STATE OF CHHATTISGARH & ANR.versusM/S SAL UDYOG PRIVATE LIMITED

142                      [2021]REPORTS
               SUPREME COURT   11 S.C.R. 142                [2021] 11 S.C.R.


A                    STATE OF CHHATTISGARH & ANR.
                                         v.
                    M/S SAL UDYOG PRIVATE LIMITED
                         (Civil Appeal No. 4353 of 2010)
B                             NOVEMBER 08, 2021
                 [N. V. RAMANA, CJI, SURYA KANT AND
                           HIMA KOHLI, JJ]
             Arbitration and Conciliation Act, 1996: ss. 34, 37, 34(2A),
      28(3) – Arbitral award – Interference with – Patent illegality – On
C
      facts, agreement between the parties wherein the State agreed to
      supply sal seeds to the respondent-company – Agreement clause
      providing for imposition of supervision charges on the amounts
      calculated towards the cost of the Sal seeds in the expenditure
      incurred by the State Government – However, the respondent-
D     company claimed refund of the excess amount purportedly paid by
      it to the appellant-State towards supervision charges incurred for
      supply of Sal seeds – Arbitral award by the arbitrator that there
      was no basis to admit any such “indirect expenses” – Plea by the
      appellant-State that the Arbitrator as also the High Court ignored
      the binding terms of the contract governing the parties relating to
E
      recovery of ‘supervision charges’ from the respondent-Company –
      Held: An arbitral award may be set aside when there is “patent
      illegality” – Failure on the part of the Sole Arbitrator to decide in
      accordance with the terms of the contract governing the parties,
      attract the “patent illegality ground”, as it amounts to gross
F     contravention of s. 28(3), that enjoins the Arbitral Tribunal to take
      into account the terms of the contract while making an Award –
      This is the patent illegality manifest on the face of the Arbitral Award
      inasmuch as the express terms and conditions of the Agreement
      governing the parties as also the Circular issued by the Government
      have been completely ignored – Award permitting deduction of
G
      ‘supervision charges’ recovered from the respondent-Company by
      the appellant-State as a part of the expenditure incurred by it while
      calculating the price of the Sal seeds, is quashed and set aside.
           ss. 34(2A), 37 – Application for setting aside arbitral award
      – Power of, when award vitiated by patent illegality – Applicability
H
                                        142
   STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                          143
                 PRIVATE LIMITED

of the ground of patent illegality to appeal u/s. 37 – Held: s. 34(2A)    A
empowers the Court to set aside an award if it finds that the same is
vitiated by patent illegality appearing on the face of the award –
Provision that enables a Court acting on its own in deciding a
petition u/s.34 for setting aside an Award, would be available in an
appeal preferred u/s. 37 of the Act – Expression used in the sub-
                                                                          B
rule is “the Court finds that” – Once the appellant-State takes such
a ground in the s. 37 petition and it was duly noted in the impugned
judgment, the High Court ought to have interfered by resorting to
s. 34(2A), a provision which would be equally available for
application to an appealable order u/s. 37 as it is to a petition filed
u/s. 34 – Plea of waiver taken against the appellant-State on the         C
ground that it did not raise such an objection in the grounds spelt
out in the s. 34 petition and is, thus, estopped from taking the same
in the appeal u/s. 37 or before this Court, not available to the
respondent.
      Disposing of the appeal, the Court                                  D
      HELD: 1.1 The law on interference in matters of Awards
under the Arbitration and Conciliation Act, 1996 has been
circumscribed with the object of minimising interference by courts
in arbitration matters. One of the grounds on which an Award
may be set aside is “patent illegality”. [Para 13][151-G; 152-A]          E
      1.2 It is an admitted position that both, the Original
Agreement dated 30th August, 1979 and the Renewed Agreement
dated 30th April, 1992 included a clause relating to levy of
“supervision charges”. Most of the terms and conditions of the
Original Agreement-Clause 6(b) and the Renewed Agreement-                 F
Clause 5(b) are materially the same. The said clauses stipulate
that expenses incurred by the State Government towards supply
of Sal seeds were to include amongst others, ‘supervision
charges’. Clause 8 of the first Agreement is identical to Clause 7
of the second Agreement which stipulates that supply of Sal seeds
to the respondent-Company would be against advance payment.               G
There is also a similarity between Clause 9(ii) of the Agreement
dated 30th July, 1979 and Clause 8(ii) of the Agreement dated
30th April, 1992, that require the respondent-Company to take
delivery of the collected Sal seeds within a stipulated time and
                                                                          H
144            SUPREME COURT REPORTS                     [2021] 11 S.C.R.


A     prescribe that in case of failure to do so, supervision charges and
      godown rent shall be payable at a fixed price. [Para 18][158-C-F]
            1.3 Though the appellant-State did raise an objection before
      the Arbitral Tribunal on the claim of the respondent-Company
      seeking deduction of supervision charges, for which it relied on
B     Clause 6(b) of the Agreement and the Circular dated 27th July,
      1987 to assert that recovery of supervision charges along with
      expenses was a part and parcel of the contract executed with the
      respondent-Company, the said objection was turned down by the
      Sole Arbitrator by giving a complete go by to the terms and
      conditions of the Agreement governing the parties and observing
C     that there is no basis to admit any such “indirect expenses”. The
      Circular dated 27th July, 1987 issued by the Government of
      Madhya Pradesh that provides for imposition of 10% supervision
      charges on the amounts calculated towards the cost of the Sal
      seeds in the expenditure incurred, was also ignored. Pertinently,
D     the respondent-Company has not denied the fact that supervision
      charges were being levied by the appellant-State and being paid
      by it without any demur as a part of the advance payment made
      on an annual basis, right from the date the parties had entered
      into the first agreement, i.e., from 30th August, 1979. This fact is
      also borne out from the specimen copies of the orders filed by
E     the appellant-State with the appeal that amply demonstrate that
      the cost of the Sal seeds required to be paid by the respondent-
      company included ‘supervision charges’ described as
      “Paryavekshan vyay” in vernacular language. It was only after
      the appellant-State had terminated the second contract on 21st
F     December, 1998, that the respondent-company raised a dispute
      and for the first time, claimed refund of the excess amount
      purportedly paid by it to the appellant-State towards supervision
      charges incurred for supply of Sal seeds. This is the patent
      illegality that is manifest on the face of the Arbitral Award
      inasmuch as the express terms and conditions of the Agreement
G     governing the parties as also the Circular dated 27th July, 1987
      issued by the Government of Madhya Pradesh have been
      completely ignored. [Para 22][160-D-H; 161-A-B]


