Arbitrators Cannot Import Notions Of Fairness And Equity Into Commercial Contracts: Bombay High Court

The Bombay High Court has held that arbitral tribunals cannot import principles of fairness and natural justice into commercial contracts contrary to their express terms.

The court made the observation while setting aside an arbitral award passed against Nayara Energy Ltd. that had directed restoration of a petrol pump dealership in Barmer and payment of ₹4 lakh compensation to the franchisee.

The court held that the tribunal acted contrary to Sections 28(2) and 28(3) of the Arbitration Act by quashing the termination despite Clause 19 of the franchise agreement permitting termination for breach. It further held that the tribunal erred in restoring a determinable contract despite Section 14(1)(c) of the Specific Relief Act barring specific enforcement of such contracts.

Justice Sharmila U. Deshmukh held that "As the notion of fairness and equity cannot be read into contract dehors the terms of the commercial contract, the findings of the Learned Arbitrator for quashing and setting aside the termination is contrary to the substantive law and hence, stands vitiated."

The dispute arose from a franchise arrangement executed in 2005 for operating a retail motor fuel filling station at Village Karnawas in Rajasthan. Nayara Energy Ltd. (formerly Essar Oil Limited) had appointed Mahendra Bagrecha as franchisee and later dealt with Nanita Jain, who sought to replace him as franchisee of M/s Mahendra Sales Services in 2009.

The franchise agreement required monthly HSD sales of 100 KL within 12 months of commissioning of the retail outlet. However, the outlet remained largely non-operational and recorded only negligible sales.

Nayara Energy terminated the dealership in December 2010, citing failure to meet minimum sales targets under the franchise agreement. Nanita Jain challenged the move, leading to arbitration in which Mahendra Sales Services sought nearly ₹45 lakh towards land costs, machinery, lease rent and loss of earnings.

In January 2023, the arbitral tribunal held that a contractual relationship existed between the parties, set aside the termination for violation of natural justice, awarded ₹4 lakh with interest, and ordered restoration of the dealership.

Nayara Energy challenged the award, arguing that the contract did not require prior notice before termination and that the dealership, being determinable in nature, could not be restored.

Allowing the petition, the High Court held that the arbitrator failed to interpret the contract and instead relied on general notions of fairness. The court noted that there was no material showing that the respondent had achieved the minimum sales target and no evidence establishing that petroleum products were denied despite written requests.

The court further held that even assuming the termination was illegal, restoration of the dealership could not have been ordered as the contract was determinable in nature.

“It also needs to be noted that learned Arbitrator could not have directed restoration of Franchise Agreement and simultaneously granted damages holding the termination to be illegal” the court said.

The court also found that the ₹4 lakh compensation award also suffered from patent illegality.

For Petitioner (Nayara Energy Ltd.): Advocates Mr. Rohan Kelkar, Ms. Aayushi Doshi and Ms. Surbhi Ahuja i/b Indialaw LLP

For Respondent (M/s Mahendra Sales Services): Advocates Mr. Prithviraj Choudhari, Ms. Kausar Jahan Sayed and Mr. Aansh Desai i/b Pythagoras Legal