FAO(OS)(COMM) 4/2024 Page 1 of 61

$~

* IN THE HIGH COURT OF DELHI AT NEW DELHI

Judgment reserved on: 12.02.2026

Judgment pronounced on: 09.03.2026

+ FAO(OS)(COMM) 4/2024

M/s JSW ISPAT STEEL LIMITED (NOW KNOWN

AS JSW STEEL LIMITED) .....Appellant

Through: Mr. Sandeep Sethi and Mr.

Ramesh Singh, Sr. Advs. with Mr. Sahil

Narang, Mr. Dhritiman Roy, Mr. Ayushman

Kacker, Mr. Krisna Gambhir and Mr. Shreya

Sethi, Advs.

versus

M/S GAS AUTHORITY OF INDIA

LIMITED ..... Respondent

Through: Ms. Madhavi Divan, Sr. Adv.

with Mr. Kapil Sankhla, Mr. Shubham

Saigal, Mr. Vipul Grover, Mr. Saurabh

Kumar Gangwar and Mr. Atharva Kotwala,

Advs.

CORAM:

HON'BLE MR. JUSTICE C. HARI SHANKAR

HON'BLE MR. JUSTICE OM PRAKASH SHUKLA

JUDGMENT

% 09.03.2026

OM PRAKASH SHUKLA, J.

1. This is an appeal filed under Section 37(1)(c) of the Arbitration

and Conciliation Act, 1996

1

, read with Section 13 of the Commercial

Courts Act, against the judgment dated 20.12.2023 passed by the

Learned Single Judge of this Court in the O.M.P (Comm.) No.

1

“the Act’ hereinafter

FAO(OS)(COMM) 4/2024 Page 2 of 61

249/2020, titled M/s Gas Authority of India Ltd. vs M/s JSW Ispat Steel

Ltd., whereby the respondent’s petition under Section 34 of the 1996

Act has been partly allowed, and the award passed in favour of the

petitioner (Appellant herein), has been set aside.

FACTUAL BACKGROUND

2. The brief factual matrix necessary for the purposes of

adjudication of the present appeal is delineated below.

2.1 The Appellant is a company engaged in the operation of a sponge

iron and hot rolled coil plant located in Dolvi, District of Raigarh,

Maharashtra.

2.2 The respondent is a state owned natural gas corporation

specialising in the transmission of natural gas, petrochemicals, and city

gas distribution.

2.3 In order to obtain continuous supply of natural gas, the appellant

and the respondent entered into a contract dated 10.09.1991 (hereinafter

referred to as the “Primary Agreement”). Under this contract, the

respondent agreed to supply natural gas as per the requirement of the

appellant, subject to a maximum quantity of 1.00 Million Metric

Standard Cubic Metres per Day (MMSCMD).

2.4 The payment structure for the gas supplied under the Primary

Agreement was: (i) Price of the gas supplied, including a transportation

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charge of INR 60.60 per thousand standard cubic meter, and (ii) a

monthly service charge/transportation charge, calculated using a

specified formula, designed to recover the operational costs and

maintenance costs associated with the gas supply.

2.5 Subsequently, a supplementary agreement was entered between

the parties on 30.03.1998 (hereinafter referred to as the “Supplementary

Agreement”), which modified and substituted certain provisions of the

Primary Agreement, particularly with respect to the charges for the gas

supply.

2.6 In particular, clause 4.03 of the Primary Agreement was

substituted by a new clause 4.03, which replaced the formula based

monthly service charge with a fixed transportation charge of Rs.

38,67,600/- per month. The respondent contended that this fixed

transportation charge was introduced to recover costs such as

maintenance, operational expenses, and a minimum return on

investment.

2.7 Additionally, clause 12 of the Primary Agreement was amended,

specifying that the appellant had a period of 14 days from the receipt of

the gas supply invoice (including the price, transportation charges,

service charges and any additional charges) to raise any discrepancies

or disputes with the invoice. Failure to raise such a dispute within this

period was to be deemed a waiver of the right to raise claims or refer

the matter to arbitration.

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2.8 Thereafter, as the events unfolded, to accommodate the

appellant’s increasing requirement for gas to operate its sponge iron

plant, a tripartite agreement was also executed between the respondent,

the appellant, and M/s Kalyani Mukund Limited on 21.12.1999. This

agreement resulted in the allocation of an additional 0.75 MMSCMD

of gas to the appellant, which was previously allocated to M/s Kalyani

Mukund Limited. As a result, the total gas allocation for the appellant

was increased from 1.00 MMSCMD to 1.75 MMSCMD.

2.9 The primary dispute arose when the respondent allegedly failed

to supply the committed quantity of gas to the appellant under both the

Primary and Supplementary Agreement. The respondent attributed this

failure to supply to government control over gas allocation, with the

supply being constrained due to scarcity.

2.10 The appellant raised concerns over the respondent’s invoicing

practices. According to the appellant, respondent’s issuance of invoices

for fixed transportation charges was wrongly calculated and wrongly

issued under both the contracts, despite the fact that the gas was only

being supplied under the Primary Agreement and not under the tripartite

agreement. The appellant argued that the respondent was wrongfully

calculating and raising invoices for transportation charges that were not

due.

2.11 Thereafter, according to appellant to resolve the issue, appellant

made several attempts to resolve the issues through communications

with the respondent, including raising formal grievances and disputing

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the transportation charges and failure to supply the contracted quantity

of gas. However, the respondent did not respond satisfactorily to these

complaints.

2.12 Due to the ongoing disputes and the respondent’s failure to

resolve the issues, the appellant invoked arbitration as per the dispute

resolution mechanism stipulated in the agreements between the parties.

2.13 Being aggrieved, the arbitration proceedings were initiated, and

an arbitral tribunal was constituted to adjudicate the disputes between

the parties.

Proceedings before the arbitral tribunal

3. Statement of claim

3.1 The appellant, in the proceedings before the arbitral tribunal,

presented its claim based on a series of contentions and legal arguments

which are set out in detail below.

3.2 The appellant contended that, while entering into the contract

dated 10.09.1991, the respondent, by virtue of its monopoly status as a

state-owned gas transmission company, took unfair advantage of its

dominant position. The appellant claimed that the respondent coerced

the appellant into agreeing to pay a fixed transportation charge,

purportedly to recover the respondent’s investments in laying the

pipeline and for the maintenance thereof.

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3.3 Thereafter, the appellant was persuaded to enter into a tripartite

agreement with the respondent and M/s Kalyani Mukund Limited on

21.12.1999, wherein the appellant was induced to pay additional fixed

transportation charges on the false assurance of receiving an additional

0.75 million standard cubic meters of gas per day. However, the

respondent failed to fulfil this commitment, leading to a material breach

of the agreement by the respondent. As a result, the appellant argued

that this constituted a fundamental breach of contract, as the promised

supply was not provided, and the fixed transportation charges were

retained despite the failure to supply the agreed gas.

3.4 The appellant contended that the payment of fixed transportation

charges was contingent upon the respondent fulfilling its commitment

to supply the full contracted quantity of natural gas each day. According

to the appellant, the respondent’s failure to supply the requisite quantity

of gas, as specified in the contracts, extinguished the respondent’s

entitlement to retain the transportation charges.

3.5 Further, the appellant asserted that the respondent’s supply was

not only deficient in quantity but also failed to meet the agreed upon

specifications. The short supply and failure to meet specifications

resulted in severe operational consequences for the appellant, including

substantial production losses and a significant loss of profit.

3.6 Moreover, the appellant claimed that the financial prejudice

suffered was compounded by the fact that the appellant has made

significant expansion investments in reliance on the respondent’s

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assurances of a continuous and adequate supply of gas. These

investments, which were made to scale up operations based on the

expectation of the promised gas supply, were rendered unproductive

due to the respondent’s failure to deliver as contracted.

3.7 Accordingly, the appellant sought the following specific reliefs

before the arbitral tribunal, (i) Supply of the shortfall quantity of gas or,

alternatively, a refund of proportionate transportation charges; (ii)

Compensation for loss of profit for Rs. 701 crores; (iii) Compensation

for loss of use of money for Rs. 55 crores or interest at 20%; (iv)

Compensation for failed expansion for Rs. 40 crores along with interest

at 20%; (v) Reduction or refund of transportation charges, and (vi)

Costs of arbitration.

4. Statement of defence

4.1 The Respondent’s first line of defence was that the appellant’s

claims were barred by the statute of limitations and, in any event, were

not suitable for resolution through arbitration.

4.2 The Respondent contended that, even accepting the appellant’s

case on its face, the gas supply commenced in 1994, and the contract

was executed on 10.09.1991. However, the appellant raised the dispute

regarding the excess transportation charges only in 2000, well beyond

the three-year limitation period. The respondent argued that any claims

for monetary relief that predates three years before the commencement

of the arbitration proceedings are barred by limitation, and therefore,

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the arbitral tribunal should refuse to entertain claims relating to periods

prior to the expiration of this three-year period.

4.3 The respondent further asserted that the claims relating to the

period before 1998 were invalid because the 1998 agreement replaced

or superseded the earlier contractual framework of 1991. Therefore,

claims relating to the pre-1998 period, should be deemed waived and

non-arbitrable.

4.4 The Respondent argued that the appellant had voluntarily agreed

to the modified contract terms under the 1998 agreement, which

included the new fixed transportation charges. The 1998 agreement

marked a conscious shift from a variable transportation charge

structure, as provided under the 1991 contract, to a fixed transportation

charge. This shift was not an “excess” charge but was explicitly agreed

upon by both parties as part of the renegotiated contractual terms.

4.5 The respondent emphasized that the appellant, entered into the

1998 agreement with full awareness of the gas supply situation and the

regulatory environment. The appellant, therefore, could not later claim

that the fixed transportation charges were unfair or excessive simply

because the supply situation or commercial outcomes were not as

expected.

4.6 The respondent contended that it did not breach the contract by

failing to meet the full gas supply commitments because the supply was

subject to government control and regulations. The gas supply was

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regulated by the Gas Linkage Committee and was subject to

governmental directions. Due to the scarcity based allocation system,

the respondent had limited control over the quantity of gas that could

be supplied to the appellant. The Respondent argued that, given the

regulatory control and scarcity of gas, the appellant’s claims for non-

supply were based on an incorrect understanding of the contract. The

respondent emphasized that such contracts in the gas sector are subject

to government regulations and cannot be treated like ordinary

commercial contracts that are negotiated freely without such

constraints.

4.7 The respondent in response to the breach of contract allegations,

stated that, despite the constraints on supply, the appellant was

consistently supplied with 80% of the contracted quantity of gas, which

was a significant proportion of the total agreed upon supply and

consistent with the government’s allocation orders. Therefore, the

respondent could not be held liable for a breach on the alleged shortfall

in supply when the constraints were beyond its control.

