SECTION 28(3) AND THE LAW OF PLEADINGS: FINDING THE EQUILIBRIUM IN ARBITRAL ADJUDICATION

This post is authored by Yajur Sood, independent legal practitioner, practicing before the Punjab and Haryana High Court.

INTRODUCTION

Arbitration, as a dispute resolution mechanism, is anchored in the principles of party autonomy as well as procedural fairness. In an arbitration, the parties set out the dispute before the arbitrator through their pleadings and by adducing evidence. The arbitrator, like in any other civil proceeding, adjudicates applying the standard of proof followed in civil law, i.e., the balance of probabilities. This ensures that no party in the proceeding is taken by surprise, and the adjudication remains within the four corners of the case presented by the parties. In parallel, Section 28(3) of the Arbitration and Conciliation Act, 1996 (‘ACA’) obligates an arbitrator to ‘decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction’.

A question arises. What is the position of law in cases where the parties’ pleadings and evidence fail to take the plea of contractual provisions? Can the arbitrator apply such provisions on its own, disregarding the law of pleadings and natural justice? Since the courts have adopted a pro-arbitration stance post Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India [2019], understanding this balance becomes critical for both practitioners and arbitrators. This blog explores that tension and suggests a reconciliation.

PLEADINGS AND STANDARD OF PROOF

In an arbitral proceeding, pleadings define the scope of the dispute, to which the jurisdiction of the arbitrator remains circumscribed. The pleadings set out differences between the parties on facts and differences on questions of law, and the arbitrator is obligated to adjudicate within these boundaries. Natural justice requires that a party should not be taken by surprise by a fact, or evidence not specifically pleaded, for if the same is allowed, it deprives the affected party of an opportunity to respond.  The Supreme Court in the case of  M/s. MSK Projects (I) (JV) Ltd v. State of Rajasthan [2011], reiterated the principle that an award which goes beyond the pleaded case of the parties is liable to be set aside. Similar findings were given by the Supreme Court recently, in SEPCO Electric Power Construction Corp. v. GMR Kamalanga Energy Ltd. [2025], where the arbitrator’s bypassing of explicit contractual notice requirements through an unpleaded theory of waiver, resulted in the award being set aside. The next question that logically follows the aforesaid is, how the facts pleaded are to be established. The burden of proof in civil cases is satisfied when a fact is established to be more probable than not. This standard equally applies to arbitral proceedings as well. An arbitrator is obligated to examine the evidence produced and draw reasonable inferences, within the boundaries of the pleaded case.

SECTION 28(3): ARBITRATOR’S DUTY

Section 28(3), ACA mandates that the arbitral tribunal “shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.” The provision ensures that an award adheres to ‘contractual bargains’ and commercial expectations. The Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. held that an award contrary to contractual terms is “patently illegal” and must be set aside under Section 34. In Associate Builders v. DDA [2014], the Court reiterated the principle that arbitrators cannot substitute contractual clauses with principles of equity. Even recently, in Ssangyong Engineering & Construction Co. Ltd. v. NHAI [2019], the Court clarified that disregarding contractual terms violates Section 28(3) and renders an award liable to be set aside. The reference to trade usages also complements this framework by rooting decisions in commercial and business realities. Thus, Section 28(3) acts as a statutory check on arbitral discretion, binding tribunals to both contract and commercial realities.

DIFFERENT NORMATIVE FUNCTIONS

The law of pleadings and Section 28(3) serve different functions. Pleadings serve a procedural function in a judicial proceeding, i.e., they limit the jurisdiction and prevent parties from being taken by surprise, thereby upholding the principle of audi alteram partem. However, Section 28(3) serves a substantive function, i.e., it ensures that awards uphold business expectations and the commercial intent of the parties. Thus, it reinforces the evolution of modern contract law, i.e., the shift from medieval notions of morality and status-based obligations to contemporary notions of party autonomy, where enforceability stems from consent and commercial expectations. An arbitrator who decides in accordance with the pleadings but neglects contractual terms upholds procedural correctness but succumbs to substantive illegality. On the other hand, applying contractual terms beyond the pleaded case compromises the principle of natural justice.

