunal fails to act in terms of contract or ignores specific terms of contract: Supreme Court

Read Judgment: Indian Oil Corporation Ltd vs. Shree Ganesh Petroleum Rajgurunagar 

Pankaj Bajpai

New Delhi, February 4, 2022: The Supreme Court has opined 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. 

A Division Bench of Justice Indira Banerjee and Justice Abhay S.Oka observed that 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.

Going by the background of the case, Indian Oil Corporation (Appellant) took a plot of land premises on lease from Ganesh Petroleum (Respondent) for a term of 29 years, pursuant to a deed of lease dated Sep 20, 2005 which was duly registered, in order to set up a retail outlet for sale of its petroleum products. At the same time, the Appellant set up a site retail outlet at the said premises making an investment of around Rs.50 lakhs and appointed Respondent as a dealer of the said retail outlet and accordingly a dealership agreement was executed by and between the Appellant and the Respondent. Furthermore, the lease agreement specifically authorized the Appellant to sublet, underlet, assign or transfer possession of the said premises to any person, without the consent of the lessor, that is, the Respondent. 

During a routine inspection, certain irregularities were noticed with regard to functioning of the retail outlet of which the Respondent had been appointed dealer. Accordingly, the Appellant directed the Respondent not to carry on further sales from the said outlet. Thereafter, a notice was issued to the Respondent calling upon to show cause why action should not be taken against the Respondent for irregularities which amounted to violation of the Marketing Discipline Guidelines (MDG) 2005 issued by the Ministry of Petroleum and Natural Gas, Government of India and Public Sector Oil Marketing Companies. The Appellant also suspended the sale and supplies to the retail outlet run by the Respondent and terminated the dealership of the Respondent, called upon the Respondent to vacate the retail outlet and hand over peaceful possession thereof to the Appellant and also to settle accounts with the Appellant. 

Challenging the termination, the Respondent invoked the arbitration clause in the dealership agreement and requested the Director (Marketing) of the Appellant, who appointed Mr. B.L Parihar as Arbitrator in terms of the dealership agreement. The Arbitration passed an award holding the termination of dealership agreement as valid. On appeal, the District Judge held that the Arbitrator had rightly enhanced the rent to Rs. 10,000/- with 10% increase after every three years. However, 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. On further appeal, the Bombay High Court observed that there was no scope for the District Court to interfere with the arbitral award. 

After considering the submissions, the Top Court noted that an Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted, and 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, and Arbitral Tribunal is entitled to interpret the terms and conditions of a contract, while adjudicating a dispute, added the Court. 

Speaking for the Bench, Justice Banerjee observed that 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 and 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, added the Bench.

Accordingly, the Top Court set aside the arbitral award to the extent that the Arbitrator has increased the monthly lease rent of the land in question from Rs. 1750 to Rs 10000 with 10% increase after every three years w.e.f. the date of the termination of the dealership and to the extent the Arbitrator has reduced the period of lease from 29 years to 19 years and 11 months.