Karnataka HC: Courts Cannot Re-Appreciate Evidence to Find Patent Illegality in Arbitral Award

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 23.09.2026

Karnataka HC: Courts Cannot Re-Appreciate Evidence to Find Patent Illegality in Arbitral Award

The Karnataka High Court has reaffirmed the limited scope of judicial interference with arbitral awards, holding that courts exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996 cannot re-appreciate evidence or interfere merely because another interpretation of the contract may be possible.

A Division Bench comprising Chief Justice Vibhu Bakhru and Justice C.M. Joshi dismissed an appeal filed by the State Project Director, Rashtriya Madhyamika Shikshana Abhiyana, thereby leaving undisturbed an arbitral award of ₹60,24,774 towards price escalation, along with interest, in favour of Mycon Construction Ltd.

Dispute Over Price Adjustment Clause in Government Construction Contract

• The dispute arose from a tender floated for the construction of model schools and the upgrading and strengthening of existing Government High Schools across 30 districts of Karnataka.
• Mycon Construction Ltd. emerged as the successful bidder for construction work under Package A-B. The parties consequently executed a construction agreement dated 15 May 2013, consisting of General Conditions of Contract and Special Conditions of Contract. Additional work was subsequently entrusted to Mycon, leading to a supplementary agreement dated 14 March 2017.
• The controversy centred on Clause 39 — the Price Adjustment Clause.
• Although the original tender material available on the e-procurement portal contained a note stating that the “price adjustment clause may be treated as deleted,” the agreements actually executed by the parties in 2013 and 2017 continued to contain Clause 39.

Arbitrator Awards ₹60.24 Lakh Against Claim of ₹1.22 Crore

• During execution of the project, Mycon raised bills claiming amounts under the price adjustment mechanism. The State objected, eventually resulting in arbitration.
• The Arbitral Tribunal adopted the fast-track procedure and delivered its award on 8 September 2023.
• Against Mycon’s claim of ₹1,22,81,956, the Tribunal partly allowed the claim and awarded ₹60,24,774 along with interest, holding that the Price Adjustment Clause was valid.
• The State challenged the award under Section 34, but the Commercial Court dismissed its petition on 2 December 2024. This led to the Section 37 appeal before the Karnataka High Court.

State: Price Adjustment Clause Was Intended to Be Deleted

• The State’s principal argument was that the tender/RFP had indicated that the Price Adjustment Clause was to be treated as deleted.
• It contended that Clause 39 had found its way into the final agreement only because the agreement was erroneously signed by the State Project Engineer. According to the State, Mycon could therefore not claim any amount under that provision.
• The State further argued that when the tender note expressly contemplated deletion of the Price Adjustment Clause, the authority signing the contract on behalf of the Government could not subsequently incorporate that clause into the agreement.
• The State also invoked Article 299 of the Constitution, contending in effect that Clause 39 should be treated as non-existent because it had allegedly been incorporated without authority.

Signed Contract Expressly Contained Clause 39

• The High Court considered it significant that there was no dispute that the final agreement signed by the parties expressly contained Clause 39.
• While the e-procurement portal carried the note that Clause 39 “may be treated as deleted,” the agreement ultimately executed by the parties neither contained such a note nor had Clause 39 scored out.
• The State did not dispute that the signed agreement contained the provision.
• Clause 39 itself provided for adjustment of the contract price for increases or decreases in rates and prices of labour, materials, fuels and lubricants, subject to the contractual formula and conditions.
• The High Court further recorded that there was no controversy regarding the calculation of the ₹60,24,774 escalation amount in accordance with Clause 39. The dispute was essentially whether Clause 39 formed part of the parties’ agreement at all.

Mycon: Bid Was Reduced Because Price Adjustment Protection Was Available

• Mycon’s original bid was ₹7,22,96,246.41, which was subsequently reduced during negotiations to ₹6,70,56,696.
• The contractor contended that it had agreed to the reduction because the contract contained a Price Adjustment Clause. It also claimed that during a meeting held on 13 February 2013, the concerned authorities had indicated that higher premiums were unnecessary because price adjustment protection was available.
• Mycon additionally relied upon a Government Order dated 26 November 2004, under which a price adjustment clause was to be included in works contracts where the estimated cost put to tender was ₹100 lakh or more and the completion period was 12 months or more.

Tribunal Was Entitled to Interpret the Contract: High Court

• The Arbitral Tribunal had rejected the State’s contention that the words “may be treated as deleted” automatically meant that Clause 39 had ceased to form part of the contract.
• The Tribunal instead relied upon the final signed agreement, which retained Clause 39 without any note stating that it should be deleted.
• It therefore held that the executed agreement could not be read as excluding Clause 39 merely because of the note appearing in the RFP on the e-procurement portal.
• The Tribunal had also rejected the State’s argument concerning lack of authority of the State Project Engineer. The State had neither rescinded nor rectified the contract and the contractor had executed the works between 2013 and 2018 without the Government taking steps to modify or rescind the agreement.
• The High Court found that the real dispute was therefore not about the existence of the contract, but about the terms of that contract. Such a dispute fell squarely within the jurisdiction of the Arbitral Tribunal.

