Arbitrator who fixed rent for a lease he had no right to touch

The arbitrator was hired to settle a dealership fight. Instead, he rewrote a lease agreement he had zero jurisdiction over.

On a Pune afternoon in 2010, the arbitrator's pen scratched across the award as he delivered a decision that would unravel years of contractual certainty. The sole arbitrator, appointed by Indian Oil Corporation's marketing director, had been asked to decide a dispute between the oil giant and one of its dealers. The dealer had lost his petrol pump after a routine inspection found irregularities. He wanted his dealership back. But he also wanted something else — a rent hike from ₹1,750 a month to ₹35,000 a month for the land he had leased to Indian Oil 29 years earlier. The arbitrator gave him neither the dealership nor the full rent hike. But he did raise the rent to ₹10,000 a month and cut the lease from 29 years to under 20. The question that reached the Supreme Court in 2022 was simple: did the arbitrator have any right to touch the lease at all?

Two agreements, one dealer, one property

The story begins with two separate agreements, signed at different times, between the same two parties. Indian Oil Corporation (IOC) needed land to set up a petrol pump. The proprietor of Shree Ganesh Petroleum owned a plot and agreed to lease it to IOC for 29 years at ₹1,750 per month. That was the lease agreement — a straightforward commercial rental contract between a landlord and a tenant.

Separately, IOC appointed the same landowner as the dealer of that very petrol pump. That was the dealership agreement — a commercial arrangement that governed how the dealer would run the outlet, sell fuel, and comply with IOC's standards. The two agreements sat side by side, but they were independent. The lease did not depend on the dealership. The dealership did not depend on the lease.

During a routine inspection, IOC found irregularities — what it called MDG violations (a term for breaches of marketing discipline guidelines). The termination letter, dated to the period of the dealership dispute, ended the dealer's appointment. IOC terminated the dealership. The landowner-dealer was out.

When the arbitrator touched what was not his

The dealer challenged the termination. The dealership agreement had an arbitration clause (a clause that says disputes will be settled by an arbitrator, not a court), so an arbitrator — Mr. B.L. Parihar — was appointed by IOC's Director (Marketing) to hear the dispute. The dealer asked for two things: first, that the termination be set aside and his dealership restored; second, that the lease rent be increased from ₹1,750 to ₹35,000 per month.

The arbitrator upheld the termination. The dealership was gone for good. But on the rent issue, the arbitrator did something unexpected. He raised the monthly rent from ₹1,750 to ₹10,000, with a 10 per cent increase every three years, and reduced the lease period from 29 years to 19 years and 11 months. He had, in effect, rewritten a lease agreement that was not before him — an agreement that had its own arbitration clause requiring the Managing Director of IOC, not the Director (Marketing), to be the sole arbitrator.

The lower courts: a divided response

IOC challenged the award before the District Judge-3 in Pune under Section 34 of the Arbitration and Conciliation Act, 1996 (a provision that allows a court to set aside an arbitral award on limited grounds). The District Court, on 29 January 2013, partly agreed with IOC: it deleted the reduction in the lease period but upheld the rent enhancement. The order, read out in the Pune courtroom, restored the lease period but left the rent hike intact.

Both sides appealed to the Bombay High Court under Section 37 of the Act (which governs appeals against orders on Section 34 applications). On 11 September 2015, the High Court went further — it restored the full arbitral award, including the lease period reduction. The file, now thick with arguments and counter-arguments, travelled from Pune to Bombay and back again.

By the time the matter reached the Supreme Court, the arbitrator's rent hike and lease cut had survived two rounds of judicial scrutiny. IOC argued that the arbitrator had no jurisdiction over the lease at all — that he was appointed under the dealership agreement and could not wander into a separate contract.

The Supreme Court's answer: jurisdiction is not a buffet

The Supreme Court bench — Justice Indira Banerjee and Justice Abhay S. Oka — allowed IOC's appeal on 1 February 2022. The courtroom fell still as the order was delivered. The court held that the arbitrator had exceeded his jurisdiction by adjudicating disputes that arose under the lease agreement. The lease had its own distinct arbitration clause, which required the Managing Director of IOC to act as sole arbitrator. The arbitrator appointed under the dealership agreement — by the Director (Marketing) — had no authority to touch the lease.

The court applied Section 34(2)(a)(iv) of the Arbitration Act, which allows a court to set aside an award that deals with disputes beyond the scope of submission to arbitration. The arbitrator's mandate was limited to the dealership dispute. The lease was a separate contract between the same parties, but it was not part of the submission.

The court also held that the award was patently illegal — a ground for setting aside under Section 34(2-A) of the Act. An arbitral tribunal, being a creature of contract, cannot rewrite valid contractual terms that the parties agreed to with their eyes open. The rent of ₹1,750 and the lease period of 29 years were fixed terms. The arbitrator could not alter them simply because he thought they were unfair or outdated.

The Supreme Court drew a critical distinction: "A distinction must be drawn between failure to act in terms of a contract (patent illegality) and erroneous interpretation of contract terms (error within jurisdiction)." In this case, the arbitrator did not merely misinterpret the lease — he had no business interpreting it at all. He was appointed under the dealership agreement, and the lease was a separate instrument with its own arbitration mechanism. By rewriting the rent and lease period, he had stepped into a contract he was never authorised to enter.

THE PLAY: Before you file a claim before an arbitrator, check which agreement contains the arbitration clause — and whether the dispute you are raising arises under that agreement or a separate one.

Why the distinction matters

The Supreme Court drew a critical line: there is a difference between an arbitrator who misinterprets a contract (which courts generally do not interfere with) and an arbitrator who acts outside the contract entirely (which is patent illegality). The first is an error within jurisdiction. The second is an act without jurisdiction.

In this case, the arbitrator did not misinterpret the lease — he had no business interpreting it at all. He was appointed under the dealership agreement, and the lease was a separate instrument with its own arbitration mechanism. By rewriting the rent and lease period, he had stepped into a contract he was never authorised to enter.

The court also noted that the award was contrary to public policy under Section 34(2)(b)(ii) of the Act. Allowing an arbitrator to rewrite freely negotiated commercial terms would undermine the certainty that parties expect when they sign a contract.

What this means for every commercial contract

For advocates, CFOs, and founders who draft or litigate arbitration clauses, the lesson is sharp: arbitration clauses are not interchangeable. If you have two agreements between the same parties, each with its own arbitration clause, the arbitrator appointed under one cannot adjudicate disputes under the other — even if the disputes are related. The scope of submission is defined by the agreement that contains the arbitration clause, not by the convenience of the parties or the arbitrator.

The Supreme Court set aside the High Court's judgment, the District Court's order on rent and lease period, and the arbitral award to the extent it had increased the rent and reduced the lease period. The termination of the dealership stood. The lease went back to its original terms: ₹1,750 a month for 29 years.

The arbitrator had been hired to settle a fight over a petrol pump. He ended up rewriting a lease he had no right to touch.