H
   STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                        145
                 PRIVATE LIMITED

       1.4 The plea of waiver taken against the appellant-State on      A
the ground that it did not raise such an objection in the grounds
spelt out in the Section 34 petition and is, therefore, estopped
from taking the same in the appeal preferred under Section 37 or
before this Court, would also not be available to the respondent-
Company having regard to the language used in Section 34(2A)
                                                                        B
of the 1996 Act that empowers the Court to set aside an award if
it finds that the same is vitiated by patent illegality appearing on
the face of the same. Once the appellant-State had taken such a
ground in the Section 37 petition and it was duly noted in the
impugned judgment, the High Court ought to have interfered by
resorting to Section 34(2A) of the 1996 Act, a provision which          C
would be equally available for application to an appealable order
under Section 37 as it is to a petition filed under Section 34 of the
1996 Act. In other words, the respondent-Company cannot be
heard to state that the grounds available for setting aside an award
under sub-section (2A) of Section 34 of the 1996 Act could not
                                                                        D
have been invoked by the Court on its own, in exercise of the
jurisdiction vested in it under Section 37 of the 1996 Act. Notably,
the expression used in the sub-rule is “the Court finds that”.
Therefore, it does not stand to reason that a provision that enables
a Court acting on its own in deciding a petition under Section 34
for setting aside an Award, would not be available in an appeal         E
preferred under Section 37 of the 1996 Act. [Para 23][161-C-F]
      1.5 The existence of Clause 6(b) in the Agreement
governing the parties, has not been disputed, nor has the
application of Circular dated 27th July, 1987 issued by the
Government of Madhya Pradesh regarding imposition of 10%                F
supervision charges and adding the same to cost of the Sal seeds,
after deducting the actual expenditure been questioned by the
respondent- Company. Therefore, failure on the part of the Sole
Arbitrator to decide in accordance with the terms of the contract
governing the parties, would certainly attract the “patent illegality
ground”, as the said oversight amounts to gross contravention           G
of Section 28(3) of the 1996 Act, that enjoins the Arbitral Tribunal
to take into account the terms of the contract while making an
Award. The said ‘patent illegality’ is not only apparent on the
face of the Award, it goes to the very root of the matter and
                                                                        H
146            SUPREME COURT REPORTS                       [2021] 11 S.C.R.


A     deserves interference. The impugned Award, insofar as it has
      permitted deduction of ‘supervision charges’ recovered from the
      respondent-Company by the appellant-State as a part of the
      expenditure incurred by it while calculating the price of the Sal
      seeds, is quashed and set aside, being in direct conflict with the
      terms of the contract governing the parties and the relevant
B
      Circular. The impugned judgment is modified to the said extent.
      [Para 25][162-C-G]
            State of Maharashtra v. Hindustan Construction
            Company Limited (2010) 4 SCC 518 : [2010] 4 SCR
            46 – held inapplicable.
C
            Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro
            Rail Corporation Ltd. (2021) SCC Online SC 695; Lion
            Engineering Consultants v. State of Madhya Pradesh
            and Others [2018] 16 SCC 758 : [2018] 6 SCR 683;
            Associate Builders v. Delhi Development Authority
D           [2015] 3 SCC 49 : [2014] 13 SCR 895; Ssangyong
            Engineering and Construction Company Limited v.
            National Highways Authority of India (NHAI) [2019]
            15 SCC 131 : [2019] 7 SCR 522 – referred to.
                            Case Law Reference
E
      [2018] 6 SCR 683                 referred to            Para 11
      [2014] 13 SCR 895                referred to            Para 13
      [2019] 7 SCR 522                 referred to            Para 14
      [2010] 4 SCR 46                  held inapplicable      Para 2
F
            CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4353
      of 2010.
            From the Judgment and Order dated 21.10.2009 of the High Court
      of Chhattisgarh at Bilaspur in Arbitration Appeal No.22 of 2006.
G           Ms. Prerna Singh, Nishanth Patil, Vidit Monga, Ms. Shubhika
      Saluja, Advs. for the Appellants.
           Pranav Malhotra, Rameshwar Prasad Goyal, Advs. for the
      Respondent.

