Delhi High Court Upholds Use Of Rule Of Contra Proferentem By Arbitrator While Interpreting Contract

The bench of Justice Chandra Dhari Singh remarked that the rule of contra proferentem can be regarded as a ‘general canon’ of interpretation that exists independently of national legal systems.

Thus, the Court upheld the findings and interpretation of the Contract made by the Sole Arbitrator after applying the rule of contra proferentem, to hold the award debtor guilty of breach of contract.

The respondent, M/s Skipper Ltd, was engaged by the petitioner, Flowmore Ltd, as the manufacturer and supplier of certain goods in relation to a Construction Contract, and an agreement was executed between the parties. The petitioner, thereafter, terminated the contract with the respondent, alleging delay and breach of contractual obligations.

The respondent invoked the arbitration clause and the parties were referred to arbitration. The Sole Arbitrator passed an award in favour of the claimant/ respondent, Skipper Ltd. The Arbitrator held that the petitioner, Flowmore Ltd, was guilty of breach of contract, which had resulted in the respondent, Skipper Ltd, incurring losses.

Against this, the petitioner filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court, contending that the arbitral award was ex-facie erroneous, suffered from patent illegality, and was contrary to the fundamental policy of Indian Law.

The petitioner, Flowmore Ltd, averred that there was misappreciation of vital evidence by the Arbitrator and thus, the award was liable to be set aside. Flowmore added that the Arbitrator’s finding that it was responsible for the delay under the Contract, was incorrect and erroneous.

It argued that as per the Purchase Order issued by it, the respondent was to ensure submission of complete and correct documents/ drawings. Thus, any delay in supply of goods on account of delayed submissions of documents, was the respondent’s fault, the petitioner pleaded. The petitioner, Flowmore, added that the Arbitrator had failed to consider the same and had wrongly interpreted the Purchase Order.

Therefore, it averred that the Arbitrator had wrongly shifted the responsibility for the delay in submission of documents/drawings to the petitioner and had virtually re-written the terms of the contract between the parties.

In support of the award, the respondent, Skipper Ltd, contended that the Arbitrator had meticulously dealt with the documents on record to conclude that the petitioner, Flowmore, had taken over the responsibility for supply of documents/drawings.

Referring to the case of Associate Builders vs. Delhi Development Authority (2014), where the Supreme Court had clarified the meaning of “Fundamental Policy of Indian Law”, the High Court ruled, “It is therefore clear that the decisive test is that first, the learned arbitrator had to adopt a judicial approach; second, the principles of natural justice had to be upheld; third, the decision must not have been egregious, or rather, perverse.”

Perusing to the arbitral award, the Court said, “In the instant case, the Petitioner claimed that the Arbitrator misappreciated the evidence on record, but a careful reading of the Award proves that the Arbitrator has rightly relied on relevant evidence to adjudicate.” Thus, it concluded, “..the Petitioner cannot have the benefit of the ‘ground of patent illegality’ to assail the impugned Arbitral Award under Section 34 of the Act, 1996.”

The bench added that “patent illegality” is an illegality that goes to the root of the matter but excludes the erroneous application of the law by an arbitral tribunal or re-appreciation of evidence by an appellate court. “The learned Arbitrator has clearly considered all the relevant evidence of record, and the ground of “misappreciation of evidence” does not stand validated as per the submissions of the Petitioner and under the observation of the Court. The impugned Award is in no way in contravention of the Arbitration and Conciliation Act, 1996, to reason that the Award is patently illegal,” the Court said.

Reiterating that reappreciation of evidence cannot be permitted under the ground of patent illegality in a Section 34 petition, the bench held that the decision of the Arbitral Tribunal is final and the Court is not required to carry out an exercise of re-adjudicating the disputes.

While dealing with the petitioner’s contention that the Arbitrator’s interpretation of the Purchase Order/ Contract was wrong, the Court said that, while determining a dispute, the clauses in a Contract, in principle, should be construed contra proferentem by the arbitrator, i.e., the clauses must be interpreted against the party that drafted it.

“The rule of contra proferentem can be regarded as a ‘general canon’ of interpretation that exists independently of national legal systems. In ICC Case No. 7110, (1999) 10 ICC Bulletin 39, 44, the Arbitral Tribunal made it clear that it is a ‘general principle of interpretation widely accepted by national legal systems and by the practice of International Arbitral Tribunals, including ICC Arbitral Tribunals, that in case of doubt or ambiguity, contractual provisions, terms or clauses should be interpreted against the drafting party,” the bench said.

“In the instant case, The Petitioner had drafted the Purchase Contract in which the Respondent was a signatory. The Learned Arbitrator having observed various interpretations of the contract, chose to endorse the interpretation that is favorable to the Respondent”, the Court held. It added: “The application of the rule of contra proferentem validates the learned Arbitrator’s findings and observations regarding the interpretation of the contract so as to decide the question of breach of the contract.”

The Court concluded that the petitioner, Flowmore Ltd, had failed to prove that the Arbitral Award was patently illegal, and contrary to the fundamental policy of Indian Law. It further held that, on the application of the rule of contra proferentem, the Purchase Order was rightly interpreted by the Arbitrator. Concurring with the findings of the Arbitrator that the petitioner was guilty of breach of contract, which resulted in the respondent/claimant incurring losses, the Court dismissed the petition.

Case Title: Flowmore Ltd versus Skipper Ltd

Citation: 2023 LiveLaw (Del) 119

Counsel for the Petitioner: Mr. Arvind Verma, Sr. Advocate with Mr. Abhinav Mukerji, Ms. Pratishtha Vij, Mr. Rohan Jaitley, Ms. Neoma Vasdev, Mr. Pratham Mehrotra, Ms. Mahima Chauhan and Ms. Smridhi Sharma, Advocates

Counsel for the Respondent: Mr. Nikhil Nayyar, Sr. Advocate with Mr. Saurav Gupta and Ms. Sugandha Batra, Advocates

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