Failure Of Adhering To Express Contract Terms Constitutes “Patent Illegality”; Calcutta High Court Sets Aside Award For Granting Specific Performance Of Determinable Agreement

It was observed that the arbitrator exceeded his jurisdiction by granting specific performance of a determinable dealership agreement—a remedy explicitly barred by substantive law and the contract itself.

​The Bench of Justice Ravi Krishan Kapur observed, “The Arbitrator has failed to adhere to the express terms of the contract and has granted relief in disregard thereof, particularly by directing specific performance of a determinable dealership agreement by importing considerations alien to the contract. The issue being not whether the law has been erroneously applied or evidence improperly appreciated, but also whether the Arbitrator has complied with the mandatory obligation under section 28(3) of the Act, which obliges the Arbitral Tribunal to decide strictly in accordance with the terms of the contract. This is a case where the approach of the Arbitrator in adjudicating upon the claim is arbitrary, capricious and shocks the conscience of the Court. The patent illegality in the instant case arises from such non-adherence of the contract and the substantive law governing it which squarely attracts the jurisdiction of this Court under sections 34(2A) of the Act and falls outside the exception carved out therein. Perversity or irrationality of a decision is tested on the touchstone of Wednesbury principle of reasonableness. If on facts proved before them, the Arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which on the face of it is untenable resulting in injustice, the adjudication made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards, is liable to be challenged and set aside.”

Senior Advocate Jishnu Saha appeared on behalf of the Petitioner, whereas Senior Advocate Debjyoti Datta appeared for the Respondent.

Facts of the case

An application under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an award. By the award, in addition to damages, the respondent has been directed to operate and run a retail outlet and, in effect, been granted specific performance of the dealership agreement.

The dispute arises from a 2004 dealership agreement between the petitioner and the respondent for the operation of a petrol pump. Following a 2011 joint industry inspection where fuel samples failed to meet quality specifications and evidence of tampered seals was discovered, the Petitioner issued a show-cause notice to terminate the dealership for malpractice under the Marketing Discipline Guidelines, 2005.

After an initial 2012 arbitral award was set aside by the court under Section 34 of the Arbitration and Conciliation Act, a new Sole Arbitrator was appointed via a Section 11 application, leading to the current impugned award following a fresh round of evidence and pleadings.

Contentions of the parties

It was contended on behalf of the Petitioner that the impugned award has been passed in violation of Section 34 of the Act, as it was passed on the touchstone of constitutional principles, where the parties had entered into a purely contractual relationship. It was also submitted that there was no relevance of Articles 12, 14 or 16 of the Constitution. It was submitted that the relief of restoration of the contract in awarding specific performance is in violation of Sections 14 and 16 of the Specific Relief Act.

On behalf of the Respondent, it was submitted that a mere error of law in terms of the proviso to Section 34(2A) of the Act is not a ground which warrants setting aside the award. The claim for damages in the award was adequately reasoned and deserves no interference.

Observations of the Court

The Court relied on a plethora of judgments and said, “In view of the above settled position of law, the direction in the award that the distribution agreement be specifically enforced despite the termination clause in the dealership agreement is in disregard of both the terms of the contract and the established precedent law on the subject… Each of those decisions was passed in petitions filed under Article 226 of the Constitution of India and in the peculiar facts of each case. A contravention of the substantive law of India would result in the death knell of an arbitral award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature.”

The Court observed, “Secondly, in passing the impugned award, the Arbitrator has embarked on a discussion on how the respondent Corporation is a State within the meaning of Article 12 of the Constitution of India and all their actions must be free from arbitrariness and fair. In going down this road, the Sole Arbitrator has painfully dwelled on the scope and ambit of Articles 12, 14, 16 and 19 of the Constitution and held that the action of the petitioner infringed the constitutional rights of the respondent both under Article 19 of the Constitution and on the ground of natural justice. The disputes between the parties were purely contractual in nature and had arisen out of a private dealership agreement.”

Conclusion

Accordingly, the Court observed that the impugned order is unsustainable and liable to be set aside. Hence, the Court allowed the application.

Cause Title: Indian Oil Corporation Ltd. v. Tapas Kuamr Das [Neutral Citation: 2025:CHC-OS:271]

Appearances:

Petitioner: Senior Advocate Jishnu Saha, Advocates Manwendra Singh Yadav, Saswati Chatterjee and Satabdi Naskar (Kundu).

Respondent: Senior Advocate Debjyoti Datta and Advocate Subhasis Bandopadhyay

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