H
    STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                                 147
                  PRIVATE LIMITED

       The Judgment of the Court was delivered by                                 A
       HIMA KOHLI, J.
      1. The appellant-State of Chhattisgarh is aggrieved by a common
judgment dated 21st October, 2009 passed by the Chhattisgarh High Court
disposing of two appeals; one preferred by the appellant 1and the other
preferred by the respondent-M/s. Sal Udyog Private Limited2, whereby              B
the order dated 14th March, 2006 passed by the learned District Judge,
Raipur in a petition filed by the appellant under Section 34 of the Arbitration
and Conciliation Act, 19963 has been partially modified and the interest
awarded in favour of the respondent from the date of the notice i.e.
6th December, 2009 till realisation, has been reduced from 18 per cent            C
per annum to 9 per cent per annum. At the same time, the appeal preferred
by the respondent-Company came to be dismissed.
       2. In brief, the relevant facts of the case are that on 30th August,
1979, the State of Madhya Pradesh had entered into an agreement with
the respondent-Company for supply of 10,000 tonnes of Sal seeds per               D
annum for a period of 12 years. In the year 1987, faced with loss of
revenue, Government of Madhya Pradesh decided to annul all agreements
relating to forest produce and enacted a legislation4. However, the said
Act was notified after a decade, on 1st January, 1997. In the absence of
any Notification of the said enactment, the agreement between the State
of Madhya Pradesh and the respondent-Company was renewed on                       E
30th April, 1992 and was valid till 29th April, 2004. Under the renewed
Agreement, the State of Madhya Pradesh agreed to supply 10,000 tonnes
of Sal seeds to the respondent-Company. When the Act was finally
notified in the year 1996, by virtue of Section 5A, State of Madhya
Pradesh terminated the Agreement dated 30 th April, 1992, on                      F
21st December, 1998. Aggrieved by the said termination, the respondent-
Company issued a notice dated 6th December, 1999 invoking Arbitration
Clause No. 23 in the Agreement and raised certain disputes, including a
claim for refund of a sum of Rs.1,72,17,613/- (Rupees One Crore Seventy
Two Lakhs Seventeen Thousand Six Hundred and Thirteen Only) on
the ground that the said amount had been paid in excess to the State of           G

1
  Appeal No. 22 of 2006
2
  M.A. No. 727 of 2006
3
  For short “the 1996 Act”
4
  M.P. Van Upaj Ke Kararon Ka Punarikshan Adhiniyam No. 32 of 1987 dated nil
                                                                                  H
148            SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A     Madhya Pradesh for the supply of Sal seeds during the period between
      1981-82 to 31st December, 1998.
             3. For the sake of completeness, it may be noted that the
      respondent-Company had filed an application under Section 11(6) of the
      1996 Act before the Jabalpur Bench of the Madhya Pradesh High Court
B     praying inter alia for appointment of an Arbitrator. During the pendency
      of the said application, the Madhya Pradesh Re-organisation Act, 2000
      came into force. Resultantly, the application moved by the respondent-
      Company was transferred to the High Court of Chhattisgarh at Bilaspur.
      With the consent of the parties, an order dated 21st March, 2002 was
      passed in the said proceeding, appointing a Sole Arbitrator, who was
C     subsequently replaced by another Arbitrator.
              4. Vide Arbitral Award dated 17.02.2005, the claim of the
      respondent-Company was allowed and a sum of Rs.7,43,46,772/- (Rupees
      Seven Crores forty three lakhs forty six thousand seven hundred seventy
      two only) was awarded in its favour which included interest at the rate
D     of 18 per cent per annum upto February, 2005 along with future interest
      at the rate of 18 per cent per annum payable with effect from 1st March,
      2005.
             5. Aggrieved by the aforesaid Award, the appellant-State filed a
      petition under Section 34 of the 1996 Act before the District Judge,
E     Raipur. Vide order dated 14th March, 2006, the learned District Judge
      declined to interfere with the Award except for modifying the same to
      the extent of the interest awarded in favour of the respondent- Company
      and making it payable from the date of the notice i.e. 6th December,
      1999, instead of, from the date of the Agreement, till 31 st December,
F     1999.
             6. The appellant-State assailed the order dated 14th March, 2006
      by preferring an appeal under Section 37 of the 1996 Act. The respondent-
      Company also filed a Cross Appeal being aggrieved by the modification
      of the Award and reduction of the period of interest awarded in its favour.
G     Several pleas were taken by the appellant-State in the appeal, including
      the ground of non-joinder of the State of Madhya Pradesh as a necessary
      party; that the respondent-Company never claimed refund of the excess
      recovery throughout the tenure of both the Agreements and that the
      respondent’s claim was barred by limitation. A plea of estoppel was also
      taken against the respondent-Company.
H
   STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                              149
           PRIVATE LIMITED [HIMA KOHLI, J.]