4.8 The respondent further defended the fixed transportation charges,

claiming that the pipeline network incur substantial fixed costs,

including capital investment, the cost of terminals, meters, safety

systems, telecommunications, monitoring, and ongoing operations and

maintenance costs. These costs must be covered by the transportation

charges, irrespective of the quantity of gas actually supplied. The

respondent argued that the fixed transportation charges are widely

recognized in the industry as a standard method to recover the costs of

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infrastructure and sustain maintenance and expansion. The appellant’s

argument that the charges were “excess” was unfounded, as the charges

were based on the actual costs associated with providing the necessary

infrastructure, which are incurred regardless of gas throughput.

4.9 The Respondent denied that the gas supply obligations under the

contract were absolute and argued that the supply was always

contingent on factors beyond their control, such as gas availability and

governmental directives. The supply was thus always conditional and

could not be viewed as an absolute obligation that the respondent was

required to fulfil regardless of the circumstances.

4.10 The Respondent further argued that the appellant was fully aware

when entering into the initial agreement in 1991 and the modified

arrangement in 1998 that the gas supply would be subject to availability

constraints and government regulations. Therefore, the appellant could

not later claim damages based on the assumption that the respondent

was obligated to supply a minimum quantity of gas, unaffected by the

government’s allocation policies or gas scarcity issues.

5. Framing of issues

5.1 In light of the factual matrix, legal arguments, and submissions

of both parties, the tribunal framed the following issues for

adjudication:

“1. Are the Claims or any part of them not arbitrable?

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2. Whether Respondent was justified in not supplying contracted

quantity of the gas to the Claimant? If no, to what effect?

3. Does the Respondent prove that under the terms of the contract,

the extent of supply to the Claimant of gas was dependent upon the

availability of gas at the material time as well as upon direction of

Government of India at that point of time?

4. Is the Respondent entitled to claim transportation charges from

the claimant even during the period of short supply or no supply

whatsoever?

5. Does the Respondent prove that the Claimant raised the objection

in regard to transportation charges from the first time in the year

2000? If yes, what is the effect?

6. Does the Respondent prove that on the execution of the supply

agreement dated 30.03.1998, all the claims prior thereto stood

extinguished?

7. It is shown that the Claims for transportation charges pertaining

to a period more than 3 years prior to date of the commencement of

arbitration i.e. 7.1.2003, is not arbitrable as barred by limitation?

8. Does the claimant prove that in view of the continuous and

uninterrupted process of issuing provisional invoices, the limitation

does not run against the Claimant until those invoices are reconciled

and made final?

9. Does the Claimant prove that the Respondent was wrong in

levying and recovering transportation Charges post-tri-partite

agreement for the same infrastructure against the same party under

two different agreements?

10. Whether the Respondent continuously made false assurances of

supplying the contracted quantity of gas so as to induce the Claimant

to continue to pay transportation charges?

11. Does the Respondent prove that the Claimant is stopped from

complaining about the levy of transportation charges because

throughout the contract period and even upto date and even post tri-

partite agreement, right upto 2000, they never disputed charges

recovered / levied by the Respondent?

12. Are the Claimant entitled to claim refund of corporate income

tax as per clause 4.03 of Contract?

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13. Are the Claimants entitled to interest? If so, from what date and

on what amount and at what rate?

14. Are the claimants entitled to all or any of the reliefs sought under

the Claim- Statement?

15. What order as to costs?

16. What Award?”

6. Arbitral award

6.1 On issue no.2 and 3, the tribunal concluded that the shortfall in

the supply of gas was not a breach of contract by the respondent. Instead

the shortfall was caused by the non-availability of gas after supplies

were first made to priority sectors as per the recommendation made by

the Gas Linkage Committee (GLC). This non-availability was a direct

result of governmental regulations and the allocation framework, and

the respondent was unable to supply the full contracted quantity due to

scarcity and governmental control over gas distribution.

6.2 The tribunal further noted that the Central Government holds the

power to allocate gas to priority sectors under its policy, and this takes

precedence over the contractual terms related to gas supply. The

tribunal held that Articles 5.01 to 5.03 of the Gas Supply Agreement

dated 10.09.1991 and relevant provisions of the Supplementary

Agreement dated 30.03.1998 had to be interpreted in a manner that was

consistent with the gas utilization policy enforced by the government.

The tribunal specifically relied on the judgment of the Supreme Court

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in Reliance Natural Resources Ltd. v. Reliance Industries Ltd.

2

to

establish that the government’s allocation decisions override any

conflicting contractual provisions, even when it results in a reduction

of the contracted gas supply.

6.3 The tribunal held that the short supply of gas, even if it could be

construed as a breach of contract, should be treated as a force majeure

even due to the government’s regulatory orders. This was seen as an

external factor that disrupted the supply of gas and therefore absolved

the respondent from liability for failing to meet the contractual supply

targets.

6.4 On issue no. 4 and 5, the tribunal did not accept the appellant’s

argument that force majeure automatically suspends its obligation to

pay the fixed transportation charges. The tribunal also rejected the

appellant’s claim for a proportionate reduction of transportation charges

based on the principle of “part performance” under section 12(2),

Specific Relief Act, 1963.

6.5 The tribunal reasoned that while a shortfall in supply could

ordinarily constitute a breach of contract under Article 5.01 of the GSA,

when the shortfall occurs due to a force majeure event, it is not

considered a breach at all. As a result, the tribunal held that the failure

to supply gas due to governmental regulations did not create a right for

the appellant to suspend payment of full transportation charges. The

2

(2010) 7 SCC 1

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fixed transportation charge remained due regardless of the shortfall,

unless the terms explicitly provided otherwise.

6.6 The tribunal dismissed the appellant’s reliance on Section 12(2)

and (3) of the Specific Relief Act, 1963. The tribunal found that, (i) the

unperformed part of the contract was not significant enough to justify a

claim for reduction of the fixed charges, as the respondent had been able

to supply gas at approximately 80% of the contracted quantity, and (ii)

even if Section 12(3) could apply, it would require the appellant to

relinquish claims for the remaining performance and compensation.

Since the appellant continued to seek damages for the shortfall, it could

not invoke the provisions of the Specific Relief Act to claim a

proportionate reduction in transportation charges.

6.7 Having rejected the claims based on legal grounds, the tribunal

turned to a more commercially sensible interpretation of the contract,

invoking the principle of business efficacy (Article 4.03). The tribunal

observed that the fixed monthly transportation charge of Rs.

38,67,600/- was meant to cover the facilities available for the supply of

gas up to the maximum capacity specified in Article 5.01 of the GSA.

However, in light of the force majeure event, the tribunal found that it

would be commercially unfair to charge the full amount when the

supply was drastically reduced.

6.8 Thus, the arbitral tribunal held that that according to the principle

of business efficacy, contracts should be interpreted in a manner that

aligns with the commercial purpose they were meant to achieve. The

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tribunal thus ruled that the fixed transportation charges should be

proportionately reduced on a month-by-month basis to reflect the actual

quantity of gas supplied. According to tribunal, this interpretation was

consistent with the commercial realities of the situation and ensured that

the respondent was not unjustly enriched at the expense of the appellant.

6.9 In addition to the contractual interpretation, the tribunal applied

the principle of “partial failure of consideration”, which is recognized

under Indian law as a basis for adjustment of payments when a service

or performance is not fully delivered. This principle allows for

apportionment where part of the contracted service is not rendered. In

this case, since the transportation service corresponding to the shortfall

in gas supply was not performed in full, the tribunal ruled that

restitution or adjustment of the charges was warranted.

6.10 Thus, the respondent submitted detailed records of the total

supplies from June 1994 to January 2003, showing that the total gas

supply during this period amounted to 2,450.01 MMSCM. The

appellant calculated the month-wise transportation charges based on the

actual quantity of gas supplied and found that the fixed monthly

transportation charge should be proportionally reduced for each month.

This reduction resulted in a refund amount of Rs. 14.67 crores.

6.11 Consequently, on issue no.4, the tribunal upheld the appellant’s

calculation and agreed that Rs. 14.67 crores represented the excess

transportation charges that should be refunded. This refund amount was

directly linked to the shortfall in the gas supply. The tribunal justified

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this decision both through a commercially sensible interpretation of the

contract and, alternatively, by applying the principle of partial failure

of consideration. The tribunal found that it would be unjust to allow the

full transportation charges to be paid when the full service was not

rendered due to the force majeure event.

6.12 On issue no.5, the tribunal concluded that the appellant was not

estopped from claiming a proportionate reduction in transportation

costs, even though the issue had been raised in the year 2000. The

tribunal held that the appellant was entitled to claim a refund of Rs.

14.67 crores for the period from June 1994 to January 2003. This was

based on a proper computation that reflected the shortfall in the gas

supply. The tribunal affirmed that the appellant’s right to claim this

refund was not barred by any time limitation, as the contractual terms

and the principles of Indian law provided a valid basis for the claim.

6.13 On issue no. 6, the tribunal rejected the respondent’s argument

that all prior claims under the 1991 agreement were waived or

extinguished upon the execution of the 1998 supplementary agreement.

The respondent had described the 1998 agreement as an amendment to

the 1991 agreement, rather than a separate, independent contract. Based

on this, the tribunal held that the 1998 agreement did not extinguish the

appellant’s claims arising under the earlier contract, as the 1998

agreement was merely a modification of certain terms and not a

complete substitution of the 1991 contract.

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6.14 On Issues 7 and 8, the tribunal addressed the respondent’s

objection that the appellant’s claims for transportation charge refunds

were bared by limitation, particularly those claims pertaining to period

prior to three years before the initiation of arbitration, i.e., before 07.

01.2003. The respondent argued that the invoices became final after 45

days, and any claim for refunds older than three years was time-barred

and therefore not arbitrable.

6.15 The tribunal accepted the appellant’s explanation that the

invoices raised throughout the contract period were provisional and that

the accounts had not been fully reconciled or finalized. The tribunal

noted that there was no evidence to suggest that these invoices were

later finalised. Even the respondent’s witness did not deny that the

invoices remained provisional.

6.16 The tribunal held that since the invoices were provisional and

never finalized, the limitation period for the appellant’s claims did not

commence. The tribunal did not accept the respondent’s argument that

the invoices should have become final within 45 days or by the end of

the financial year. Therefore, the tribunal ruled that the claim of Rs.

14.67 crores was not barred by limitation.

6.17 Therefore, under Issue 7, the tribunal held that the appellant’s

refund claim of Rs. 14.67 crores was not barred by limitation and was

arbitrable. The claim was timely, as the limitation period has not yet

begun, given the pending reconciliation of the provisional invoices.

Under Issue 8, the tribunal held that the limitation period would

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commence once the provisional invoices were reconciled and made

final. Since this had not occurred, the claim was within the permissible

time frame.

