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Introduction
In this India seated arbitral challenge, the Supreme Court of India ("Supreme Court") upheld the Orissa High Court ("High Court") Division Bench's decision setting aside an award that had granted substantial reliefs to the contractor. The Court found the following flaws in the Award: (i) denial of equal treatment and full opportunity (Section 18; Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996 (hereinafter "Act")), and (ii) impermissible "contract-rewriting," including dilution of a strict "no-oral-modification/no-waiver" regime and of sequenced performance-testing preconditions. Given the pervasiveness of these defects, severance or partial salvage of the award was ruled out.
The appeal arose from the Division Bench judgment under Section 37 of the Act that set aside both a Section 34 order and the underlying arbitral award. The Supreme Court dismissed the contractor's appeal, affirming that the High Court acted within the narrow supervisory bounds of Sections 34 and 37 because the award offended fundamental requirements of equal treatment, fair opportunity, and contractual fidelity. While party autonomy permits differing choices for substantive law, arbitration agreement law, and procedural law, those choices must operate under the lex arbitri at the seat: in this case, the Act.
Factual Background
The dispute stemmed from a multi-contract EPC package for a coal-fired power project at Kamalanga, Odisha encompassing three 350 MW units (Units 1–3) with later contemplation of a fourth unit. Key instruments included the CWEETC (Agreement for Civil Works and Engineering, Erection, Testing and Commissioning) and allied onshore/offshore supply agreements (collectively, "EPC Agreements"). Unit 4 was suspended in August 2011. Subsequently, owing to delays in the Project, the parties met at Jinan City, People's Republic of China, recording Minutes dated 7 November 2012 ("Jinan Agreement"). As numerous disputes arose between the parties, the contractor went on to demobilize from the sites of construction around January 2015 and subsequently issued a Notice of Dispute against the owner. This was followed by Notice of Arbitration leading to constitution of an arbitral tribunal comprising three members. The three-member tribunal rendered an award largely in the contractor's favour.
On challenge, the Single Judge under Section 34 of the Act rejected the owner's objections; however, the Division Bench under Section 37 of the Act reversed the judgment assailed, setting aside both the Section 34 order and the award. The contractor appealed to the Supreme Court.
Contractual Architecture that the Arbitral Tribunal was required to apply
A strict No-Oral-Modification/No-Waiver (NOM) clause:
The amended CWEETC contained a clause requiring that any variation or waiver thereof should be in writing and signed by both parties. Although the Arbitral Tribunal had rejected the contention raised on behalf of the contractor that the condition precedent for the allegedly mandatory contractual notices stood waived by the parties in March 2010, the Arbitral Tribunal placed reliance on the Jinan Agreement and the concerned emails from March 2012 that the condition for contractual notices was waived; a ground never raised by the contractor. The owner was never given an opportunity to exhibit evidence to this effect. Despite the owner's reliance on the "No Oral Modification" clause, the Tribunal deemed equitable estoppel to have arisen in March 2012. This observation amounted to modification of the terms of the contract.
A detailed, time-bound notice regime for claims:
The contract stipulated an initial prompt notice (e.g., within hours/days), periodic particulars, and a final, comprehensive claim package within set timelines. The Arbitral Tribunal applied the notice regime unevenly. For the contractor, it inferred a waiver, thereby easing the contractor's obligation to give notices, on the strength of materials that did not satisfy the agreement's strict waiver mechanics. For the owner, however, the Arbitral Tribunal insisted upon exacting compliance with the same notice provisions when evaluating the owner's counterclaims.
Sequenced performance-testing preconditions:
The contract required performance tests to follow a sequence. The Unit Characteristics Test had to be completed successfully before the Performance Guarantee Test could count. Records demonstrated that the Unit Characteristics Test failed. Therefore, the Performance Guarantee Test could not have been successful. Yet the Arbitral Tribunal treated the Performance Guarantee Test as "successfully completed" and ruled in favour of the contractor. In doing so, it ignored the unmet preconditions, rewrote the milestone requirements, and modified the agreement's express terms. This exceeded the Arbitral Tribunal's authority, which was contrary to the public policy of India.
Issues Before the Supreme Court
After consideration of the facts and circumstances of the case and the relevant legal matrix, Supreme Court of India considered and gave its decision the following broad issues:
1. Whether the Division Bench exceeded the limited remit of Section 37 of the Act by re-appreciating evidence and contractual interpretation;
2. Whether the Arbitral Tribunal's findings on waiver/estoppel and notices denied the owner equal treatment and a fair opportunity to present its case (Section 18; Section 34(2)(a)(iii)) of the Act;
3. Whether the Arbitral Tribunal impermissibly departed from the contract text; including and not limited to the NOM clause and the testing sequence, amounting to "contract-rewriting"; and
4. Whether any parts of the award could be severed and preserved without it amounting to judicial modification.
The Court's Analysis
Metting the Section 34/37 Threshold:
The Court emphasised that scrutiny under Sections 34 and 37 is supervisory in character and not a rehearing on appeal. Even so, judicial intervention is warranted where an arbitral tribunal denies a party equal treatment or a full and fair opportunity to present its case, or where the decision departs from the fundamental policy of Indian law or the parties' own contractual bargain. Measured against these standards, the Supreme Court held that the Division Bench in the appeal under Section 37 of the Act, was entitled to examine the contract language and the evidentiary record with care. The grievances raised were about due process and adherence to the agreed terms, rather than mere disagreements on the merits, and thus properly attracted the court's limited but real supervisory jurisdiction.
