Absence of Reasons, Unaddressed Claims Render Award Patently Illegal: Delhi HC

The Delhi High Court has partly set aside an arbitral award in a high-value insurance dispute, holding that key portions of the award suffered from patent illegality due to absence of reasoning and failure to adjudicate material claims, while affirming that arbitral tribunals are bound to render reasoned findings on all issues placed before them.

A single-judge bench of Justice Mini Pushkarna, exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, set aside the arbitral award insofar as it denied pre-reference interest, permitted certain deductions, and failed to consider claims relating to taxes and statutory dues, while granting liberty to the petitioner to re-agitate these aspects through fresh arbitration proceedings in accordance with law.

The dispute arose following a fire incident at the petitioner company’s godown, which was insured under a Standard Fire and Special Perils Floater Policy issued by the respondent insurer.

The petitioner claimed losses exceeding Rs. 37 crore, while the insurer’s appointed surveyor assessed the loss at approximately Rs. 20.65 crore. Despite this assessment, the insurer offered a settlement of only Rs. 65.86 lakh, leading the petitioner to invoke arbitration.

The arbitral tribunal adjudicated the dispute but rejected certain claims of the petitioner, including pre-reference interest, and upheld deductions applied by the insurer.

It also failed to render any finding on the petitioner’s claim regarding tax liabilities arising out of the awarded amount. Aggrieved by these aspects, the petitioner approached the High Court under Section 34 of the Act.

On examining the award, the High Court found that the Arbitrator had denied pre-reference interest without assigning any reasons, despite recording findings that indicated delay and resistance on the part of the insurer in settling the claim.

The Court held that such absence of reasoning violated the mandate of Section 31(3) of the Arbitration Act, which requires arbitral awards to state reasons unless otherwise agreed. It further held that this deficiency constituted patent illegality under Section 34(2A), warranting interference.

The Court reiterated that the grant of interest is a matter within the discretion of the arbitral tribunal, but such discretion must be exercised judiciously and supported by reasons.

In the present case, the failure to provide any justification for denying pre-reference interest, particularly in light of the tribunal’s own findings on delay, rendered that part of the award unsustainable.

With respect to deductions applied to the claim amount, the Court examined the contractual framework governing the insurance policy. It noted that while a 5 percent deduction was permissible as an excess clause under the policy terms, an additional 5 percent deduction on account of alleged errors, omissions, or dead stock had no contractual basis.

The Arbitrator, however, had effectively upheld both deductions without adequately analysing their legal and contractual validity. The Court held that this amounted to an error apparent on the face of the award and reflected non-application of mind, thereby attracting the ground of patent illegality.

At the same time, the Court declined to interfere with the Arbitrator’s findings regarding the valuation of old and slow-moving stock.

It observed that the surveyor’s report was detailed and based on physical inspection, records, and a reasoned methodology, including valuation at 9 percent of the maximum retail price.

The petitioner’s reliance on accounting standards and audit documents was found insufficient to displace the conclusions of the surveyor, which had been accepted by the Arbitrator on a rational basis.

A significant flaw identified by the Court was the Arbitrator’s complete failure to adjudicate the petitioner’s claim relating to taxes and statutory dues payable on the awarded amount. The Court noted that this claim had been specifically raised as Claim No. 5 and was also framed as an issue for adjudication.

Despite this, the award was entirely silent on the question.

The Court held that such omission violated the statutory requirement under Section 31(3), as an arbitral tribunal is duty-bound to decide all issues placed before it.

Failure to do so undermines the validity of the award and constitutes patent illegality.

The Court emphasised that arbitral awards must demonstrate due application of mind to all claims and issues, and that silence on a material issue cannot be cured or overlooked.

It reiterated that Section 34 jurisdiction permits courts to set aside awards where there is patent illegality appearing on the face of the award, including where findings are unsupported by reasons or where issues remain unaddressed.

In light of these findings, the Court partly set aside the arbitral award on the issues of pre-reference interest, impermissible deductions, and non-adjudication of tax-related claims.

It clarified that the petitioner would be at liberty to pursue these claims afresh through arbitration in accordance with law, thereby ensuring that the parties are not left remediless.

The ruling reinforces the principle that while courts exercise limited supervisory jurisdiction over arbitral awards, such deference does not extend to sustaining awards that are unreasoned, incomplete, or contrary to statutory mandates. It underscores the importance of reasoned decision-making and comprehensive adjudication in arbitration proceedings, particularly in complex commercial disputes involving substantial financial claims.

Case Title: Panchanan International Pvt. Ltd. v. The Oriental Insurance Company Ltd.

Bench: Justice Mini Pushkarna

Date of Judgment: 10.04.2026