6.18 On Issue 11, the tribunal considered whether the appellant was

estopped from challenging the transportation charges because it had not

objected to them during the contract period or up to 29.12.2000.

6.19 The tribunal held that mere failure to object earlier or until

29.12.2000, did not create estoppel, especially since the tribunal had

already determined that the claims were not barred by limitation. The

tribunal also held that the 14-day dispute mechanism did not

automatically impose estoppel if not invoked. Additionally, the refund

of Rs. 4.22 crores after the 1998 revision did not preclude the appellant

from claiming other amounts due and accepting payments or revisions

without protest did not bar a lawful claim. Therefore, the tribunal ruled

that the appellant was not estopped from seeking refund of

proportionate transportation charges.

6.20 At last, the tribunal awarded Rs. 14.67 crores to the appellant as

a refund for proportionate transportation charges, based on a

commercial interpretation of the contract and the principle of partial

failure of consideration. The tribunal held that fixed transportation

charges should be reduced in line with the shortfall in supply due to

force majeure.

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6.21 The tribunal awarded interest at 6% per annum from 29.12.2000,

exercising discretion under Section 31(7) of the Arbitration and

Conciliation Act, 1996, as the contract did not specify interest. This

decision compensated the appellant for the delayed payment of the

refund.

7. Impugned Judgment

7.1 Aggrieved by the arbitral award, the respondent filed a petition

under Section 34 petition of the Arbitration and Conciliation Act, 1996

before this court, seeking to set aside the award passed by the Arbitral

Tribunal.

7.2 Section 34 of the Act provides the mechanism for setting aside

an arbitral award in specific grounds, including when the award is in

conflict with the public policy of India. In this case, the learned Single

Judge of this court considered the section 34 petition and ultimately set

aside the arbitral award. The reasons and findings for this decision are

delineated below:

7.3 The learned Single Judge first considered the respondent’s

challenge to the arbitral tribunal’s decision to reduce the fixed

transportation charges on a pro-rata basis, as well as the tribunal’s

reliance on the business efficacy principle and the partial failure of

consideration. The respondent argued that under the 1991 Agreement

and the 1998 Supplementary Agreement, the transportation charges

were fixed and not contingent on the quantity of gas supplied. As such,

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they contended that reducing the transportation charges to a pro-rata

basis was legally flawed.

7.4 The respondent argued that the arbitral tribunal’s reliance on

business efficacy was legally erroneous and inconsistent with its own

force majeure findings. The tribunal had essentially found that the

failure to supply gas was due to force majeure, but simultaneously

applied partial failure of consideration to reduce the transportation

charges. The respondent argued that this created a contradiction, as

force majeure and partial failure of consideration should not co-exist in

the manner applied by the tribunal.

7.5 While the learned Single Judge acknowledged the respondent’s

argument that the transportation charges were fixed and not linked to

supply levels, the learned single Judge also noted that contractual

interpretation was within the domain of the arbitral tribunal. The

learned Single Judge observed that the tribunal’s interpretation,

although contentious, was a plausible and reasonable construction of

the contract. Since the tribunal’s view was within the ambit of

reasonable interpretation, the learned Single Judge declined to

reappraise the merits of the interpretation. In other words, the learned

single Judge refused to interfere with the arbitral award on the grounds

of merits-based reconsideration.

7.6 The learned Single Judge refrained from engaging in a merits-

based review, reiterating that the role of the court under Section 34 is

not to substitute its own interpretation for that of the arbitrator and

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contractual interpretation remains a matter for the arbitral tribunal as

long as the tribunal’s interpretation was within the reasonable bounds

of contract law, the court would not interfere.

7.7 On Issue No. 5,7,8, and 11, the learned Single Judge focused on

the amended Clause/Article 12.03 of the Supplementary Agreement

dated 30.03.1998. The amended clause specifically outlined the

consequences of failing to lodge a claim within 14 days of receiving

invoices for transportation charges. It was clearly stated that failure to

do so would constitute an absolute waiver of the claim and the right to

refer the matter to arbitration.

7.8 The learned Single Judge highlighted that the failure of the

appellant to raise any claim within the prescribed 14-day period under

Article 12.03 was a crucial aspect that had to be considered. However,

the arbitral tribunal had not taken this into account, ignoring the clear

stipulation in the agreement. As a result, the learned Single Judge

concluded that the tribunal’s failure to consider waiver meant that it had

overlooked a critical issue affecting the jurisdiction of the tribunal itself.

7.9 The learned single judge found that the issue of waiver and the

jurisdiction of the tribunal were not addressed by the arbitral tribunal,

despite the fact that Article 12.03 of the contract was central to the

dispute. The failure of the tribunal to even address this provision was

found to be a serious oversight.

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7.10 The learned Single Judge recorded that the framework of Article

12.03, which governs the dispute resolution process and time limits for

raising claims, had been ignored by the tribunal. The tribunal’s

reasoning that the invoices were provisional and therefore did not

trigger the limitation period was criticized. The learned Single Judge

held that even if the invoices were provisional, this did not extend the

time indefinitely for raising claims.

7.11 The learned Single Judge further rejected the tribunal’s

conclusion that the invoices being provisional prevented the limitation

period from running. The learned Single Judge ruled that if the invoices

were indeed provisional, they cannot be open-ended, and the appellant

should have raised disputes within a reasonable time. The failure to do

so was deemed a violation of the 14-day limitation period set out in the

contract, which would bar the claims under Section 34 of the Limitation

Act, 1963.

7.12 Additionally, the learned Single Judge pointed out that the

appellant’s primary claim was for loss of profit due to the wrongful levy

of transportation charges. However, the tribunal had treated the claim

as one for a partial refund of transportation charges, awarding Rs. 14.67

crores based on that assumption. The learned Single Judge found that

this was a discrepancy, as the appellant had never formally sought a

refund of transportation charges in its Statement of Claim.

7.13 The learned Single Judge further emphasized that the award

granted by the tribunal did not align with the appellant’s pleaded case.

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The claim for loss of profit was distinct from a claim for partial refund

of transportation charges, yet the tribunal awarded the latter despite the

fact that the appellant had abandoned any claim related to the 1999

Tripartite Agreement, and consequently, this issue was formally framed

as Issue No. 9.

7.14 The learned Single Judge noted that the appellant’s primary

grievance was related to the transportation charges under the 1999

Tripartite Agreement. However, during the arbitration, the appellant

itself clarified that disputes under the Tripartite Agreement were not

part of the reference. Despite this, the tribunal proceeded to award a

refund based on the 1991 and 1998 agreements, which the learned

Single Judge found to be inconsistent with the appellant’s pleaded case

and the issue framing.

7.15 The learned Single Judge noted that the tribunal had awarded

relief under contracts other than those originally pleaded by the

appellant. This was deemed an error, as it departed from the actual

dispute and the issues framed during arbitration.

7.16 The learned Single Judge concluded that the arbitral award was

legally flawed and inconsistent with the contractual stipulations,

particularly with respect to the issue of waiver under Article 12.03 and

the claims raised by the appellant. The failure to properly consider these

critical issues, along with the error in awarding a refund based on a

different contractual framework, led the learned Single Judge to set

aside the arbitral award.

FAO(OS)(COMM) 4/2024 Page 24 of 61

7.17 As a result of the aforementioned findings, the learned Single

Judge allowed the Section 34 petition filed by the respondent and set

aside the arbitral award.

Proceedings before us

8. Rival submissions

8.1 Mr. Sandeep Sethi, learned Senior Counsel for the appellant,

argued that the learned Single Judge wrongly held that the appellant had

waived its claim by failing to dispute the transportation invoices within

the 14 day period prescribed under Article 12.03 of the Supplementary

Agreement. It was submitted that the arbitral tribunal had considered

and rejected the plea of waiver and estoppel under Issues 5, 6 and 11,

referencing Article 12.03 in its award. The counsel argued that these

factual findings by the tribunal were beyond interference by the court

under Section 34 of the Act.

8.2 It was further argued that Article 12.03 itself was void under

Section 28 of the Indian Contract Act, 1872, as it restricted and

extinguished the rights of the appellant in an unjust manner. According

to the appellant, waiver requires a positive act, not mere silence or

payment of provisional invoices. The appellant maintained that Article

12.03 could not extinguish its rights to claim due to the lack of a clear

and explicit waiver under Indian contract law principles.

FAO(OS)(COMM) 4/2024 Page 25 of 61

8.3 The learned Senior Counsel submitted that the impugned arbitral

award had rendered its finding only after carefully considering and

setting out the submissions from both sides. As such, the counsel argued

that the award expresses a clear application of mind by the tribunal and

was in conformity with section 31 (3) of the Act, which mandates that

an arbitral award must state the reasons for its decision.

8.4 The appellant’s Senior Counsel submitted that the lack of

detailed reasoning in the award should not be a ground for interference

under Section 34. The counsel referred to precedents suggesting that

minimal reasoning does not automatically justify setting aside an

arbitral award under the Indian law framework.

8.5 It was further argued that the claims were within the prescribed

period of limitation, emphasizing several grounds:

i. The Agreement for supply of gas formally ended on

31.12.2000, although the actual supply continued till January

2003. The appellant contended that it could only ascertain the

total shortfall in gas supply after 31.12.2000, when the contract

period formally concluded. Therefore, cause of action arose only

after 31.12.2000, and the invocation of arbitration on 07.01.2003

was well within the three-year limitation period prescribed under

Section 3 of the Limitation Act, 1963.

ii. Even for the alternative claim for refund of proportionate

transportation charges, limitation would begin at the earliest from

31.12.2000 when the contractual period ended.

FAO(OS)(COMM) 4/2024 Page 26 of 61

iii. The shortfall in gas supply occurred throughout the

contract period, making it a continuing breach, which, according

to the appellant, extends the limitation period.

iv. The invoices were marked “provisional” by the

respondent, and there was no final reconciliation of accounts,

meaning the claim could not properly arise until the final

reconciliation took place.

v. The arbitral tribunal accepted these arguments and held

that the claim was within time. The learned counsel criticized the

learned Single Judge’s reliance on the Reliance Industries case,

asserting that it only upheld the tribunal’s findings on limitation

and that waiver/estoppel were questions of fact, not of law. The

Supreme Court had clarified that legal questions in the case

remained open.

8.6 It was also urged that the representations of the appellant were

considered by the Respondent only on 15.07.2002, after which mutual

consultations or settlement discussions ended, and the cause of

arbitration arose. According to the appellant, until that point, any claim

would have been premature.

8.7 Lastly, the appellant’s counsel submitted that, even assuming the

claims were partially barred, the Appellant would still be entitled to a

sum of Rs. 8.5 Cr. (out of 14.67 Cr.) as a refund, and after calculating

the interest accrued, the total amount would be Rs. 44.86 Cr. as of

10.01.2024.

