Section 11 of the Indian Arbitration and Conciliation Act 1996 (Act) provides for the procedure for appointment of arbitrators.

Section 33 of the Act provides for correction and interpretation of arbitral award by the arbitrator.

Section 34 of the Act enables the court to set aside an arbitral award on the grounds specified in the section.

The Directorate of Income Tax, one of the departments of the Ministry of Finance of Government of India (DIT), entered into an agreement with two advertising companies (Ogilvy & Mather Private Limited and Hindustan Thompson Associates Limited), both collectively referred to as the Agency, for the advertisement of a Voluntary Disclosure of Income Scheme (VDIS) introduced by the DIT.

The Agreement required the Agency to publish the advertisements in the two newspapers that offered rates stipulated by the Directorate of Advertising and Visual Publicity (DAVP). In the event that the newspapers did not offer DAVP rates, the rates had to be negotiated and finalised with the prior approval of the Ministry of Finance. However, the two newspapers on the DAVP panel offered DAVP rates only for advertisements by DAVP directly; and not for advertisements through agencies. Therefore, the rates offered to agencies were much higher than the DAVP rates.

The Agency and the two newspapers therefore entered into negotiations and agreed a negotiated rate, which was approved by the DIT. In Phase I of advertising, the Agency published the advertisements in the same two newspapers and billed the DIT as per the negotiated rates. At this stage, the DIT did not raise any objections. However, in Phase II of advertising, the DIT stated that no releases were to be made in newspapers on the DAVP list which did not offer DAVP rates. Nevertheless, by then the Agency had incurred the cost of the releases in the two newspapers.

On raising further bills, the Agency received amounts after retrospectively deducting amounts paid by the DIT from earlier bills at the DAVP rates and not at the negotiated rates. According to the Agency, the bills were short-paid without disclosing any reasons; while the DIT maintained that the payments had to be made only at the DAVP rates. Therefore, the Agency filed an application before the Delhi High Court under section 11 of the Act for the appointment of an arbitrator, who was subsequently appointed.

The arbitrator made an award, awarding smaller claims of the Agency but rejecting the largest claim relating to the balance amount of the bills short-paid by the DIT.

The Agency filed an application under section 33 of the Act before the arbitrator on the ground that the arbitrator had omitted or wrongly rejected the major claim of the Agency. However, the arbitrator rejected the Agency's application. The Agency filed a petition under section 34 of the Act before the Delhi High Court to set aside the award.

The Delhi High Court set aside the award to the extent that it rejected the Agency's claim of short payment of bills and remanded the matter to arbitration for a fresh decision limited to that claim.

On examining the correspondence between the parties that formed a part of the arbitral record, the court observed that the arbitrator had failed to take notice of evidence demonstrating that the DIT had approved the negotiated rates for the two newspapers. Therefore, the Delhi High Court set aside the award and regarded it as being patently illegal and contrary to Indian public policy, as it had omitted to take account of the evidence on record and had erroneously rejected a claim.

This decision illustrates what may happen where arbitrators do not deal carefully with evidence. After this decision, arbitrators may take more care to take note of the evidence placed on the arbitral record and also offer reasons for rejecting certain evidence.