Arbitrators Cannot Override Binding Government Policy: Supreme Court Clarifies Patent Illegality and Contractual Hierarchy in IRCTC v. Brandavan Food Products

Introduction

The Supreme Court of India in Indian Railways Catering and Tourism Corp. Ltd v. M/s Brandavan Food Products (2025 INSC 1294, decided on 07 November 2025) revisited the limits of judicial interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, and laid down a consequential rule about how arbitrators must treat binding governmental policy instruments that are expressly incorporated into public contracts.

The dispute arose from catering contracts on premium Indian Railways trains (Rajdhani, Shatabdi, Duronto). After the Railway Board briefly introduced a lower-priced “combo meal” in October 2013, it was withdrawn within two weeks, but the Board directed that the restored second regular meal be served “without any increase in charges,” effectively paying caterers the lower combo-meal tariff for a regular meal. A later circular in August 2014 introduced welcome drinks. In 2019, acting on IRCTC’s recommendation, the Board corrected the anomaly prospectively by allowing regular-meal tariffs for the second meal.

Caterers sought arbitral compensation for: (a) the difference between regular meal rate and “combo” rate paid for the second regular meal before 03 October 2019; and (b) reimbursement for welcome drinks. A sole arbitrator largely upheld the claims (within limitation), awarding principal sums and interest. A Single Judge under Section 34 partially set aside the award (denying the second-meal differential but allowing welcome drinks), and a Division Bench under Section 37 restored both principal heads while disallowing the interest methodology. IRCTC appealed to the Supreme Court.

Key issues included: whether the arbitrator rewrote the contract contrary to the incorporated Railway Board policy; whether equity or notions of fairness could justify compensation; whether welcome drinks, added by policy after the MLA, entitled caterers to tariff absent a specific circular; and how Sections 28(3), 34(2)(b)(ii), and 34(2A) apply when arbitral interpretation contradicts an expressly prioritized policy regime.

Summary of the Judgment

Allowing IRCTC’s appeals and dismissing the caterers’ cross-appeals, the Supreme Court:

• Set aside the arbitral award in its entirety (including both the second-meal differential and the welcome-drink reimbursement), as well as the Delhi High Court’s Section 34 and Section 37 judgments.
• Held that the arbitrator rewrote the contract by ignoring binding Railway Board circulars that the contract explicitly prioritized, thereby violating Section 28(3) of the Arbitration Act; the award was therefore vitiated by patent illegality under Section 34(2A) and conflicted with public policy under Section 34(2)(b)(ii).
• Clarified that where the contracting public entity (IRCTC) lacks discretion because policy circulars control and are incorporated with primacy, courts and arbitrators cannot invoke fairness or Article 14-type standards to modify the bargain; the only lawful route to redress is to challenge the policy in writ jurisdiction (which the caterers tried and lost).
• Found the welcome-drink claim unjustified because the contract allowed unilateral menu changes and the tender originally contemplated a welcome drink; the later circular’s re-introduction of welcome drinks fell squarely within that power, despite the absence of a specific tariff.
• Did not rule on interest methodology because the principal claims failed; it noted, however, the concession that the arbitrator’s lump-sum interest from a fixed date was flawed.

Analysis

Contractual and Policy Framework: The Core Matrix

The judgment turns on a precise chronology and a contractual hierarchy clause:

• 1999 Circular fixed menus and tariffs for premium trains (including a welcome drink/morning tea component).
• May 2013 tender and bid relied on the 1999 regime.
• 09 October 2013 Circular 63 introduced a lower-priced “combo meal” as the second meal.
• 23 October 2013 Circular 67 withdrew combo meals, restored a regular second meal, and mandated that “the above changes will be done without any increase in charges.”
• 21 April 2014 MLA executed, with Annexure II (Section C) reflecting tariffs; the table still referenced “CM” (combo) against the second meal, not to authorise combo-service but to preserve the lower tariff for the restored regular meal as per the 23 October 2013 policy.
• 06 August 2014 Circular 32 rationalised menus, (re)introduced welcome drinks at commencement, and reaffirmed that the second regular meal was to be served “at the tariff applicable for combo meal.”
• 03 October 2019 Circular prospectively corrected parity for the second meal, following IRCTC’s recommendation.