FAO(OS)(COMM) 4/2024 Page 27 of 61

8.8 Per contra, Ms. Madhavi Divan, learned Senior Counsel for the

respondent, submitted that the appellant could not now seek a refund of

the fixed transportation charges under the 1991 contract. The

respondent pointed out that when the 1991 Contract was amended in

1998, the appellant did not raise any concern about the fixed

transportation charges despite knowing that the charges were not linked

to the actual supply of gas. The 1998 Supplementary Agreement clearly

stipulated the fixed transportation charges, which were agreed to by

both parties.

8.9 Learned Senior Counsel for the respondent contended that the

Tripartite issue had been settled, and the respondent had refunded Rs.

4.22 crores through a credit note for the transportation charges. The

appellant accepted this refund without objection, and therefore, the

claims before 30.03.1998 were settled and waived. The respondent

argued that the appellant had agreed in 1998 to change the

transportation charges to a fixed monthly amount of Rs. 38,67,600/-,

fully aware that these charges were independent of the amount of gas

supplied. The respondent submitted that any objections to the invoices

should have been raised within 14 days, but the appellant did not do so,

creating estoppel under the terms of the contract.

8.10 The respondent submitted that it had duly supplied the contracted

quantity of gas under the 1991 Contract. According to the respondent,

the appellant was not entitled to claim a refund of “fixed transportation

charges” on the basis of short supply, as the contractual requirement

was not breached. It was noted that Clause 5.02 of the 1991 Agreement

FAO(OS)(COMM) 4/2024 Page 28 of 61

specifically contemplated reduced supply and provided a formula for

such situations. The respondent met the 80% supply threshold set in the

contract, which was more than the minimum guaranteed supply

required.

8.11 The respondent argued that under the amended Article 12.03 of

the Supplementary Agreement, the appellant was required to raise

objections to the invoices within 14 days and failing to do so meant that

the appellant’s claim for refunds was barred by the limitation period

under the contract. The respondent emphasized that the invoices were

final once the 14-day period elapsed, and any objections raised later

were inadmissible.

8.12 Lastly, the respondent highlighted that the arbitral tribunal itself

had acknowledged that reduced supply was contractually envisaged

under the 1991 Contract. As per Article 5.01, the fixed transportation

charges were not linked to the actual quantity of gas supplied. Reduced

supply was always contemplated, and the Tribunal’s attempt to order a

pro-rata refund was inconsistent with the contractual terms. Moreover,

the tribunal’s conclusion on force majeure as contradictory, as it

simultaneously justified reduced supply due to external factors yet

ordered a pro-rata refund of transportation charged.

Reasoning and findings

9. We have heard learned senior counsel and learned counsels who

appeared before us at a considerable length and on various dates. The

record has also been carefully perused in its entirety.

FAO(OS)(COMM) 4/2024 Page 29 of 61

10. Scope of interference

10.1. In a challenge to an arbitral award, the most important starting

point is to recognize the limited scope of judicial interference, as

enshrined in Part-I of the Arbitration and Conciliation Act, 1996 (“the

Act”). The framework of the Act, particularly Section 34, is premised

on minimal intervention by courts to ensure that arbitration remains an

effective and efficient alternative dispute resolution mechanism. It is

essential to understand that judicial review of arbitral awards is not

intended to serve as an appeal on the merits of the case. Rather, it is

confined to a limited set of circumstances as prescribed by the Act.

10.2. To clarify the boundaries of judicial intervention, the Supreme

Court has consistently emphasized, through a catena of decisions, the

restrictive and narrow nature of interference under Section 34 of the

Act. The Appellate Court under Section 37 is even more constrained

than the Section 34 Court, as it is not authorized to conduct a merit

based review of the award. However, to avoid prolixity, and keep the

analysis concise, it is best to refer only a select few key authorities to

understand the binding principles without overloading the discussion

with excessive details.

10.3. The apex court in its decision of Jan De Nul Dredging India

Pvt Ltd. versus Tuticorin Port trust

3

, after taking into account the

decisions in MMTC Limited vs. Vedanta Limited

4

, Konkan Railway

3

2026 INSC 34

4

(2019) 4 SCC 163

FAO(OS)(COMM) 4/2024 Page 30 of 61

Corpn. Ltd. v. Chenab Bridge

5

, Punjab State Civil Supplies Corpn.

Ltd. v. Sanman Rice Mills Project

6

, UHL UHL Power Company

Limited vs. State of Himachal Pradesh

7

and Bombay Slum

Redevelopment Corporation Private Limited vs. Samir Narain

Bhojwani

8

clearly stated that the appellate power under Section 37 of

the Act is restricted to verifying whether the Section 34 court has

exceeded its jurisdiction or failed to exercise its powers appropriately.

The Supreme Court noted that appellate intervention should only occur

if the Section 34 court has misapplied the scope of its jurisdiction or

made an error in law. The relevant observation is as follows:

30. That being the position, the award of the Arbitral Tribunal

was not liable to be disturbed under Section 34 of the Act and was

rightly not disturbed. It is settled in law that the appellate powers

under Section 37 are limited to the scope of Section 34 and cannot

exceed beyond it. Certainly, therefore, if an award is not liable to

be disturbed under Section 34 of the Act, the same could not have

been interfered with in exercise of powers under Section 37 of the

Act.

31. In MMTC Limited vs. Vedanta Limited

9

, this Court has

very succinctly laid down the powers of Appellate Court under the

Act. It held as under :-

“14. As far as interference with an order made under

Section 34, as per Section 37, is concerned, it cannot be

disputed that such interference under Section 37 cannot

travel beyond the restrictions laid down under Section 34. In

other words, the court cannot undertake an independent

assessment of the merits of the award and must only

ascertain that the exercise of power by the court under

Section 34 has not exceeded the scope of the

provision. Thus, it is evident that in case an arbitral

award has been confirmed by the court under Section 34 and

5

(2023) 9 SCC 85

6

2024 SCC OnLine SC 2632

7

(2022) 4 SCC 116

8

(2024) 7 SCC 218

9

(2019) 4 SCC 163

FAO(OS)(COMM) 4/2024 Page 31 of 61

by the court in an appeal under Section 37, this Court must

be extremely cautious and slow to disturb such concurrent

findings.”

32. In Konkan Railway Corpn. Ltd. v. Chenab Bridge

Project

10

, a three-judge bench of this Hon’ble Court has

extensively dealt with the jurisprudence around Sections 34 and 37

of the Arbitration Act. This Court has held that:

“18. At the outset, we may state that the jurisdiction of

the court under Section 37 of the Act, as clarified by this

Court in MMTC Ltd. v. Vedanta Ltd.7, is akin to the

jurisdiction of the court under Section 34 of the Act. Scope

of interference by a court in an appeal under Section 37 of

the Act, in examining an order, setting aside or refusing to

set aside an award, is restricted and subject to the same

grounds as the challenge under Section 34 of the Act.

19. Therefore, the scope of jurisdiction under Section 34

and Section 37 of the Act is not akin to normal appellate

jurisdiction. It is well-settled that courts ought not to

interfere with the arbitral award in a casual and cavalier

manner. The mere possibility of an alternative view on facts

or interpretation of the contract does not entitle courts to

reverse the findings of the Arbitral Tribunal.”

33. In Punjab State Civil Supplies Corpn. Ltd. v. Sanman Rice

Mills

11

, this Hon’ble Court, while examining the scope of Section

34 and Section 37 of the Arbitration Act, has held that:

“20. In view of the above position in law on the subject,

the scope of the intervention of the court in arbitral matters

is virtually prohibited, if not absolutely barred and that the

interference is confined only to the extent envisaged under

Section 34 of the Act. The appellate power of Section 37 of

the Act is limited within the domain of Section 34 of the Act.

It is exercisable only to find out if the court, exercising

power under Section 34 of the Act, has acted within its limits

as prescribed thereunder or has exceeded or failed to

exercise the power so conferred. The Appellate Court has no

authority of law to consider the matter in dispute before the

arbitral tribunal on merits so as to find out as to whether the

decision of the arbitral tribunal is right or wrong upon

reappraisal of evidence as if it is sitting in an ordinary court

of appeal. It is only where the court exercising power under

10

(2023) 9 SCC 85

11

2024 SCC OnLine SC 2632

FAO(OS)(COMM) 4/2024 Page 32 of 61

Section 34 has failed to exercise its jurisdiction vested in it

by Section 34 or has travelled beyond its jurisdiction that the

appellate court can step in and set aside the order passed

under Section 34 of the Act. Its power is more akin to that

superintendence as is vested in civil courts while exercising

revisionary powers. The arbitral award is not liable to be

interfered unless a case for interference as set out in the

earlier part of the decision, is made out. It cannot be

disturbed only for the reason that instead of the view taken

by the arbitral tribunal, the other view which is also a

possible view is a better view according to the appellate

court.

21. It must also be remembered that proceedings under

Section 34 of the Act are summary in nature and are not like

a full-fledged regular civil suit. Therefore, the scope of

Section 37 of the Act is much more summary in nature and

not like an ordinary civil appeal. The award as such cannot

be touched unless it is contrary to the substantive provision

of law; any provision of the Act or the terms of the

agreement.”

34. In UHL Power Company Limited vs. State of Himachal

Pradesh

12

, a three judges Bench of this Court observed as under:-

“The jurisdiction conferred on the courts under Section 34 of the

Arbitration Act is fairly narrow, when it comes to the scope of an

appeal under Section 37 of the Arbitration Act, the jurisdiction of

the Appellate Court in examining an order, setting aside or refusing

to set aside an order, is all the more circumscribed.”

35. In a recent case of Bombay Slum Redevelopment

Corporation Private Limited vs. Samir Narain Bhojwani

13

, a

Bench of this Court, of which one of us (P. Mithal, J.) was a

member, had held that the jurisdiction of the Appellate Court

dealing with an appeal under Section 37 of the Act against the

judgment in a petition under Section 34 of the Act is more

constrained than the jurisdiction of the court dealing with a petition

under Section 34 of the Act.

36. The gist of the aforesaid decisions is that the jurisdiction of

the court under Section 37 of the Act is akin to the jurisdiction of

the court under Section 34 of the Act, and, therefore, the scope of

interference by the court in appeal under Section 37 cannot go

beyond the grounds on which challenge can be made to the award

under Section 34 of the Act. Moreover, the courts exercising

12

(2022) 4 SCC 116

13

(2024) 7 SCC 2018

FAO(OS)(COMM) 4/2024 Page 33 of 61

powers under Sections 34 and 37, do not act as a normal court, and

therefore, ought not to interfere with the arbitral award on a mere

possibility of an alternative view.

37. In other words, the scope of interference of the court with

the arbitral matters is virtually prohibited, if not absolutely barred.

