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Arbitral Award Granted Outside Contractual Terms Undermines Sanctity of Contracts

In Union of India through Garrison Engineer AF v. Yauk Engineers [2024 AHC 59078] dated April 5, 2024, the Allahabad High Court held that an arbitrator being a creature of the contract undermines the sanctity of contracts and trust in the arbitration process by granting an award that goes beyond the confines of clear and explicit contractual terms.

M/s. Yauk Engineers (respondent) entered into a contract with the appellant to supply a 33KV transformer. This contract stipulated completion of the work within 18 months, and the contract was duly completed on August 9, 1997, with the certificate being issued on August 14, 1997. As per the clauses of the contract, the respondent guaranteed efficient performance of the installation for a period of 12 months post-completion, for which a separate undertaking was furnished in writing. 

In June 1998, the supplied transformer became defective, prompting rectification by the respondent, who sought reimbursement of the incurred rectification costs. Based on the undertaking provided by the respondent, the appellant contended that it was not liable to reimburse any costs incurred towards the rectification of defects and thus, disputes arose in this regard. This led to arbitration proceedings wherein the arbitrator ordered the appellant to pay the reimbursement costs inclusive of interest to the respondent.

 

This award was challenged by the appellant under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”) which was dismissed. Aggrieved by the same, the appellant has brought the present appeal under Section 37 of the Act.

 

Apart from emphasizing on the retrospective action of the applicable law in the present case, the court observed that an arbitrator is a creature of the contract and therefore must act within the confines of the contractual terms. While observing that going beyond the terms of the contract not only undermines the autonomy of the parties but also affects the legitimacy and enforceability of an arbitral award, the court noted that the present case was not one where the terms of the contract were ambiguous requiring the tribunal to exercise its discretion. 

It further stated that the terms of the contract were clear and explicit to show that the efficient performance of the installation/transformer was guaranteed by the respondent and therefore, by granting an award in favour of the respondent for reimbursement of costs, the arbitrator traversed beyond the confines of the contract terms, relieving the respondent of its obligations under the contract. Holding that this award set a dangerous precedent that undermines the sanctity if contracts and trust in the arbitration process, the court partially set aside the award.