In a recent judgment passed by the Hon’ble Supreme Court of India titled ‘Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum Rajgurunagar’¹, the Apex Court, while allowing the appeal, set aside the award passed by the arbitral tribunal, for acting beyond the confines of the contract executed between the parties since an arbitral tribunal is a ‘creature of the contract’. The Hon’ble Apex Court held that courts’ and arbitral tribunals’ power is limited to the terms of the contract and that if the underlying contract specified a fixed rate of interest, an arbitrator could not reinterpret the contract's terms and award a higher amount.

The Indian Oil Corporation Ltd. ("lessee") and M/s Shree Ganesh Petroleum ("lessor") signed a 29-year Lease Agreement in which the lessee established a retail outlet for the selling of its petroleum products for a monthly payment of Rs. 1750/-. Pursuant thereto, the parties signed a Dealership Agreement, in which the lessor was appointed as a dealer of the stated retail outlet. As per the Lease Agreement, any issue was to be addressed to the lessee, Indian Oil, Managing Director, or, if the Managing Director was unable to act, to someone else chosen by the Managing Director. On the other hand, the Dealership Agreement, provided for sole arbitration of the lessee's Marketing Director, who might either participate as an arbitrator themselves or designate another officer of the lessee to act as an arbitrator. Accordingly, the parties entered into two distinct agreements, i.e. the Lease Agreement and the Dealership Agreement, both of which are independent of each other.

The Dealership Agreement was terminated by the Indian Oil Corporation and subsequently an Arbitrator was appointed for the resolution of disputes under that Dealership Agreement. However, the Arbitrator passed an award on issues arising out of the Lease Agreement, thereby increasing the monthly lease rent and reducing the duration of the lease.

Whilst the arbitral tribunal did not have the authority to lower the lease length, the District Court found that the increase in rent to Rs. 10,000/- per month, with a 10% increase every three years, was appropriate. Both parties appealed the District Court's decision to the High Court of Bombay under Section 37 of the Arbitration and Conciliation Act, 1996 (‘Act’), which was further upheld by the Hon’ble High Court. Finally, the lessee appealed against the decisions of the Hon’ble High Court before the Hon’ble Apex Court.

Relying on its earlier decision in Associate Builders v. Delhi Development Authority², the Hon’ble Supreme Court observed that an award is against India's public policy in the following circumstances:

1. The award appears to be in patent violation of a statutory provision;
2. The arbitral tribunal did not adopt judicial approach to resolving the dispute(s);
3. The award is contravention to the principles of natural justice;
4. The award is unreasonable or perverse;
5. The award is patently in contravention of the provisions of any substantive law of India, or the Act; and
6. The award is contrary to the interest of India, or against justice or morality.

Calling an arbitral tribunal a creature of contract, the Hon’ble Supreme Court held that an arbitral tribunal is bound to act in terms of the contract under which it is constituted. The Court further held that an award can be said to be patently illegal where the arbitral tribunal failed to act in terms of the contract or has ignored the specific terms of a contract.

It can be well seen that the limits and scope of the patent illegality in India have evolved over time. The Supreme Court's findings in Indian Oil clarifies the distinction between fallacious contractual interpretation and failure to act in accordance with a contract. However, the ratio of the Court to confine the award to the four walls of the contract must not be interpreted in absolute strict sense. The Court, while providing for the limitations to the interpretation of the tribunal, observed that the courts ordinarily does not interfere with interpretation made by the tribunal, unless such interpretation is patently unreasonable or perverse. The Hon’ble Supreme Court further opened the realm of the tribunal to interpret contractual provisions where a provision is ambiguous or is capable of being interpreted in more ways than one. The present judgement while drawing limitations to the powers of the arbitral tribunal gave a further direction to the purview of patent illegality of the arbitral awards.

By - Rishika Jain, Associate & Bhavya Murgai, Intern