Critically, Clause 21.1 of the MLA created a hierarchy of documents, giving primacy to the “latest catering policy” and Railway Board circulars over the agreement and annexures, which in turn trumped bid responses and the bid itself. Clauses 1.4 and 8.1 permitted unilateral changes to tariff/menu by the Railway, and Clause 1.3.1 bound caterers to supply in accordance with Railway policies and instructions. The Supreme Court held that this architecture left no discretion to IRCTC to deviate and no scope for arbitral “equitable” adjustment against policy.

Precedents Cited and Their Influence

• Ssangyong Engineering & Construction Co. Ltd. v. NHAI (2019) 15 SCC 131:
  Established that an arbitral award which effectively creates a new contract or imposes unilateral alteration contrary to the agreed bargain can be set aside as conflicting with the most basic notions of morality or justice. The Court used this to hold that rewriting the tariff bargain, when policy forbade an increase, fell into the narrow “shocks the conscience” category.
• PSA Sical Terminals Pvt. Ltd. v. VO Chidambranar Port Trust (2023) 15 SCC 781:
  Confirmed that tribunals cannot thrust new terms into contracts; doing so offends fundamental principles of justice. The Court analogised the arbitrator’s approach here to inserting a non-existent tariff for the second meal and welcome drink.
• State of Chhattisgarh v. SAL Udyog Pvt. Ltd. (2022) 2 SCC 275:
  Clarified that failure to decide in accordance with the terms of the contract triggers “patent illegality” under Section 34(2A), owing to a contravention of Section 28(3). The Supreme Court directly applied this to hold that ignoring the circulars (deemed trade usages) and the hierarchy clause was a Section 28(3) breach.
• Associate Builders v. DDA (2015) 3 SCC 49:
  Provided the earlier articulation of patent illegality and the narrow scope of intervention, which still allows setting aside where the arbitrator disregards the contract.
• Industrial Promotion & Investment Corp. of Orissa Ltd. v. Tuobro Furguson Steels Pvt. Ltd. (2012) 2 SCC 261:
  Emphasised that parties entering a contract with eyes open are bound by it; neither can unilaterally abrogate it after acting upon it. The Court used this to reinforce that caterers, having acted per policy-infused contracts and having failed in writ to strike the policy, could not rely on arbitration to undo it.

Legal Reasoning: Why the Award Was Set Aside

• Policy supremacy embedded in contract:
  The MLA’s express hierarchy (Clause 21.1) elevated Railway Board policy as the first interpretive reference point. The policy clearly required that the restored second regular meal be paid at the lower “combo” tariff until changed prospectively in October 2019. The arbitrator’s contrary interpretation flouted this hierarchy.
• Section 28(3) violation and trade usages:
  Section 28(3) requires arbitrators to decide taking into account the terms of the contract and applicable trade usages. The Court treated the Railway Board circulars as the relevant trade usage in a regulated public contract. The arbitrator’s disregard of these instruments amounted to patent illegality.
• Public policy and fundamental principles of justice:
  By awarding parity for the second meal and compensation for welcome drinks contrary to binding policy, the arbitrator effectively rewrote the bargain. Following Ssangyong and PSA Sical, this was held to offend the fundamental principles of justice and thus conflicted with public policy under Section 34(2)(b)(ii).
• No equity/ex aequo et bono without express consent:
  Section 28(2) allows decisions ex aequo et bono only with express party authorisation. None existed. Equity could not be used to displace policy-incorporated contract terms.
• Fairness/Article 14 arguments inapposite:
  Because IRCTC had no discretion (being bound by Railway policy), the usual public law scrutiny of arbitrariness had no role in altering contractual allocation. The proper remedy was to challenge the policy by writ. The caterers filed such a writ and lost; not appealing that defeat was fatal to their arbitral claim.
• Welcome drinks:
  The tender contemplated a welcome drink; the 2014 circular reintroduced it and rationalised breakfast. Clause 8.1 allowed unilateral menu change. Absent a tariff circular, the arbitrator could not fabricate a rate based on “tea” or other analogies. Awarding reimbursement contravened the policy-controlled contract.

