Rs. 278 crore power deal: When can a court overturn an arbitrator's award?

The High Court cut a Rs. 278 crore award by more than half. The Supreme Court just reversed that — and laid down one rule every party to a contract needs to know. A sole arbitrator had spent months untangling a power purchase agreement gone sour, only for a High Court bench to re-read the contract and decide the arbitrator got it wrong.

Could a judge do that? The answer, the Supreme Court just made clear, is almost never.

When the fuel switch sparked a Rs. 278 crore fight

Reliance Infrastructure had signed a Power Purchase Agreement (PPA) with the State of Goa to generate electricity. The deal was straightforward: Reliance would build and run a power plant, and Goa would pay for the electricity. Then the fuel changed. The plant had been designed to run on Naphtha, but the government shifted policy toward cleaner fuel — Regasified Liquefied Natural Gas (RLNG).

The switch created a cascade of disputes. How should the price be recalculated for the new fuel? Could the plant's contracted capacity be "downrated" (reduced) because RLNG produced less power than Naphtha? What about the variable charges on 4 MW of power that Reliance sold to third parties with Goa's permission? And how should backup power supplied by the state be "netted out" against what Reliance owed?

By May 2013, the State of Goa stopped paying altogether. Reliance was left holding a contract that, on paper, was worth hundreds of crores — but in practice, had become a dead letter. The silence in the state's payment office was matched only by the growing stack of unpaid invoices on Reliance's desk.

The arbitrator's award: Rs. 278.29 crore

The dispute went to a sole arbitrator — Justice B.P. Singh, a former Supreme Court judge. After hearing both sides, examining the PPA clause by clause, and applying the governing law, the arbitrator delivered an award of Rs. 278.29 crore in favour of Reliance Infrastructure. The award covered all four heads of dispute: variable charges on RLNG, downrating of capacity, variable charges on the 4 MW third-party sale, and the netting-out of backup power. In the room where the award was read, the only sound was the rustle of paper as the arbitrator's handwritten notes were set aside and the final order was announced.

The State of Goa challenged the award before the Commercial Court (the Principal District & Sessions Judge, North Goa, Panjim) under Section 34 of the Arbitration and Conciliation Act, 1996 — the provision that allows a court to set aside an arbitral award on very limited grounds. The Commercial Court dismissed the challenge. The award stood.

The State then appealed under Section 37 of the same Act (the provision for appeals against orders under Section 34) to the Bombay High Court, Goa Bench. And there, the award was gutted.

When the High Court became a third arbitrator

The Bombay High Court partially allowed the State's appeal. It re-examined the evidence, re-interpreted the contract, and slashed the award by more than half. The High Court effectively substituted its own view of what the PPA meant for the arbitrator's view. The courtroom fell silent as the order was pronounced — the stack of PPA clauses on the bench seemed to weigh heavier than before.

Both parties appealed to the Supreme Court. Reliance wanted its full award back. The State wanted the High Court's reduction upheld. The core question before the Supreme Court was deceptively simple: Had the High Court exceeded the narrow jurisdiction that Sections 34 and 37 give to courts reviewing arbitral awards?

The answer would determine not just this Rs. 278 crore dispute, but the fate of hundreds of commercial contracts across India.

The razor-thin line between 'error' and 'patent illegality'

The Supreme Court's framework for reviewing arbitral awards is built on a careful distinction. Under Section 34(2A) of the Arbitration Act, a court can set aside an award only if it suffers from "patent illegality" — an illegality that is apparent on the face of the award, not one that requires the court to dig through evidence and re-argue the case.

The proviso to Section 34(2A) is explicit: an award cannot be set aside merely because the arbitrator applied the law incorrectly or because the court disagrees with the arbitrator's appreciation of the evidence. The error must be so fundamental that it jumps off the page.

The Supreme Court has repeatedly drawn this line in landmark judgments. In Associate Builders v. DDA (2015), the court held that interference is justified only if the arbitrator's construction of the contract is one that "no fair-minded and reasonable person could make." In Ssangyong Engineering v. NHAI (2019), the court clarified that "patent illegality" does not include a mere erroneous application of law — it requires something that shocks the conscience of the court.

And in Delhi Airport Metro Express v. DMRC (2022), the court reiterated that the scope of review under Section 37 cannot travel beyond the restrictions laid down under Section 34. A court hearing an appeal under Section 37 must only check whether the Section 34 court exceeded its power — it cannot itself re-appreciate evidence.

Why the High Court's approach failed

The Supreme Court bench — Justices Dinesh Maheshwari and Sanjay Kumar — examined the High Court's judgment closely. What they found was a pattern of re-appreciation. The High Court had gone through each head of claim, re-weighed the evidence, and substituted its own interpretation of the PPA for the arbitrator's.

On the variable charges for RLNG, the High Court decided that the arbitrator's reading of the contract was wrong. On downrating of capacity, the High Court held that the plant's capacity should not have been reduced. On the 4 MW variable charges, the High Court disagreed with the arbitrator's calculation method. On netting-out of backup power, the High Court imposed its own formula.

The Supreme Court held that none of these findings amounted to "patent illegality." The arbitrator had construed the contract in a reasonable manner. The High Court's disagreement — however strongly felt — was not enough to set aside the award. The court stated: "If an arbitrator construes terms of a contract in a reasonable manner, the award cannot be set aside; interference arises only if the construction is one no fair-minded and reasonable person could make." The smell of old paper from the case files seemed to fill the courtroom as this principle was reaffirmed.

The judgment: Reliance gets its award back

The Supreme Court allowed Reliance Infrastructure's appeal. The High Court's partial setting aside of the award on variable charges, downrating, 4 MW variable charges, and netting-out was reversed. The award of Rs. 278.29 crore was restored on those heads.

The State of Goa's limited challenge regarding the interest rate was addressed separately, but the core of the award survived.

The Supreme Court also issued a clear warning: the narrow scope of Sections 34 and 37 cannot be breached by using different expressions that refer only to "error" rather than "patent illegality." A court cannot dress up a disagreement as a legal error and then set aside an award.

What this means for every party to a contract

For lawyers, CFOs, and founders who draft and litigate commercial contracts, this judgment is a reminder of a fundamental principle: arbitration is meant to be final. The arbitrator is the master of facts and contract interpretation. A court can intervene only when the award is so perverse that no reasonable person could have reached it.

THE PLAY: When challenging an arbitral award, do not argue that the arbitrator got the facts or the contract wrong — argue that the award is so fundamentally illegal that it cannot stand without re-examining any evidence.

The High Court cut a Rs. 278 crore award by more than half. The Supreme Court just reversed that — and laid down one rule every party to a contract needs to know. The rule is this: arbitration is not a rehearsal for litigation. It is the final act.