Arbitrator Cannot Rewrite Contract By Ignoring Express Pre-Conditions; Award Set Aside: Delhi High Court U/S 34 Arbitration Act - 2025-09-10

Arbitral Award That Rewrites Contractual Pre-Conditions Violates Public Policy, Delhi High Court Sets it Aside

New Delhi: In a significant ruling on the scope of judicial review under arbitration law, the Delhi High Court has set aside an arbitral award, holding that an arbitrator cannot ignore express contractual pre-conditions and effectively rewrite the bargain between parties. Justice Jasmeet Singh, presiding over the case, found the award to be in conflict with the fundamental policy of Indian law and the principles of natural justice.

The Court allowed a petition filed by Bharat Heavy Electricals Limited (BHEL) under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an award that had granted Rs. 13.65 lakh to a Chinese firm, Xiamen Longking Bulk Material Science & Engg. Co. Ltd. (Xiamen Longking).

Background of the Dispute

The case originated from a 2016 contract where BHEL issued three Letters of Award (LoA) to Xiamen Longking for the supply, erection, and commissioning of a Mill Reject System (MRS). A crucial part of Xiamen Longking's bid was its Project Execution Methodology (PEM), which explicitly undertook to establish a project office and open a bank account in India to manage the Indian component of the contract, a mandatory requirement for issuing purchase orders and remitting payments in Indian Rupees.

However, Xiamen Longking failed to fulfill this obligation and instead proposed using the bank account of an associated Indian company. When BHEL insisted on strict adherence to the PEM, the Chinese firm sent an email on June 3, 2017, stating it could not continue the project under these conditions. BHEL treated this as a repudiation of the contract, invoked the "risk and cost" clause, and terminated the agreement.

Xiamen Longking subsequently initiated arbitration, claiming over Rs. 3 crore for various costs, while BHEL filed a counter-claim of over Rs. 2 crore. The arbitrator rejected most claims but awarded Rs. 13.65 lakh to Xiamen Longking for the cost of preparing 65 technical drawings.

Key Arguments in Court

BHEL's Submissions: BHEL, represented by Advocate Arvind Chaudhary, argued that the arbitral award was perverse and patently illegal. The primary contentions were:

* Rewriting the Contract: The arbitrator ignored the express contractual mandate in the PEM for setting up a local office and bank account, wrongly concluding it was not a necessary pre-condition.

* Violation of Natural Justice: The arbitrator erroneously relied on a contract clause regarding payment via a Letter of Credit (LC) as a possible alternative. This was a point never pleaded or argued by either party, thus denying BHEL an opportunity to respond.

* Award Without Evidence: The award of Rs. 13.65 lakh for drawings was based on no evidence, unsupported by any calculation, and contradicted the arbitrator's own reasoning for rejecting similar unproven claims from the Chinese firm.

Xiamen Longking's Position: Though the respondent did not appear for the final hearings, their written reply contended that:

* The scope of interference under Section 34 is extremely narrow.

* Opening a local office was a later-stage formality, not a pre-condition for work to commence.

* BHEL had illegally terminated the contract while the respondent was willing to perform.

High Court's Analysis and Decision

Justice Jasmeet Singh conducted a thorough analysis and sided with BHEL on all major grounds.

On Ignoring Contractual Terms: The Court found that a "conjoint reading of the PEM, LoA and GCC leaves no scope for payment to any unrelated third party or for waiver of the local office/bank account requirement." The arbitrator’s finding that these conditions could be deferred or substituted with video-conferencing was deemed a direct departure from the contractual framework.

Quoting from the judgment: "By disregarding these stipulations and denying the obligations, the learned arbitrator has in effect re-written the contract... A construction treating these obligations as optional or deferrable until after material dispatch is inconsistent with the contractual framework..."

The Court cited the Supreme Court's decision in PSA Sical Terminals (P) Ltd. v. V.O. Chidambranar Port Trust , reinforcing that rewriting a contract for the parties breaches fundamental principles of justice and "shocks the conscience of the court."

On Violation of Natural Justice: The Court held that the arbitrator's suo motu reliance on the unpleaded ground of payment via an LC prejudiced BHEL. "By introducing the Note to Clause 9.6 as a determinative factor, without affording the parties an opportunity to address it, amounts to a violation of Section 18 of the Act, which guarantees a full opportunity to present one’s case," the bench noted.

On the Award for Drawings: The Court concluded that the award of Rs. 13.65 lakh lacked any evidentiary basis and was based on "conjectures rather than evidence." The judgment highlighted that the arbitrator himself had rejected other similar claims from Xiamen Longking for lack of proof, yet inexplicably allowed this one without providing any reasoning or calculation.

Final Verdict

In light of these findings, the Court set aside the entire arbitral award dated July 3, 2020.

"Consequently, the present petition under Section 34 of the Act is allowed and the Arbitral Award... is hereby set aside, being in conflict with the fundamental policy of Indian law as well as the fundamental principles of natural justice," the Court ordered.

BHEL was permitted to withdraw the amount it had deposited with the court registry, along with accrued interest.