What the High Court Got Wrong

• The Section 37 Division Bench characterised the arbitrator as merely interpreting contract terms; the Supreme Court held the arbitrator subverted the explicit policy-first hierarchy and contradicted unambiguous circulars reaffirmed in 2014.
• The Division Bench’s criticism of the Single Judge’s waiver analysis was ultimately immaterial: the Supreme Court’s dispositive basis was the contractual-policy framework and Section 28(3) compliance, not waiver/estoppel.
• The Division Bench accepted the CA-certified computations and the arbitrator’s reliance on Section 65(g) of the Evidence Act; but once the principal legal entitlement fell, computation and evidence sufficiency ceased to matter.

Impact

The decision has significant implications for public contracts, regulatory-tariff arrangements, and the scope of arbitral interpretive latitude:

• Policy instruments as contract terms and trade usages:
  Where a contract explicitly subordinates itself to evolving policy circulars (and assigns them precedence), those circulars are not merely background facts but binding terms and relevant trade usages. Arbitrators must apply them strictly.
• No arbitral “equity” against binding policy:
  Even egregious commercial asymmetries (like serving a full meal at a lower tariff) cannot be redressed by arbitral equity unless the policy is first invalidated in writ. Arbitration is not an avenue to indirectly nullify extant policy.
• Section 28(3) as a robust review gateway:
  This ruling reinforces that ignoring contractual hierarchy clauses and incorporated policies exposes awards to setting aside for patent illegality, even under the narrow Section 34 framework.
• Fairness constraints on the State:
  Article 14-based fairness may not rework bargains where the State entity is itself bound and lacks discretion. Counsel must assess whether any alleged arbitrariness inheres in the policy (requiring writ review) or in its application (potentially arbitrable).
• Drafting and risk allocation:
  Parties bidding for public contracts must price for policy risk where the contract contains policy-first clauses. Attempts to recoup policy-driven losses in arbitration are unlikely to succeed absent policy change or successful writ challenge.

Complex Concepts Simplified

• Patent illegality (Section 34(2A)):
  A domestic award can be set aside if a clear legal error appears on its face—such as the tribunal ignoring explicit contract terms or mandated policy frameworks (contrary to Section 28(3)). It is more than a mere wrong view; it is a blatant departure from the agreed legal regime.
• Public policy (Section 34(2)(b)(ii)):
  Post-amendment, limited to narrow grounds, including contravention of fundamental policy of Indian law or most basic notions of morality/justice. Rewriting a contract contrary to policy can meet this high threshold in exceptional cases (Ssangyong).
• Ex aequo et bono:
  Deciding based on equity/fairness rather than strict law. Arbitrators can only do this if the parties expressly authorise it in the arbitration agreement. Otherwise, tribunals must apply the contract, applicable law, and trade usages.
• Trade usages under Section 28(3):
  Customary rules/practices governing the transaction. In regulated public contracts, binding policy circulars can operate as trade usages, shaping the contract’s performance and payment regime.
• Contractual hierarchy clauses:
  Clauses like MLA Clause 21.1 that set the order of precedence among policy, agreement, annexures, and bid documents. They control interpretation; ignoring them is a legal error.

Conclusion

The Supreme Court’s decision sets a clear and consequential rule: when a public contract gives primacy to binding governmental policy instruments, arbitrators cannot override those instruments in the name of fairness or contractual reinterpretation. Awards that do so are vulnerable to being set aside for patent illegality and conflict with public policy. The ruling also cabins Article 14-based fairness arguments where the contracting public entity lacks discretion because it is policy-bound; recourse must be through a constitutional challenge to the policy itself, not arbitration.

For public procurement participants, the message is unambiguous. Price for policy risk, read and respect contractual hierarchy clauses, and do not expect arbitral tribunals to rewrite policy-laden bargains. For arbitrators and courts, the case reaffirms the centrality of Section 28(3) and the disciplined, narrow terrain of Sections 34 and 37 review, while acknowledging that rewriting the bargain in the teeth of policy is not merely an error—it is a fundamental injustice warranting curial correction.