Section 31(3) of the Indian Arbitration Act 1996 (1996 Act) places an obligation on arbitrators to state the reasons upon which the award is based.

The Indian Arbitration Act 1940 (1940 Act) (repealed by the 1996 Act) did not have a corresponding provision.

In 1985, Directorate of Industries, Uttar Pradesh (appellant) invited bids for the supply of zinc sulphate to the agriculture department. The appellant received several bids of which the lowest bid was made by M/s Combined Chemicals Ltd (respondent). The appellant approved the bid and an acceptance letter (Letter) was issued to the respondent. In another tender notice, the appellant received a lower bid (as compared to the respondent's bid) and decided to postpone the implementation of the Letter.

The tender form through which the bid was made by the respondent contained a provision that any dispute that arose between the parties be settled by arbitration. On learning about the deferment of acceptance, the respondent filed a petition under section 20 of the 1940 Act for the appointment of an arbitrator. The trial court held that a contract was executed between the parties and appointed an arbitrator. Against this order of the trial court, an appeal was filed by the appellant in the Allahabad High Court (High Court). Pending the appeal, the appellant also filed an application in the High Court to stay the arbitral proceedings. This application was dismissed.

Meanwhile, the arbitrator made an ex parte award and allowed the respondent's claim and therefore the High Court dismissed the appeal as the arbitrator had already made an award. The trial court ordered enforcement of the award. The appellant therefore, filed an appeal against this enforcement order in the High Court.

The High Court dismissed the appeal and the appellant approached the Supreme Court of India.

The following issues were to be determined by the Supreme Court:

The Supreme Court partially allowed the appeal and referred the dispute back to the arbitrator.

As regards the existence of a contract between the parties, the Supreme Court held that a contract had come into existence as the bid given by the respondent was accepted and a Letter was issued treating it as a contract. Thus the respondent was entitled to invoke the arbitration clause contained in the tender form.

The Supreme Court held that the appellant's contention that the arbitrator acted in violation of the principles of natural justice was without merit as the appellant did not bother to participate in the arbitration proceedings and the arbitrator had every right to proceed with the matter and make the award.

However, on the issue of the validity of the award, the Supreme Court observed that the arbitrator did not state the reasons for his award. The Supreme Court relied on its decision in Raipur Development Authority v Chokhamal Constractors (1989) 2 SCC 721 in which it held that "the decision of every judicial and quasi-judicial body should be supported by reasons". Therefore, the Supreme Court partly allowed the appeal on the ground that the arbitrator did not state any reasons for the award. As a result, the Supreme Court directed the arbitrator to decide the dispute afresh.

The 1940 Act did not stipulate that the arbitrators should state reasons while making an award. However, certain judicial precedents under the 1940 Act held that awards made without stating reasons did not satisfy the test of fairness and non-arbitrariness. The issue was remedied by section 31 of the 1996 Act. By this decision, the Supreme Court has been consistent with the 1996 Act and has reiterated that an arbitral award must be supported with reasons.

State of Uttar Pradesh and others v. M/s Combined Chemicals Company Pvt Ltd. Civil Appeal No.5236 of 2007.