Dispute Resolution And Arbitration Update

In The High Court of Delhi M/s JSW Ispat Steel Limited (Now known As JSW Steel Limited) [Appellant] Vs. M/s Gas Authority of India Limited [Respondents

Background facts

• The dispute arose out of long-term gas supply agreements executed between the Appellant and the Respondent for supply of natural gas.
• A Primary Agreement dated 10.09.1991 was executed, under which the Respondent agreed to supply gas up to a specified quantity, subject to governmental allocation policies.
• A Supplementary Agreement dated 30.03.1998 was then executed which inter alia modified the payment structure, replacing variable transportation charges with fixed monthly transportation charges. Additionally, it was also specified that the appellant had a period of 14 days from the receipt of the gas supply invoice to raise any discrepancies or disputes with the invoice. Failure to raise such a dispute within this period was to be deemed a waiver of the right to raise claims or refer the matter to arbitration.
• To accommodate the appellant’s increasing requirement for gas, a Tripartite Agreement dated 21.12.1999 was further executed, which enhanced gas allocation to the Appellant. The Appellant contended that despite this enhanced allocation, the Respondent failed to supply the additional quantity while continuing to levy fixed transportation charges.
• Disputes arose when the Respondent failed to supply the contracted quantity of gas. The Respondent contended that gas supply was subject to government control and scarcity. The Appellant further alleged that the Respondent wrongfully levied fixed transportation charges despite short supply. The Respondent stated that the fixed transportation charges were contractually agreed and independent of actual supply.
• The above disputes were referred to arbitration. Vide its award, the Arbitral Tribunal held that short supply was due to force majeure and that in case of gas allocations, the government’s decisions override contractual provisions. Despite the force majeure, the Appellant’s obligations to pay fixed transport charges were not suspended and rejected the claim for refund. Despite the legal claim rejection, the Arbitral Tribunal was of the opinion that the transportation charges included maintenance facilities but in light of force majeure event the said fixed charges should be proportionately reduced. Citing the ‘business efficacy’ principle, the Arbitral Tribunal opined that the interpretation was consistent with commercial realities. Applying the said principle and the partial ‘failure of consideration’ principle, it awarded a proportionate refund of transportation charges amounting to Rs. 14.67 crores. The respondent further argued that the invoices became final after 45 days, and any claim for refunds older than three years was time-barred and therefore not arbitrable. However, the tribunal held that since the invoices were provisional and never finalized, the limitation period for the appellant’s claims did not commence.
• The Respondent challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”). The learned Single Judge observed that the tribunal’s interpretation, although contentious, was a plausible and reasonable construction of the contract and accordingly, declined to reappraise the merits of the interpretation. However, the Arbitral Tribunal had failed to consider the provisions regarding limitation and waiver of claims, wrongly considered invoices provisional and awarded refund which was not pleaded in Statement of Claim. The learned Single Judge concluded that the arbitral award was legally flawed and inconsistent with the contractual stipulations, and therefore set aside the award.
• Aggrieved by the same, the Appellant filed an appeal under Section 37 of the Act before the Delhi High Court.

Issue(s) at hand

• Whether the arbitral tribunal can grant relief beyond the pleadings and contractual framework?
• Whether the scope of judicial interference under Sections 34 and 37 of the Act permits re appreciation of contractual interpretation and factual findings by the arbitral tribunal?
• On what grounds can an award be set aside under Section 34 of the Act?

Findings of the Court

• The Hon’ble Delhi High Court reiterated the well-settled position that the scope of judicial interference under Sections 34 and 37 of the Act is delineated and restricted. It was emphasized that courts do not exercise appellate jurisdiction over arbitral awards and cannot re-appreciate evidence or substitute their own interpretation merely because an alternative view is possible.
• The Court referred to MMTC Limited v. Vedanta Limited¹ to stress that the jurisdiction under Section 37 is confined within the limits prescribed under Section 34. It was observed that the appellate court is only required to examine whether the award suffers from jurisdictional infirmities or patent illegality, and not to undertake a merits-based reassessment.
• Further, the Court drew support from Konkan Railway Corpn. Ltd. v. Chenab Bridge Project² to reiterate that an arbitral award must be sustained if the interpretation adopted by the tribunal is a plausible one. The existence of an alternative or more preferable interpretation does not warrant interference by the Court.
• Coming to the order of the Learned Single Judge, the Hon’ble Court observed that although not expressly stated, the reasoning for setting aside the award seems to be ‘patent illegality’. Relying on the case of Ramesh Kumar Jain v. BALCO³, it was asserted that ‘patent illegality’ may arise when the arbitrator has neglected to consider or ignore crucial evidence placed before it or arrived at a conclusion no fair or sensible person would have arrived at given the facts.
• On the facts of the case, the Hon’ble Court found that the arbitral tribunal had failed to consider a material contractual provision, namely the amended Article 12.03 of the Supplementary Agreement, which mandated that disputes in respect of invoices be raised within a period of 14 days. This omission was held to be significant, as it directly impacted the issue of waiver and the maintainability of the claims. Further, the classification of invoices as ‘provisional’ cannot defy statutory limitation. thereby constituting a jurisdictional error.
• Citing the judgment of OPC Power Generation Pvt. Ltd. V. Enexi Power Cooling solutions India Pvt Ltd and anr⁴ the failure of the arbitral tribunal to state reasons for deciding the issue of limitation made it susceptible to interference. In the absence of any intelligible reasoning, no fair-minded person could adopt the reasoning of the arbitral tribunal as proper or adequate.
• It was further held that the reasoning adopted by the tribunal for refunding transportation charges represents a misapplication of the business efficacy principle in a manner that no reasonable person could have adopted. Further, the arbitral tribunal exceeded its mandate and altered/re-wrote the terms of the contract, which could not be permitted. Additionally, the reasoning was found to be internally inconsistent, inasmuch as the tribunal accepted the existence of force majeure while simultaneously granting a pro-rata refund.
• The award was held to be perverse and patently illegal and was thus set aside.

HSA Viewpoint

By relying on precedents, the Hon’ble Court has fortified that while the powers under section 34 and 37 are limited, patent illegality is a valid ground for setting aside awards. " Patent illegality” is a valid ground for setting aside a domestic arbitral award under Section 34(2A) of the Act. Patent illegality involves an error of law that is "on the face of the award," such as violating the statute, contract terms, or the constitution. It has further reinforced that while arbitral tribunals enjoy wide autonomy in interpreting contracts, discretion is not unfettered and must operate within the confines of the legal parameters, contractual framework and pleadings. The ruling highlights that failure to consider material contractual provisions constitutes a jurisdictional error warranting judicial intervention. It also draws a clear distinction between permissible interpretation and impermissible rewriting of the basic understanding of contracts. By rejecting the tribunal’s attempt to introduce a pro rata adjustment mechanism contrary to fixed contractual terms, the Court has underscored the primacy of contractual certainty in commercial arbitration.

Footnotes

1. (2019) 4 SCC 163

2. (2023) 9 SCC 85

3. 2025 INSC 1457

4. 2024 INSC 71 

To read this article in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.