Arbitrator Cannot Rewrite Contract Or Travel Beyond Pleadings: Punjab & Haryana High Court Quashes ₹5.18 Crore Award

“Under-Insurance Was Lessor’s Own Risk — Arbitrator Could Not Shift Contractual Burden To Lessee”, In a strongly worded and contract-centric ruling Punjab and Haryana High Court set aside an arbitral award of ₹5.18 crores, holding that the arbitrator had acted in “patent illegality” by ignoring the express terms of the lease deed and venturing beyond the pleadings of the parties.

The Division Bench of Justice Ashwani Kumar Mishra and Justice Rohit Kapoor held that the award was contrary to Section 28(3) of the Arbitration and Conciliation Act, 1996, which mandates that an arbitral tribunal “shall, in all cases, take into account the terms of the contract.”

The Court categorically concluded that the arbitrator had virtually “re-written the contract”, a course impermissible in law.

Background: Fire Incident, Insurance Claim And Arbitration

The dispute arose out of a lease deed dated 20.04.2016, under which the appellant-lessee took a warehouse on lease for nine years. Clause 13 of the lease clearly placed the responsibility of insuring the entire premises against fire and other perils upon the lessor.

On 16.10.2018, a major fire broke out in the warehouse. Police records, the Fire Department report, and the surveyor appointed by the lessor’s insurer consistently recorded that the fire was accidental and caused by electrical short circuit. The surveyor specifically opined that “the cause of fire is not intentional.”

The lessor lodged a claim with his insurer, Oriental Insurance Company, and ultimately accepted ₹2.52 crores in full and final settlement, executing a discharge voucher and subrogating his rights in favour of the insurer.

Despite this, the lessor invoked arbitration alleging negligence on the part of the lessee and claimed damages of over ₹7.8 crores, including compensation for damage to the premises and loss of rent.

The arbitrator allowed substantial portions of the claim and awarded over ₹5.18 crores, including rent for the period even after termination of lease. The Commercial Court upheld the award under Section 34. The matter then reached the High Court under Section 37.

“Surveyor, Police And Fire Brigade All Found Accidental Fire — Arbitrator Discarded Overwhelming Evidence”

The High Court noted that all competent authorities had consistently held that the fire was accidental and caused by short circuit. The lessor had accepted the insurance settlement on that basis without protest.

The Bench held that the arbitrator could not ignore such material evidence and invent a contrary theory of negligence. The finding of negligence was described as being “contrary to overwhelming evidence available on record” and suffering from “patent illegality.”

The Court further observed that the arbitrator introduced a completely new case by attributing the fire to alleged construction of unauthorized additional floors by the lessee — a plea never taken in the statement of claim. This deprived the lessee of an opportunity to contest such allegation and amounted to deciding matters beyond the scope of arbitration.

“Clause 13 Fastened Insurance Obligation On Lessor — Under-Insurance Cannot Be Passed On”

Clause 13 of the lease deed unequivocally required the lessor to insure the building premises and equipment against fire and other perils during the lease period.

The insurance survey report revealed that the premises were under-insured to the extent of 19.92% and fire-fighting systems to the extent of 54.50%. Because of this under-valuation, the final payout was reduced.

The High Court held that this shortfall was a direct consequence of the lessor’s own failure to adequately insure the premises.

The Bench observed that if the claimant believed the insurance settlement was inadequate, his remedy lay against the insurer. The arbitrator could not compensate the shortfall by shifting the contractual burden onto the lessee.

By doing so, the arbitrator had “virtually re-written the contract”, which was impermissible under Section 28(3).

“No Evidence Of Actual Repair Costs — Claim Could Not Be Assessed On Construction Value”

The Court also found that the claimant had failed to prove the actual amount spent on repair and restoration after the fire.

Reliance on a Chartered Accountant’s certificate indicating that construction cost was ₹8.43 crores was insufficient. The Court emphasized that compensation under Clause 11(v) required proof of actual expenditure incurred towards rectification attributable to the lessee.

In the absence of such evidence, the award of damages was unsustainable.

“Termination Clause Was Unqualified — Arbitrator Could Not Create Right To Post-Termination Rent”

Another significant aspect of the judgment concerned the award of rent for the period after the lessee had terminated the lease.

Clause 14 of the lease deed granted the lessee an unqualified right to terminate the lease by giving three months’ prior notice “without assigning any reason whatsoever.”

It was undisputed that such notice had been served and rent for the notice period paid.

The arbitrator nonetheless awarded rent until the premises were re-let, holding the termination to be unjustified.

The High Court held that once termination was effected strictly in terms of Clause 14, the lessee had no further liability to pay rent. Awarding rent beyond termination amounted to creating a contractual obligation not contemplated by the parties.

The Court reiterated that an arbitrator “has no authority to rewrite the contract or to add a stipulation which otherwise does not exist.”

“Commercial Court Failed To Exercise Jurisdiction Under Section 34”

The Division Bench found that the Commercial Court had mechanically rejected the Section 34 objections without examining the patent illegality and contravention of contractual clauses.

Such failure to exercise jurisdiction warranted correction under Section 37.

Allowing the appeal, the High Court set aside the Commercial Court’s order dated 22.08.2025 and quashed the arbitral award dated 23.12.2023 in its entirety. Parties were left to bear their own costs.

The judgment stands as a firm reaffirmation that arbitral autonomy operates within the boundaries of the contract. As the Bench made clear, arbitral tribunals cannot disregard express clauses, ignore overwhelming evidence, or travel beyond pleadings. In arbitration, the contract remains supreme — and courts will intervene where it is judicially rewritten under the guise of interpretation.

Date of Decision: 13/02/2026