       7. In view of the order dated 30th April, 2010 whereunder leave        A
was granted in the present petition limited to the issue of disallowance of
supervision charges to the tune of Rs.1.49 crores under the Award, which
as per the appellant-State, was liable to be borne by the respondent-
Company under the Agreement, this Court does not propose to examine
the other pleas taken by the appellant-State in the present appeal.
                                                                              B
      8. Ms. Prerna Singh, learned counsel for the appellant-State has
contended that a perusal of the terms and conditions of the Agreement
make it apparent that the parties had agreed that the expenses incurred
every year by the State Government for supplying Sal seeds to the
respondent-Company would not only include the cost of collection,
purchase price paid to the growers and Commission Agents, cost of             C
storage and transportation, but also include handling and supervision
charges. She pointed out that the said plea taken by the appellant-State
was duly noted by the learned Arbitrator in para 18, but was erroneously
turned down in para 19 of the Award. Paras 18 and 19 of the Award are
extracted herein below for ready reference:-                                  D
      “18. The further submission of the defendant is that in clause
      6(B) of the agreement in respect of supervision expense it is
      mentioned and the provision also enjoins that the supervision
      expenses along with other expenses which are spent by the
      defendant would be recoverable. In so far as the supervision            E
      expense is concerned that concerned that concerns will all those
      expenses with respect to collection of the Sal seeds under the
      banner of the government. And in these expenses there are certain
      expenses like godown rent, the Salary of the officers and the
      staffs, the appointment of the different persons of the work in the
      department and their travelling allowance, vehicle, telephone,          F
      furniture, transport and all other expenses of the vehicle. They
      are all such proportionate expenses which cannot be shown under
      the head of the bill or the voucher under the head of Sal seeds and
      therefore 10% supervision expenses are acceptable and
      recoverable.                                                            G
      19. On the analysis of this issue there is a clear provision in the
      agreement that the purchase of the Sal seeds shall be divided into
      two parts, the first would be of royalty and the second part would
      be of the purchaser of Sal seed and all those expenses until its
      delivery in which the collection expenses, purchasing price,            H
150            SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A           handling and supervision expenses, the agents commission,
            transports would all be assembled. After the examination of the
            price on both the ends the first end would be of royalty according
            to the industrial policy of the state government of Madhya Pradesh
            the meaning of royalty implies the meaning the price at the
            production site. For the calculation the bazaar rate or the auction
B
            or the price received on tender, the transport (in wood matter the
            cutting) expenses may be reduced. In this was in the matter of
            royalty from the point of production and protection and until the
            arrangement for the sake of trading all in direct expenses are
            assembled so far as the second part is concerned from the point
C           of collection of Sal seeds until its delivery all expenses are
            assembled. In order it to make more clear the first part has been
            shown which relates to the expenses relating to ‘storing and the
            purchase price to the producers and other handling and supervision
            expenses’. In so far as the guidelines which have been issued by
            virtue of the notification of the state government dated 25.04.1981
D
            in so far as in para 17 is concerned and particularly the guidelines
            which has been issued by Madhya Pradesh Rajya Vanopaj Sangh
            it is apparent that the work of the supervisor has to be done by the
            agent/committee and particularly the expenses to the clerk checher
            etc and all those other expenses which goes to the handling
E           expenses and the commission. And thus in so far as in the form of
            supervision expenses there is no basis to admit any indirect
            expense. In this situation the amount which is shown in the account
            by the account experts are liable to be admitted for adjustments.”
             9. Learned counsel for the appellant-State argued that the aforesaid
F     patent illegality on the face of the Award was highlighted in grounds (J)
      & (K) of the appeal preferred under Section 37 of the 1996 Act and was
      noted in para 3 of the impugned judgment but the High Court failed to
      return a finding. It was canvassed that ‘supervision charges’ have been
      clearly referred to in Clause 6(b) of the Agreement and is the subject
      matter of a Circular dated 27th July, 1987 issued by the State Government.
G     Levy of ‘supervision charges’ had also been intimated to the respondent-
      Company at the time of seeking advance payment and it did not raise
      any objection to paying the same. She adverted to the documents filed
      with the appeal and marked as Annexure P2(Colly.) which are specimen
      copies of the orders placed, indicating the price of the Sal seeds to be
H     supplied by the State Government and the amount required to be paid by
    STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                              151
            PRIVATE LIMITED [HIMA KOHLI, J.]

the respondent-Company to state that the same specifically refer to            A
supervision charges described as “Paryavekshan vyay” in Hindi. It
was thus submitted that the respondent-Company having failed to raise
any objection regarding levy of ‘supervision charges’ over the years and
having paid the said amount without any demur till termination of the
contract, there was no reason for the learned Sole Arbitrator to have
                                                                               B
deducted ‘supervision charges’ and directed refund thereof to the
respondent-Company. To buttress the argument that the plea of patent
illegality is a permissible ground for reviewing a domestic Award, the
ruling in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail
Corporation Ltd.5 has been cited.
       10. Per contra, Mr. Pranav Malhotra, learned counsel for the            C
respondent-Company argued that the appellant-State having failed to
raise any objection relating to deduction of ‘supervision charges’ in its
Section 34 petition, it must be assumed that it had waived its right to take
any such plea in the Section 37 petition filed in the High Court and for
that matter, before this Court. He cited State of Maharashtra v.               D
Hindustan Construction Company Limited6 to substantiate such an
objection.
       11. Learned counsel for the appellant-State relied on the judgment
in Lion Engineering Consultants v. State of Madhya Pradesh and
Others7 to meet the aforesaid objection raised by learned. counsel for         E
the respondent-Company that the appellant-State did not take a specific
ground in the Section 34 petition on the aspect of refund of ‘supervision
charges’. She reiterated that the objection regarding ‘supervision charges’
was taken by the appellant-State before the learned Sole Arbitrator as
also in the Section 37 petition and ought to have been considered by the
High Court.                                                                    F

       12. We have carefully perused the records and given our thoughtful
consideration to the submissions advanced by learned counsel for the
parties.
      13. The law on interference in matters of Awards under the 1996          G
Act has been circumscribed with the object of minimising interference
by courts in arbitration matters. One of the grounds on which an Award

5
  2021 SCC Online SC 695
6
  [2010] 4 SCC 518
7
  [2018] 16 SCC 758                                                            H
152               SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A     may be set aside is “patent illegality”. What would constitute “patent
      illegality” has been elaborated in Associate Builders v. Delhi
      Development Authority8, where “patent illegality” that broadly falls
      under the head of “Public Policy”, has been divided into three sub-heads
      in the following words:-
B                    “...42. In the 1996 Act, this principle is substituted by the
               “patent illegality” principle which, in turn, contains three subheads:
                     42.1. (a) A contravention of the substantive law of India
               would result in the death knell of an Arbitral Award. This must be
               understood in the sense that such illegality must go to the root of
C              the matter and cannot be of a trivial nature. This again is really a
               contravention of Section 28(1)(a) of the Act, which reads as under:
                   “28. Rules applicable to substance of dispute. – (1)
               Where the place of arbitration is situated in India-
                             (a) In an arbitration other than an international
D                     commercial arbitration, the Arbitral Tribunal shall decide
                      the dispute submitted to arbitration in accordance with the
                      substantive law for the time being in force in India;”
                      42.2. (b) A contravention of the Arbitration Act itself would
               be regarded as a patent illegality – for example if an arbitrator
E              gives no reasons for an award in contravention of Section 31(3)
               of the Act, such award will be liable to be set aside.
                      42.3. (c) Equally, the third subhead of patent illegality
               is really a contravention of Section 28(3) of the Arbitration
               Act, which reads as under:
F
               “28. Rules applicable to substance of dispute. – (1) – (2)
               ***
                     (3) In all cases, the Arbitral Tribunal shall decide in
               accordance with the terms of the contract and shall take into
               account the usages of the trade applicable to the transaction.”
G
                      This last contravention must be understood with a caveat.
               An Arbitral Tribunal must decide in accordance with the terms of
               the contract, but if an arbitrator construes a term of the contract
               in a reasonable manner, it will not mean that the award can be set
      8
H         [2015] 3 SCC 49
      STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                               153
              PRIVATE LIMITED [HIMA KOHLI, J.]

