An Arbitral Award Cannot Be Set Aside Under Section 34 Merely Due to Erroneous Interpretation of Contractual Terms Unless It Suffers from Patent Illegality

The High Court held that an arbitral award cannot be set aside under Section 34 merely due to an erroneous interpretation of contractual terms unless it suffered from patent illegality.

The Madras High Court Single-Judge Bench of Justice M. Dhandapani reviewed an appeal and held that an arbitral award could not be set aside under Section 34 of the Arbitration and Conciliation Act, 1996, merely due to an erroneous interpretation of contractual terms unless it suffered from patent illegality, procedural irregularities, or violations of statutory provisions or principles of natural justice.

The present appeal was filed before this Court challenging the order of dismissal of the original arbitration petition by the Principal District Judge, Cuddalore. The arbitration petition had been filed by the appellant against the arbitral award. The appellant, who was the petitioner in the original petition, contended that the dispute arose from a contract for the supply of stainless steel seamless pipes. The 1st respondent had agreed to supply the material, imported from Italy, within a specified period. However, due to non-compliance with the agreed schedule, the quantity of supply was restricted, and payments were made for the reduced supply. The 1st respondent subsequently raised a dispute and invoked the arbitration clause.

The Arbitral Tribunal, by a majority of 2:1, awarded a sum of Rs. 12,30,626/- with future interest at 7% per annum on Rs. 10,58,594/- to the 1st respondent. Aggrieved by this decision, the appellant preferred an original petition before the trial court, which was dismissed on the ground that no valid reason had been established to interfere with the arbitral award. Consequently, the present appeal was filed.

The appellant's counsel argued that the award was perverse and lacked proper findings regarding damages. It was submitted that the arbitrators had ignored the contractual terms and that the award was contrary to the provisions of the agreement. The appellant contended that the failure of the 1st respondent to supply the contracted items within the stipulated time justified the restriction of supply, and the invocation of Clause 11 of the contract could not be faulted. The appellant further argued that the arbitral award suffered from patent illegality and should have been set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

Despite the service of notice, the 1st respondent did not appear before this Court. It was brought to the Court’s attention that the 1st respondent had undergone liquidation under Section 54 of the Insolvency and Bankruptcy Code, 2016, following an order of the National Company Law Tribunal. Given these circumstances, this Court considered the appellant’s contentions in the absence of a response from the 1st respondent.

Upon analyzing the provisions of Section 34 of the Arbitration and Conciliation Act, this Court observed that the grounds for setting aside an arbitral award are well-defined. These include lack of jurisdiction, improper notice, disputes beyond the arbitration scope, procedural irregularities, and awards conflicting with public policy. The Court found that the arbitration clause was valid and that the arbitrators were appointed as per the contract. There was no evidence that the arbitration process had violated statutory provisions or principles of natural justice.

The appellant had not demonstrated that any of the grounds under Section 34(2) were applicable. The arbitral award was found to be within the tribunal’s jurisdiction, and the appellant had not challenged the validity of the arbitration proceedings. The primary contention related to the appreciation of evidence and the interpretation of contractual terms, which did not fall within the scope of interference under Section 34. The Court reiterated that an arbitral award cannot be set aside merely due to an erroneous interpretation of contractual provisions unless it suffers from patent illegality.

In light of the foregoing, this Court held that the findings of the arbitral tribunal and the lower court did not warrant interference. Accordingly, the appeal was dismissed, affirming the arbitral award.

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