The Delhi High Court has upheld a single-bench judgment setting aside a portion of an arbitral award that had reduced the contractual licence fee payable under a commercial leave and licence agreement. The Division Bench held that the arbitral tribunal had impermissibly “re-priced” the contract by substituting the agreed licence fee with an industrial benchmark. In this judgment, the Delhi Court explained the application of Section 19 of the Indian Contract Act, 1872 and Section 28(3) of the Arbitration and Conciliation Act, 1996.
Brief Facts
The dispute arose out of a Lease and License Agreement concerning commercial premises situated in New Delhi. The premises were licensed for a monthly fee with an option for extension. Subsequently, the parties executed an addendum extending the arrangement with an enhancement in the licence fee.
During the subsistence of the arrangement, the respondent-licensee raised concerns regarding the permissibility of commercial use of the premises and withheld payment of the licence fee. The licensor thereafter terminated the agreement and invoked arbitration.
Before the arbitral tribunal, the licensor-claimant sought arrears of the licence fee and damages for unauthorised occupation, while the respondent sought damages alleging that the claimant had misrepresented that the premises could legally be used for office purposes.
The arbitral tribunal accepted the allegation of misrepresentation and reduced the payable licence fee by applying an “industrial rate” instead of the agreed contractual rate.
The Single Judge, however, partly set aside the award under Section 34 of the Arbitration and Conciliation Act, 1996, and restored the contractual rates. The licensee challenged this order before the Division Bench under Section 37.
High Court's Observations
The question before the Delhi High Court was whether the respondent-licensee was able to make out any ground to set aside the impugned judgement whereby a single-judge bench, under Section 34, modified the license fee in the arbitral award.
On the scope of interference under Sections 34 and 37 of the Arbitration Act
The Division Bench referred to an earlier judgement of the Delhi High Court in the case titled NHAI v. HK Toll Road (P) Ltd. wherein it was observed,
“The Appellate Court is not required to substitute its views with the view taken by the Arbitral Tribunal, which is a reasonable or a plausible view except where the discretion is exercised arbitrarily or where the AT has ignored the settled principles of law.”
Hence, the Appellate Court must not re-assess the merits of the arbitral tribunal’s reasoning.
Referring to the limits on appellate review in arbitral matters, the HC quoted the Supreme Court’s ruling in Larsen Air Conditioning & Refrigeration Co. v. Union of India,
“In appeal, Section 37 of the Act grants narrower scope to the appellate court to review the findings in an award, if it has been upheld, or substantially upheld under Section 34.”
On Rules Applicable to the Dispute
On the duty of arbitral tribunals to adhere to contractual terms, the Court observed, “Under Section 28(3) of the Act of 1996, an Arbitral Tribunal seated in India is mandatorily required to decide the dispute before it in accordance with the terms of the contract while giving due consideration to the applicable trade usages.” The High Court reiterated that the tribunal cannot travel beyond or rewrite the bargain entered into between the parties by way of a contract, based on an abstract notion of equity or fairness.
Relying on the legal principle laid down in Associate Builders v. DDA, the Bench emphasised that an arbitral award contrary to contractual stipulations would amount to patent illegality,
“Therefore, an award granting relief not anchored in the contract, or directly contradicting the terms and arrangements arrived at by the parties, will be treated as being violative of Section 28(3) of the Act of 1996, thereby amounting to patent illegality for the purpose of Section 34 of the Act of 1996.”
Criticising the arbitral tribunal’s approach, the Court said,
“The AT neither identified any contractual clause authorising the re-pricing nor properly worked out damages linking the alleged misrepresentation to a quantified pecuniary loss; rather, the AT merely substituted the agreed rate of licence fee with a notional industrial benchmark drawn from an unrelated lease.”
On the allegation of Misrepresentation
The Court further held that, in terms of Section 19 of the Indian Contract Act, 1872, the respondent’s conduct in continuing under the contract and executing the addendum defeated its plea of misrepresentation.
“Once a contracting party, after discovering the alleged misrepresentation, elects to continue under the contract and even enters into a further arrangement (the Addendum) on the same footing, its conduct is consistent with affirmance of the contract rather than rescission,” the DB observed.
The Division Bench strongly disapproved of the arbitral tribunal permitting the respondent to retain contractual benefits while seeking a reduction in licence fee obligations:
“The approach adopted by the AT, in effect, permitted a legally impermissible dichotomy, permitting the Respondent to retain the substantive benefits of the contract, including continued commercial user, while simultaneously re-engineering the financial substratum thereof.”
The Division Bench found that the Single Bench was right in finding that the “Respondent could not approbate and reprobate” at the same time.
On Patent Illegality and Perversity
Regarding the Arbitrator’s decision, the Court observed that, “This was not a mere instance of adopting one plausible view of evidence over another; rather, the view of the AT was one that no reasonable adjudicator could take while remaining faithful to the contract and applying Section 19 of the Act of 1872 as well as Section 28(3) of the Act of 1996.”
Regarding the HC’s Single Bench’s decision, the Court concluded, “The limited interference exercised by the SB, setting aside the severable and patently illegal component of the AA, while restoring the Agreement/Addendum rates, was a legitimate exercise of powers conferred under Section 34 of the Act of 1996.”
The DB found that the Single Bench did not supplant the Tribunal’s domain, it just excised the legally untenable portion and upheld the parties’ consensual bargain.
High Court Division Bench’s Decision
The Division Bench dismissed the appeals and upheld the Single Bench judgment restoring the contractual licence fee and addendum rates.
The Court held that the arbitral tribunal had exceeded its jurisdiction by effectively rewriting the bargain between the parties without contractual or legal basis. It ruled that the tribunal’s substitution of agreed licence fees with an industrial benchmark amounted to patent illegality and perversity warranting interference under Section 34 of the Arbitration and Conciliation Act.
Accordingly, the Court found no ground to interfere under Section 37 and dismissed the appeals as devoid of merit.
Case Title: Goyal Mg Gases Pvt Ltd v. Classic Motors Pvt. Ltd.
Bench: Justice Anil Kshetrapal and Justice Amit Mahajan
Judgment Date: May 12, 2026
Case Details: FAO (OS) (COMM) 23/2021
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