Error in Contract Interpretation Is Ordinarily Within Arbitrator’s Jurisdiction

• The Division Bench referred to the Supreme Court’s ruling in MSK Projects India (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573.
• The principle highlighted by the Court was that an error committed by an arbitrator while construing a contract is an error within the arbitrator’s jurisdiction. A jurisdictional error arises when the arbitrator travels outside the contract and deals with matters not entrusted to arbitration.
• The High Court also relied upon SAIL v. Gupta Brother Steel Tubes Ltd., (2009) 10 SCC 63, where the Supreme Court distinguished between an arbitrator travelling beyond the contract and an arbitrator merely interpreting the contractual provisions.
• Where the arbitrator’s conclusion represents a possible view, courts should not interfere merely because another view may also be possible. Courts cannot examine the correctness of arbitral findings as though exercising appellate jurisdiction.

Courts Cannot Substitute Their Own Interpretation of Contract

• The Karnataka High Court further relied upon State of Rajasthan v. Puri Construction Co. Ltd., (1994) 6 SCC 485.
• The Supreme Court had distinguished between an error within jurisdiction and an error in excess of jurisdiction, holding that courts cannot substitute their own evaluation of the facts or contractual interpretation merely because they might have reached a different conclusion.
• Where the arbitrator’s interpretation of a contract represents a possible view, the award cannot be reopened simply to reassess the contractual materials and evidence.

Construction of Contract Lies Within Province of Arbitral Tribunal

• The Bench also referred to Assam SEB v. Buildworth (P) Ltd., (2017) 8 SCC 146, reiterating that questions concerning construction of contractual provisions ordinarily fall within the province of the Arbitral Tribunal.
• Where the arbitrator’s interpretation is supported by relevant evidentiary material, courts cannot interfere merely because they might prefer another construction.

Section 34 Courts Cannot Re-Appreciate Evidence

• The High Court agreed with the Commercial Court that the Tribunal’s conclusions were based upon evidence and could not be characterised as patently illegal or contrary to the public policy of India.
• It reiterated that courts cannot re-appreciate evidence while examining an arbitral award, and that interference must remain confined to the grounds expressly provided under Section 34.
• The Bench relied upon Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd., AIR Online 2021 SC 78, where the Supreme Court emphasised that Section 34 courts must act strictly within the confines of the statutory provision and refrain from appreciation or re-appreciation of facts and evidence.

Every Error of Law Is Not “Patent Illegality”

• The High Court also reiterated the restrictive meaning of patent illegality under Section 34(2A).
• An illegality must go to the root of the matter. Every legal error or erroneous application of law does not amount to patent illegality.
• Interference may be justified where, among other circumstances, the arbitrator adopts a view that is not even a possible one, interprets a contractual clause in a manner no fair-minded or reasonable person could adopt, travels outside the contract, bases conclusions on no evidence, or ignores vital evidence.
• Courts, however, cannot re-appreciate evidence merely to reach the conclusion that an award is patently illegal.

Article 299 Argument Rejected

• The State had relied on K.P. Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203 to challenge the contractual provision.
• The Karnataka High Court found that decision inapplicable because it concerned a situation where no written agreement had been entered into after the auction.
• In Mycon’s case, there was an undisputed signed agreement between the parties, and there was no dispute that the Government had awarded the works contract and that an agreement for execution of those works was authorised.
• The controversy was therefore confined to whether Clause 39 formed part of the contractual terms, a question that the Arbitral Tribunal had already considered and decided in Mycon’s favour.
• The Tribunal had also taken note of the State’s failure to rescind or rectify the executed agreement.

Karnataka HC Dismisses State’s Appeal; Mycon’s Award Stands

• The Division Bench ultimately held that the State’s challenge could not be sustained under either Section 34(2) or Section 34(2A) of the Arbitration and Conciliation Act.
• Finding no ground to interfere with the arbitral award and no infirmity in the Commercial Court’s refusal to set it aside, the High Court dismissed the State’s appeal.
• Accordingly, Mycon Construction Ltd. succeeded in defending the arbitral award of ₹60,24,774 towards price escalation, along with interest, against the State’s Section 34 and Section 37 challenges.

Key Takeaway

The ruling reinforces a fundamental principle of Indian arbitration law: interpretation of contractual terms is primarily the domain of the arbitrator. A court exercising jurisdiction under Sections 34 or 37 cannot substitute its preferred contractual interpretation merely because another view is possible.

Where an executed government contract expressly contains a price adjustment clause, and the arbitrator adopts a possible interpretation of that agreement based on the contractual documents and evidence, judicial interference cannot be justified simply by pointing to a conflicting note in the earlier tender material.

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Source: Karnataka High Court

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