Section 28(2) of the Arbitration and Conciliation Act, 1996

Section 28 of the Act addresses the rules that arbitral tribunals must apply when deciding the substance of a dispute. Sub-section (2) specifically deals with the use of equitable principles in arbitration, stating that an arbitral tribunal may only decide ex aequo et bono or as an amiable compositeur if the parties have expressly authorized the tribunal to do so.

According to Black’s Law Dictionary, ex aequo et bono is defined as, “in justice and fairness; according to what is first and good; according to equity and conscience” and amiable compositeur is defined as “arbitrator authorised to abate something of the strictness of the law in favour of natural equity”.

While these equitable principles have been traditionally applied in international arbitration, their treatment in Indian law is restricted. Section 28(2) serves as a safeguard, ensuring that arbitral awards are grounded in legal norms rather than personal interpretations of fairness. It restricts the tribunal’s ability to invoke equity as a basis for its decision, unless the parties have explicitly consented to it

Treatment by Courts

The judicial treatment of equitable reliefs in arbitration, particularly with respect to Section 28, has evolved through several significant rulings of courts. In Food Corporation of India v. Chandu Construction, the Supreme Court held that the arbitrator, being a creature of contract, must operate within the four corners of the agreement and that if he deals with matters outside the contract, he commits a jurisdictional error.

Subsequently, in Associate Builders v. Delhi Development Authority (“Associate Builders”), the Supreme Court held that a contravention of Section 28 would constitute a patent illegality, which would form grounds for challenge of an arbitral award under Section 34 of the Act. The later ruling of Ssangyong Engineering & Construction Co. Ltd. v. NHAI (“Ssyangyong Engineering”) affirmed this position. It is to be noted that patent illegality as a ground for challenge of an award under Section 34 of the Act can only be argued in respect of arbitrations seated in India.

This view has also been taken by the Delhi High Court, in MSTC Ltd. v. Jain Traders, where it set aside an award on grounds of patent illegality due to the grant of equitable relief by the arbitrator without the parties’ authorization. The Court emphasized that an arbitrator cannot decide based on personal notions of equity and fairness, particularly in such a manner, and that it goes contrary to the specific contractual terms.

In another Delhi High Court decision in the matter of Prakash Atlanta v NHAI, the Division Bench upheld the single Judge’s decision describing the award allocating responsibility between parties 50:50 as a ‘panchayati solution’ and setting it aside as it granted equitable relief in the absence of any contractual provision authorizing such relief.

Supreme Court Judgment in Batliboi

A significant departure from this line of thought occurred in Batliboi. In this case, the Supreme Court was considering a civil appeal against a decision of the Division Bench of the Bombay High Court under Section 37 of the Act whereby the High Court had allowed the appeal and set aside the underlying arbitral award. While the Court dismissed the appeal and upheld the setting aside of the award on other grounds, it held the following while explaining the scope of Section 34 of the Act:

“An award based on little evidence or no evidence, which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Every arbitrator need not necessarily be a person trained in law as a Judge. At times, decisions are taken acting on equity and such decisions can be just and fair should not be overturned under Section 34 of the A&C Act on the ground that the arbitrator’s approach was arbitrary or capricious.”

However, the Supreme Court did not specifically deal with Section 28(2) of the Act or provide any guidance on whether there would still be any requirement for party authorization. As evident from the above extract, this decision has created uncertainty regarding the treatment of awards grounded in equity, as it remains unclear whether an award that grants equitable relief without the parties’ explicit authorization would be susceptible to being set aside under Section 34 for constituting patent illegality.

The Need for Harmonization

In Power Grid Corporation of India Ltd. v. Ranjit Singh & Co. (“Power Grid”), the Delhi High Court discussed the decision in Batliboi, particularly its departure from the earlier rulings in Associate Builders and Ssangyong Engineering. The Court in Power Grid acknowledged that Batliboi had relaxed the strict interpretation of Section 28(2) of the Act, allowing for the possibility of the award not being set aside merely on the ground that equitable reliefs had been granted. In Power Grid, the facts did not necessitate a resolution of this issue, as the arbitral tribunal had explicitly noted that the respondent had provided no evidence or material to support its claim. As a result, the Power Grid decision stopped short of providing any guidance on the ambiguity surrounding the scope of equitable reliefs in arbitration.

There is a pressing need for clarity on the issue, particularly regarding whether an award that relies on equity in the absence of party authorization would be vulnerable to being set aside under Section 34 as a patent illegality. The tension between the rigid stance in earlier cases and the flexibility introduced in Batliboi necessitates a harmonized approach to the application of equitable principles in arbitration.

Conclusion

Without clearer judicial guidance, there is a risk that arbitral tribunals may face uncertainty when deciding whether to adopt an equitable approach. This could undermine the effectiveness of arbitration as a dispute resolution mechanism, especially in cases where parties seek to ensure that the award is based strictly on legal principles and contractual obligations. A more consistent and predictable approach is essential to provide certainty to both parties and tribunals involved in arbitration.

In India, commercial contract disputes are typically resolved based on the terms of the contract itself, rather than on principles of equity or fairness. While equity can play a role in some contexts, especially in public-private contracts or where there are specific statutory provisions, it is not generally a primary basis for resolving commercial contract disputes. Justice, in its purest form, requires not only equality before the law but also equity in its application. Justice without equity can lead to situations where individuals are treated the same, even when their circumstances demand different treatment to achieve fairness.

To ensure that arbitration remains a reliable and predictable process, Indian arbitration law must provide clear guidelines on the use of equity in arbitral awards. This will foster greater confidence in arbitration as a dispute resolution mechanism and ensure that arbitral tribunals operate within a well-defined legal framework

This article was originally published in Bar & Bench on 12 June 2025 Co-written by: Lalan Gupta, Partner; Aboli Mandlik, Associate. Click here for original article

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