Supreme Court sets aside arbitral award that attempted to rewrite contractual terms contrary to Railway Board's policy directives. Court rules arbitrator exceeded jurisdiction by ignoring binding policy circulars and contractual terms agreed upon by parties.
(i) CAN AN ARBITRATOR REWRITE CONTRACTUAL TERMS THAT ARE BASED ON BINDING POLICY DIRECTIVES OF THE RAILWAY BOARD?
(ii) IS AN ARBITRAL AWARD THAT CONTRADICTS EXPRESS POLICY CIRCULARS AND CONTRACTUAL TERMS PATENTLY ILLEGAL AND IN CONFLICT WITH PUBLIC POLICY?
(i) No, an arbitrator cannot rewrite contractual terms that are based on binding policy directives. The arbitrator exceeded jurisdiction by interpreting contractual terms contrary to the language used therein, which merely mirrored the policy decisions of the Railway Board which were binding in nature.
(ii) Yes, an arbitral award that contradicts express policy circulars and contractual terms is both patently illegal and in conflict with the public policy of India. Such awards violate Section 34(2A) and Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996.
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Supreme Court Ruling: "Arbitrator cannot rewrite contract terms based on policy" - sets aside award
| Legal Provision | What It Means | Application in This Case |
|---|---|---|
| Section 34(2A) Arbitration Act |
Ground for setting aside domestic awards for patent illegality | Award rewriting policy-based contract terms is patently illegal |
| Section 34(2)(b)(ii) Arbitration Act |
Ground for setting aside awards against public policy | Award violating binding policy directives conflicts with public policy |
| Section 28(3) Arbitration Act |
Arbitrator must consider contract terms and trade usages | Arbitrator failed to consider binding policy as trade usage |
| Clause 21.1 MLA Contract Hierarchy |
Policy circulars have precedence over other documents | Arbitrator ignored contractual hierarchy giving primacy to policy |
Illegality that appears on the face of the award. When an award violates express terms of contract or statutory provisions, it becomes patently illegal.
The fundamental policy of Indian law, interests of India, justice or morality. Awards violating binding policy directives conflict with public policy.
The order of precedence among contractual documents. Policy circulars often have higher precedence than other contractual terms.
Official instructions issued by government authorities that form part of contractual framework and are binding on parties.
"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... which he could not have touched."
This judgment reinforces that arbitrators must respect the contractual framework and binding policy directives. Parties entering into contracts with government entities must understand that policy terms form an integral part of the contractual relationship and cannot be rewritten through arbitration based on equitable considerations.
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