The Supreme Court of India, in a significant judgment on arbitration law, has allowed appeals filed by the Indian Railways Catering and Tourism Corp. Ltd. (IRCTC) and set aside an arbitral award that had granted claims worth crores to railway caterers.
A bench comprising Justice Sanjay Kumar and Justice Satish Chandra Sharma held that the arbitral award was “patently illegal” and “in conflict with the public policy of India” because the arbitrator had “practically rewrote the contract” by overlooking binding policy circulars issued by the Railway Board.
The dispute centered on claims by caterers, including M/s. Brandavan Food Products (BFP), for reimbursement for (1) providing a “second regular meal” at the price of a “combo meal” and (2) supplying “welcome drinks” for which no separate payment was made, on Rajdhani, Shatabdi, and Duronto trains.
Background of the Dispute
The case originates from a 2013 tender by the Northern Railway for catering services, based on the 1999 Catering Policy. While BFP’s bid was under process, the Railway Board issued two critical circulars:
- Commercial Circular No. 63 (09.10.2013): This introduced the “combo meal” concept at a lower tariff (₹66.50) in place of the second regular meal and revised tariffs generally due to inflation.
- Commercial Circular No. 67 (23.10.2013): Following passenger dissatisfaction, this circular, issued just 14 days later, deleted the combo meal and restored the second “regular meal.” However, it crucially stipulated, “The above changes will be done without any increase in charges.”
The Letter of Award (17.01.2014) and the Master Licence Agreement (MLA) (21.04.2014) were executed with BFP after these circulars were in effect. Subsequently, Commercial Circular No. 32 (06.08.2014) directed caterers to provide a “welcome drink” and explicitly reiterated that the second regular meal was to be served “at the tariff applicable for combo meal.”
The caterers provided the services but later raised disputes, claiming they were forced under “financial and economic duress” to accept the lower payment for the second regular meal and no payment for the welcome drink.
Procedural History
A sole Arbitrator, by an Award dated 27.04.2022, found in favour of the caterers. The Arbitrator accepted the plea of economic duress and held that IRCTC, in a dominant position, could not deny reimbursement.
In a Section 34 petition, a learned Single Judge of the Delhi High Court (13.08.2024) partially set aside the award, rejecting the claim for the second regular meal but upholding the claim for welcome drinks.
In a Section 37 appeal, a Division Bench of the High Court (10.02.2025) reversed the Single Judge, restoring the Arbitrator’s findings on the second regular meal and the welcome drink, but set aside the interest component. IRCTC appealed this decision to the Supreme Court.
Arguments Before the Supreme Court
IRCTC, the appellant, contended that the Arbitrator had exceeded his jurisdiction by rewriting a commercial contract that the parties had entered into with “their eyes wide open.” It argued that the MLA (Clause 8.1) explicitly allowed the Railway to change the menu, and Clause 21.1 gave the Railway Board’s policy circulars “primacy and priority” over all other contract documents.
The caterers, respondents, argued that the Arbitrator’s interpretation was justified. They contended that the phrase “without any increase in charges” in the 2013 circular did not apply to the restoration of the regular meal. They also argued that IRCTC, as a State instrumentality, must adhere to principles of fairness under Article 14, even in contracts.
Supreme Court’s Analysis and Decision
The Supreme Court found the Arbitrator’s award unsustainable in law, siding entirely with IRCTC’s arguments.
On the Second Regular Meal: The Court rejected the caterers’ interpretation of the circular, stating, “a bare reading… indicates that there is no distinction made… All the changes were to be made without any increase in charges is how the circular reads”.
The bench noted as “fatal” the fact that BFP had previously challenged these circulars in a writ petition which was dismissed by the Delhi High Court, and BFP did not appeal further. Consequently, the “policy decisions remained in place untouched” and were binding.
On the Welcome Drink: The Court overturned the award on this count as well. It noted that the original 2013 bid document did contemplate a welcome drink. Furthermore, Clause 8.1 of the MLA “empowered the Railway to change the menu for the train at any time.” The Court held, “Addition of a welcome drink is clearly a change in the menu and was, therefore, directly traceable to the power conferred by Clause 8.1 of the MLA.”
On ‘Patent Illegality’ and Public Policy: The judgment cited State of Chhattisgarh and another vs. SAL Udyog Private Limited to state that an arbitral tribunal’s failure to decide “in accordance with the terms of the contract” amounts to a “gross contravention of Section 28(3) of the Act of 1996” and attracts the “patent illegality” ground.
It also referenced Ssangyong Engineering and PSA Sical Terminals, affirming that “rewriting a contract for the parties would be a breach of the fundamental principles of justice.”
The Court concluded that the Arbitrator “completely overlooked the weightage to be given to the policy decisions” and “practically rewrote the contract between the parties in such a manner that it was in contradiction with the policy decisions… which he could not have touched.”
On the ‘State Fairness’ Argument: The Court rejected the Article 14 argument, holding that IRCTC and Northern Railway “had no independent discretion in the matter… as they were bound by the policy directives of the Railway Board.” The Court stated, “Once IRCTC had no independence… the question of applying the principles of fair play in action… would not even arise.”
In its final order, the Supreme Court held: “The Award, being patently illegal and in conflict with the public policy of India is, therefore, unsustainable in law and is liable to be set aside…”. The appeals by IRCTC were allowed, and the cross-appeals by the caterers were dismissed.
