Award Granting Statutorily Barred Relief Suffers From Patent Illegality: Madras High Court

The Madras High Court on 18 March held that determining whether an arbitral award grants relief barred by law or beyond the contract is a question of legality, not of re-examining evidence. Courts can intervene under Section 34(2A) of the Arbitration and Conciliation Act, 1996 only if the award shows patent illegality.

A Division Bench of Justice P. Velmurugan and Justice K. Govindarajan Thilakavadi allowed Southern Railway's appeal and set aside the arbitral award that directed continuation and renewal of a railway catering licence granted to Mrs. G. Bharathi.

It observed:

“In the present case, the direction issued by the arbitral tribunal compelling continuation of the licence and granting renewal of a determinable contract is contrary to Section 14(d) of the Specific Relief Act, 1963.”

Southern Railway had granted a license to Bharathi under the Scheduled Tribe quota scheme to operate a catering stall at Chennai Central Railway Station. A Letter of Acceptance dated 2 February 2015 granted the licence for five years from 4 March 2015 to 3 March 2020, with a total licence fee of Rs. 46,50,000.

During the licence period, the Railway Administration recorded multiple alleged violations, including hygiene lapses and operational irregularities. The licence was terminated on 22 August 2017, after the stall had remained closed from March 2017.

Aggrieved, Bharathi invoked the arbitration clause. By an award dated 7 January 2019, the arbitrator held the termination unjustified, rejected the Railway's counterclaims, and directed continuation of the licence along with renewal for an additional three-year period.

A Single Judge, by order dated 6 March 2020, dismissed Southern Railway's challenge under Section 34, holding that the award did not suffer from patent illegality and that courts could not re-appreciate evidence.

Southern Railway then filed an Original Side Appeal under Clause 15 of the Letters Patent, arguing that the licence agreement was determinable and could not be specifically enforced. It contended that the arbitrator exceeded jurisdiction by ordering renewal of the licence, which was neither automatic nor contractually guaranteed.

Bharathi maintained that the arbitrator had evaluated evidence and reached a plausible conclusion, which could not be interfered with under judicial review.

The High Court rejected the Single Judge's approach, clarifying that Southern Railway's challenge targeted the legality of the relief, not factual findings. It held that a licence, being a determinable contract, cannot be specifically enforced under Section 14(d) of the Specific Relief Act, 1963, which bars courts from enforcing revocable or terminable contracts.

The Court further explained that granting relief barred by law or beyond the contract amounts to patent illegality under Section 34 and involves only a legality check, not re-appreciation of evidence. It observed:

“The issue involved here does not relate to re-appreciation of evidence or re-evaluation of the factual findings recorded by the arbitral tribunal. The challenge raised by the appellant relates to the legality of the relief granted by the arbitrator.”

Applying these principles, the Court held that the arbitrator's direction effectively forced continuation and extension of a contractual relationship that had already been terminated, which was legally impermissible.

Accordingly, the Division Bench allowed Southern Railway's appeal and set aside the Single Judge's order and the arbitral award.

Appearances for appellant (Southern Railway): Advocates V. Radhakrishnan, M. Vijay Anand.

Appearances for respondent (Mrs. G. Bharathi): Advocates V. Raghavachari, V.S. Senthil Kumar.