Arbitrator’s Finding of Irregularity Based on "No Evidence" and Undisclosed Particulars Constitutes Patent Illegality

The Appellant, an LPG distributor for the Respondent since 1981, executed a Dealership Agreement on 31.10.2013.

In 2014, the Respondent received complaints alleging 826 fake LPG connections in the Appellant's database.

Verification letters sent to a sample of 387 consumers were returned undelivered, and physical inspections in specific areas failed to locate the consumers.

The Respondent issued a Show Cause Notice (SCN) and subsequently imposed a penalty of ₹2,24,89,020 based on the Marketing Disciplinary Guidelines (MDG), citing 826 fake connections and 25,181 unaccounted refills.

The dispute was referred to a Sole Arbitrator who upheld the penalty (adjusted to ₹2,03,12,102).

The Appellant’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996, was dismissed by a Single Judge.

The Appellant then filed this intra-court appeal under Section 37.

1. Whether the learned Arbitrator became ineligible to continue the proceedings under Section 12(5) of the Arbitration Act, 1996, following the 2015 Amendment.

2. Whether the findings of the Arbitral Tribunal regarding the existence of 826 fake connections were based on "no evidence" and thus patently illegal.

3. Whether the arbitral award can be partially set aside or modified under the doctrine of severability.

Section 26 of the 2015 Amendment Act, which stipulates that amendments do not apply to arbitral proceedings commenced before 23.10.2015 unless parties agree otherwise.

Reliance on Rajasthan Small Industries Corpn. Ltd. v. Ganesh Containers Movers Syndicate, confirming Section 12(5) is prospective.

Section 34(2-A) and principles from Associate Builders v. DDA and Ssangyong Engg. & Construction Co. Ltd. v. NHAI, which define "patent illegality" as findings based on "no evidence" or ignoring vital evidence.

Doctrine of severability from Gayatri Balasamy v. ISG Novasoft Technologies Ltd., allowing courts to partially set aside an award if the valid and invalid portions are separable.

The Court first held the Arbitrator was eligible because the proceedings commenced in 2014, prior to the 2015 Amendment.

For "Set I" (446 connections), the Court found the Arbitrator’s decision plausible as particulars were provided in the SCN and the Appellant admitted to data manipulation by employees.

For "Set II" (380 connections), the Court found the award patently illegal. The Respondent provided no particulars for these connections, conducted no investigation, and the Appellant’s letters seeking their identity were ignored.

The Arbitrator’s shifting of the burden of proof to the Appellant to prove the genuineness of unidentified consumers was deemed perverse and based on "no evidence".

The Court concluded that while the first two penalty heads (fixed penalty and per-connection fine for Set I) were severable and calculable, the third head (unaccounted refills) was inseparably linked to all 826 connections and required fresh fact-finding, making it unsustainable.

The Court modified the award by maintaining the penalty for the 446 verified fake connections (Set I) while setting aside the findings for the remaining 380 connections (Set II).

Specifically, it sustained ₹3,15,472 (critical irregularity) and ₹22,30,000 (penalty for 446 connections @₹5000 each).

It set aside the ₹1,64,81,665 penalty for unaccounted refills as it was based on an unsegregated figure for all 826 connections.

The Court partially allowed the appeal and reduced the final recoverable Counter-Claim to ₹25,45,472.