         aside on this ground. Construction of the terms of a contract is         A
         primarily for an arbitrator to decide unless the arbitrator construes
         the contract in such a way that it could be said to be something
         that no fair-minded or reasonable person could do.”
                                                           (emphasis added)
       14. In Ssangyong Engineering and Construction Company                      B
Limited v. National Highways Authority of India (NHAI) 9, speaking
for the Bench, Justice R.F. Nariman has spelt out the contours of the
limited scope of judicial interference in reviewing the Arbitral Awards
under the 1996 Act and observed thus :
         “34. What is clear, therefore, is that the expression “public policy     C
         of India”, whether contained in Section 34 or in Section 48, would
         now mean the “fundamental policy of Indian law” as explained in
         paras 18 and 27 of Associate Builders [Associate Builders v. DDA
         (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] i.e. the fundamental
         policy of Indian law would be relegated to “Renusagar”                   D
         understanding of this expression. This would necessarily mean
         that Western Geco [ONGC v. Western Geco International Ltd.,
         (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] expansion has been
         done away with. In short, Western Geco [ONGC v. Western Geco
         International Ltd.,(2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12], as
         explained in paras 28 and 29 of Associate Builders [Associate            E
         Builders v. DDA,(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204],
         would no longer obtain, as under the guise of interfering with an
         award on the ground that the arbitrator has not adopted a judicial
         approach, the Court’s intervention would be on the merits of the
         award, which cannot be permitted post amendment. However,                F
         insofar as principles of natural justice are concerned, as contained
         in Sections 18 and 34(2) (a)(iii) of the 1996 Act, these continue to
         be grounds of challenge of an award, as is contained in para 30 of
         Associate Builders [Associate Builders v. DDA(2015) 3 SCC 49
         : (2015) 2 SCC (Civ) 204].
                                                                                  G
         35. It is important to notice that the ground for interference insofar
         as it concerns “interest of India” has since been deleted, and
         therefore, no longer obtains. Equally, the ground for interference
         on the basis that the award is in conflict with justice or morality is
9
    [2019] 15 SCC 131                                                             H
154      SUPREME COURT REPORTS                           [2021] 11 S.C.R.


A     now to be understood as a conflict with the “most basic notions of
      morality or justice”. This again would be in line with paras 36 to
      39 of Associate Builders [Associate Builders v. DDA (2015) 3
      SCC 49 : (2015) 2 SCC (Civ) 204], as it is only such Arbitral
      Awards that shock the conscience of the court that can be set
      aside on this ground.
B
      36. Thus, it is clear that public policy of India is now constricted to
      mean firstly, that a domestic award is contrary to the fundamental
      policy of Indian law, as understood in paras 18 and 27 of Associate
      Builders [Associate Builders v. DDA (2015) 3 SCC 49 : (2015) 2
      SCC (Civ) 204], or secondly, that such award is against basic
C     notions of justice or morality as understood in paras 36 to 39 of
      Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49
      : (2015) 2 SCC (Civ) 204]. Explanation 2 to Section 34(2)(b)(ii)
      and Explanation 2 to Section 48(2)(b)(ii) was added by the
      Amendment Act only so that Western Geco [ONGC v. Western
D     Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ)
      12], as understood in Associate Builders [Associate Builders v.
      DDA (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204], and paras 28
      and 29 in particular, is now done away with.
      37. Insofar as domestic awards made in India are concerned,
E     an additional ground is now available under sub-section
      (2-A), added by the Amendment Act, 2015, to Section 34.
      Here, there must be patent illegality appearing on the face
      of the award, which refers to such illegality as goes to the
      root of the matter but which does not amount to mere
      erroneous application of the law. In short, what is not
F     subsumed within “the fundamental policy of Indian law”,
      namely, the contravention of a statute not linked to public
      policy or public interest, cannot be brought in by the
      backdoor when it comes to setting aside an award on the
      ground of patent illegality.
G     38. Secondly, it is also made clear that reappreciation of evidence,
      which is what an appellate court is permitted to do, cannot be
      permitted under the ground of patent illegality appearing on the
      face of the award.
      39. To elucidate, para 42.1 of Associate Builders [Associate
H     Builders v DDA(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204],
   STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                                155
           PRIVATE LIMITED [HIMA KOHLI, J.]

