Interpretation Of Contract Primarily A Matter For Arbitrator To Determine, Scope Of Section 34 Arbitration Act Limited: Delhi High Court

A Division Bench of the Delhi High Court recently allowed restoration of an arbitral award, noting that it was not within the scope of the Single Judge u/s 34 of A&C Act to re-interpret the contract between the parties and substitute the finding of the Arbitrator’s despite it being plausible and well-reasoned.

The court referred to Ssangyong Engineering and Construction Co. Ltd. v. NHAI and said:

“…a change that has been brought in by the Amendment Act, 2015 is that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short that the arbitrator's view is not even a possible view to take”.

Applying the test laid down in Associate Builders v. DDA on the scope of interference u/s 34 on the ground of ‘public policy’, it was observed that the Arbitrator had given a plausible interpretation to the contract terms which was not against ‘public policy’ and did not shock the conscience of the court.

The Bench, comprising Justices Suresh Kumar Kait and Neena Bansal Krishna, added that if an Arbitrator wanders beyond the contract and deals with matters not allotted to him, he commits an error of jurisdiction and would fall within the new ground of ‘patent illegality’ added u/s 34(2A).

Initially, the respondent had entered into an agreement for development of land owned by the appellant. In the process, tenants occupying part of the land were to be evicted and sanction plans obtained.

As per the appellant, the respondent failed to obtain necessary sanctions in time to commence work. As such, it revoked the SPA and GPA (PoAs) executed in favour of respondent’s representatives.

Aggrieved by this revocation, the respondent had initiated arbitration proceedings. In response, the appellant had terminated the contract.

The Arbitrator had observed that the PoAs were revocable as they only conferred limited rights on the respondent for development of the project (essentially eviction of tenants). It was further noted that the respondent failed to fulfil its end of the bargain, as over a period of 8 years, it only got occupants of 14 tenancies evicted.

Opining that the termination period was to be considered from the date of commencement of agreement, the Arbitrator also held that the agreement had been validly terminated. The Single Judge set aside the award.

Before the Division Bench, the appellant contended that the Single Judge went beyond the scope of Section 34 by re-appreciating merits. Two issues arose viz. whether PoAs were revocable and whether the contract was validly terminated.

Disapproving of the Single Judge’s reappreciation of facts, the Bench approved the Arbitrator’s interpretation of the contract terms in a commercial sense. It reiterated,

“The scope of grounds on which an Arbitral Award can be challenged under Section 34 of the Act is limited”.

It was further added that, “…interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law.”

The second issue turned on the interpretation of clauses of the contract. On this aspect, the Division Bench again concurred with the Arbitrator’s view i.e., counting the termination period from the date when entire tenanted area was vacated would have given the respondent indefinite time for obtaining necessary sanctions, but this interpretation could not be afforded to any development contract.

Mr. Sanjiv Sen, Sr. Advocate with Mr. Ujjal Banerjee, Mr. Akash Khurana, Ms. Anjali Singh & Ms. Radha Gupta, Advocates appeared for appellant

Mr. Ritin Rai, Sr. Advocate with Mr. Soham Ksumar, Ms. Prathana Singhania & Mr. Abel Thomas, Advocates appeared for respondent

Case Title: Raghunath Builders Pvt. Ltd. v. Anant Raj Limited

Citation: 2023 LiveLaw (Del) 1119

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