High Court Can't Re-Appreciate Evidence or Rewrite Contract to Set Aside Arbitral Award: Supreme Court Reinstates Award Under Quantum Meruit

"Findings of Arbitrator, Even if Brief or Based on Honest Estimation, Cannot Be Interfered With Unless They Shock Judicial Conscience" – In a significant reaffirmation of judicial restraint under arbitration law, the Supreme Court on December 18, 2025, set aside a High Court judgment that had annulled an arbitral award under the pretext of patent illegality, emphasizing that appellate courts cannot re-appreciate facts or substitute their interpretation for that of an arbitrator.

The decision came in the matter of Ramesh Kumar Jain vs. Bharat Aluminium Company Limited (BALCO), a civil appeal arising from SLP (C) No. 14529 of 2023, decided by a Bench comprising Justice Aravind Kumar and Justice N.V. Anjaria. The Court reinstated the arbitral award for extra work and related damages, which had been upheld by the Commercial Court but reversed by the Chhattisgarh High Court in its judgment dated 03.05.2023.

The Apex Court held: "When a court sets aside an arbitral award under Section 37, it must stay within the narrow confines of Section 34. The High Court, by reassessing the evidence and substituting its own interpretation, overstepped its jurisdiction."

“Patent Illegality Does Not Include Divergent Interpretation or Estimations Based on Some Evidence” – Court Clarifies Doctrine Under Sections 34 and 37

Arbitrators Are Masters of Facts, Estimations & Contractual Construction – Even if Evidence is Sparse, Guesswork Based on Some Materials is Valid

The main legal issue in the case was whether the High Court, under Section 37 of the Arbitration and Conciliation Act, 1996, could set aside an arbitral award already upheld under Section 34 on the ground of patent illegality. The Apex Court held unequivocally: "Section 37 does not enlarge the scope of interference beyond Section 34. Both provisions impose strict limits on judicial scrutiny."

Reiterating principles from earlier rulings including MMTC Ltd. v. Vedanta Ltd., Associate Builders v. DDA, and Ssangyong Engineering v. NHAI, the Court stressed that reassessment of facts, guesswork in quantifying damages, or even errors in interpretation of contracts do not automatically justify setting aside an award unless the findings are perverse or shock the judicial conscience.

Referring to the award's findings, the Court held: “The arbitrator scrutinised oral and documentary evidence, including affidavits, letters, and tabular estimates, to arrive at a reasonable valuation. This was not a case of ‘no evidence’, nor were the conclusions so irrational as to warrant judicial correction.”

Arbitrator’s Use of ‘Quantum Meruit’ to Award Compensation for Extra Work Is Not Rewriting Contract, But Fills a Vacuum Under Section 70, Contract Act

One of the core legal contentions by BALCO was that the arbitrator acted beyond the contract by awarding Rs. 10 per metric ton for extra work without a predetermined rate—allegedly amounting to rewriting the contract. The Supreme Court firmly rejected this.

Citing Section 70 of the Indian Contract Act, 1872, the Court explained that quantum meruit is a legally recognized restitutionary remedy applicable where services are performed lawfully, not gratuitously, and the beneficiary accepts the benefit. The Court observed:

"After the contract's expiry, BALCO requested the contractor to continue operations without fixing any rate. This creates a classic case of non-gratuitous service. The arbitrator did not rewrite the contract but applied settled principles of unjust enrichment to compensate fairly."

The Court further held that the arbitrator rightly exercised discretion in awarding a reasonable rate based on evidence and communications, noting: “An assessment of Rs. 10 per MT was not arbitrary; it was rooted in the surrounding facts and conduct of the parties.”

Reinstating the Award, Supreme Court Emphasizes Judicial Deference to Arbitral Findings

The Supreme Court noted that the arbitrator had addressed each claim methodically, rejecting or adjusting them where appropriate. Notably:

• The claim for extra work (1,95,000 MT of bauxite) was allowed at Rs. 10 per MT, based on letters and evidence of continued work post-contract.
• A partial award for idle machinery and manpower during strike was granted after rejecting the full claim, reflecting judicial balance.
• The claim for extra transportation cost due to truck load restrictions was accepted after evidence showed continued enforcement of 10.2 MT limits by BALCO even after a stay from the District Transport Officer.

The High Court, however, held these to be instances of "guesswork", and interfered on that basis. The Supreme Court found this error glaring:

"Guesswork is not impermissible where some material is present. Arbitrators can estimate damages using their expertise where exact quantification is impractical. This leeway is built into arbitration jurisprudence. The High Court ignored this."

Interpretation of Contract Is Arbitrator’s Domain – Even an Erroneous View Isn’t Interference-Worthy Unless It Defies Logic or Law

On the issue of contract interpretation, the Supreme Court reiterated a cardinal principle:

"Interpretation of a contractual clause is primarily within the domain of the arbitrator. Unless the interpretation is so irrational that no reasonable person could have arrived at it, courts must not interfere."

This was echoed in the Court’s reference to Associate Builders, where it was held that arbitrators may adopt reasonable constructions of ambiguous terms. The Court emphasized:

"Even if the High Court’s view was more plausible, it could not replace the arbitrator’s view. Arbitration is not a platform for judicial second-guessing."

Principle of Patent Illegality Revisited: Error Must Be One That Strikes at the Root, Not Merely Different View

In discussing “patent illegality,” the Court provided an in-depth review of case law, from ONGC v. Saw Pipes to Ssangyong Engineering, holding:

"Patent illegality must go to the root of the matter. A mere alternate interpretation or a deduction based on sparse evidence does not meet this threshold. If the reasoning path is discernible and rational, interference is unwarranted."

It noted that the High Court’s analysis imposed a stricter burden of proof than arbitration law permits, which is contrary to the flexible evidentiary approach envisioned under Section 19 of the Arbitration and Conciliation Act.

Award Restored, Appeal Allowed – Arbitral Autonomy Prevails

Concluding, the Bench held:

"The High Court erred in law by acting beyond the contours of Section 37 and re-appreciating evidence and contractual interpretation that were squarely within the arbitrator’s domain. Such overreach defeats the purpose of the Arbitration Act."

Accordingly, the Court set aside the High Court’s judgment dated 03.05.2023, and restored the award dated 15.07.2012 as upheld by the Commercial Court on 02.01.2017.

Date of Decision: December 18, 2025