Supreme Court of India· 07 November 2025
Does an arbitrator ignoring Section 28(3) of the Arbitration and Conciliation Act, 1996 commit patent illegality?
Indian Railways Catering and Tourism Corporation Ltd. v. M/s. Brandavan Food Products & Ors.
2025 INSC 1294
Coram: Sanjay Kumar; Satish Chandra Sharma
Answer
Yes. Section 28(3) mandatorily requires the arbitrator to take into account the terms of the contract and the trade usages applicable to the transaction. Failure to decide in accordance with the terms of the contract governing the parties amounts to a gross contravention of Section 28(3) and attracts the patent illegality ground under Section 34(2A).
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 66A little later, in State of Chhattisgarh and another vs. SAL Udyog Private Limited[^7], a 3-Judge Bench of this Court dealt with the issue as to what would constitute ‘patent illegality’ appearing on the face of the award, in terms of Section 34(2A) of the Act of 1996. Reference was made to the earlier decisions in Associate Builders v. Delhi Development Authority[^8] and Ssangyong Engineering (supra) and it was held that the failure of the arbitral tribunal to decide in accordance with the terms of the contract governing the parties would certainly attract the ‘patent illegality’ ground as the said oversight amounted to gross contravention of Section 28(3) of the Act of 1996, which enjoined the arbitral tribunal to take into account the terms of the contract while making the award.
Paragraph 69In its wisdom, having chosen to challenge the aforestated circulars, BFP did not carry it forward after the dismissal of its writ petition and, in consequence, BFP and the other caterers can raise no objection at this stage to the policy decisions embodied in those circulars which were merely replicated and applied in their contracts/MLAs. Once the contracts between the parties were strictly in terms of and in keeping with the extant policy, the terms of such contracts could not have been interpreted by the Arbitrator contrary to and in violation of the policy, which remained intact after the dismissal of BFP’s writ petition. The Arbitrator was, therefore, not justified in undertaking interpretation of the contractual terms contrary to language used therein, which merely mirrored the policy decisions of the Railway Board which were binding in nature. In effect, the Arbitrator practically rewrote the contract between the parties in such a manner that it was in contradiction with the policy decisions set out in the Circulars dated 23.10.2013 and 06.08.2014, which he could not have touched. In the light of the judgments referred to supra, this error on the part of the Arbitrator resulted in the Award not only being against the public policy of India but also made it patently illegal. Section 28(3) of the Act of 1996 mandatorily required the Arbitrator, while deciding and making the Award, to take into account the terms of the contract and the trade usages applicable to the transaction. The trade usages in this regard were the policy decisions of the Railway Board, Ministry of Railways, Government of India, that governed contracts of this nature. Therefore, the Arbitrator was bound to consider such policy decisions in that light and evaluate the contractual terms in the context thereof. In the present case, the Arbitrator completely overlooked the weightage to be given to the policy decisions embodied in the Railway Board’s circulars and compounded the error by contrarily interpreting the contractual terms, which were strictly in consonance therewith, to grant relief to the caterers.
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 IndiaOne judgment a day. That's the whole habit.
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