The powers of the Appellate Court are even more restricted than

the powers conferred by Section 34 of the Act. The appellate power

under Section 37 of the Act is exercisable only to find out if the

court exercising power under Section 34 of the Act, has acted

within its limits as prescribed thereunder or has exceeded or failed

to exercise the power so conferred. The Appellate Court exercising

powers under Section 37 of the Act has no authority of law to

consider the matter in dispute before the Arbitral Tribunal on merits

so as to hold as to whether the award of the Arbitral Tribunal is

right or wrong. The Appellate Court in exercise of such power

cannot sit as an ordinary court of appeal and reappraise the

evidence to record a contrary finding. The award of the Arbitral

Tribunal cannot be touched by the court unless it is contrary to the

substantive provision of law or any provision of the Act or the

terms of the agreement.

11. In the decision of M/s Larsen Air Conditioning and

Refrigeration Company vs. Union of India & Ors

14

the Supreme Court

held that Section 37 of the Act provides a narrower scope for reviewing

arbitral awards, especially when the award has been substantially

upheld under Section 34. The Court reiterated that appeals under

Section 37 should be limited to ensuring compliance with the

jurisdictional boundaries defined in Section 34 and cannot be used for

a reassessment of facts or law.

12. Thus, the law on judicial review of arbitral awards, as crystallized

by the Supreme Court, can be summarised as follows:

i. The powers of Section 37 court are strictly confined within the

limits prescribed by Section 34. The section 37 court cannot go

14

2023 INSC 708

FAO(OS)(COMM) 4/2024 Page 34 of 61

beyond the grounds available for setting aside an arbitral award

under section 34.

ii. Section 37 empowers the appellate court only to determine

whether the Section 34 court has acted within its jurisdiction.

The scope of Section 37 intervention is restricted and akin to

jurisdiction of the Section 34 court, which is confined to

reviewing specific grounds such as excess of authority, lack of

jurisdiction, violation of public policy and patent illegality.

iii. The judicial review of arbitral awards under Section 34 and 37

is extremely limited. Courts must refrain from intervening

merely because they might prefer a different view or

interpretation of the facts or law. Unless these is a manifest error

of law, contravention of public policy, or a substantial

miscarriage of justice, the tribunal’s decision should be allowed

to stand.

iv. One of the primary objective of the Act is to respect the

autonomy of the arbitral process and minimize judicial

intervention. Therefore, judicial intervention should be

exercised with extreme caution and in a restrictive manner. If

courts excessively intervene in arbitral awards, it would not only

undermine the efficiency and finality of arbitration but also

defeat the very purpose of arbitration.

13. Thus, as discussed above, the court’s role under Section 37 is

confined to examining whether the Section 34 court has acted within its

jurisdiction and not exceeded the limited grounds for setting aside an

FAO(OS)(COMM) 4/2024 Page 35 of 61

arbitral award. Hence, to examine whether the learned Single Judge

acted within its jurisdiction, we deem it relevant to also briefly

understand the jurisdiction conferred upon section 34 courts to set aside

an award.

14. The apex court in its decision of Consolidated Construction

consortium limited vs. Software technology parks of India

15

emphasized that an arbitral award cannot be set aside simply because

the award is illegal or erroneous in law, as that would require re-

appraisal of evidence, which is not permissible under Section 34. The

observation with regards to section 34 reads as below:

“22. Sub-section (1) of Section 34 provides that an application may

be made to the competent court for setting aside an arbitral award.

This is the only remedy available for setting aside an arbitral award.

The conditions for setting aside an arbitral award are mentioned in

sub-sections (2) and (2A). Sub-section (2) provides for situations

such as the agreed party was under some incapacity or the arbitration

agreement is not valid under the law or the aggrieved party did not

receive proper notice regarding appointment of arbitrator or of the

arbitral proceedings which prevented it from presenting its case or

the arbitral award deals with a dispute not contemplated by or not

falling within the terms of arbitration or the composition of the

arbitral tribunal or the procedure adopted in arbitration were not in

accordance with the agreement of the parties or the subject matter of

dispute is not capable of settlement by arbitration or the arbitral

award is in conflict within the public policy of India. In terms of sub-

section (2A), an arbitral award may also be set aside on the ground

of patent illegality appearing on the face of the award. Sub-section

(3) provides for the time limit for filing of an application for setting

aside arbitral award. Therefore, the grounds on which an arbitral

award can be set aside are clearly mentioned in Sections 34(2) and

34(2A) of the 1996 Act. An arbitral award cannot be set aside on a

ground which is beyond the grounds mentioned in sub-sections (2)

and (2A) of Section 34.

23. Scope of Section 34 of the 1996 Act is now well crystallized by

a plethora of judgments of this Court. Section 34 is not in the nature

15

2025 INSC 574

FAO(OS)(COMM) 4/2024 Page 36 of 61

of an appellate provision. It provides for setting aside an arbitral

award that too only on very limited grounds i.e. as those contained

in sub-sections (2) and (2A) of Section 34. It is the only remedy for

setting aside an arbitral award. An arbitral award is not liable to be

interfered with only on the ground that the award is illegal or is

erroneous in law which would require re-appraisal of the evidence

adduced before the arbitral tribunal. If two views are possible, there

is no scope for the court to re-appraise the evidence and to take the

view other than the one taken by the arbitrator. The view taken by

the arbitral tribunal is ordinarily to be accepted and allowed to

prevail. Thus, the scope of interference in arbitral matters is only

confined to the extent envisaged under Section 34 of the Act. The

court exercising powers under Section 34 has perforce to limit its

jurisdiction within the four corners of Section 34. It cannot travel

beyond Section 34. Thus, proceedings under Section 34 are

summary in nature and not like a full-fledged civil suit or a civil

appeal. The award as such cannot be touched unless it is contrary to

the substantive provisions of law or Section 34 of the 1996 Act or

the terms of the agreement

24. Therefore, the role of the court under Section 34 of the 1996 Act

is clearly demarcated. It is a restrictive jurisdiction and has to be

invoked in a conservative manner. The reason is that arbitral

autonomy must be respected and judicial interference should remain

minimal otherwise it will defeat the very object of the 1996 Act.”

15. Upon a plain reading of the above, it is clear that the role of

Section 34 court is narrow and restricted. The court cannot re-appreciate

the evidence, nor can it correct mere factual or legal errors made by the

arbitral tribunal. The court is not an appellate authority and cannot

substitute its own view simply because another view is possible. The

principle behind Section 34 is to uphold arbitral autonomy and respect

the object of the Act, and Courts must exercise a minimal-interference

approach to avoid undermining the arbitral process.

16. Additionally, in the decision of ONGC limited v. Saw Pipes

Limited

16

the apex court enumerated the grounds under Section 34 on

16

(2003) 5 SCC 705

FAO(OS)(COMM) 4/2024 Page 37 of 61

which an arbitral award can be set aside. These grounds are, (a)

contravention of fundamental policy of Indian law; or (b) violation of

the interest of India; or (c) violation of justice or morality, or (d)

patently illegal. The Court made it clear that the grounds for

interference under Section 34 are limited, and an award can only be set

aside on these specific grounds. Further, it was held that patent

illegality, as a ground for setting aside an award, is an exception and

requires a careful and cautious approach.

17. Coming to the impugned award under challenge, upon a careful

perusal thereof, we find that the order does not explicitly refer to any of

the aforesaid grounds while setting aside the award. However, the

reasoning adopted by the learned Judge appears to proceed on the

premise of patent illegality, albeit without expressly articulating this

ground.

18. In light of the above, it is apposite to briefly examine the contours

of patent illegality under Section 34 of the Act.

19. Apex court in its decision of Ramesh Kumar Jain v. Bharat

Aluminium Company Limited(BALCO)

17

has extensively elaborated

on the concept of patent illegality. The relevant observations makes an

interesting read and are as follows:

“35. Considering the aforesaid precedents, in our considered view,

the said terminology of ‘patent illegality’ indicates more than one

scenario such as the findings of the arbitrator must shock the judicial

conscience or the arbitrator took into account matters he shouldn’t

17

2025 INSC 1457

FAO(OS)(COMM) 4/2024 Page 38 of 61

have, or he must have failed to take into account vital matters,

leading to an unjust result; or the decision is so irrational that no fair

or sensible person would have arrived at it given the same facts. A

classic example for the same is when an award is based on “no

evidence” i.e., arbitrators cannot conjure figures or facts out of thin

air to arrive at his findings. If a crucial finding is unsupported by any

evidence or is a result of ignoring vital evidence that was placed

before the arbitrator, it may be a ground the warrants interference.

However, the said parameter must be applied with caution by

keeping in mind that “no evidence” means truly no relevant

evidence, not scant or weak evidence. If there is some evidence, even

a single witness’s testimony or a set of documents, on which the

arbitrator could rely upon or has relied upon to arrive at his

conclusions, the court cannot regard the conclusion drawn by the

arbitrator as patently illegal merely because that evidence has less

probative value. This thin line is stood crossed only when the arbitral

tribunal’s conclusion cannot be reconciled with any permissible

view of the evidence.”

20. From the above exposition, it is clear that patent illegality

encompasses situations where (i) the arbitrator’s findings shock the

conscience of the court, (ii) the findings are based on considerations

that ought not to have been taken into account, (iii) the award ignores

vital evidence that should have been considered, or (iv) the findings are

so irrational that no fair-minded person could have arrived at the same

conclusion on the available material. Also, a clear distinction is drawn

between “weak evidence’ and “no evidence”, with interference being

justified only when the tribunal’s conclusions are irreconcilable with

any permissible view of the evidence on record.

21. In Ssangyong Engineering and Construction Company Limited

vs. National Highways Authority of India

18

and National Highways

Authority of India vs. ITD Cementation India Limited

19

the Apex

18

(2015) 15 SCC 131

19

(2015) 14 SCC 21

FAO(OS)(COMM) 4/2024 Page 39 of 61

Court reiterated that the construction of contractual terms is primarily

within the domain of the arbitrator. Judicial interference is warranted

only if the arbitrator’s interpretation is so unreasonable that no fair-

minded person could adopt it.

22. With the above legal principles clarified, we must now examine

whether the learned single judge in the impugned judgment exceeded

its jurisdiction or failed to exercise the jurisdiction vested in it while

setting aside the impugned arbitral award under the ground of patent

illegality.

23. On a careful appraisal of the facts, it is pertinent to note that the

learned Single Judge of this Court, even after affirming the arbitral

award on merits, proceeded to set aside the same on the grounds of

limitation and alleged ignorance of a vital contractual clause. In doing

so, the court appears to have substituted its own evaluation of evidence

and contractual interpretation for that of the arbitrator. This raises a

critical question as to whether such interference transgressed the

permissible scope of judicial review under Section 34, particularly in

the context of patent illegality, which is meant to address manifestly

unjust or irrational findings, and not merely to reassess the merits of the

award.

