Court holds Government's negligence in floating tender despite status quo order not a ground to set aside arbitration award under public policy
In a significant judgment dated 30th September 2026, the Madhya Pradesh High Court at Jabalpur has set aside the order of the District Judge that had annulled an arbitral award on the ground that it was against public policy. The Arbitration Appeal No. 23 of 2026 was filed by M/s Laxman Sharma challenging the decision of the 23rd District Judge, Jabalpur, which had allowed the Union of India's application under Section 34 of the Arbitration and Conciliation Act, 1996, to set aside the arbitral award.
The dispute arose from a tender floated by the Central Public Works Department (CPWD) for the construction of Kendriya Vidyalaya on a land parcel allotted by the Collector, Jabalpur. Despite a subsisting High Court order directing status quo on possession of the land (dated 11.04.2011 in W.P. No.618/2008), the Government authorities issued the Notice Inviting Tender (NIT) in 2014, invited bids, accepted earnest money, and awarded the contract to the appellant in 2015. The appellant deposited Rs. 20 lakh and furnished a performance guarantee as per contractual terms.
Subsequently, a dispute arose regarding the validity of the award due to the prior status quo order on the land. The respondent Union of India challenged the arbitral award on grounds that it violated the fundamental policy of Indian law and public policy, arguing that the Government's negligence in floating the tender despite the court order invalidated the award.
Justice Vivek Agarwal, presiding over the appeal, after analyzing the facts and relevant Supreme Court precedents, observed that negligence or fault on the part of Government instrumentalities does not amount to violation of the fundamental policy of Indian law or public policy. The Court relied on the authoritative Supreme Court rulings in ONGC v. Saw Pipes Ltd. (2003) and Associate Builders v. Delhi Development Authority (2015), which expanded the scope of "public policy of India" in arbitral awards.
The Court reiterated that an arbitral award can be set aside on public policy grounds only if it is contrary to fundamental policy of Indian law, interest of India, justice or morality, or if it is patently illegal going to the root of the matter. Mere negligence by the Government department in not verifying the legal status of the land before floating the tender did not amount to fraud, corruption or any contravention attributable to the contractor that would vitiate the award.
The Court further clarified that the explanation added to Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, post amendment effective from 23.10.2015, states that an award is against public policy only if it is induced or affected by fraud or corruption, or is in conflict with fundamental policy of Indian law or basic notions of morality or justice. In the absence of any such findings against the appellant contractor, the award was not liable to be interfered with.
Consequently, the High Court allowed the arbitration appeal and quashed the order of the District Judge, restoring the arbitral award in favor of M/s Laxman Sharma. The judgment underscores the principle that fault or negligence of Government authorities in procedural matters does not automatically invalidate arbitral awards on public policy grounds and reaffirms the limited scope of judicial interference in arbitration matters.
This ruling is expected to provide clarity on the interpretation of public policy in arbitration disputes involving Government contracts and strengthen the sanctity of arbitral awards unless there is a clear violation of fundamental legal principles or corruption.
Bottom Line:
Arbitration and Conciliation Act, 1996 - Section 34 - Public policy of India - Arbitral award cannot be set aside merely because Government authorities themselves negligently floated NIT and awarded work despite subsisting status quo order regarding land - Fault of department does not amount to violation of fundamental policy of Indian law or public policy - Order setting aside award reversed.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 - Section 34, Section 37
M/s Laxman Sharma v. Union of India, (MP)(Jabalpur) : Law Finder Doc Id # 3002573
