Tribunal Cannot Re-Write the Contract Under the Guise of Interpretation: Karnataka High Court Sets Aside ₹8.65 Crore Arbitral Award for Patent Illegality

“Finding That Six Months Was ‘Too Short’ to Achieve KPIs Is Contrary to the Parties’ Intent and Tantamounts to Re-Writing the Contract”, Karnataka High Court delivered a significant ruling under Section 37 of the Arbitration and Conciliation Act, 1996, read with Section 13(1-A) of the Commercial Courts Act, 2015.

A Division Bench comprising Chief Justice Vibhu Bakhru and Justice C.M. Poonacha partly allowed the appeal and set aside an arbitral award directing payment of ₹8,65,99,649/- with 18% interest towards consultancy fees and ₹1,09,17,991/- towards software purchases. The Court held that the arbitral tribunal’s findings were “patently illegal” as they ignored key contractual clauses relating to KPIs and turnover projections and effectively re-wrote the contract between the parties. However, the award of ₹25,12,378/- towards rental of laptops was sustained.

The judgment reinforces that while arbitral awards enjoy limited judicial interference, findings contrary to contractual stipulations and material on record fall within the ground of patent illegality under Section 34, and are amenable to correction in a Section 37 appeal.

A Build-Operate-Transfer Model with Assured KPIs and Turnover Targets

The appellant, Avio Helitronics Infosystems Pvt. Ltd. (AIS), an MSME aerospace engineering services company, entered into a Business Plan dated 28.07.2014 and a Consultancy Agreement dated 01.08.2014 with the respondent consultant.

The Agreement, valid for 18 months from 01.08.2014 to 31.01.2016, was based on a Build-Operate-Transfer model. The consultant was required to recruit manpower, deploy domain experts, build business relationships, and achieve ambitious Key Performance Indicators (KPIs) including recovery of lost key accounts and securing order intakes worth millions of US dollars. Clause 8 assured turnover projections based on prior performance.

Clause 27 of the Agreement was crucial. It stipulated:

“Non-performance in any of the KPIs for a continued 2 quarters will attract termination of the contract… The consultant will reimburse the client for 50% of the entire consultancy fees for the period of non-performance and will forego the fee for the remaining period of the contract.”

The Agreement was terminated by AIS on 28.02.2015 by email citing:

“Inadequacy of services… No progress demonstrated towards the proposed KPIs mentioned in clause No.6… No reports received since Oct 2014…”

The sole arbitrator held the termination illegal and awarded ₹8.65 crores towards consultancy fees, ₹1.09 crores towards software purchases, and ₹25.12 lakhs towards rental laptops, all with 18% interest. The Section 34 challenge failed before the Commercial Court, prompting the present Section 37 appeal.

The appeal raised core issues under arbitration law:

“Whether the arbitral award was vitiated by patent illegality for ignoring contractual clauses relating to KPIs and turnover assurances?”

“Whether termination after six months could be justified under Clause 27 for non-performance of KPIs for two quarters?”

“Whether the tribunal could award full consultancy fees despite the contractual stipulation limiting entitlement to 50% in case of non-performance?”

“Whether reimbursement for software purchases was contractually sustainable?”

Patent Illegality in Ignoring Clauses 5, 6 and 8

The High Court held that the arbitral tribunal failed to examine the binding stipulations in Clauses 5, 6 and 8 regarding manpower deployment, KPI assurances, and turnover projections.

The Court observed that there was “no material placed by the claimant to demonstrate that it had secured new businesses/clients… or in any manner expanded the volume of business.” The tribunal had even recorded that six months was “too short a time” to require achievement of KPIs.

Rejecting this reasoning, the Bench held:

“The said finding of the Tribunal is contrary to the purport and intent of the parties in entering into the Agreement and tantamounts to re-writing the contract between the parties.”

The Court emphasized that arbitral tribunals cannot dilute contractual timelines or performance benchmarks merely on equitable considerations. Interpretation cannot override clear stipulations.

Two Quarters’ Non-Performance: Tribunal’s Finding Held “Ex Facie Untenable”

The tribunal had reasoned that since consultancy fees for August and September 2014 were paid without protest, those months could not be counted toward the two-quarter period of non-performance.

The High Court rejected this approach as legally unsustainable:

“The finding of the Tribunal that when the termination notice was issued on 28.02.2015, two quarters non-performance did not occur at all, is ex-facie untenable.”

The Court clarified that mere payment of initial consultancy fees without protest does not preclude examination of performance during those months. The Agreement commenced on 01.08.2014 and was terminated on 28.02.2015 — exactly six months, i.e., two quarters.

Thus, the tribunal’s exclusion of the first two months was held to be without basis.

Consultancy Fees: Clause 27 Restricts Entitlement to 50%

Even assuming termination for non-performance, Clause 27 clearly provided that the consultant would be entitled only to 50% of consultancy fees for the period of non-performance and must forego the remaining fee.

The tribunal, however, awarded the entire consultancy fee for December 2014, January 2015 and February 2015, aggregating ₹8,65,99,649/- with 18% interest.

The High Court held that such award ignored the explicit contractual consequence of non-performance:

“Having regard to a plain reading of clause 27… the award of Rs.8,65,99,649/- together with interest at 18% is also without any basis and liable to be set aside.”

The Court granted liberty to the parties to initiate fresh arbitration confined to consultancy fees payable between 01.08.2014 and 28.02.2015 strictly in terms of Clause 27.

Reimbursement Claims: Laptops Upheld, Software Set Aside

On rental laptops, the tribunal’s award of ₹25,12,378/- was upheld. The Court found it based on documentary material and not perverse.

However, the award of ₹1,09,17,991/- for purchase of software, storage and UPS was set aside. The software invoices were in the claimant’s name and there was no contractual clause mandating reimbursement. The Court found no material establishing exclusive use by the appellant.

The finding fastening liability was therefore “without any basis and liable to be interfered with on the ground of patent illegality.”

Consequently, interest at 18% per annum on the set-aside components also stood quashed.

Limited Interference, But No Sanctuary for Contractual Distortion

The Karnataka High Court partly allowed the appeal, setting aside the arbitral award insofar as it directed payment of ₹8.65 crores with 18% interest and ₹1.09 crores towards software purchases. The award for ₹25.12 lakhs towards rental laptops was sustained.

The ruling is a pointed reminder that while courts respect arbitral autonomy, they will intervene where an award:

“is patently illegal, having been made without any basis and contrary to the material on record.”

By holding that an arbitral tribunal cannot dilute KPIs or contractual timelines on equitable grounds, the Court has reaffirmed that commercial contracts — especially in high-value consultancy arrangements — must be enforced as written.

Date of Decision: 12/02/2026