Arbitrator Cannot Ignore Contract Terms Or Grant Relief Beyond Dispute: Supreme Court

The Supreme Court has held that an arbitral award can be set aside if it is patently illegal, contrary to the fundamental policy of Indian law, or so unfair and unreasonable that it shocks the conscience of the court.

A Bench of Justices Sanjay Kumar and Sanjeev Sachdeva held that patent illegality arises when an arbitrator goes beyond the express terms of a contract, rewrites its provisions or grants relief on matters that were not in dispute.

Court also held that the appellate jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996, is as broad as the jurisdiction under Section 34, permitting the high court to examine an arbitral award on the anvil of the unamended Section 34.

"An arbitral tribunal must decide in accordance with the terms of the contract and trade usages. Where the terms are clear and explicit, the tribunal cannot rewrite the contract or ignore its specific stipulations, and doing so renders the award patently illegal," Court observed.

Court made these observations while dismissing an appeal filed by Shreeram Builders, upholding the Bombay High Court's decision to set aside a majority arbitral award for rewriting contractual terms, including altering payment rates and adjusting payments under superseded agreements, in violation of Section 28(3) of the Act.

Arbitral tribunal cannot rewrite contractual terms

Court held that where an agreement makes the execution of a conveyance deed conditional upon payment of the entire consideration and fulfilment of specified project milestones, specific performance cannot be granted when these conditions remain unfulfilled.

In the present case, Court found that the appellant had failed to comply with the payment schedules and obtain a sanctioned plan. Despite this, the majority arbitral award directed the respondents to execute a conveyance deed in favour of the appellant. Court held that such a direction was improper.

The Bench noted that the majority award proceeded on the premise that the agreement in question was not merely an agreement for development but an agreement to sell, and analysed its terms accordingly.

However, it pointed out that Section 28(3) of the Act mandates that an arbitral tribunal must decide disputes by taking into account the terms of the contract and applicable trade usages.

"In that regard, we may note that Section 28(3) of the Act of 1996 mandates that, in all cases, the arbitral tribunal shall decide and make the award by taking into account the terms of the contract and the trade usages applicable to the transaction. Trite to state, when the terms of the contract are clear and explicit, it would not be necessary to import trade usages, as that step would usually be necessary when the contract is silent on such aspects," the Bench said.

Court found that the total consideration payable by the appellant to the respondents had not been fully determined in accordance with the agreement and remained fluid even on the date of the award.

"Surprisingly, the majority award completely overlooked and ignored the obligations in the agreement and the sequence in which they were to be performed. Even if the award, on the analysis undertaken, proceeded on the premise that the subject agreement was an agreement to sell and was not just for development, it was not for the two arbitrators to rewrite its terms," the Bench observed.

It held that the two arbitrators had not only interpreted the express terms of the agreement contrary to their actual meaning but had effectively replaced them with new terms of their own.

"Their approach was clearly at variance with the edicts of this Court as to interpretation of the underlying contract. Their award, therefore, ought not to have granted the relief of specific performance to the appellant and its partners, by holding them entitled to execution of a deed of conveyance for the 2/9th share of the respondents, in total derogation of the agreement terms," the Bench said.

Court clarified that although the Bombay High Court had also examined whether the agreement was an agreement to sell or merely an agreement for development, such an exercise was unnecessary. The high court had correctly found that the majority award violated Section 28(3) by rewriting the contractual terms.

It added that the high court's 2024 judgment gave effect to the settled legal position that an arbitral tribunal cannot rewrite the underlying contract.

Court further held that the respondents were required to return the consideration paid by the appellant, as no construction had been undertaken on their 2/9th share in the properties. Since they had chosen to retract from the agreement, they could not retain the amount paid under it.

"Therefore, though we find no grounds to uphold the majority award for the reasons, we deem it appropriate to exercise jurisdiction under Article 142 of the Constitution, so as to do complete justice instead of relegating the parties to a fresh round of litigation on this issue," the Bench said.

Court noted that the condition prohibiting payment of interest would have applied had the respondents returned the money when they terminated the agreement on April 9, 2008. However, they had failed to do so and continued to retain the amount.

It held that the respondents must now refund the money with reasonable interest.

Accordingly, Court directed the respondents to refund the amounts received under the agreement, along with simple interest at 9% per annum from the date of each payment until the actual date of refund.

It further directed that the amounts deposited by the appellant with the courts be returned along with any interest accrued on them.

Background

The dispute originated from an Agreement for Development dated August 6, 2003, executed between the respondents, comprising Upendra Kantilal Thanawala and his son Vishal Upendra Thanawala, Pankaj Kantilal Thanawala and his sons Kunal Pankaj Thanawala and Niket Pankaj Thanawala, and the appellant, Shreeram Builders, along with its partners Ramesh Amrutlal Mehta, Deepak Ramesh Mehta and Alpa Ketan Mehta.

Clause 61 of the agreement provided for arbitration of disputes arising between the parties under the Arbitration and Conciliation Act, 1996. It stipulated that each party would appoint an arbitrator, who would collectively elect an umpire, and that the decision of the arbitrators would be binding.

After the respondents terminated the agreement through a legal notice dated April 9, 2008, the parties invoked the arbitration clause and nominated their respective arbitrators, who subsequently elected an umpire.

The arbitral tribunal comprised retired Justice S.D. Pandit as the umpire, retired judge P.S. Mudholkar as the arbitrator nominated by the appellant and its partners, and retired judge V.P. Patil as the arbitrator nominated by the respondents.

On December 10, 2011, the majority award was delivered by Justice Pandit and Mudholkar, while Patil delivered a dissenting award.

The majority award ruled in favour of the appellant and its partners, who were the claimants in the arbitration proceedings. It declared the termination of the 2003 agreement illegal and held that the claimants were entitled to specific performance, subject to depositing Rs 10,91,30,164 within three months.

Upon such deposit, the respondents were directed to execute a sale deed transferring their 2/9th share in the properties listed in Schedules A, B and C of the statement of claims. However, their share in the bungalow and garden, a room in Chawl No. 1 and the adjoining open courtyard were excluded.

The respondents were directed to execute the sale deed within a month of the deposit, failing which the claimants could seek its execution through the court.

Both sides subsequently filed civil miscellaneous applications before the Principal District Judge, Thane, which decided in favour of the appellant and its partners through a common order dated March 29, 2017.

Aggrieved by the order, the respondents approached the Bombay High Court under Section 37 of the Act. On June 26, 2019, a single judge disposed of the appeals after recording the consent of both sides to have the matter decided afresh by the Principal District Judge, Thane. The 2017 order was accordingly set aside and the matter was remitted for fresh consideration.

In the second round of proceedings, the Principal District Judge, Thane, dismissed both applications on January 25, 2020, thereby upholding the majority award in its entirety.

Both sides again challenged the decision before the Bombay High Court, which, on March 5, 2024, ruled in favour of the respondents and set aside the majority award.

Case Title: Shreeram Builders Vs Upendra Kantilal Thanawala and others

Bench: Justices Sanjay Kumar and Sanjeev Sachdeva

Date of Judgment: October 29, 2026