Arbitrator's 'impossible' reading of contract gets award axed

The arbitrator read the contract one way. The High Court said no reasonable person would read it that way. The Supreme Court just picked a side.

Patel Engineering had already won twice — first before an arbitrator, then before a trial court. The Meghalaya High Court's reversal in February 2019 must have felt like a door slamming shut. The company had been awarded roughly ₹12 crore for extra transportation of sand and boulders from quarries to a hydroelectric project site. Then the High Court threw it all out. It called the arbitrator's interpretation of the contract "perverse" — a word that, in legal language, means the decision was so unreasonable that no sensible person would have reached it.

The question that hung over the case: When can a court set aside an arbitrator's reading of a contract? And does a judge's accidental reference to old case law automatically make that judge's decision wrong?

When the contract said one thing, but the arbitrator saw another

Patel Engineering had a construction contract with North Eastern Electric Power Corporation Ltd. (NEEPCO) for a hydroelectric project in Meghalaya. The project was divided into three packages. A dispute arose about the rate payable for extra transportation of sand and boulders — what the industry calls "extra-lead" — from quarries to the work site.

The contract contained Clause 33(ii)(a). Both sides agreed it governed the situation. But they disagreed violently on what it meant. The sole arbitrator, ruling in March 2016, read the clause in Patel Engineering's favour and awarded them the higher rate.

NEEPCO challenged the awards under Section 34 of the Arbitration Act (the provision that allows a court to set aside an arbitral award on limited grounds) before the Additional Deputy Commissioner (Judicial) in Shillong. That court upheld the awards. NEEPCO then appealed under Section 37 (the provision for appeals against Section 34 orders) to the Meghalaya High Court.

Why the High Court reversed

The High Court did something significant. It examined the contract itself — not just the arbitrator's reasoning, but the actual language of Clause 33(ii)(a). It concluded that the arbitrator's interpretation was one that no fair-minded person could adopt. The clause, read as a whole, simply did not support the rate the arbitrator had awarded. The High Court called the awards "perverse" and set them aside.

Patel Engineering filed its first Special Leave Petitions (SLPs — petitions seeking the Supreme Court's permission to appeal) before the Supreme Court. Those SLPs were dismissed in July 2019. That should have been the end.

Instead, the company filed review petitions before the High Court itself. It argued that the High Court had applied the wrong legal standard — specifically, that it had relied on pre-2015 amendment case law (the Saw Pipes and Western Geco judgments) when the law had changed after the 2015 Amendment to the Arbitration Act. The High Court dismissed those review petitions too.

The argument that almost worked

When Patel Engineering came to the Supreme Court a second time, its argument was clever. The 2015 Amendment to the Arbitration Act, effective from October 23, 2015, had introduced a new ground for setting aside domestic awards: "patent illegality" under Section 34(2A) (a specific provision that allows courts to set aside domestic awards if the arbitrator's decision violates a clear legal principle or a fundamental term of the contract). Before the amendment, courts had relied on a broader "public policy" ground under Section 34(2)(b)(ii) (the provision that allowed courts to set aside awards that violated the "public policy of India"). The pre-amendment standard, as interpreted in Saw Pipes and Western Geco, was wider and gave courts more room to interfere.

Patel Engineering argued that the High Court had applied the pre-amendment standard — the wider one — and that this was an error apparent on the face of the record. If the High Court had applied the narrower post-amendment standard, the argument went, it might not have set aside the awards.

What the Supreme Court actually decided

The Supreme Court bench — Justice R. Banumathi, Justice Indu Malhotra, and Justice Aniruddha Bose — dismissed the SLPs. But the reasoning matters more than the result.

The court held that the High Court had, in substance, applied the correct standard. Yes, the High Court had cited Saw Pipes and Western Geco in its judgment. But citing old case law does not automatically make a decision wrong. What matters is the test actually applied. The High Court had found the arbitrator's interpretation to be one that no reasonable person could take — and that, the Supreme Court said, is exactly the post-amendment "patent illegality" standard.

The court relied on its own recent judgments in Associate Builders v. Delhi Development Authority and Ssangyong Engineering v. NHAI, which had clarified that after the 2015 Amendment, an award is patently illegal only if the arbitrator's construction of the contract is one that no fair-minded or reasonable person would take — the view must not even be a "possible view."

The Supreme Court also noted that Patel Engineering's first SLPs had already been dismissed. A review petition on the same grounds, filed before the High Court, could not succeed. And the Supreme Court would not interfere with the dismissal of such a review.

What this means for every arbitration

For practitioners, this judgment draws a clear line. An arbitrator has wide freedom to interpret a contract — but that freedom is not absolute. If the interpretation is so far-fetched that no reasonable person could adopt it, a court can step in under the "patent illegality" standard. And a court's judgment is not automatically invalid just because it cites pre-amendment case law, as long as the actual test applied is consistent with the current law.

THE PLAY: When challenging an arbitral award, focus on whether the arbitrator's interpretation was even a possible reading of the contract — not on whether the court cited the right case names.

The sand and boulders stayed where they were. The contract said what it said. And the arbitrator's reading, in the end, was just not possible.