'Arbitrators cannot rewrite contract terms': Supreme Court upholds setting aside of INR 995 Crore award in SEPCO vs GMR Kamalanga dispute
SEPCO Electric Power Construction Corporation Vs GMR Kamalanga Energy Ltd.
Supreme Court of India
Justice B. R. Gavai, Justice Augustine George Masih
26th September 2025
Read the judgment here
Facts of the Case:
Parties Involved:
The appellant in this case is SEPCO Electric Power Construction Corporation (referred to as “SEPCO”), and the respondent is GMR Kamalanga Energy Ltd. (hereinafter “GMRKE Limited”).
Background:
SEPCO and GMRKE Limited entered into several agreements for the construction of three coal-fired thermal power plants in Kamalanga, Odisha. The primary contracts included an Engineering, Procurement, and Construction (EPC) Agreement and other related agreements, all dated August 28, 2008. A fourth plant was proposed later but was suspended. However, disputes arose between the parties, leading SEPCO to issue a Notice of Dispute in March 2015, followed by a Notice of Arbitration in June 2015, which resulted in the formation of an arbitral tribunal to resolve these disputes. The arbitration proceedings addressed various claims concerning delays, contractual obligations, and financial entitlements. Ultimately, the tribunal awarded SEPCO nearly INR 995 Crores against GMRKE Limited.
Legal Action:
Upon disagreement with the Arbitral Award, GMRKE Limited challenged it under Section 34 of the Arbitration and Conciliation Act, 1996, citing procedural and legal errors made by the tribunal. The Single Judge of the High Court dismissed their challenge, which led GMRKE Limited to further appeal under Section 37 of the Act. The Division Bench of the High Court then overturned the Single Judge’s ruling, finding that the tribunal’s decisions shocked the conscience of the court and conflicted with the principles of natural justice, thereby violating the provisions of the Arbitration and Conciliation Act. Consequently, the Division Bench set aside both the Arbitral Award and the Single Judge’s judgment, declaring the award invalid due to its failure to comply with applicable legal standards, thus prompting SEPCO to appeal to the Supreme Court.
Key Issues:
Whether the arbitral tribunal’s interpretation of waiver of contractual notices and application of equitable estoppel was valid despite “No Oral Modification” clause in the agreement?
Whether unequal treatment of parties by the arbitral tribunal in applying the waiver of notices violated principles of natural justice under Section 18 of the Arbitration Act?
Whether the arbitral tribunal exceeded its jurisdiction by rewriting/modifying express terms of the contract in violation of Section 28(3) of the Arbitration Act?
Whether the Division Bench of High Court was justified in interfering with and setting aside the arbitral award under Section 37 of the Arbitration Act despite limited scope of judicial review?
Court’s Reasoning:
1. On the Validity of Waiver of Contractual Notices and Application of Equitable Estoppel: The Supreme Court scrutinized the arbitral tribunal’s interpretation regarding the waiver of contractual notices and the invocation of equitable estoppel despite the presence of a “No Oral Modification” clause in the Amended CWEETC Agreement. The Court highlighted that the arbitral tribunal had focused on an email exchange from March 2012, concluding that the parties had waived the requirement for notices. However, the Court noted that sustainable evidence for such a waiver was absent and that the terms of the contract clearly mandated that any modification must be in writing. The ruling drew heavily from principles within the Indian Contract Act, emphasizing that a waiver cannot simply arise from informal communications—there must be explicit intentionality from both parties. The arbitral tribunal’s reliance on the email neglected the established contractual requirements that prevented any oral modification, leading to a critical view of the tribunal’s authority to enhance or modify contract terms outside explicit terms agreed upon by the parties.
2. On Violations of Natural Justice and Unequal Treatment of Parties: The Court addressed the claims of GMRKE Limited regarding unequal treatment by the arbitral tribunal in applying the waiver of notices. The judges emphasized that the essence of natural justice and the principles encapsulated in Section 18 of the Arbitration Act mandate equal treatment and the opportunity for all parties to present their case fully. The Supreme Court underscored that the arbitral tribunal’s decisions to dismiss GMRKE Limited’s counterclaims on grounds of insufficient notice, while simultaneously allowing SEPCO’s claims where contractual notices were similarly unissued, constituted a violation of natural justice. This discriminatory treatment was seen as fundamentally unjust, undermining the procedural integrity that arbitration seeks to uphold.
3. On Jurisdictional Exceedance by the Arbitral Tribunal: The analysis turned to whether the arbitral tribunal exceeded its jurisdiction by effectively rewriting the terms of the contract and the consequences of such actions under Section 28(3) of the Arbitration Act. The Court observed that an arbitral tribunal’s authority is confined to the mandate established by the parties through their contractual agreements. Notably, the interpretation of the contract must adhere strictly to its written terms, and any significant deviation constitutes a jurisdictional error. The tribunal’s purported alterations, allegedly to act in accordance with practical realities, were viewed as a direct contravention of the established principles of arbitration that prohibit such modifications. The Supreme Court underscored that an arbitrator’s functions are not merely to adjudicate disputes but to do so in fidelity to the underlying contractual framework, and failure to respect this framework equated to exceeding the limits of its jurisdiction.
4. On the Division Bench’s Justification for Setting Aside the Arbitral Award: The Court considered whether the Division Bench of the High Court was justified in intervening to set aside the arbitral award, recognizing the limited standard of review established under Section 37 of the Arbitration Act. The judges reasoned that while the scope for intervention is indeed narrow, violations of fundamental principles of justice and natural justice, alongside conflicts with public policy, warrant judicial scrutiny. The Division Bench had determined that the arbitral award failed to meet these essential standards, particularly given the irrational treatment of the parties and the modification of contract terms. The Supreme Court reiterated that in cases where an award blatantly contravenes foundational legal principles, it is the court’s duty to intervene, emphasizing that such actions are necessary to maintain the rule of law and preserve the integrity of the arbitral process. Thus, the High Court’s decision was seen as a necessary corrective measure in light of grave violations present in the arbitral process.
Final Decision
1. The Civil Appeal filed by SEPCO Electric Power Construction Corporation is dismissed.
2. The Judgment dated September 27, 2023, passed by the Division Bench of the High Court of Orissa is upheld, whereby the Arbitral Award and the Section 34 Judgment are set aside.
3. SEPCO is not entitled to recover the awarded amounts as determined by the Arbitral Tribunal due to violations of fundamental principles of justice.
4. The implications of the decision shall ensure that GMR Kamalanga Energy Limited is not prejudiced in relation to the claims and defenses regarding the issuance of contractual notices.
5. There shall be no order as to costs.
6. Any pending applications related to this matter shall be disposed of in accordance with this judgment.