S. 37 Arbitration | Arbitral Awards Not Liable To Set Aside On Mere Error In Law Or Misappreciation Of Evidence : Supreme Court

The Supreme Court on Thursday (December 18) overturned the Chhattisgarh High Court's judgment, holding that the High Court had exceeded its jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 by effectively acting as an appellate court, re-appreciating the evidence, and substituting its own interpretation in place of the arbitral award.

“High Court, in exercise of limited jurisdiction under Section 37, impermissibly re-appreciated facts and substituted its own interpretation, contrary to settled law.”, held a bench of Justices Aravind Kumar and NV Anjaria, while observing that “arbitral awards are not liable to be set aside merely on the ground of erroneous in law or alleged misappreciation of evidence and there is a threshold that the party seeking for the award to be set aside has to satisfy, before the judicial body could enter into the realm of exercising its power under section(s) 34 & 37. It is also apt and appropriate to note that re-assessment or re-appreciation of evidence lies outside the contours of judicial review under section(s) 34 and 37.”

“Even an award which is based on little or no evidence would not be held to be invalid on this score. At times, the decisions are taken by the arbitrator acting on equity and such decisions can be just and fair therefore award should not be overridden under section 34 and 37 of the A&C Act on the ground that the approach of the arbitrator was arbitrary or capricious.”, the court added.

The case involved a contract for mining and transporting bauxite. After the initial contracted work was complete, BALCO, via a letter dated January 5, 2002, requested the contractor to continue work, stating the rate would be decided "in due course." No rate was ever fixed, but the contractor supplied an additional 1,95,000 metric tons.

A sole arbitrator in 2012 awarded the contractor compensation, including an amount for the extra work calculated at an additional ₹10 per metric ton, applying the principle of quantum meruit (reasonable value for work done). The Commercial Court in Raipur upheld the award. BALCO appealed to the High Court under Section 37 of the Arbitration Act, which set aside the award, labeling it based on "guesswork" and a "patent illegality" for rewriting the contract.

Setting aside the impugned order, the judgment authored by Justice Aravind Kumar emphasized that the High Court erred in invoking a patent illegality ground to interfere with the award, as the ground of patent illegality does not encompass erroneous application of law or re-appreciation of evidence. It refers only to a glaring illegality going to the root of the award, such as a decision based on no evidence or one that directly contradicts an explicit contractual bar.

The bench said that it is not open for the courts to treat every factual error or every divergent interpretation of the contract as an illegality.

“The illegality must be of a kind that strikes at the heart of the award's validity. For instance, if an arbitrator ignores a binding precedent or a clear prohibition in the contract, that may be patent illegality. Likewise, a finding based on no evidence at all can be said to be perverse and thus patently illegal. But where there is some evidence and a reasonably plausible inference has been drawn by the arbitrators, the courts should ordinarily refrain themselves from supplanting the views arrived by the arbitrator as that would be the true import of the legislative intent inherent in the Amendment Act.”, the court observed.

Explaining further the circumstances covered under patent illegality, the Court said:

“the said terminology of 'patent illegality' indicates more than one scenario such as the findings of the arbitrator must shock the judicial conscience or the arbitrator took into account matters he shouldn't have, or he must have failed to take into account vital matters, leading to an unjust result; or the decision is so irrational that no fair or sensible person would have arrived at it given the same facts. A classic example for the same is when an award is based on “no evidence” i.e., arbitrators cannot conjure figures or facts out of thin air to arrive at his findings. If a crucial finding is unsupported by any evidence or is a result of ignoring vital evidence that was placed before the arbitrator, it may be a ground the warrants interference. However, the said parameter must be applied with caution by keeping in mind that “no evidence” means truly no relevant evidence, not scant or weak evidence. If there is some evidence, even a single witness's testimony or a set of documents, on which the arbitrator could rely upon or has relied upon to arrive at his conclusions, the court cannot regard the conclusion drawn by the arbitrator as patently illegal merely because that evidence has less probative value. This thin line is stood crossed only when the arbitral tribunal's conclusion cannot be reconciled with any permissible view of the evidence.”

The Court termed the arbitrator's decision to be appropriate to gave divergent interpretation to the contract, when it does not say either way about compensating extra work done at request, then according to the judgment, the arbitrator can imply a term or use principles of restitution to award a reasonable sum, without violating the terms of contract.

“where the contract is simply silent on a legitimate claim which is inherently linked to the natural corollary of contractual obligation of the parties the arbitrator will be well within his powers to interpret the contract in the light of principles of the contractual jurisprudence and apply the equity to that situation.”

In essence, the Court rejected the High Court's view that the arbitrator had rewritten the contract, it held that the arbitrator had merely filled a contractual vacuum to prevent unjust enrichment. Relying on Section 70 of the Indian Contract Act, 1872, the Court observed that a party enjoying the benefit of non-gratuitous work is legally bound to compensate the person who performed it.

“In such a factual matrix, the arbitral tribunal cannot be said to have rewritten or varied the contract rather the arbitrator addressed a vacuum in the contractual arrangement by determining reasonable compensation in terms of Section 70 of the Contract Act, 1872, to obviate the possibility of unjust enrichment. The quantification of additional compensation at Rs. 10/- PMT i.e., from Rs. 634.20/- PMT to Rs. 644.20/- PMT represents an assessment of reasonable value for the extra work performed and does not amount to substitution of any agreed contractual rate as no such sum was mutually inked down by both the parties. Therefore, we disagree with said view of the High court as the arbitral award did not rewrite the contract but merely enforced a restitutionary obligation arising from admitted extra work directed and accepted by the respondent, where the aspect of consideration was consciously left open and later misused by the respondent to sway away from discharge of its usual contractual obligation. Hence, the High Court, in exercise of limited jurisdiction under Section 37, impermissibly re-appreciated facts and substituted its own interpretation, contrary to settled law..”, the court held.

The Court also observed:

“The errors pointed out in the impugned judgement, i.e., lack of evidence, percentage-based guess allowances, etc. do not, singly or cumulatively, amount to patent illegality warranting annulment. There were at least some evidence and logical rationale for each award element. The arbitrator's approach was certainly a possible view a reasonable man might take. The High Court, unfortunately, re-appreciated the evidence and came to a different view, which is impermissible. The High Court's scrutinized the award from a stricter standard of proof than arbitration law demands. Arbitrators are not bound by the strict rules of evidence as per Section 19 of the A&C Act and may draw on their knowledge and experience. It is settled that a court should not interfere simply because the arbitrator's reasoning is brief or because the arbitrator did not cite chapter and verse of the contract as long as the path can be discerned by which the arbitrator arrived at his conclusions. Here, the path is discernible and not absurd.”

Accordingly, the appeal was allowed, the award passed by the sole arbitrator was restored.

Cause Title: RAMESH KUMAR JAIN VERSUS BHARAT ALUMINIUM COMPANY LIMITED (BALCO)

Citation : 2025 LiveLaw (SC) 1226

Click here to download judgment

Appearance:

For Petitioner(s) :Mr. Mukul Rohtagi, Sr. Adv. Mr. Anil Kumar Mishra-1, Adv. Mr. Aditya Jain-1, AOR Mr. Sanjeevi Seshadri, Adv. Mr. Supantha Sinha, Adv. Mr. Satyam Shivaach, Adv. Ms. Mansi Gupta, Adv. Mr. Mohit Miglani, Adv. Mr. Navneet Jha, Adv.

For Respondent(s) :Mr. Ranjit Kumar, Sr. Adv. Mr. Ravi Raghunath, AOR Mr. Namanjeet Singh Bhatia, Adv.