1. Dispute over payment for blanket supply rejected for substandard quality — Section 37, Arbitration Act. (Para 1 , 2 , 4 )
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2026 Supreme(Online)(Del) 19977
IN THE HIGH COURT OF DELHI AT NEW DELHI
C. Hari Shankar, Vinod Kumar, JJ
M/S SHIVANI HANDLOOMS (WCIS) LTD. – Appellant
Versus
UNION OF INDIA & ANR. – Respondent
FAO (COMM)-119/2025
Important Points
An arbitral award is patently illegal and must be set aside if the arbitrator fails to render a finding on a pressed counter-claim, provided the award is not severable due to the claims emerging from a single contract.
Subject
Arbitration Law - Challenge to Arbitral Award
Act Referred
Headnote
(A) Arbitration and Conciliation Act, 1996 - Sections 34 and 37; Commercial Courts Act, 2015 - Section 13(1A) - Failure of an arbitrator to render a finding on a specific counter-claim pressed during proceedings constitutes patent illegality and vitiates the award (Paras 34, 40).
(B) Severability of Arbitral Award - Power of the court to modify or sever an award is limited; where the invalid portion cannot be separated from the valid portion because the claims arise from a single contract and the determined compensation would offset the claims awarded, the entire award must be set aside (Paras 37-40).
Facts of the case:
A contract for the supply of blankets involved multiple consignments to various locations. While most consignments were accepted and delivery notes were issued, one consignment was rejected for being substandard and was taken back by the supplier but not replaced. The supplier sought payment for the accepted goods, while the purchaser filed counter-claims for liquidated damages and losses. The Arbitrator awarded payment to the supplier and rejected the counter-claims based on the accepted consignments but remained silent regarding the compensation/damages for the failure to replace the rejected consignment. The District Court set aside the award on the ground that the Arbitrator failed to render a finding on the counter-claim.
Findings of Court:
The Arbitrator failed to determine the damages in respect of the rejected supplies as per the contract terms. The failure to provide a finding on a pressed counter-claim regarding the non-replacement of stores within the stipulated period is a significant omission that represents patent illegality. Since all supplies originated from a single contract, the issue of compensation for one consignment is not severable from the rest of the award as it would have influenced the final amount payable.
Issues: Whether the failure of the Arbitrator to render a finding on a specific counter-claim regarding the non-replacement of rejected goods vitiates the entire award and whether such an award is severable.
Ratio Decidendi: When an arbitrator ignores a significant counter-claim concerning liquidated damages for breach of contract, the award is patently illegal. If the award is not severable because the claims and counter-claims are inextricably linked to a single contract—where a determination of one would offset the other—the entire award must be set aside.
Result: Appeal dismissed.
(B) Severability of Arbitral Award - Power of the court to modify or sever an award is limited; where the invalid portion cannot be separated from the valid portion because the claims arise from a single contract and the determined compensation would offset the claims awarded, the entire award must be set aside (Paras 37-40).
Facts of the case:
A contract for the supply of blankets involved multiple consignments to various locations. While most consignments were accepted and delivery notes were issued, one consignment was rejected for being substandard and was taken back by the supplier but not replaced. The supplier sought payment for the accepted goods, while the purchaser filed counter-claims for liquidated damages and losses. The Arbitrator awarded payment to the supplier and rejected the counter-claims based on the accepted consignments but remained silent regarding the compensation/damages for the failure to replace the rejected consignment. The District Court set aside the award on the ground that the Arbitrator failed to render a finding on the counter-claim.
Findings of Court:
The Arbitrator failed to determine the damages in respect of the rejected supplies as per the contract terms. The failure to provide a finding on a pressed counter-claim regarding the non-replacement of stores within the stipulated period is a significant omission that represents patent illegality. Since all supplies originated from a single contract, the issue of compensation for one consignment is not severable from the rest of the award as it would have influenced the final amount payable.
Issues: Whether the failure of the Arbitrator to render a finding on a specific counter-claim regarding the non-replacement of rejected goods vitiates the entire award and whether such an award is severable.
Ratio Decidendi: When an arbitrator ignores a significant counter-claim concerning liquidated damages for breach of contract, the award is patently illegal. If the award is not severable because the claims and counter-claims are inextricably linked to a single contract—where a determination of one would offset the other—the entire award must be set aside.
Result: Appeal dismissed.
