Arbitrator appointed under one contract cannot rewrite another

An arbitrator was only supposed to settle a dealership dispute. Instead, he raised the rent from ₹1,750 to ₹10,000 and cut the lease by 9 years. The Supreme Court had to decide whether a man appointed to fix one problem could rewrite an entirely separate contract — or whether he had crossed a line that no arbitrator is allowed to cross.

Two contracts, one piece of land

Indian Oil Corporation (IOC) needed a plot of land to set up a petrol pump in Rajgurunagar. The land belonged to the proprietor of Shree Ganesh Petroleum. In 1981, the two parties signed a registered lease deed: 29 years, at ₹1,750 per month. The document was crisp, the terms clear. The ink on that signature page bound both sides for nearly three decades.

But there was a second document. IOC also appointed the landowner as the dealer to run the petrol pump. That dealership agreement had its own term — 15 years — and its own arbitration clause. The lease deed, meanwhile, contained a separate arbitration clause naming the Managing Director of IOC as the arbitrator for any lease disputes.

Two contracts. Two arbitration clauses. Two different decision-makers. The landowner and IOC were bound by both agreements, but each one had its own rules.

When the inspection found trouble

For years, the arrangement worked. Then came a routine inspection. IOC officials found irregularities at the petrol pump — what the judgment calls "MDG violations" (the rulebook for dealership operations). The inspection report was damning. The violations were serious enough that IOC terminated the dealership agreement.

The landowner-dealer did not accept this. He invoked the arbitration clause under the dealership agreement and challenged the termination. The Director (Marketing) of IOC appointed a sole arbitrator to hear the dispute.

So far, everything was by the book. The dealership agreement said the Director (Marketing) would appoint the arbitrator. That is what happened. The arbitrator was supposed to decide whether the termination was valid.

The award that went too far

The arbitrator upheld the termination. The dealership was gone. That should have been the end.

But the arbitrator did not stop there. On his own, he decided to rewrite the lease deed — the separate contract between IOC and the landowner. He increased the monthly rent from ₹1,750 to ₹10,000, with a 10% increase every three years. He also cut the lease period from 29 years to 19 years and 11 months. The arbitrator was appointed under the dealership agreement. He had no authority over the lease. He did it anyway. The courtroom fell silent when the award was read out — the lease had been gutted by a man who was never meant to touch it.

IOC went to the District Court in Pune under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that allows a party to ask a court to set aside an arbitral award). The District Judge partly agreed with IOC and modified the award on the lease terms. Both sides appealed to the Bombay High Court under Section 37 (the provision for appeals against orders on arbitral awards). The High Court restored the full arbitral award on the lease — meaning the rent hike and the shortened lease period were back in force.

IOC appealed to the Supreme Court.

The question the court had to answer

The core issue was simple: could an arbitrator appointed under one contract decide disputes arising from a completely separate contract?

IOC argued that the lease deed and the dealership agreement were independent documents. The lease had its own arbitration clause, which named the Managing Director as the arbitrator. The dealership agreement named the Director (Marketing). The arbitrator was appointed under the dealership agreement. He had no jurisdiction — no legal authority — to touch the lease. By modifying the rent and the lease period, he had acted beyond the scope of the submission to arbitration.

The landowner-dealer argued that the two agreements were connected. The lease existed because of the dealership. The arbitrator was entitled to look at the overall relationship between the parties. Changing the lease terms was within his power because the two contracts were part of the same commercial arrangement.

The Supreme Court had to choose between these two positions.

Why the arbitrator had no power to touch the lease

The bench — Justice Indira Banerjee and Justice Abhay S. Oka — held that the arbitrator had clearly exceeded his jurisdiction. The reasoning turned on three points.

First, the two agreements were separate. The lease deed was a registered document with its own arbitration clause. The dealership agreement was a different contract. An arbitrator appointed under one cannot adjudicate disputes under the other. The court applied Section 34(2)(a)(iv) of the Arbitration Act (the ground that an award can be set aside if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration). Since the arbitrator was appointed under the dealership agreement, the lease dispute was outside his scope.

Second, an arbitrator cannot rewrite a valid contract. The lease deed was signed by both parties with their eyes open. The rent was ₹1,750 per month. The term was 29 years. The arbitrator had no power to change either. The court held that modifying contractual terms in this way was "patently illegal" — a ground for setting aside an award under Section 34(2-A) of the Act (which allows a court to set aside an award that is vitiated by patent illegality appearing on the face of the award). The Supreme Court observed, as recorded in the judgment, that an arbitrator "cannot alter or rewrite the terms of a valid contract executed between parties with their eyes open." An award that does so is patently illegal and against public policy.

Third, the court clarified that an arbitrator is a creature of contract. The arbitrator's power comes from the agreement that appoints him. He cannot go beyond that agreement. If he does, the award is invalid to the extent of the excess.

The precedents that guided the court

The Supreme Court relied on several of its own decisions. In Associate Builders v. Delhi Development Authority (2015), the court had held that an award is patently illegal if the arbitrator ignores a specific term of the contract or acts beyond the scope of the submission. In Ssangyong Engineering and Construction Company Limited v. NHAI (2019), the court had clarified that the patent illegality ground under Section 34(2-A) applies when the arbitrator's decision is so perverse that no reasonable person could have reached it.

The court also cited Rahul Yadav v. Indian Oil Corporation Limited (2015), a case involving similar facts where the court had held that an arbitrator appointed under a dealership agreement could not decide disputes under a lease deed. That precedent was directly on point.

What the court did

The Supreme Court allowed IOC's appeal. It set aside the Bombay High Court's judgment. It also set aside the District Court's order insofar as it had modified the lease terms. The arbitral award of November 4, 2010 was set aside to the extent that the arbitrator had increased the rent and reduced the lease period.

The termination of the dealership stood. The lease deed remained as it was originally written: 29 years, ₹1,750 per month.

The court did not disturb the part of the award that upheld the termination. That was within the arbitrator's jurisdiction. Only the part that touched the lease was struck down.

THE PLAY: If your contract has its own arbitration clause, make sure the arbitrator is appointed under that clause — not under a different agreement — or the award on that contract will be set aside.

Why this matters for every commercial contract

For lawyers and business owners, this case is a reminder that arbitration clauses are not interchangeable. A company that signs multiple agreements with the same party cannot assume that one arbitrator can decide everything. Each contract must be treated separately. If a dispute arises under a lease, the lease's arbitration clause must be invoked. If a dispute arises under a dealership agreement, that agreement's clause must be used. Mixing them up can invalidate the entire award on that part of the dispute.

For arbitrators, the message is equally clear: stay within your mandate. An arbitrator's power is defined by the agreement that appoints him. Going beyond that — even to fix something that seems unfair — is an excess of jurisdiction that will not survive judicial scrutiny.

The lease deed remained exactly as it was written.