Arbitrator cannot go beyond the agreement: Supreme Court

In a recent ruling, the Supreme Court stated that arbitrators cannot go beyond the agreement between the parties. This means that arbitrators must stay within the scope of the agreement when making decisions. If they attempt to go outside of the agreement, their decision may be overturned by a court. The ruling is a victory for businesses, as it helps to ensure that arbitrators will not make decisions that are not authorized by the parties. It also helps to protect businesses from being held liable for decisions that they did not agree to. This ruling will help to promote fairness in arbitration and ensure that businesses can rely on arbitrators to make decisions that are in line with their agreements.

An arbitrator must act based on the intent of an agreement. The Supreme Court has upheld this concept in various judgments. The researcher submits that it is necessary for the arbitrator to stick to the agreement and doesn’t cross the scope of the agreement. The Supreme Court has made reference to its previous decisions which stated that the arbitrator derives its authority from the agreement. In addition, he could not pass an award against or beyond the contractual stipulations.

Few observations made by the Supreme Court have been provided below. The Supreme Court had questioned whether an arbitrator can make an award in contradiction to the contract made between the parties. The court noted that this issue remained unanswered. But, now the courts have settled the law on this issue. The law states that arbitrators don’t have jurisdiction to make an award against the contractual terms.

Observations are given by the Supreme Court

In the case of Steel Authority of India Ltd. v. J.C. Budharaja, Government and Mining Contractor, the Supreme Court observed that the arbitrator derives its authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one. In addition, the court observed that the arbitrator’s deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may be tantamount to mala fide action. Therefore, arbitrators must be careful in giving the award and should limit themselves to the contractual terms.

The arbitrator can interpret a particular condition in the contract. This interpretation would be within the arbitrator’s jurisdiction. However, when the issue of interpretation does not arise and the issue is of sole reading of the contract terms; then the arbitrator cannot ignore it. If the arbitrator ignores the provision and declares an award despite the prohibition. Then the said award would be arbitrary and without jurisdiction.

Whether the arbitrator has acted beyond the terms of the contract or has traveled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. The arbitrator may have jurisdiction to entertain a claim and yet he may not have jurisdiction to pass an award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error.

Further, the court observed that the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously. The arbitrator’s existence depends upon the agreement and his function is to act within the limits of the said contract.

Few more observations

In W.B. State Warehousing Corporation & Anr. v. Sushil Kumar Kayan & Ors., the Supreme Court observed that “if there is a specific term in the contract or the law which does not permit the parties to raise a point before the arbitrator and if there is a specific bar in the contract to the raising of the point, then the award passed by the arbitrator in respect thereof would be in excess of his jurisdiction.”

In Bharat Coking Coal Ltd. v. Annapurna Construction, the court reiterated the legal position of the arbitrator’s authority. There lies a clear distinction between an error within the jurisdiction and an error in excess of jurisdiction. Thus, the role of the arbitrator is to arbitrate within the terms of the contract. He has no power apart from what the parties have given him under the contract. Thus, if the arbitrator traveled beyond the contract, he would be acting without jurisdiction. If he has remained inside the parameters of the contract, his award cannot be questioned.