Recently, the Delhi High Court set aside an arbitral award after holding that an arbitrator cannot rewrite a contract by linking repayment obligations to commercial success when the agreement itself does not contemplate such a condition. The Court issued a firm reminder that an arbitrator is a creature of the contract and must remain bound by its express terms.
Brief Facts:
The case arose from a dispute under a Technology Development Assistance Agreement executed between the funding authority, the implementing company, and an academic institution, under which financial assistance of up to Rs. 2.80 crore was extended for the development of composite CNG cylinders. The agreement stipulated that upon successful development of technology, as certified by the Advisory and Monitoring Committee (AMC), the recipient would repay up to Rs. 3.36 crore in instalments.
Designated as the final authority under Clause VIII of the TDA, the AMC certified the project as technically successful, following which post-dated cheques were issued towards repayment. The dispute surfaced when the recipient contended that the project had not achieved commercial success and that repayment was therefore not due. Arbitration ensued pursuant to a consent order, resulting in an award that linked repayment to commercial viability. Aggrieved by this approach, both sides approached the High Court under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the award on distinct grounds.
Contentions of the Petitioner:
The Petitioner contended that the arbitrator had travelled far beyond the contractual framework by conditioning repayment on commercial success, a requirement never envisaged under the TDA. The Counsel argued that the agreement drew a clear distinction between development of technology and commercialisation, and that once the AMC certified successful development, repayment under Clause IX of the TDA stood triggered automatically. It was further submitted that SEPL had accepted the AMC’s declaration without protest and had, by issuing post-dated cheques, acquiesced to its repayment obligations.
Contentions of the Respondent:
On the other hand, the Respondent argued that the project never achieved its intended outcome of commercial production, which, according to it, was the true measure of success. It was submitted that the AMC’s declaration was flawed and contradictory, particularly as funds were released for the procurement of crucial machinery even after the project was declared successful. SEPL maintained that the arbitrator was well within jurisdiction to examine whether the project had truly reached fruition and that repayment could not be enforced in the absence of commercial viability.
Observation of the court:
The Court, while examining the limits of judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996, reiterated that while the scope of interference is narrow, an arbitral award cannot survive if it suffers from patent illegality. The Court emphasised that an award is liable to be set aside if it runs contrary to the substantive law, the Act itself, or the express terms of the contract.
The Court found that the arbitrator had impermissibly travelled beyond the contractual framework of the Technology Development Assistance Agreement (TDA). Justice Jasmeet Singh observed that “No doubt the Arbitrator has the power to interpret the terms and conditions of the contract, but, the Arbitrator being the creature of the contract, does not have the power to substitute, supplement, alter or modify the terms of the contract.”
The Court noted that the TDA drew a clear distinction between development of technology and commercialisation, and that repayment obligations were expressly triggered upon certification of successful development by the Advisory and Monitoring Committee (AMC). Rejecting the arbitrator’s approach of linking repayment to market viability, the Court held that “The finding of the Arbitrator that the development of technology is not successful until the commercial viability is achieved is contrary to the specific terms of the TDA.”
The Court further held that the arbitrator had no authority to sit in appeal over the AMC’s declaration of success, which was final and binding under the contract. By ignoring Clause IX of the TDA and importing a condition of commercialisation that was never envisaged by the parties, the arbitrator effectively rewrote the contract. Such an approach, the Court held, squarely attracted the ground of patent illegality, observing that the award had “gone behind the terms of the TDA and rewritten the contract.”
The Court reiterated that an arbitral award which runs contrary to the express terms of the contract is liable to be struck down on the ground of patent illegality. It further drew support from PSA Sical Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, where the Supreme Court cautioned that rewriting a contract for the parties breaches fundamental principles of justice and shocks the conscience of the court. Applying these settled principles, the Court concluded that the arbitral award, having travelled beyond the contractual framework, was vitiated by patent illegality and could not be sustained in law.
The decision of the Court:
In light of the foregoing discussion, the Court allowed the petitions and set aside the arbitral award in its entirety, holding that the arbitrator had exceeded jurisdiction by rewriting the contract contrary to its express terms.
Case Title: Technology Information Forecasting and Assessment Council v. Strategic Engineering Pvt. Ltd. & Anr.
Case No.: O.M.P. (COMM) 548/2020
Coram: Hon’ble Mr. Justice Jasmeet Singh
Advocate for the Petitioner: Adv. D. Bhattacharya
Advocate for the Respondent: Advs. A.K. Thakur, Rishi Raj, Sujeet Kumar, Ningthem Oinam
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