An Arbitral Tribunal Cannot Rewrite the Contract in the Name of Justice”: Supreme Court Nullifies ₹995 Crore Award to SEPCO for Violating Party Equality and Natural Justice

“Discriminatory Application of Waiver Clause and Contractual Silence by Tribunal Offends Section 18 of the Arbitration Act”: In a major ruling on arbitral fairness and jurisdictional boundaries, the Supreme Court of India upheld the setting aside of a ₹995 crore arbitral award granted in favour of SEPCO Electric Power Construction Corporation by a Singapore-seated arbitral tribunal, holding that the award stood vitiated due to violation of the principles of natural justice, discriminatory treatment of parties, and manifest disregard of the contractual framework. In the landmark case of SEPCO Electric Power Construction Corporation v. GMR Kamalanga Energy Ltd., the Court held that arbitral tribunals are not at liberty to selectively apply contractual clauses, presume waiver without pleadings or evidence, or deny equal treatment to the parties under the guise of equity or expediency.

The Court ruled that the Division Bench of the Orissa High Court was correct in setting aside the award and that non-interference by the judiciary in such glaring circumstances would “hamper the fundamental policy of Indian law”. It thus dismissed SEPCO’s civil appeal against the judgment.

When Contracts are Rewritten, and Waivers Assumed without Evidence, the Arbitral Award Cannot Survive

The dispute arose from a suite of contracts executed between SEPCO, a Chinese EPC contractor, and GMR Kamalanga Energy Limited (GMRKE) for the development of a thermal power project in Odisha. SEPCO was to construct and commission multiple units under the amended CWEETC Agreement, with detailed technical, procedural, and commercial terms including clauses on delay, notice requirements, and performance guarantees.

After SEPCO demobilized in 2015, disputes regarding delay claims, prolongation costs, and performance issues were referred to arbitration under the Arbitration and Conciliation Act, 1996, with Singapore as the venue and India as the seat of arbitration. In 2020, the arbitral tribunal awarded SEPCO ₹995 crore, which GMRKE challenged under Section 34. Though the Single Judge of the Orissa High Court dismissed the petition, the Division Bench under Section 37 reversed the award. SEPCO’s challenge to the Division Bench’s decision was finally rejected by the Supreme Court.

Scope of Review under Section 37 is Narrow – But Not Toothless Where Arbitral Tribunal Defies Basic Justice

While the Court acknowledged that interference with arbitral awards under Section 37 of the 1996 Act is limited, it clarified that such restraint is not absolute when “basic notions of justice” are trampled upon. Citing decisions in Konkan Railway, MMTC, and Reliance Infrastructure, the Court reiterated:

“While exercising jurisdiction under Section 37 of the Act, the Court is concerned about the jurisdiction that the Section 34 Court exercised while considering the challenge to the arbitral award.”

“The jurisdiction under Section 34 of the Act is exercised only to see if the Arbitral Tribunal’s view is perverse or manifestly arbitrary… a Division Bench exercising jurisdiction under Section 37 of the Act cannot reverse an award… but must ensure the Section 34 Court has not ignored patent illegality or breach of natural justice.”

Tribunal’s Finding of Waiver without Pleadings or Proof Was Perversity in Plain Sight

The Tribunal had accepted SEPCO’s claim that contractual notice requirements were waived based on a Jinan Agreement and certain email exchanges from March 2012, despite rejecting a similar claim earlier in the same award. It never allowed GMRKE an opportunity to respond to this supposed waiver.

The Supreme Court condemned this as a fundamental breach: “Despite this, and without it being raised on behalf of SEPCO, the Arbitral Tribunal placed reliance… that the condition for contractual notices was waived. GMRKE was never given an opportunity to exhibit evidence to this effect. This amounted to modification of the terms of the contract.” [Para 85]

It held that this finding was unsupported by record, beyond the pleadings, and in violation of Section 18 which mandates equal treatment of parties and full opportunity to present one’s case.

“Discriminatory Application of Waiver Clause Is Antithetical to Section 18” – Tribunal Treated SEPCO and GMR Differently on Same Legal Issue

The Tribunal rejected GMRKE’s counterclaims citing absence of contractual notice, but excused SEPCO on similar procedural defaults. The Apex Court noted:

“On one hand, while SEPCO’s claims have been granted despite its admitted failure to issue contractual notices, the counter claims of GMRKE Limited have been rejected on the ground that it failed to serve equivalent notices… Such discrimination was violative of the equality principle enshrined under Section 18 of the 1996 Act.” [Para 119]

This selective application, according to the Court, also violated natural justice and the fundamental policy of Indian law, thereby justifying full annulment of the award.

Tribunal Cannot Bypass Contractual Milestones and Assume Technical Tests Were Passed

Another pivotal ground of interference was the Tribunal’s decision to award SEPCO 5% of the contract value, despite its failure in the Unit Characteristics Test, a prerequisite to the Performance Guarantee Test under Clause 6.1 of the contract.

The Court termed this reasoning not just incorrect, but legally indefensible:

“If the Unit Characteristic Test had failed, there was no question of the Performance Guarantee Test having passed… The Tribunal had modified the express terms of the agreements which was contrary to the public policy of India.” [Para 120]

Court Decries Tribunal’s Assumption of Arguments Never Raised by SEPCO

Perhaps most damning was the Court’s censure of the tribunal’s tendency to decide on issues not pleaded by SEPCO. The Court held that such a decision:

“Cannot be justified under any principle of arbitration law… GMRKE would only come to know of such discriminatory treatment after the award… The findings of the Single Judge to the contrary were perverse.” [Para 117]

Such assumption of arguments violated Section 34(2)(a)(iii) as well as audi alteram partem, rendering the award liable to be set aside in full.

Tribunal’s Actions Shock Conscience of Court; Award Set Aside in Entirety

The Court refused SEPCO’s plea to sever and preserve parts of the award, holding:

“The Arbitral Award could not have been severed… The Tribunal, being a creature of the EPC Agreements, cannot rewrite the contract… The discriminatory treatment and modification of contract terms were enough to set aside the entire award.” [Para 123]

Ultimately, the Court concluded: “The findings of the Division Bench are recorded after considering the entire material on record and are in consonance with the law laid down… Therefore, we see no reason to interfere.” [Para 121]

The appeal was dismissed.

Conclusion: Arbitral Tribunals Must Remain within Contractual and Legal Boundaries – Equality and Fair Hearing are Non-Negotiable

The Supreme Court's decision in SEPCO v. GMRKE reaffirms that arbitral tribunals, while enjoying considerable autonomy, cannot violate the bedrock principles of fairness, equality, and legal fidelity. The judgment will serve as a warning against tribunals that engage in contractual improvisation, procedural asymmetry, or jurisdictional overreach under the cover of party autonomy.

Where an award is infected by such vices, judicial restraint must yield to judicial duty. As the Court powerfully concluded, when the conscience of justice is shocked, intervention is not just permitted, but imperative.

Date of Decision: September 26, 2025