Court holds that arbitral award based on contradictory findings and ignoring vital evidence violates principles of natural justice; appeal allowed with award set aside.
In a significant judgment delivered on October 28, 2026, the Delhi High Court (Division Bench) set aside an arbitral award in the dispute between Flowmore Limited (Appellant) and M/S Skipper Limited (Respondent) relating to the manufacture and supply of structural tower material for the Jharkhand Urja Sancharan Nigam Limited (JUSNL) project. The Court found that the arbitral tribunal committed patent illegality by erroneously holding that the appellant waived prototype inspection and granted manufacturing clearance for tower structures despite the absence of any evidence on record supporting such waiver.
The arbitration arose from a purchase order dated March 2, 2019, issued by Flowmore Limited to M/S Skipper Limited for supply of fabricated and hot-dip galvanized tower parts. A dispute emerged concerning the approval process, prototype inspections, manufacturing clearance, and advance payments. The respondent initiated arbitration claiming over Rs. 11.68 crore for manufactured goods and related losses, while the appellant filed counterclaims exceeding Rs. 26 crore alleging breach of contractual obligations.
The arbitral award dated July 5, 2022, awarded Rs. 8.15 crore to the respondent along with interest, but dismissed the appellant's counterclaims. The appellant challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge dismissed the objections, and subsequent appeals and remands ensued, including intervention by the Supreme Court restoring the appeal to the original position.
The Court meticulously examined the contractual clauses concerning prototype inspection, manufacturing clearance, and advance payments. Clause 16 mandated a 10% advance payment upon submission of an Advance Bank Guarantee (ABG) and proforma invoice during manufacturing clearance, while Clause 38 required written manufacturing clearance before commencement of manufacture.
Crucially, the Court noted that while emails dated June 14 and 19, 2019, allowed mass production of stubs and templates, they did not extend to tower structures. The arbitrator's finding that the appellant waived prototype inspection and granted manufacturing clearance for towers was unsupported by any documentary evidence and contradicted the respondent's own emails indicating that prototype inspection of towers was pending.
Moreover, the arbitrator's reasoning was internally contradictory-on one hand stating that prototype inspection would only arise after advance payment (which was not made), and on the other hand holding that inspection of towers was waived. The Court held such contradictory findings unsustainable.
In addition, the respondent's claim that the manufactured goods were customized and sold as scrap to mitigate loss was inconsistent with its earlier assertion that the goods were similar to those supplied in another project. The arbitrator failed to consider this vital evidence, rendering the quantification of loss flawed.
The Court applied the well-settled legal principles that while courts exercising jurisdiction under Sections 34 and 37 of the Arbitration Act cannot re-appreciate evidence or sit in appeal over findings, interference is justified where an award suffers from patent illegality-such as findings based on no evidence, ignoring vital evidence, or containing contradictory conclusions.
Relying on recent Supreme Court precedents including Associate Builders v. DDA (2015), Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. (2024), and Ramesh Kumar Jain v. Bharat Aluminium Company Ltd. (2025), the Court reiterated that a patent illegality arises where no reasonable person could have arrived at the arbitral tribunal's view, or when fundamental contradictions exist within the award.
Consequently, the Court set aside the arbitral award and allowed the appeal. The judgment underscores the limited but vital scope of judicial scrutiny in arbitration matters to ensure adherence to contract terms and natural justice, without descending into re-appreciation of evidence.
This judgment will have significant implications for commercial arbitration, especially in contracts involving complex manufacturing and inspection protocols, emphasizing the necessity of clear documentary evidence for waivers and clearances.
Bottom Line:
Arbitration - Scope of interference under Sections 34 and 37 of Arbitration and Conciliation Act, 1996 - Though re-appreciation of evidence is impermissible, arbitral award can be set aside for patent illegality where finding is based on no evidence, ignores vital evidence, or contains contradictory findings - Finding of waiver of prototype inspection and manufacturing clearance for tower structures held unsupported by record - Award set aside.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Sections 34, 37
Flowmore Limited v. M/S Skipper Limited, (Delhi)(DB) : Law Finder Doc Id # 3004958