RECONCILING THE TWO-PURPOSIVE INTERPRETATION OF PLEADINGS AND CONTRACTUAL CONTEXTUALISATION

Whether pleadings are to be given primacy or contractual clauses under Section 28(3) of the Arbitration and Conciliation Act, 1996, creates a tension. This tension is accentuated where the arbitration concerns technical disputes, where at times neither the counsel nor the arbitrators are subject matter experts. The challenge for courts to confront is whether an award can be sustained where an arbitrator has (a) failed to consider relevant contractual provisions because the parties did not specifically plead the contractual clauses or grounds arising out of such contractual clauses, or (b) alternatively has applied those contractual clauses despite their absence from being specifically pleaded.

Indian courts have stressed the need for liberal construction of pleadings, as long as the other party was provided with a fair notice. Therefore, pleadings referencing breach, delay, or termination implicitly encompass associated contractual clauses such as force majeure or liquidated damages, even if not explicitly pleaded. Contextual interpretation of contractual terms supports a seamless interplay of pleadings with the principle enshrined in Section 28(3). Although the standard of evidence followed in arbitration is a balance of probabilities only, Section 28(3) comes into play by limiting the boundaries of what may be considered ‘probable’. For instance, in the case of Batliboi Environmental Engineers Ltd.  v. Hindustan Petroleum Corporation Limited [2023], the Court ruled that if a contract bars payment of escalation, evidence proving escalation costs cannot result in an award, as the same would breach Section 28(3), and be liable to be set aside. Thus, contractual provisions perform the function of being normative filters for examining evidence in support of claims. Thus, by applying the principles of contractual contextualisation, an arbitrator can accurately outline the pleaded dispute, contextualise the same through contract clauses reasonably connected to the issue, even in the absence of express pleadings, and apply trade usages to reconcile ambiguities without rewriting contracts.

Indian courts also support this approach. In McDermott v. Burn Standard [2006], the Court affirmed that arbitrators are bound by contractual terms, but retain discretion to interpret, subject to reasonableness and fairness. In Associate Builders v. DDA, and in Ssangyong Engineering v. NHAI, the Court held that ignoring terms of the contract violates Section 28(3), whereas going beyond the pleaded case violates natural justice both independently merit the award being set aside.  

Comparative insights from other jurisdictions also support such a reconciliation. For example, Section 46(1) of the English Arbitration Act 1996 mandates an award in line with contractual terms, while Section 14 of the aforementioned act ensures tribunals are within the bounds of reference. English jurisprudence also accepts that a court may adjudicate on an issue that properly arises within the scope of the dispute, even where the parties’ formulation of that issue is less than precise as it can be seen in Lesotho Highlands Development Authority v. Impregilo SpA [2005]. Further, the Singapore Court of Appeal in PT Prima v. Kempinski [2012] held that an arbitrator must be grounded in the pleadings, and matters not pleaded are not automatically outside the scope of the arbitrator, unless the parties have had the opportunity to contest them.

A reconciliation lies in adopting the principle provided in the proviso to Order XLI, Rule 2 of the Code of Civil Procedure, 1908, which states, ‘the Court shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of contesting the case on that ground’. Thus, under Section 28(3), contractual terms should apply even if not pleaded, but only after the arbitrator has given the parties an opportunity of hearing on the same. This approach on the part of the arbitrator ensures an adherence to principles of natural justice, while also ensuring that the mandate of substantive justice under Section 28(3) of the Arbitration and Conciliation Act, 1996 is followed.

CONCLUSION

Reconciling Section 28(3) with the law of pleadings requires an arbitrator to exercise measured discretion. The arbitrator’s consideration of the contract should not neglect procedural fairness. On the other hand, pleadings cannot restrict the arbitrator from giving effect to business expectations. Section 28(3) should thus act as a substantive compass for arbitrators to guide their reasoning, and not as a procedural handicap. Indian arbitration jurisprudence should move towards a balance where fairness safeguards due process, and contractual contextualisation preserves the sustainability of the award within India’s pro-arbitration framework.