The Madras High Court has reaffirmed that an arbitral award suffers from patent illegality if the arbitrator fails to adjudicate a specifically framed issue, even if the core dispute appears resolved. This ruling reinforces procedural rigor in arbitration and underscores that procedural compliance is not a mere formality but a substantive requirement under the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
The petitioner, K. Jayachandran, was a partner in the firm S J Infra, along with the second respondent, V. Sudhakar. A partnership deed dated 19.07.2017 governed their relationship. In August 2019, the petitioner discovered that cheques of the firm were being issued without his signature. He was informed by the bank that a reconstitution deed dated 03.06.2019 had been executed, removing him as a partner and inducting the third respondent, Madhupriya (wife of the second respondent), as a new partner.
Procedural History
- 03.06.2019: Alleged reconstitution deed executed, removing petitioner as partner.
- 14.08.2019: Petitioner wrote to Andhra Bank to freeze the firm’s account.
- 02.09.2019: Petitioner filed a police complaint alleging fabrication of the deed.
- 18.10.2019: Parties consented to arbitration; Sole Arbitrator appointed under Section 11.
- 08.04.2021: Sole Arbitrator framed an additional issue on whether settlement of dues had occurred.
- 23.01.2023: Arbitral award dismissed petitioner’s claims without addressing the additional issue.
- 21.01.2026: Petitioner filed Section 34 petition before Madras High Court.
Relief Sought
The petitioner sought to set aside the arbitral award on grounds of patent illegality, arguing that the arbitrator failed to decide the additional issue on settlement of dues, which was critical to determining the validity of the reconstitution deed.
The Legal Issue
The central question was whether an arbitral award is vitiated by patent illegality under Section 34(2)(a) of the Arbitration and Conciliation Act, 1996, when the arbitrator fails to decide a specifically framed issue that directly impacts the outcome of the dispute.
Arguments Presented
For the Petitioner
The petitioner’s counsel argued that the additional issue framed on 08.04.2021 - whether the respondents had settled the amount payable to the petitioner under the reconstitution deed - was integral to assessing the legitimacy of the deed. The arbitrator’s silence on this issue rendered the award incomplete and legally unsustainable. Reliance was placed on Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India to argue that failure to address a material issue constitutes patent illegality.
For the Respondent
The respondents contended that the reconstitution deed was valid, the petitioner’s signature was undisputed, and the award correctly found that the petitioner failed to prove fabrication. They argued that the additional issue was merely procedural and did not affect the core finding on the deed’s validity. They cited BCCI v. Kochi Cricket Pvt. Ltd. to assert that courts should not interfere with arbitral findings unless there is a clear legal error.
The Court's Analysis
The Court examined the structure of the arbitral proceedings and the relationship between the primary and additional issues. It held that the additional issue was not peripheral but central to the dispute. The reconstitution deed explicitly stated that the outgoing partner acknowledged full payment of dues. The respondents’ defence repeatedly relied on this clause. Thus, the question of whether payment was actually made was not ancillary - it was a necessary precondition to validating the deed.
"The Sole Arbitrator ought to have decided this additional issue since the finding rendered for this additional issue will also have a direct bearing on the legality or otherwise of the reconstitution deed."
The Court emphasized that patent illegality arises not merely from erroneous findings but from the failure to apply judicial reasoning to a material issue framed by the arbitrator himself. The omission was not a mere oversight but a structural flaw that rendered the award legally defective. The Court distinguished this from situations where an arbitrator omits an unframed argument, noting that a framed issue creates a procedural obligation.
The Court further noted that the respondents’ own pleadings and the deed’s language made the settlement of dues a factual and legal linchpin. By ignoring this, the arbitrator deprived the petitioner of a fair hearing and violated the principles of natural justice embedded in Section 34.
The Verdict
The petitioner succeeded. The Madras High Court set aside the arbitral award dated 23.01.2023 on the ground of patent illegality under Section 34(2)(a). The Court held that the arbitrator’s failure to decide the framed issue on settlement of dues rendered the award legally unsustainable. The parties were left free to initiate fresh arbitration proceedings.
What This Means For Similar Cases
Failure to Decide Framed Issues Vitiates Awards
- Practitioners must now argue that any omission of a specifically framed issue constitutes patent illegality, regardless of whether the outcome appears fair.
- Arbitrators must explicitly address every framed issue in the award; silence is not an option.
- Section 34 petitions can be successfully filed even where the arbitrator’s findings are factually plausible, if procedural completeness is lacking.
Settlement Clauses Require Independent Verification
- When a deed references payment of dues, the arbitrator must independently assess whether such payment occurred, even if the parties claim it did.
- Oral assertions or blanket clauses in deeds are insufficient without corroborating evidence.
- Parties must lead evidence on settlement - courts and arbitrators cannot assume it.
Arbitration Is Not a Free-for-All
- Arbitration is not a substitute for judicial procedure; procedural discipline is mandatory.
- Framing issues is not a formality - it is a binding step that defines the scope of adjudication.
- Courts will intervene where arbitrators act as if they are conducting a negotiation rather than a quasi-judicial inquiry.
