Restoration of determinable contracts and awarding damages without proof constitutes patent illegality.

In brief

The question

1. Whether the Arbitrator committed a patent illegality by directing the restoration of a dealership agreement that was terminable at the option of the parties under the contract and the Specific Relief Act

The court held

The High Court dismissed the appeal and upheld the judgment of the Single Judge.

It also directed

The Court held that an arbitral award that directs restoration of a determinable contract, applies Article 12 to a commercial agreement, or awards damages without evidence suffers from patent illegality and must be set aside

The order for restoration and damages was found to be contrary to the established principles of law and the terms of the contract

No order as to costs was made

01Facts

The Appellant entered into a dealership agreement with the Respondent on March 8, 2004, to operate a retail petrol pump

¶ 7

Following an inspection on February 9, 2011, samples failed to meet prescribed specifications, leading to show-cause notices for alleged adulteration and tampering

¶ 8-10

In the second round of arbitration, the Arbitrator passed an award on July 30, 2018, declaring the termination of the dealership bad in law, directing restoration of the dealership, and awarding damages

¶ 12

The Respondent challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996. On December 23, 2025, a Single Judge set aside the award, finding that the Arbitrator disregarded the determinable nature of the contract and awarded damages without evidence

¶ 1, 13-15

The Appellant subsequently filed this appeal under Section 37 of the Act.

02Issues

i.1. Whether the Arbitrator committed a patent illegality by directing the restoration of a dealership agreement that was terminable at the option of the parties under the contract and the Specific Relief Act

¶ 13

ii.2. Whether the Arbitrator erred in applying Constitutional provisions under Article 12 to a purely commercial contract

¶ 14

iii.3. Whether an award for damages can be sustained in the absence of evidence proving the loss suffered

¶ 15

iv.4. Whether the Single Judge correctly applied the parameters of Section 34 in setting aside the arbitral award

¶ 16

03Law Applied

The court primarily applied Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, which govern the setting aside of awards and the scope of appellate interference, respectively

¶ 1, 16

It relied on Sections 14 and 16 of the Specific Relief Act, 1963, which prohibit the specific performance (or restoration) of contracts that are by their nature determinable

¶ 13

Furthermore, the court applied the principle that an Arbitrator cannot "re-write" a contract or apply Constitutional Law (Article 12) to override express commercial terms voluntarily undertaken by parties

¶ 14, 16

Finally, it applied the evidentiary rule that damages cannot be awarded without proof of actual loss

¶ 15

Provisions in the judgment · 5 · Linked ones open on LawLens

Arbitration and Conciliation Act, 1996 Section 11 Section 34 Section 37

Specific Relief Act, 1963 Section 14 Section 16

04Reasoning

The Division Bench observed that the Arbitrator acted beyond his jurisdiction by disregarding Clause (3) of the dealership agreement, which allowed for termination without an event of default

¶ 13

By ordering restoration, the Arbitrator ignored the mandate of the Specific Relief Act regarding determinable contracts, which constitutes a patent illegality

¶ 13

The Court further found that the Arbitrator incorrectly introduced Constitutional Law into a private commercial dispute, noting that the parties' relationship was governed by a voluntary contract rather than public law obligations

¶ 14

Regarding the award of damages, the Court concurred with the Single Judge that the Arbitrator granted compensation without any supporting evidence or proof of loss

¶ 15

The Court concluded that the Arbitrator had essentially re-written the contract, and since the award fell foul of established legal principles, the Single Judge was justified in setting it aside under Section 34

¶ 16