Legal Category Hierarchy
- practice and procedure
- contract law
-
commercial law
- micro small and medium enterprises (Para 5)
Advocates:
For the Appellants/Petitioners: Ashok Kumar Soni, Priyanka Soni, Sarita
For the Respondents: Rohan Jaitley, Dev Pratap Shahi, Akshay Sharma, Varun Pratap Singh, Yogya Bhatia
For the Appellants/Petitioners: Ashok Kumar Soni, Priyanka Soni, Sarita
For the Respondents: Rohan Jaitley, Dev Pratap Shahi, Akshay Sharma, Varun Pratap Singh, Yogya Bhatia
Table of Contents
2. Claimant sought payment for accepted supplies; respondent argued supplies were substandard and claimed damages. (Para 5 , 15 )
3. Arbitrator failed to decide counter-claim for non-replacement of rejected Pune consignment, vitiating the award. (Para 33 , 34 , 35 )
4. A non-severable omission to decide a counter-claim renders the entire award patently illegal under Section 34. (Para 37 , 40 )
5. Appeal under Section 37 dismissed for lack of merit; impugned judgment upheld. (Para 41 )
6. Can an arbitral award be set aside for the arbitrator's failure to decide a counter-claim?
Yes, failure to render a finding on a counter-claim raised and pressed by a party vitiates the entire award. (Para 34 , 35 , 36 )
7. Can a court in appeal under Section 37 determine the compensation the arbitrator failed to decide?
No, the court cannot step into the arbitrator's shoes to calculate damages as it would amount to modifying the award. (Para 37 , 38 )
8. Is a non-severable part of an award regarding a counter-claim separable from the rest of the award?
No, if the issue of compensation cannot be severed, the whole award must be set aside. (Para 37 , 40 )
JUDGMENT
16.09.2026
%
VINOD KUMAR, J.
1. The present appeal preferred under Section 37 of Arbitration and Conciliation Act, 1996 read with Section 13 (1A) of the Commercial Courts Act, 2015 has challenged a judgment dated 10.02.2025 of learned District Judge-03, Patiala House Courts, Delhi.
2. Vide the impugned judgment, learned District Judge had allowed a petition ARBTN. No. 4499/2017 (filed by respondent no.1 herein) raising objections under Section 34 of the Arbitration and Conciliation Act, 1996 and set aside the Award dated 09.11.2011 passed by the Sole Arbitrator.
3. For the sake of convenience, the appellant would also be referred to as ‘claimant’ and respondent no.1 would be referred to as ‘respondent’. Respondent no.2 is the Sole Arbitrator and is not a party to the dispute.
DISPUTE
4. The claimant was awarded a contract by the respondent- Govt. of India/Ministry of Defence for supply of 35897 blankets at various places including Pune. The Pune consignment of 7660 blankets was rejected by the respondent on the ground that it did not meet prescribed specifications. Therefore, the same was taken back by the claimant. But the respondent refused to make the payment towards the remaining of consignments, which were sent even to the places other than Pune. Hence, the dispute. As per clause 24 of Rules of the Director General of Supplies and Disposals (DGS&D) applicable to this contract, the dispute was to be resolved through Arbitration. On an application under Section 11 of the Arbitration and Conciliation Act 1996, the Arbitrator was appointed, who proceeded with the arbitration.
CLAIM PETITION
5. The case of the claimant, as per the Statement of Claim, is that it is a Small Scale Industry covered under The Micro, Small and Medium Enterprises Development Act, 2006. The claimant was awarded a Rate Contract dated 24.01.2007 for the supply of blankets for the period from 12.01.2007 to 01.06.2009. The contract was subject to the terms and conditions as contained in Director General of Supplies and Disposals-156 (DGS&D – 156) and other General and Special Conditions of Contract incorporated therein, including the General Conditions of Contract detailed in DGS&D - 68. Pursuant to the said Rate Contract, the Director General Border Roads, Delhi Cantt. issued a Supply Order dated 05.06.2008 for the supply of 35897 blankets at the rate of Rs.598/- per blanket, to be delivered at various stations. According to the claimant, advance samples were required to be approved before the delivery. The claimant offered the advance samples on 16.06.2008, however, according to the claimant the respondent did not inspect the same and returned the same and vide communication dated 11.07.2008, asked the claimant to resubmit the samples. The respondent also changed the terms of inspection authority as stipulated in the supply order.
6. In another communication dated 17.07.2008, the respondent further informed the claimant that the samples would be now approved by the Board of Officers at Headquarter and called the claimant to furnish nine samples. According to the claimant, the samples were thereafter offered before the Board of Officers appointed by the respondent and were approved by the Board. Thereafter, upon issuance of the inspection notes, blankets were dispatched to the different consignees specified under the Supply Order.
7. As per the claimant, barring the consignment supplied to the Pune, which was rejected on 31.01.2009, the remaining supplies (i.e. 28327 blankets) were found to be in conformity with the prescribed specification. For the entire quantity of 28327 blankets, the purchasers released the inspection notes. So far as the Pune consignment is concerned, claimant submitted that the supply was made according to the contractual terms and specifications, but on account of the rejection by Pune Consignee, the claimant lifted those blankets and did not raise any claim and has also not received any payment towards the said consignme