Ignorance of vital contractual clause

24. One of the principle grounds for interference, as held by the

learned Single Judge, was the arbitral tribunal’s alleged ignorance of or

FAO(OS)(COMM) 4/2024 Page 40 of 61

failure to take note of amended Article 12.03. According to the learned

Single Judge, Article 12.03 was of direct relevance to multiple critical

aspects of the dispute, namely, (i) the absolute waiver of any claim of

appellant (ii) the appellant’s right to refer the dispute to arbitration, and

(iii) the issue of limitation. The learned Single Judge observed that,

being a vital contractual stipulation going to the root of the matter,

Article 12.03 ought to have been considered by the arbitral tribunal. The

relevant findings of the impugned judgement on this aspect is as

follows:

“48. It is evident that Article 12.03 as amended vide the

Supplementary Agreement dated 30.03.1998, clearly prescribes the

consequences of the respondent/claimant not lodging the claim

within the period of 14 days from the date of receipt of the relevant

invoices for transportation charge. It specifically provides that

failure to put-forward any claim within the said time period, shall be

“an absolute waiver of the claim”, as also respondent/claimant’s

right to refer the matter to arbitration. Although the issue of waiver

squarely and clearly arose for consideration in the context of issue

nos.5 and 11, the aforesaid contractual stipulation has not been taken

note of while deciding the said issues, or anywhere else in the entire

arbitral award. Likewise, whether or not the respondent/claimant

was entitled to seek reference to arbitration in derogation of the

aforesaid contractual stipulation was an issue that directly arose for

consideration, and also had a direct bearing on the jurisdiction of the

arbitral tribunal. The above stipulation also has a vital bearing on the

issue of limitation. However, the impugned award does not even take

note of the aforesaid provision, much less deal with it.”

25. Consequently, the question for determination which falls before

us is whether the arbitral tribunal overlooked a vital contractual clause

that had a direct bearing on the matters in dispute, and if so, whether

such oversight vitiates the award at its foundation.

26. Before evaluating the alleged oversight, it is essential to assess

whether amended Article 12.03 is itself so relevant as tot go to the root

FAO(OS)(COMM) 4/2024 Page 41 of 61

of the dispute. In this regard, amended and unamended Article 12.03 is

reproduced:

Unamended Amended

In case of any discrepancy/ dispute, the

BUYER shall lodge a claim with the

SELLER within the period of 14

(Fourteen) days from the date of receipt

of invoice. To the extent the claim

admitted by the SELLER shall issue a

credit note in favour of the BUYER and

adjust the same in the next invoice to

be raised. The SELLER, undertakes to

settle the claim of BUYER within a

period of 30 (Thirty) days from the

receipt of such claim, if found

acceptable

In case of any discrepancy/dispute, the

BUYER shall lodge a quantified claim

with the SELLER within the period of

14 ( Fourteen) days from the date of the

receipt of the related invoice. To the

extent the claims are admitted by the

SELLER, the SELLER shall issue a

Credit Note in favour of the BUYER

and adjust the same in the next invoice

to be raised. The SELLER undertakes

to settle the claims with the BUYER

within a period of 30 ( Thirty ) days

from the date of receipt of such claim,

if and to the extent found acceptable.

Failure of the BUYER to put forward

any claim within the time specified

above shall be an absolute waiver of

any claim as also the BUYER's right to

refer the matter to Arbitration.

27. A comparison between the original and amended clauses reveals

that while both clauses impose a strict 14-day window for the appellant

to dispute an invoice and contemplate issuance of credit notes, the

amended clause introduces an express consequence for delay.

Specifically, it provides that failure to raise a claim within the stipulated

time period constitutes: (i) an absolute waiver of the claim, and (ii) a

waiver of the appellant’s right to refer the matter to arbitration, a bar

that was entirely absent in the original clause.

28. The amendment operates as a condition precedent and constitutes

a contractual bar which can determine, at the threshold, whether any

FAO(OS)(COMM) 4/2024 Page 42 of 61

claim survives at all and whether the dispute-resolution mechanism can

be invoked.

29. Therefore, any failure to consider this amendment necessarily

goes to the root of the matter, since it directly affects the maintainability

of the claim, limitation issues, waiver, and the very jurisdictional basis

upon which an arbitral reference could proceed.

30. It is settled law that non-compliance with conditions precedent to

invoking arbitration can be treated as a jurisdictional objection. The

jurisdiction of the arbitral tribunal is contingent upon the existence of a

dispute that the contract permits to be referred to arbitration.

31. In the present case, the facts and circumstances compel the

conclusion that whether the appellant was entitled to seek reference to

arbitration in view of amended Article 12.03 was a critical issue directly

arising for consideration. Further, this issue had a direct bearing on the

jurisdiction of the arbitral tribunal.

32. On a detailed perusal of the arbitral award, it is evident that the

arbitral tribunal has not dealt with the amended clause at all. Although

the arbitral award records submissions pertaining to Article 12.03, it

does not return any finding thereon, nor does it provide reasoning for

ignoring or bypassing the clause. In other words, the award fails to

interact with crucial material on record. By rendering the award without

considering this vital clause, the arbitral tribunal overlooked evidence

that had direct bearing on: (i) the waiver of the appellant’s claim, (ii)

FAO(OS)(COMM) 4/2024 Page 43 of 61

the appellant’s right to refer the dispute to arbitration, and (iii) the issue

of limitation.

33. The contention of the appellants that the arbitral tribunal had

effectively addressed Article 12.03 under Issues 5, 6, and particularly

Issue 11, cannot be accepted. A thorough reading of the award reveals

no reasoning or explanation as to Article 12.03.

34. As regards the submission that Article 12.03 is hit by Section 28

of the Indian Contract Act, 1872, it is pertinent to note that the learned

Single Judge rightly relied on the decision in Reliance Industries

Limited (supra). Mere labelling of charges as “provisional” cannot

override statutory limitation, and therefore cannot render the clause

irrelevant.

35. In view of the foregoing, it is evident that the learned Single

Judge correctly concluded that the arbitral tribunal ignored a vital

contractual stipulation, and such omission directly affected the

jurisdiction, limitation, and maintainability of the claim.

Limitation

36. Another ground for interference, as relied upon by the learned

Single Judge, was that the arbitral tribunal’s treatment of the issue of

limitation. According to the learned Single Judge, the view adopted by

the arbitral tribunal was not a possible or tenable view. Simply labelling

the invoices as “provisional” does not, in law, result in an indefinite

FAO(OS)(COMM) 4/2024 Page 44 of 61

extension of the limitation period. It was further observed that the

impugned award does not contain any cogent reasoning as to why the

objections raised by the petitioner deserve to be rejected.

37. In this regard, it is instructive to refer to the decision of the

Supreme Cout in OPG Power Generation Private Limited vs Enexio

Power Cooling solutions India Private Limited & Anr.

20

, which

provides guidance on the standard of reasoning expected in arbitral

awards. The Court observed that an arbitral tribunal’s reasoning, (i)

need not be a long or detailed narration of every submission or evidence

exchanged between the parties;(ii) is not required to set out every step

of reasoning or respond to every argument; (iii)is sufficient if the

tribunal states its findings and explains the evidentiary path by which it

reached such finding. The relevant portions reflecting the observation

of the apex court are reproduced below, –

“71.1 As to the form of a reasoned award, in Russell on Arbitration

(24th Edition, page 304) it is stated thus:

“6.032. No particular form is required for a reasoned award

although ‘the giving of clearly expressed responsive to the

issues as they were debated before the arbitrators reduces

the scope for the making of unmeritorious challenges’.

When giving a reasoned award the tribunal need only set

out what, on its view of the evidence, did or did not happen

and explain succinctly why, in the light of what happened,

the tribunal has reached its decision, and state what that

decision is. In order to avoid being vulnerable to challenge,

the tribunal’s reasons must deal with all the issues that were

put to it. It should set out its findings of fact and its

reasoning so as to enable the parties to understand them and

state why particular points were decisive. It should also

indicate the tribunal’s findings and reasoning on issues

argued before it but not considered decisive, so as to enable

20

2024 INSC 711

FAO(OS)(COMM) 4/2024 Page 45 of 61

the parties and the court to consider the position with

respect to appeal on all the issues before the tribunal. When

dealing with controversial matters, it is helpful for the

tribunal to set out not only its view of what occurred, but

also to make it clear that it has considered any alternative

version and has rejected it. Even if several reasons lead to

the same result, the tribunal should still set them out. That

said, so long as the relevant issues are addressed there is no

need to deal with every possible argument or to explain why

the tribunal attached more weight to some evidence than to

other evidence. The tribunal is not expected to recite at great

length communications exchanged or submissions made by

the parties. Nor is it required to set out each step by which

it reached its conclusion or to deal with each and every point

made by the parties. It is sufficient that the tribunal should

explain what its findings are and the evidential route by

which it reached its conclusions.

71.2 On the requirement of recording reasons in an arbitral award

and consequences of lack of, or inadequate, reasons in an arbitral

award, this Court in Dyna Technologies (supra) held:

“34. The mandate under section 31 (3) of the Arbitration

Act is to have reasoning which is intelligible and adequate

and, which can in appropriate cases be even implied by the

courts from a fair reading of the award and documents

referred to thereunder, if need be. The aforesaid provision

does not require an elaborate judgment to be passed by the

arbitrators having regard to the speedy resolution of

dispute.

35. When we consider the requirement of a reasoned order,

three characteristics of a reasoned order can be fathomed.

They are: proper, intelligible and adequate. If the

reasonings in the order are improper, they reveal a flaw in

the decision-making process. If the challenge to an award is

based on impropriety or perversity in the reasoning, then it

can be challenged strictly on the grounds provided in

section 34 of the Arbitration Act. If the challenge to an

award is based on the ground that the same is unintelligible,

the same would be equivalent of providing no reasons at all.

Coming to the last aspect concerning the challenge on

adequacy of reasons, the court while exercising jurisdiction

under section 34 has to adjudicate the validity of such an

award based on the degree of particularity of reasoning

required having regard to the nature of issues falling for

consideration. The degree of particularity cannot be stated

FAO(OS)(COMM) 4/2024 Page 46 of 61

in a precise manner as the same would depend on the

complexity of the issue even if the court comes to a

conclusion that there were gaps in the reasoning for the

conclusions reached by the tribunal, the court needs to have

regard to the document submitted by the parties and the

contentions raised before the tribunal so that awards with

inadequate reasons are not set aside in casual and cavalier

manner. On the other hand, ordinarily unintelligible awards

are to be set aside, subject to party autonomy to do away

with the reasoned award. Therefore, the courts are required

to be careful while distinguishing between inadequacy of

reasons in an award and unintelligible awards.”

71.3. We find ourselves in agreement with the view taken in Dyna

Technologies (supra), as extracted above. Therefore, in our view, for

the purposes of addressing an application to set aside an arbitral

award on the ground of improper or inadequate reasons, or lack of

reasons, awards can broadly be placed in three categories:

(1) where no reasons are recorded, or the reasons recorded

are unintelligible;

(2) where reasons are improper, that is, they reveal a flaw

in the decision- making process; and

(3) where reasons appear inadequate.