      namely, a mere contravention of the substantive law of India, by          A
      itself, is no longer a ground available to set aside an Arbitral Award.
      Para 42.2 of Associate Builders [Associate Builders v DDA
      (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204], however, would
      remain, for if an arbitrator gives no reasons for an award and
      contravenes Section 31(3) of the 1996 Act, that would certainly
                                                                                B
      amount to a patent illegality on the face of the award.
      40. The change made in Section 28(3) by the Amendment
      Act really follows what is stated in paras 42.3 to 45 in
      Associate Builders [Associate Builders v. DDA (2015) 3
      SCC 49 : (2015) 2 SCC (Civ) 204], namely, that the
      construction of the terms of a contract is primarily for an               C
      arbitrator to decide, unless the arbitrator construes the
      contract in a manner that no fair-minded or reasonable
      person would; in short, that the arbitrator’s view is not even
      a possible view to take. Also, if the arbitrator wanders
      outside the contract and deals with matters not allotted to               D
      him, he commits an error of jurisdiction. This ground of
      challenge will now fall within the new ground added under
      Section 34(2-A).
      41. What is important to note is that a decision which is perverse,
      as understood in paras 31 and 32 of Associate Builders [Associate         E
      Builders v. DDA (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204],
      while no longer being a ground for challenge under “public policy
      of India”, would certainly amount to a patent illegality appearing
      on the face of the award. Thus, a finding based on no evidence at
      all or an award which ignores vital evidence in arriving at its
      decision would be perverse and liable to be set aside on the ground       F
      of patent illegality. Additionally, a finding based on documents taken
      behind the back of the parties by the arbitrator would also qualify
      as a decision based on no evidence inasmuch as such decision is
      not based on evidence led by the parties, and therefore, would
      also have to be charcterised as perverse.”                                G
                                                        (emphasis added)
       15. In Delhi Airport Metro Express Pvt. Ltd. (supra) referring
to the facets of patent illegality, this Court has held as under:

                                                                                H
156            SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A           “26. Patent illegality should be illegality which goes to the root of
            the matter. In other words, every error of law committed by the
            Arbitral Tribunal would not fall within the expression ‘patent
            illegality’. Likewise, erroneous application of law cannot be
            categorised as patent illegality. In addition, contravention of law
            not linked to public policy or public interest is beyond the scope of
B
            the expression ‘patent illegality’. What is prohibited is for courts
            to re-appreciate evidence to conclude that the award suffers from
            patent illegality appearing on the face of the award, as courts do
            not sit in appeal against the Arbitral Award. The permissible
            grounds for interference with a domestic award under Section
C           34(2-A) on the ground of patent illegality is when the arbitrator
            takes a view which is not even a possible one, or interprets a
            clause in the contract in such a manner which no fair-minded or
            reasonable person would, or if the arbitrator commits an error of
            jurisdiction by wandering outside the contract and dealing with
            matters not allotted to them. An Arbitral Award stating no reasons
D
            for its findings would make itself susceptible to challenge on this
            account. The conclusions of the arbitrator which are based on no
            evidence or have been arrived at by ignoring vital evidence are
            perverse and can be set aside on the ground of patent illegality.
            Also, consideration of documents which are not supplied to the
E           other party is a facet of perversity falling within the expression
            ‘patent illegality.”
             16. Having regard to the aforesaid parameters, we may proceed
      to examine the facts of the instant case. As noted above, this Court is
      required to examine the singular issue as to whether any interference is
F     called for in the Award on the ground taken by the appellant-State that
      the learned Arbitrator as also the High Court has ignored the binding
      terms of the contract governing the parties relating to recovery of
      ‘supervision charges’ from the respondent-Company and the Circular
      dated 27th July, 1987 issued by the State Government on the same lines
      which as per the appellant-State, goes to the root of the matter.
G
            17. Some of the relevant terms and conditions of the Original
      Agreement dated 30th August, 1979, are extracted below for ready
      reference:-
            “6. The price payable by the Purchaser for the Sal Seeds supplied
H           under this agreement shall consist of: -
STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                            157
        PRIVATE LIMITED [HIMA KOHLI, J.]

