Supreme Court of India· 07 November 2025

Can a State instrumentality bound by policy directives be held unfair under Article 14 in the contractual sphere?

Indian Railways Catering and Tourism Corporation Ltd. v. M/s. Brandavan Food Products & Ors.

2025 INSC 1294
Coram: Sanjay Kumar; Satish Chandra Sharma

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Answer

No. Where the State instrumentality had no independent discretion of its own, being bound by policy directives it could not deviate from, and the contracts merely reflected those directives, the question of applying the principles of fair play in action and lack of arbitrariness, traceable to Article 14 of the Constitution, does not even arise.

Headnote

Arbitration and Conciliation Act, 1996 - ss. 28(3), 34(2)(b)(ii), 34(2A), 37 - Constitution of India - Art. 14 - Arbitral award - Patent illegality - Public policy of India - Rewriting the contract - Binding policy circulars - Arbitration and Conciliation Act, 1996 - s. 28(3) - Terms of contract binding on arbitrator - Held: An arbitrator is bound by Section 28(3) to decide according to the terms of the contract and the trade usages applicable to the transaction. Failing to do so is not mere interpretation but a gross contravention attracting patent illegality. (¶66, 69) Arbitration and Conciliation Act, 1996 - s. 34(2)(b)(ii) - Rewriting the contract - Public policy of India - Held further: Where contractual terms merely replicate binding policy decisions in a government circular, an arbitrator construing them contrary to that policy practically rewrites the contract. Such an award offends the most basic notions of morality or justice. (¶65, 69) Constitution of India - Art. 14 - State instrumentality bound by policy - Fairness plea unavailable - Held further: A State instrumentality with no independent discretion, being bound by policy directives it cannot deviate from, does not act unfairly in giving them effect. The plea of fair play in action traceable to Article 14 does not arise. (¶70) Arbitration and Conciliation Act, 1996 - ss. 34, 37 - Unchallenged circular - Award set aside - Held further: A party that lets a dismissed writ challenge to a policy circular rest cannot later resist that policy through contractual interpretation before an arbitrator. Award being patently illegal and against public policy, set aside; appeals allowed. (¶69, 73)

In the Court's own words

Paragraph 70The last contention urged by the caterers is as to whether the IRCTC, being a State instrumentality, has to be tied down by principles of fairness and reasonableness even in the contractual sphere. It was argued that the IRCTC could not act unreasonably or unfairly even while acting under a contract. This contention no longer stands to reason as we have held that the IRCTC and its predecessor, Northern Railway, had no independent discretion in the matter while drawing up the contracts/MLAs and giving effect to them, in so far as the two subject issues were concerned, as they were bound by the policy directives of the Railway Board and could not have deviated therefrom. The circulars which embodied these policy directives were unsuccessfully challenged by BFP before the Delhi High Court and left at that. Therefore, those policy directives remained in force and the contracts/MLAs between the parties merely reflected the same. Once IRCTC had no independence of its own or discretion to condition or alter the contracts/MLAs, the question of applying the principles of fair play in action and lack of arbitrariness, traceable to Article 14 of the Constitution, would not even arise.

Acts & Sections

s.28(3) Arbitration and Conciliation Act, 1996s.34(2A) Arbitration and Conciliation Act, 1996s.34(2)(b)(ii) Arbitration and Conciliation Act, 1996s.37 Arbitration and Conciliation Act, 1996s.31(7) Arbitration and Conciliation Act, 1996Art.14 Constitution of India

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Also decided in this judgment

Does an arbitrator ignoring Section 28(3) of the Arbitration and Conciliation Act, 1996 commit patent illegality?May an arbitrator construe contract terms contrary to the binding Railway Board circular they merely replicate?

Plain-language answer prepared by the LexStreak Editorial Desk — verify against the judgment. Source: Supreme Court of India. Corrections