71.4. Awards falling in category (1) are vulnerable as they would

be in conflict with the provisions of Section 31(3) of the 1996 Act.

Therefore, such awards are liable to be set aside under Section

34, unless (a) the parties have agreed that no reasons are to be

given, or (b) the award is an arbitral award on agreed terms

under Section 30.

71.5. Awards falling in category (2) are amenable to a challenge on

ground of impropriety or perversity, strictly in accordance with the

grounds set out in Section 34 of the 1996 Act. 7

71.6. Awards falling in category (3) require to be dealt with care. In

a challenge to such award, before taking a decision the Court must

take into consideration the nature of the issues arising between the

parties in the arbitral proceedings and the degree of reasoning

required to address them. The Court must thereafter carefully peruse

the award, and the documents referred to therein. If reasons are

intelligible and adequate on a fair-reading of the award and, in

appropriate cases, implicit in the documents referred to therein, the

award is not to be set aside for inadequacy of reasons. However, if

FAO(OS)(COMM) 4/2024 Page 47 of 61

gaps are such that they render the reasoning in support of the award

unintelligible, or lacking, the Court exercising power under Section

34 may set aside the award.”

38. The Apex Court also categorized awards under review for

reasoning deficiencies into three broad categories, (i) where no reasons

are recorded or reasons are unintelligible, such awards are vulnerable

and liable to be set aside, (ii) where reasons are improper or reveal a

flow in decision making, such awards can be challenged on the ground

of perversity, (iii) where reasons are adequate, these awards must be

approached with judicial restraint.

39. The arbitral tribunal, in the present case, recorded its reasoning

on the issue of limitation as follows:

“In our opinion, the contention of the learned senior counsel for the

claimant is correct and we agree that the invoices were provisional

and they continued to be provisional. We are unable to accept that

beyond 45 days of the presentation of the invoice, they would become

final. As these invoices were and continued to be provisional, the

question of the bar of limitation does not arise. Therefore, the issue

is arbitrable.”

40. Thus, applying the principles laid down by the Apex Court, it is

clear that while the arbitral tribunal was not required to set out every

step of its reasoning, it was nonetheless required to indicate the

evidential route by which it reached its conclusions. Upon examination

of the submissions made before the tribunal, it is evident that the issue

of limitation warranted reasoned examination, particularly given that

the respondent had substantially raised the objection regarding

limitation.

FAO(OS)(COMM) 4/2024 Page 48 of 61

41. The respondent contended, inter alia, that (i) invoices cannot

remain provisional indefinitely; and (ii) in terms of Article 12.03, the

dispute had to be raised within 45 days of presentation of the invoice.

However, the arbitral tribunal fails to record any reason as to why these

contentions of the appellant were accepted or rejected. The so only

reasoning in the award i.e. “the contention of leaned senior of counsel

for the claimant is correct” and “we are unable to accept that beyond

45 days of the presentation of the invoice, they would become final”,

does not disclose the evidentiary path or reasoning by which the tribunal

arrived at its conclusion.

42. In the absence of any intelligible reasoning, no fair-minded

person could adopt the reasoning of the arbitral tribunal as proper or

adequate. The award, therefore, falls squarely within Category (i) as

classified by the Apex Court and is consequently liable to set aside on

this ground.

43. The appellant contended that the limitation could only be

determined after the agreement concluded and that the shortfall

persisted throughout the contractual period. The learned Single Judge,

however, rightly referred to the decision in Reliance Industries Limited

v. Gail (India) Limited(supra), wherein it was held that merely

labelling an invoice as provisional cannot extend the period of

limitation indefinitely.

44. The learned counsel for the appellant sought to distinguish the

Reliance Industries decision on two grounds, (i) that the judgment

FAO(OS)(COMM) 4/2024 Page 49 of 61

concerned the issue of gas price, and (ii) that the respondent contended

that its provisional invoices never triggered limitation.

45. Such attempts to distinguish the Reliance industries limited v.

Gail (India) limited (supra) are untenable as labelling invoices as

provisional cannot indefinitely postpone limitation and the issue of

limitation cannot be distinguished on the ground that it concerned gas

price or transportation charges. Thus, the aforesaid judgment is equally

applicable to the present dispute. The respondent’s attempt to achieve a

result by indefinitely labelling invoices as provisional is squarely

contrary to settled law. Accordingly, the learned Single Judge did not

err in relying upon the said judgment.

46. In view of the foregoing, we find no error in the reasoning

adopted by the learned Single Judge on the issue of limitation. The

findings of the learned Single Judge are legally sound, intelligible, and

in conformity with established principles of law relating to limitation

and arbitral awards.

Cross objections

47. The respondent has filed cross-objections challenging the

observation recorded in Para 45 of the judgment, where the learned

Single Judge upheld the arbitral award on merits and held that the view

taken by the arbitral tribunal was a “plausible view”. According to the

learned counsel for the respondent, the arbitral tribunal, in granting the

relief, effectively re-wrote the contract and blurred the distinction

FAO(OS)(COMM) 4/2024 Page 50 of 61

between two types of transportation charges. In the submission of the

respondents, such an approach cannot be characterised as a plausible or

reasonable view within the ambit of judicial review under Section 34 of

the Act.

48. According to respondent, the arbitral tribunal has observed that

the reduced supply of gas by the respondent was justified on the

grounds of force majeure, and therefore, did not affect the obligation to

pay fixed transportation charges. Despite this, the tribunal proceeded to

grant a proportionate reduction in the transportation charges.

49. The tribunal justified the reduction on the principles of business

efficacy and partial failure of consideration, effectively recognising that

while the contractual obligation to pay transportation charges existed,

the reduced performance warranted a proportionate adjustment.

50. Thus, the question for determination is whether the arbitral

tribunal took a plausible view in granting reduced transportation

charges in light of the business efficacy model and partial failure of

consideration.

51. The principle of business efficacy has been extensively explained

and summarised by the Apex Court in M/s Adani Power (Mundra) Ltd.

vs. Gujarat Electricity Regulatory Commission and Ors,

21

, wherein

the Court underscored that the doctrine of business efficacy allows an

21

(2019) 19 SCC 9

FAO(OS)(COMM) 4/2024 Page 51 of 61

implied term to be read into a contract only under very limited

circumstances. The relevant observation reads as under

“20. It could thus be seen that it is more than well settled that the

clauses in the agreement ought to be given the plain, literal and

grammatical meaning of the expression used in the same. No

doubt, that the courts will also try to gather as to what intention the

parties wanted to give them. As has been held by Ranjan Gogoi, J.

(as His Lordship then was) the principle of business efficacy could

be invoked only if by a plain literal interpretation of the term in the

agreement or the contract, it is not possible to achieve the result or

the consequence intended by the parties acting as prudent

businessmen. This test requires that a term can only be implied, if

it is necessary to give business efficacy to the contract, to avoid

such a failure of consideration that the parties cannot as reasonable

businessmen have intended. If the contract makes business sense

without the term, the courts will not imply the same. It is amply

clear that courts can imply a clause only if it is found that the plain

and literal meaning given to the expression used in the terms is not

in a position to make out the intention of the parties. Reading an

unexpressed term in an agreement would be justified on the basis

that such a term was always and obviously intended by and

between the parties thereto. An unexpressed term can be implied if

and only if the court finds that the parties must have intended that

term to form part of their contract. It is not enough for the court to

find that such a term would have been adopted by the parties as

reasonable men if it had been suggested to them. It must have been

a term that went without saying, a term necessary to give business

efficacy to the contract, a term which, although tacit, forms part of

the contract. As held in the case of Nabha Power Ltd. (supra), for

invoking the business efficacy test and carving out an implied

condition, not expressly found in the language of the contract, the

following five conditions will have to be satisfied:

(1) Reasonable and equitable;

(2) Necessary to give business efficacy to the contract;

(3) It goes without saying i.e. the Officious Bystander Test;

(4) Capable of clear expression; and

(5) Must not contradict any express term of the contract.

FAO(OS)(COMM) 4/2024 Page 52 of 61

52. From the judicial exposition, it is clear that the principle of

business efficacy can be invoked only if the plain meaning of the

express terms of the contract does not disclose the intention of the

parties. In other words, the reading of an unexpressed term in an

agreement is justified only if such a term was obviously intended by the

parties at the time of contracting. Further, it is not sufficient that the

court considers that term would have been reasonable or desirable from

the perspective of a third party; rather, it must be a term which the

parties must be taken to have intended, though left unexpressed,

because it is so obvious as to “go without saying.

53. The “officious bystander” test, as explained in the said judgment,

provides a practical method to determine whether a term can be implied.

Under this test, a term may be implied only if it is so obvious that, had

an independent bystander asked the parties at the time of contracting

whether such a term applies, both parties would have immediately

responded, “Of course”. If the proposed term could have elicited any

real possibility of a different answer from either party, it cannot be

treated as an implied term.

54. In view of the above, the arbitral award must be examined against

the twin principles of, Business Efficacy, which permits implying terms

necessary to make the contract workable when the parties’ intention is

otherwise ambiguous; and The Officious Bystander test, which ensures

that no term is implied unless it is so obvious and self-evident that the

parties must be taken to have intended it.

FAO(OS)(COMM) 4/2024 Page 53 of 61

55. The enquiry, therefore, focuses on whether the tribunal’s grant of

proportionate reduction in transportation charges, despite recognising

force majeure and fixed payment obligations, falls within the ambit of

a plausible view consistent with these principles, or whether it

constitutes an impermissible rewriting of the contract.

56. Upon a careful perusal of the arbitral award, the tribunal has

articulated its reasoning for invoking the principle of business efficacy

and granting proportionate reduction of transportation/service charges

in the context of reduced gas supply due to force majeure. The tribunal’s

reasoning may be summarized and elaborated as follows:

“1) Interpretation of Article 4.03 of the 1998 contract in a

commercial and business sense:

It is well settled that a commercial the contract must be construed in

a manner that yields business common sense and reflects the

commercial intentions of the parties. Courts and tribunals, in

interpreting contracts in commercial transaction, should not defeat

the efficacy of documents upon which the parties have acted, and

should adopt a practical approach that gives effect to the substance

rather than the form. This principle has been repeatedly emphasized

in Mulla's Commentary on the Contract Act (14th Edition 2012,

p.213), wherein it is stated that judicial interpretation should uphold

the commercial purpose of contractual provisions.

Applying these principles to the present case:

Article 4.03 of the 1998 contract stipulates a fixed sum of

Rs.38,67,600.00, which is expressly stated to cover "for the

facilities provided by the seller for supply of the gas from Thai

to Delivery point located at the Buyer's premises."

