The Bombay High Court has reaffirmed the limits of an arbitral tribunal’s intervention in disputes arising from a commercial agreement. The court observes that arbitrators can neither read provisions into the agreement contrary to law nor base its observations outside the agreement and the applicable law.
In the Nayara Energy v M/s Mahendra Sales Services (2026) case, the court was hearing a petition to set aside an arbitration award.
Mahendra Bagrecha’s proprietorship firm Mahendra Sales Services (the firm), was appointed as a franchisee of Nayara Energy. Under the dealership agreement, Bagrecha would operate a retail motor fuel filling service station, while under the franchise deal, Bagrecha would bear all the costs of construction and setting up the retail outlet.
A lease dead for land owned by Bagrecha was also signed between the parties, stating that Nayara Energy wished to set up the retail outlet.
In the franchise agreement, Bagrecha was required to achieve certain sales targets that Nayara Energy had set and had the right to terminate for any breach.
Soon after, Nanita Jain expressed interest to Nayara Energy to replace Bagrecha in the firm. Following this, Nayara Energy wrote to its district supply officer, describing Jain as the proprietor of the firm and requested the issue of the necessary licence. No official document was executed between Jain and Nayara Energy to this effect.
The dispute arose when Nayara Energy terminated the franchise agreement by writing to both Bagrecha and Jain, for failure to meet minimum sales targets. Previous letters addressed to both Bagrecha and Jain had called on them to improve sales, performance and service of the outlet.
Jain then sent a legal notice to Nayara Energy naming Bagrecha as the entity delaying execution and implementation of agreement terms.
Nayara Energy replied that there is no privity of contract with Jain as the formalities required for Jain to replace Bagrecha at the firm had not been completed. The notice also pointed to Jain’s evasion of execution of documents to have contributed towards the breach of terms, leading to termination of the franchise agreement.
During the arbitration proceedings, the firm sought compensation of INR4.5 million (USD47,174) for various losses and expenses incurred in setting up the outlet.
Nayara Energy again reiterated the absence of a contract wiith Jain and that she never executed the required documents to officially replace Bagrecha. As per Nayara Energy, Bagrecha was handling the business of the retail outlet, which remained unoperational despite follow-ups and reminders.
Nayara Energy also contested the compensation claims as being untenable and also filed their own counterclaim.
The final award was passed in favour of Mahendra Sales Services, finding existence of a contract between Jain and Nayara Energy and awarding INR400,000 as compensation for loss of investment and depreciation to machinery and equipment. The termination letter was also set aside for not giving an opportunity for Jain to be heard.
Before the high court, Nayara Energy again reiterated its contentions of absence of privity of contract. It also contested the compensation awarded for loss of investment and depreciation to the machinery and equipment, pointing it to be in contravention of the agreement, whereby the firm’s proprietor, Bagrecha, would bear all costs.
It was also contended that setting aside the termination for violation of principles of natural justice was contrary to law as the principles cannot be read into a commercial contract.
Mahendra Sales Services, in its submissions before the court, contended that the supply of products by Nayara Energy to the firm in itself was enough to establish privity of contract.
The firm also argued Nayara Energy’s right of termination did not entitle them to terminate at will or without cause. It was argued that a franchise agreement included various scenarios to combat failure to meet sales targets, and that termination was not mentioned as a consequence of such failure.
In deciding the case, the court held there to be privity of contract between the parties on the basis of expressed interest, communication to the district supply officer and delivery of consignment thereafter.
The court did not agree with setting-aside the termination letter on the grounds of violation of principles of natural justice, observing that the “notion of fairness and equity cannot be read into contract dehors the terms of the commercial contract”. The court observed that the arbitrator could not have restored the dealership.
The court also observed that the findings of the arbitrator in the case were contrary to the franchise agreement between the parties, and that the award of INR400,000 as compensation is also patently illegal and violative of applicable law.
The court observed that “the arbitrator could not have directed restoration of the franchise agreement and simultaneously granted damages holding the termination to be illegal”. The court thus set aside the arbitration award.