 (a) Royalty at the rate of Rs. 312.50/- (Rupees Three Hundred           A
 Twelve and Fifty Paise only) per tonne for the initial four years of
 this agreement and.
 (b) All expenses incurred by the Governor each year, till
 the delivery of the Sal Seeds to the Purchaser, which shall
 include the cost of collection and/or the Purchase price paid           B
 to growers, as well as handling supervision charges,
 commission to agent, cost of storage, transportation etc.
 8. Supply of Sal Seeds shall be made to the Purchaser against
 advance payments as given below: -
 At the beginning of each working season not later than 1st April        C
 each year, the Conservator(s) of Forests of the Circle(s) mentioned
 in Schedule ‘A’ shall intimate to the Purchaser the price payable
 as per clause 6 above. The Purchaser shall pay the same in the
 following manner: -
 (i) The amount of royalty as per clause 6(a) shall be deposited         D
 initially (not later than 30th April each year) and 500 quintals of
 Sal Seeds through a crossed Bank Draft or a Call Deposit Receipt
 in favour of the concerned Divisional Forest Officer(s). This initial
 payment shall be replenished by the Purchaser every week or
 immediately after delivery of the quantity paid for, whichever is       E
 earlier.
        Provided that in case of a shortfall in the supply of Sal
 Seeds for any such payment, the amount paid to the Sal Seeds not
 actually supplied shall be adjusted towards the subsequent payment.
 (ii) Advance payment on account of collection costs and/or the          F
 purchase price as specified in clause 6(b) above shall be made in
 cash simultaneously and separately for the quantity mentioned
 above and as laid down above to such officer who may be
 authorized by the concerned DFO in this behalf.
 9.(i) The Purchaser shall arrange to take delivery of the Sal Seeds     G
 at the collection centre(s) or godown(s) as decided by the DFO
 within 24 hours of its collection there and shall arrange to remove
 the Sal Seeds so deposited within 15 days of the delivery thereof.
 (ii) If the Purchaser fails to take delivery of the collected
 Sal Seeds or fails to remove the same within the period                 H
158            SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A           prescribed above, then the Purchaser shall pay to the
            Governor supervision charges and godowns rent at the rate
            of five paise per quintal per day from the date of expiry of
            the period mentioned above.
            (iii) If failure to take delivery of Sal Seeds continue beyond the
B           prescribed period of 15 days, the concerned Divisional Forest
            Officer may, in tis discretion, refuse delivery of Sal Seeds to the
            Purchaser and permit delivery to any other person or party in
            respect of a part or the whole quantity of such Sal Seeds to any
            other person or party and in such circumstances, the Purchaser
            shall be liable to pay the amount of loss as well as other expenses
C           on supervision etc. Incurred by the Governor and this sum shall
            be recoverable as arrears of land revenue.”
              18. It is an admitted position that both, the Original Agreement
      dated 30th August, 1979 and the renewed Agreement dated 30th April,
      1992 included a clause relating to levy of “supervision charges”. Most
D     of the terms and conditions of the Original Agreement dated 30 th August,
      1979 and the Renewed Agreement dated 30th April, 1992 are materially
      the same. Clause 6(b) of the Agreement dated 30th August, 1979 is
      identical to Clause 5(b) of the Agreement dated 30th April, 1992. The
      said clauses stipulate that expenses incurred by the State Government
E     towards supply of Sal seeds were to include amongst others, ‘supervision
      charges’. Clause 8 of the first Agreement is identical to Clause 7 of the
      second Agreement which stipulates that supply of Sal seeds to the
      respondent-Company would be against advance payment. There is also
      a similarity between Clause 9(ii) of the Agreement dated 30 th July, 1979
      and Clause 8(ii) of the Agreement dated 30th April, 1992, that require the
F     respondent-Company to take delivery of the collected Sal seeds within a
      stipulated time and prescribe that in case of failure to do so, supervision
      charges and godown rent shall be payable at a fixed price of 0.05p. [five
      paise] per quintal per day.
             19. Circular dated 27th July, 1987 issued by the Government of
G     Madhya Pradesh provides for the assessment of the actual collection
      expenditure of the Sal seeds supplied from the year 1981 to 1986, and
      stipulates that:-
            “2. The imposition of 10% supervision charges on the amount
            calculated after deducting the actual expenditure, adding the cost
H
   STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                             159
           PRIVATE LIMITED [HIMA KOHLI, J.]

      of sukhat (illegible) in the Sal seeds in the expenditure, and         A
      computation & recovery of interest for the period from the date
      of supply order till the date of supply after the order of Court, in
      certain cases wherein stay orders were passed by High Court &
      Supreme Court, have been recommended.”
      20. The appellant-State had taken a plea on the aspect of levy of      B
‘supervision charges’ in Ground (J) and (K) of the Section 37 petition as
follows:
      “J. For that the Ld. Arbitrator failed to appreciate that general
      supervision charges which includes administrative expenses
      including Salary, telephone, TA/DA, POL and other expenses             C
      incurred on officers and staff of the Department and, therefore,
      vide circular No. 7/87 dated 27.07.87 the erstwhile State of
      Madhya Pradesh has fixed the general supervision charges as
      10% of the price which do not require any assessment.
      K. That vide order dated 27.08.1999 of Hon’ble High Court,             D
      Jabalpur in W.P. No. 3177/99 in Bastar Oil Mills case, recovery
      of handling and supervision charges was fixed at 20% of the price,
      which was subsequently fixed by the Supreme Court as
      Rs.1500/- per tonne vide order dated 17.01.2000 in SLP (C) No.
      6/2000, State of M.P. Vs. Bastar Oil Mills case, that was about
      60% of the price, meaning thereby the terms of contract contains       E
      two types of supervision charges i.e. one is General handling and
      Supervision charges and second is Special supervision charges
      when there is delay in the taking of delivery of Sal Seed under
      Clause (9) of the agreement and there was no dispute at all about
      the supervision charges charges under Clause (6) at the rate of        F
      10% of the price nor such dispute was ever raised by the
      respondent. So, the order directing refund of general handling and
      supervision charges collected is bad in law and is error apparent
      on the face of the record.”
       21. Though the aforesaid plea has been recorded in paras 3 and 5      G
of the impugned judgment, as can be seen from the following, it has
remained un-answered by the High Court:-
      “3 ***
         ***
                                                                             H
160             SUPREME COURT REPORTS                          [2021] 11 S.C.R.


A                     Learned Arbitrator has also ignored circular of the erstwhile
              State Government whereby general supervision charges was fixed
              by 10% of the price which did not require assessment. Learned
              Arbitrator also not considered that High Court of M.P. at Jabalpur
              in W.P. No. 3177/99 in Bastar Oil Mill’s case fixed the recovery
              towards handling and supervision charges at 20% of the price,
B
              which was subsequently fixed by the Hon’ble Supreme Court at
              Rs. 1,500/- per ton vide order dated 17.01.2000 by S.L.P. (Civil)
              No. 6/2000. Thus, the impugned award whereby the State has
              been directed refund of general handling and supervision charges
              collected by the State is bad in law.
C             4 ***
              5 “....The State was within its right to recover supervision charges
              under Clause 6 at the rate of 10% of the price and there was no
              dispute raised by the purchaser in this regard and thus, the award
              directing refund of general handling and supervision charges
D             collected by the State is contrary to law.”
              22. On a conspectus of the facts of the case, it remains undisputed
      that though the appellant-State did raise an objection before the Arbitral
      Tribunal on the claim of the respondent-Company seeking deduction of
      supervision charges, for which it relied on Clause 6(b) of the Agreement
E     and the Circular dated 27th July, 1987 to assert that recovery of supervision
      charges along with expenses was a part and parcel of the contract
      executed with the respondent-Company, the said objection was turned
      down by the learned Sole Arbitrator by giving a complete go by to the
      terms and conditions of the Agreement governing the parties and
      observing that there is no basis to admit any such “indirect expenses”.
F     The Circular dated 27th July, 1987 issued by the Government of Madhya
      Pradesh that provides for imposition of 10% supervision charges on the
      amounts calculated towards the cost of the Sal seeds in the expenditure
      incurred, was also ignored. Pertinently, the respondent-Company has
      not denied the fact that supervision charges were being levied by the
      appellant-State and being paid by it without any demur as a part of the
G
      advance payment made on an annual basis, right from the date the parties
      had entered into the first agreement, i.e., from 30th August, 1979. This
      fact is also borne out from the specimen copies of the orders filed by the
      appellant-State with the appeal that amply demonstrate that the cost of
      the Sal seeds required to be paid by the respondent-company included
H     ‘supervision charges’ described as “Paryavekshan vyay” in vernacular
    STATE OF CHHATTISGARH & ANR. v. M/S SAL UDYOG                                 161
            PRIVATE LIMITED [HIMA KOHLI, J.]

