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State of Chhattisgarh v. M/s Sal Udyog (P) Ltd

Civil Appeal · 2021 INSC 705Decided 8 Nov 2021
Civil Appeal No. 4353 of 2010
Chief Justice N.V. Ramana · Justice Surya Kant · Justice Hima Kohli

Background

The State (originally Madhya Pradesh, later Chhattisgarh after reorganisation) had a long-running agreement with a private company for supply of Sal seeds (a forest produce). After the State terminated the agreement in 1998, the company invoked arbitration claiming a refund of amounts allegedly overpaid, including "supervision charges" the State had levied over the years. An arbitrator awarded a large sum in the company's favour, rejecting the State's claim to retain supervision charges. The District Court and then the High Court largely upheld the award (only reducing the interest rate), prompting the State to appeal to the Supreme Court specifically on the supervision-charges issue.

Decision Breakdown

The Supreme Court held that the arbitrator had ignored the clear terms of the agreement (which expressly included "handling and supervision charges" as part of the price) and a government circular fixing such charges at 10%, despite the company never having objected to paying these charges for years. The Court held this amounted to "patent illegality", a recognised ground for setting aside a domestic arbitral award when the arbitrator's decision goes against the plain terms of the contract, and that this ground survives even if not expressly raised at every earlier stage, since courts can invoke it on their own under Section 34(2-A) of the Arbitration Act. The Court set aside the part of the award directing refund of supervision charges, while leaving the rest of the award (and High Court judgment) intact. The appeal was partly allowed.

Lesson Learnt

An arbitrator must decide disputes in line with the actual terms of the contract between the parties; ignoring a clear, long-accepted contractual term (like an agreed charge both sides followed for years without objection) can get an award partly struck down in court even though arbitration awards are normally given great deference.

Official source (sci.gov.in)View Judgment (PDF)

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