Article 5.01 of the 1991 contract provides that "the seller agrees to

sell and, deliver the gas at the aforesaid point of delivery to. the

Buyer as per requirement of the Buyer subject to the maximum of

1.00 (one point zero zero) million standard cubic meters per day .....".

FAO(OS)(COMM) 4/2024 Page 54 of 61

The fixed charges under Article 4.03 are linked to the capital

investment, operation, and maintenance of the pipelines, and other

infrastructure necessary to supply the maximum contractual quantity

of gas. These costs are computed with reference to the maximum

supply envisaged under Art. 5.02.

The tribunal observed that, in circumstances where the respondent

cannot supply gas as per the claimant’s requirement due to

Government directives falling under the force majeure clause

(Article 10), the monthly transportation/service charges must be

correspondingly reduced, proportionate to the quantity of gas

actually supplied.

The maximum transportation/service charges of Rs.3 8,67,600.00

p.m. are applicable only when the respondent is able to supply the

gas as per the claimant’s requirements under Art.5.01.

When the respondent’s supply is curtailed on account of

Government directives falling under force majeure clause (Article

10), charging the full fixed sum would be commercially

unreasonable and absurd.

As an illustrative, if the respondent supplies only 1% of the

contracted quantity, it would be unfair and commercially unsound to

require payment of the full transportation charges of

Rs.38,67,600.00. Such a literal interpretation would contradict

common business sense and produce an inequitable result, which the

doctrine of business efficacy seeks to avoid.

The tribunal further observed that there is a direct link between the

fixed sum of Rs.38,67,600.00 and the facilities provided by the

sellers contemplated under Art. 11 of the contract. Consequently,

wherever the contracted supply is reduced, whether due to force

majeure or other events covered under the contract, the fixed sum

must be reduced proportionately.

Accordingly, on a holistic construction of Articles 4.03, 5.01, 5.02,

and 10 of the contract, the tribunal concluded that:

The fixed transportation/service charges of Rs.38,67,600.00 shall be

proportionately reduced whenever the supply of gas by the

respondent is less that the contracted quantity due to reasons covered

under the force majeure clause (Art. 10). Such interpretation is

commercially reasonable, aligns with business sense, and reflects

what a third party with knowledge of the facts and circumstances

would reasonably conclude.

FAO(OS)(COMM) 4/2024 Page 55 of 61

57. Upon careful examination of the arbitral award, it is evident that

the reasoning adopted by the tribunal represents a misapplication of the

business efficacy principle in a manner that no reasonable person could

have adopted. It is undisputed that in the present matter, Clause 4.03 of

the contract was amended in 1998, replacing the earlier variable

monthly service charge with a fixed transportation cost of Rs.

38,67,600/-.

58. The arbitral tribunal itself recognised that Article 4.03 stipulates

a fixed charge for the facilities provided by the seller, including

infrastructure, pipelines, delivery systems, personnel, and maintenance.

If the contract was deliberately amended to fix the charge, no

reasonable person could interpret the parties’ intention as making this

fixed charge variable or contingent upon the quantum of gas supplied.

59. By imputing a proportional reduction of the fixed charge, the

tribunal assumed that the fixed charge must vary in accordance with

supply to achieve commercial sense. However, if the parties had

intended such proportionality, they could have, (i) retained the original

variable charge structure, or (ii) expressly linked the fixed charge to the

actual delivered quantity. The absence of such express linkage

demonstrates that the tribunal’s proportionality reasoning effectively

rewrites the contract, rather than interpreting it.

60. Further, the tribunal’s illustrative example, that if only 1% of gas

is supplied, the respondent cannot collect the full transportation

charges, is not a legitimate application of commercial common sense.

FAO(OS)(COMM) 4/2024 Page 56 of 61

The business efficacy principle is not intended to allow courts or

tribunals to insert terms merely because they appear reasonable. For a

term to be implied, it must, (i) be necessary to make the contract

workable, and (ii) “go without saying” i.e., be so obvious that the parties

must have intended it, though left unexpressed.

61. Clearly, the proportionate reduction of charges does not satisfy

this test. There is nothing in the contract to indicate that such

proportionality was obvious, necessary or intended by the parties. On

the contrary, the adoption of a fixed monthly charge is a standard

commercial practice in infrastructure intensive contracts, where capital

and maintenance costs are not contingent upon variable supply.

62. Applying these principles, it is apparent that no reasonable

businessperson, reading the contract as a whole and applying the

business-efficacy principle in its proper limits, would have interpreted

the contract to convert a fixed facility/transportation charge into a pro-

rata, variable charge linked to actual supply.

63. The principle of business efficacy is intended solely to give effect

to the parties’ expressed bargain when the language is genuinely

ambiguous or commercially unworkable. It cannot be invoked to insert

a term not agreed upon, especially where the contract deliberately

adopts a fixed-charge structure. A reasonable person in the parties’

position would understand Article 4.03 as fixing the charge for keeping

the facilities ready for use, regardless of the actual quantum of supply.

FAO(OS)(COMM) 4/2024 Page 57 of 61

64. Thus, we are in agreement with the submissions of the learned

senior counsel for the respondent that the business efficacy principle

cannot be applied in a manner that results in complete variance from

the parties’ original intention. Accordingly, the conclusions reached by

both the learned Single Judge and the arbitral tribunal cannot be

sustained.

65. The arbitral tribunal also sought to justify the pro-rata reduction

on the alternative ground of partial failure of consideration, reasoning

that if relief were not granted, there would be unjust enrichment, which

had to be neutralised via restitution, provided apportionment was

feasible.

66. The principle of partial failure of consideration applies only

where the consideration for which money was paid has wholly or partly

failed in substance, meaning that the very basis of the payment has not

materialised. In the present case, the fixed monthly charge of Rs.

38,67,600.00 is expressly for the operation and maintenance of

facilities and is not contingent upon the gas supplied. The consideration,

therefore, lies in keeping the facilities ready for use, not in the quantity

delivered.

67. It is also pertinent to note that the possibility of reduced supply

was expressly contemplated with the contractual clauses, as

acknowledged in the tribunal’s findings on Issues Nos. 2 and 3. Despite

this, while deciding Issue No. 4, the tribunal directed the respondent to

FAO(OS)(COMM) 4/2024 Page 58 of 61

refund the fixed transportation charges proportionate to the alleged

reduction in supply, invoking partial failure of consideration.

68. Thus, on this issue, we agree with the submissions of the learned

senior counsel for the respondent that once the tribunal held that

reduced supply was anticipated within the contractual framework, there

can be no question of failure of consideration.

69. Additionally, the tribunal itself concluded that, in view of the

force majeure event, there was no breach, and the reduced supply could

not affect the obligation to pay fixed transportation charges. Yet, in the

later part of the Award, the tribunal directed precisely such a pro-rata

reduction, which is internally inconsistent and legally unsustainable.

70. In consequence, the view adopted by the arbitral tribunal is an

impossible one, and no reasonable person could have reached such a

conclusion on a proper construction of the contract.

71. For the foregoing reasons, we set aside the findings of both the

learned Single Judge and the arbitral tribunal insofar as they directed a

proportionate reduction of the fixed transportation charges. Such a

reduction cannot be justified in view of the express terms of the

contract, the proper limits of the business efficacy principle, and the

absence of any partial failure of consideration.

FAO(OS)(COMM) 4/2024 Page 59 of 61

Conclusion

72. In conclusion, after a comprehensive evaluation of the issues

raised, we disagree with the findings of both the learned Single Judge

and the Arbitral Tribunal. In particular, we are of the view that, while

applying the business efficacy principle, the Arbitral Tribunal exceeded

its mandate by effectively re-writing the terms of the contract. It is a

well settled principle in contract law that a tribunal is not authorized to

alter the terms of a contract based on its subjective perception of

business efficacy unless such alterations are clearly warranted by the

express or implied intentions of the parties.

73. We are further of the opinion that, upon a careful reading of the

contract in its entirety, no reasonable person, upon reading of any

contractual term could have concluded the fixed transportation charges

into a variable, pro-rata charge. Further, no contractual term was so

inherently obvious that it must be implied that the parties intended the

fixed transportation charge to be read as pro-rata charge. The notion of

business efficacy cannot be invoked to introduce terms that were not

agreed upon by the parties, nor can it be used to imply provisions that

fundamentally alter the agreed contractual structure without a clear and

unambiguous basis for such an inference.

74. Additionally, the Arbitral Tribunal, in its reasoning, has

contradicted itself in a manner that cannot be reconciled. Initially, the

Tribunal held that the force majeure event, which justified a reduced in

gas supply, did not affect the obligation to pay the fixed transportation

FAO(OS)(COMM) 4/2024 Page 60 of 61

charges. However, in a subsequent part of the Award, the Tribunal

directed that the same fixed transportation charges be reduced or

refunded in proportion to the actual gas supplied. This is inherently

contradictory as the fixed charges, once deemed payable despite the

reduced supply, cannot simultaneously be subject to reduction or refund

based on the supply variation. This inconsistency renders the Award

flawed and untenable, as no reasonable person would have arrived at

such conflicting conclusions.

75. On the issue of limitation, we find ourselves in agreement with

the findings of the learned Single Judge, which relied on the

authoritative judgment in Reliance industries limited v. Gail (india)

limited(supra). The learned Single Judge’s reliance on this judgment

was well placed, and we find that there was a lack of sufficient

reasoning in the Arbitral Tribunal’s decision regarding the objection

raised on limitation. The Tribunal failed to provide any cogent rationale

as to why the objection pertaining to limitation was dismissed, and this

omission is material and legally significant. Consequently, the

Tribunal’s findings on this point are liable to be set aside and the

findings of the learned single judge are upheld.

76. Finally, in regard to the Tribunal’s failure to address a crucial

contractual clause, namely Article 12.03, which directly impacts the

issues of limitation, arbitrability, and waiver, we concur with the

findings of the learned Single Judge. The provisions of Article 12.03

are central to the dispute and bear directly on the core issues of the case.

The Tribunal’s failure to consider this vital clause constitutes a clear

FAO(OS)(COMM) 4/2024 Page 61 of 61

instance of neglecting material evidence, which significantly

undermines the credibility and fairness of the arbitral process and

amount to patent illegality. The omission of such an important

contractual stipulation constitutes a serious flaw and must be regarded

as an error that calls for judicial intervention.

77. In light of the above discussed findings, it is clear that the arbitral

award is vitiated by perversity and patent illegality. The award is

therefore set aside. Furthermore, the cross-objections raised by the

respondent are hereby allowed.

78. Accordingly, we dismiss the present appeal, along with any

pending applications, if any. The order of the learned Single Judge is

partly upheld to the extent that it concurs with the conclusions reached

in this judgment.

79. There shall be no order(s) as to cost.

OM PRAKASH SHUKLA, J

C.HARI SHANKAR, J

MARCH 09, 2026/pa