language. It was only after the appellant-State had terminated the second         A
contract on 21st December, 1998, that the respondent-company raised a
dispute and for the first time, claimed refund of the excess amount
purportedly paid by it to the appellant-State towards supervision charges
incurred for supply of Sal seeds. In our opinion, this is the patent illegality
that is manifest on the face of the Arbitral Award inasmuch as the express
                                                                                  B
terms and conditions of the Agreement governing the parties as also the
Circular dated 27th July, 1987 issued by the Government of Madhya
Pradesh have been completely ignored.
        23. We are afraid, the plea of waiver taken against the appellant-
State on the ground that it did not raise such an objection in the grounds
spelt out in the Section 34 petition and is, therefore, estopped from taking      C
the same in the appeal preferred under Section 37 or before this Court,
would also not be available to the respondent-Company having regard to
the language used in Section 34(2A) of the 1996 Act that empowers the
Court to set aside an award if it finds that the same is vitiated by patent
illegality appearing on the face of the same. Once the appellant-State            D
had taken such a ground in the Section 37 petition and it was duly noted
in the impugned judgment, the High Court ought to have interfered by
resorting to Section 34(2A) of the 1996 Act, a provision which would be
equally available for application to an appealable order under Section 37
as it is to a petition filed under Section 34 of the 1996 Act. In other
words, the respondent-Company cannot be heard to state that the grounds           E
available for setting aside an award under sub-section (2A) of Section
34 of the 1996 Act could not have been invoked by the Court on its own,
in exercise of the jurisdiction vested in it under Section 37 of the 1996
Act. Notably, the expression used in the sub-rule is “the Court finds
that”. Therefore, it does not stand to reason that a provision that enables       F
a Court acting on its own in deciding a petition under Section 34 for
setting aside an Award, would not be available in an appeal preferred
under Section 37 of the 1996 Act.
        24. Reliance placed by learned counsel for the respondent-
Company on the ruling in the case of Hindustan Construction Company
Limited (Supra) is found to be misplaced. In the aforesaid case, the              G
Court was required to examine whether in an appeal preferred under
Section 37 of the 1996 Act against an order refusing to set aside an
Award, permission could be granted to amend the Memo of Appeal to
raise additional/new grounds. Answering the said question, it was held
that though an application for setting aside the Arbitral Award under             H
162                SUPREME COURT REPORTS                        [2021] 11 S.C.R.


A     Section 34 of the 1996 Act had to be moved within the time prescribed in
      the Statute, it cannot be held that incorporation of additional grounds by
      way of amendment in the Section 34 petition would amount to filing a
      fresh application in all situations and circumstances, thereby barring any
      amendment, however material or relevant it may be for the consideration
      of a Court, after expiry of the prescribed period of limitation. In fact,
B
      laying emphasis on the very expression “the Courts find that” applied
      in Section 34(2)(b) of the 1996 Act, it has been held that the said provision
      empowers the Court to grant leave to amend the Section 34 application
      if the circumstances of the case so warrant and it is required in the
      interest of justice. This is what has been observed in the preceding
C     paragraph with reference to Section 34(2A) of the 1996 Act.
             25. To sum up, existence of Clause 6(b) in the Agreement
      governing the parties, has not been disputed, nor has the application of
      Circular dated 27th July, 1987 issued by the Government of Madhya
      Pradesh regarding imposition of 10% supervision charges and adding
      the same to cost of the Sal seeds, after deducting the actual expenditure
D
      been questioned by the respondent-Company. We are, therefore, of the
      view that failure on the part of the learned Sole Arbitrator to decide in
      accordance with the terms of the contract governing the parties, would
      certainly attract the “patent illegality ground”, as the said oversight
      amounts to gross contravention of Section 28(3) of the 1996 Act, that
E     enjoins the Arbitral Tribunal to take into account the terms of the contract
      while making an Award. The said ‘patent illegality’ is not only apparent
      on the face of the Award, it goes to the very root of the matter and
      deserves interference. Accordingly, the present appeal is partly allowed
      and the impugned Award, insofar as it has permitted deduction of
      ‘supervision charges’ recovered from the respondent-Company by the
F
      appellant-State as a part of the expenditure incurred by it while calculating
      the price of the Sal seeds, is quashed and set aside, being in direct conflict
      with the terms of the contract governing the parties and the relevant
      Circular. The impugned judgment dated 21st October, 2009 is modified
      to the aforesaid extent.
G            26. The present appeal is disposed of in the above terms, while
      leaving the parties to bear their own costs.

      Nidhi Jain                                                  Appeal disposed of.



H