Recently, in Indian Oil Corporation. Ltd. v. Shree Ganesh Petroleum, (2022) 4 SCC 463, the Supreme Court of India ("Supreme Court") has reiterated that courts and arbitral tribunals have limited jurisdiction when it comes to interfering with the terms of a contract.

The principle that an Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted, has been emphasised by the Hon'ble Courts in India, time and again.

In the present case, the lessor invoked the arbitration clause under the dealership agreement and approached the Marketing Director of the lessee who appointed a sole arbitrator. Whereas, the dealership agreement and lease agreements were separate and distinct agreements. Therefore, the arbitral tribunal had no jurisdiction to adjudicate upon any dispute pertaining to the lease agreement, which contained a distinct mechanism for reference of disputes to arbitration.

In Ganesh Petroleum (supra), the Supreme Court has revisited the jurisprudence that any re-writing or interpretation of the contract, which is not intended by the parties, would amount to a breach of fundamental principles of justice entitling the court in appeal to interfere under S.34 of the Arbitration and Conciliation Act, 1994 ("Act).

It has been emphasised by the Hon'ble Supreme Court in the Ganesh Petroleum (supra) judgment, that an Arbitral Tribunal is entitled to interpret the terms and conditions of a contract while adjudicating a dispute. However, it has also delineated that a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. The Hon'ble Supreme Court has while reemphasizing that an Arbitral Tribunal is entitled to interpret the terms and conditions of a contract while adjudicating a dispute, stated that an error in interpretation of a contract in a case where there is a valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within the jurisdiction.

On the court's scope of interference under S.34, the Hon'ble Supreme Court has stated that the Court does not sit in appeal over the award made by an Arbitral Tribunal. The Court does not ordinarily interfere with the interpretation made by the Arbitral Tribunal of a contractual provision unless such interpretation is patently unreasonable or perverse. Where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award, only because the Court is of the opinion that another possible interpretation would have been a better one.

Therefore, it has been established that an award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract

Referring to the judgments of the Supreme Court in Associate Builders1 , Ssangyong Engineering2 and PSA Sical3 , Supreme Court held that an award ignoring the terms of a contract would not be in the public interest.

The Supreme Court in this judgement has correctly held that where parties have entered into a contract with their eyes wide open, it is not for the courts or arbitrator(s) to interfere with the terms of the same. This judgment, in line with the other pronouncements of the Supreme Court, is establishing the principle of 'Limited Jurisdiction' of the Arbitral Tribunal and clarified that the arbitrator can only adjudicate within the four corners of a contract and any adjudication by an arbitrator beyond the terms of the contract would not be jurisdictional.


1 Associate Builders v. Delhi Development Authority (2015) 3 SCC 49

2 Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (2019) 15 SCC 131

3 PSA SICAL Terminals Pvt. Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Others (2021) SCC Online SC 508

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