The arbitrator read the first half of the clause and stopped before the words that mattered
A fixed-price contract that expressly allowed adjustments for labour, materials and fuel. The Delhi High Court sets aside the rejection of a price variation claim as patently illegal, and leaves the parties to a fresh arbitration on quantum.
Patent illegality is the narrowest of the grounds on which a domestic award can be set aside, and the narrowest version of it is the one that bites here: an arbitrator who fails to act in accordance with the terms of the contract, or ignores its specific provisions, has stepped outside the mandate the parties gave.
On 28 September 2026 Justice Mini Pushkarna applied it to an award of December 2018, in a petition under Section 34 that succeeded on one claim out of several.
What the clause said
The contractor claimed price variation — the adjustment a construction contract makes for movements in the cost of inputs over the life of the work. The Sole Arbitrator rejected that claim.
His reasoning rested on Clause 50.1 of the Special Conditions of Contract, which he read as fixing the rates.
The Court's objection is textual and precise. The finding is based solely on the initial part of Clause 50.1, without taking into account the qualifying words that follow in the same provision — “barring adjustment (which may be plus or minus) to be made as provided for herein”.
Those words do real work. They expressly contemplate the adjustments provided under Clause 50.2, including adjustments for variations in the market rates of inputs such as labour, materials and fuel or energy during the course of the contract. Clause 50.2 provides for adjustment on account of price variation, and Clause 50.3 prescribes the procedure through which it is granted.
So the contract was not a fixed-price contract in the sense the award assumed. It fixed rates subject to a variation mechanism it set out in the next two sub-clauses.
The finding, the Court held, proceeds on an incomplete reading of Clause 50 and in doing so disregards the contractual framework prescribed for such adjustments.
Why that is patent illegality
The Court placed the error in the settled framework. Patent illegality includes cases where the arbitrator has failed to act in accordance with the terms of the contract or has ignored its specific provisions — as distinct from cases where a court simply disagrees with a plausible construction.
It drew on PSA Sical Terminals Private Limited v. Board of Trustees of V.O. Chidambranar Port Trust, (2023) 15 SCC 781, where an award had substituted a revenue-sharing method for the royalty payment method the parties had agreed, against the express stand of one of them. The Supreme Court held that the tribunal had thrust a new term upon the parties and created a new contract by the unilateral intention of one against the intention of the other — breaching, as Ssangyong Engineering had earlier held, the fundamental principle that a contract cannot be unilaterally added to or altered.
The error here is the mirror image of that. PSA Sical concerned a tribunal writing in a term the parties had not agreed; this concerns a tribunal writing out one they had. Either way, the award ceases to give effect to the bargain.
The claims that survived
The petition was only partly successful, and the parts that failed show the Court applying the same discipline in the other direction.
On a dispute about steel, the contractor said it had been required to use SAIL steel. The Court found the contract itself, in Clause 12.3 of the SCC, required only conformity with Indian Standard Specifications, and no term made SAIL steel mandatory — so the contractor was free to use any brand meeting those specifications. No document was produced showing the employer had asked for SAIL steel; on the contrary, a letter of 21 March 2011 clarified that if SAIL steel was unavailable, TISCO and Rathi brands could be used. Despite that, the contractor undertook by its own letter of 8 July 2011 to use SAIL steel only.
On that material the arbitrator's view was held to be a plausible one, and no interference was called for. That phrase — a plausible view — is the test for everything a Section 34 court does not touch.
On alleged delay in payment of bills, the arbitrator had held in categorical terms that there was no delay contributing to the outcome claimed, and the Court declined to disturb that finding on the documents.
The order
The award was held to suffer from patent illegality on the determination of Claim No. 4 and was set aside to that extent.
On the quantum of price variation, the Court did not substitute its own figure — it could not. The parties were given liberty to invoke fresh arbitration proceedings for determination of the amount. The petition was partly allowed and disposed of in those terms.
That remedy is worth noting. Setting aside an award under Section 34 leaves the claim undecided rather than granting it, and where the flaw goes to entitlement rather than computation, the parties go back to arbitration on what they are owed. The contractor has established that its claim should not have been rejected on the ground given; how much it recovers is a question for another tribunal.
The lesson in the drafting
For anyone drafting or arguing a price variation dispute, the case is a reminder that the whole clause is the clause. Clause 50.1 read alone says rates are fixed; read with the words that qualify it and the sub-clauses it points to, it says rates are fixed subject to a defined adjustment mechanism. An award that stops at the first reading is not interpreting the contract but shortening it — and that, unlike a debatable construction, is reviewable.