Notice as a Condition Precedent and the Tribunal's finding of "Waiver"-and Departure from contract text:
The Arbitral Tribunal acknowledged that the contractor had not proven strict compliance with the contract's notice regime for several claim heads. Still, it treated notices as "waived," relying on the 2012 email exchange and the Jinan Agreement; although the contractor had not pleaded this as a case of waiver and the owner had been provided no fair chance to contest it with evidence.
The Supreme Court characterised this as twofold error, observing that a breach of due process arises under Section 18 and Section 34(2)(a)(iii) of the Act when a tribunal introduces a case not pleaded into the adjudication; and then relies upon it as a decisive ground without first giving the affected party a fair opportunity to respond. Parties are entitled to know the case they must meet and entitled to make submissions accordingly. When a tribunal departs from the pleaded contours of the dispute, it undermines the guarantees of equal treatment and a full opportunity to present one's case, thereby vitiating the award.
Separately, the agreement contained a strict No-Oral-Modification clause that requires any waiver or variation to be recorded in a signed writing. By treating informal communications as equivalent to a formal, signed waiver, the Arbitral Tribunal diluted the parties' negotiated safeguard. Where parties have deliberately installed a tight waiver mechanism, arbitral tribunals are bound to apply that mechanism as written and not relax the same in the name of equity or convenience.
Further, the Supreme Court noted several additional instances in which the Arbitral Tribunal granted substantial monetary relief despite clear defects in the evidentiary record and in the face of contractual requirements that were neither optional nor ambiguous, for example, requirements pertaining to the nature and quality of proof, the method of quantification, and the protocols for documenting and settling claims.
The Supreme Court affirmed the larger principle that flows from these lapses: when adjudication departs from agreed arrangements, whether by relaxing contractual thresholds or by relying on theories that were never pleaded or proved, the integrity of the award is compromised on fundamental-policy grounds. In such circumstances, the defect is not merely technical; it strikes at the core of due process, warranting judicial intervention.
Section 18 of the Act: Equal Treatment and a Fair Opportunity to present its case:
The Supreme Court emphasised that the Arbitral Tribunal enforced the contract's notice requirements inconsistently. It treated the contractor as having a waived notice obligation based on materials that fell short of the agreement's strict waiver formalities, thereby easing the contractor's burden. By contrast, when assessing the owner's counterclaims, the Arbitral Tribunal demanded strict, literal compliance with the very same notice provisions.
The court held that this imbalance goes to the heart of equal treatment. A single contractual framework cannot be relaxed for one party and rigidly enforced against the other without disturbing the adversarial balance. By lightening the contractor's burden while tightening the owner's, the Arbitral Tribunal produced a procedural asymmetry that prejudiced the owner. Section 18 of the Act requires that parties stand on an equal procedural footing and receive a full and fair opportunity to present their cases. Those guarantees were not honoured here.
No Room for Salvage or "Surgical" Modification:
The Court also indicated that severance was not an option. Even if certain claim heads such as claims linked to the Unit-4 suspension/cancellation, appeared to be self-contained, the Supreme Court held that they could not be salvaged. The award is tainted by structural defects: unequal treatment of the parties, denial of a fair opportunity to meet the case, and a departure from the contract's express allocation of risk and procedure. These were foundational breaches that infect the award as a whole. To extract and uphold "clean" fragments would require the Court to re-engineer the award, which is impermissible. Where the errors go to due process and contract fidelity, partial affirmation is inappropriate; and the award must be set aside in its entirety.
Takeaways
The Supreme Court's judgment is a pointed reminder that arbitral autonomy coexists with mandatory safeguards anchored in the Act and the contract between the parties. Procedural fairness is substantive, not cosmetic. This case affirms that "equal treatment" and a "full opportunity to present one's case" are hard guarantees, not box-ticking rituals. When a tribunal introduces a case not pleaded or imposes uneven standards on the parties, it tilts the playing field and taints the award. Such defects are not harmless; they strike at the integrity of the process and expose the award to annulment.
The judgment also serves as a reminder that text prevails over intuition. Where parties have installed precise gates—signed written waivers, staged performance tests, documented and timely claims—tribunals must honour those thresholds as written. To relax, or gloss over these conditions is not "interpretation"; it is modification of the bargain. Arbitral authority begins with the contract and ends at its edges.
It is also pertinent to note that severance is not a cure-all. When violations of due process and departures from contractual fidelity run through an award, courts will not engage in surgical salvage. Where partial preservation would require the court to reshape the award, only course is to set the award aside.
Lastly, the cross-border ramifications of this judgment will be noteworthy, as it highlights a divergence between India's contract-centric posture and systems that permit arbitrators greater discretion to temper formal requirements with commercial fairness. Foreign contractors may encounter unanticipated exposure in India-seated arbitrations and in enforcement proceedings before Indian courts, and in practice, this may push foreign investors to opt for non-Indian seats. The ruling elevates the role of Indian courts in shaping arbitral outcomes, thereby intensifying concerns about intervention and predictability for cross-border participants.
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