Arbitral Award In Violation Of Contractual Bar Is Patently Illegal: Calcutta High Court

Justice Bhattacharyya held that:

“Since the parties are bound by the contract, which itself is the basis of the reference to arbitration, the Arbitrator was also bound by the terms of the contract between the parties as embodied in the bid document.”

Sub-section (2-A) of Section 34 addresses the ground of "patent illegality" as a basis for setting aside an arbitral award in domestic arbitrations seated in India.

Brief Facts:

Union of India (Petitioner) approached the High Court and challenged an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The arbitrator granted several claims made including 2596 Conductor Rail Support Insulators, Value Added Tax (VAT) at different rates on the awarded sum, and interest. The Petitioner argued that the interest awarded contradicted Clause 15.4 of the tender document which explicitly barred claims for interest against the purchaser.

Further, the Petitioner contended that Section 31(7) of the Arbitration Act binds the arbitrator to the contract terms agreed upon by the parties, including any agreement to waive interest claims. According to Section 28(3) of the Arbitration Act, the arbitrator is obligated to consider the contract terms and relevant trade practices in making their decision.

Regarding claim no. 2, the Petitioner argued that Clause 21 of the Special Conditions of Contract (SCC) denied the claimant benefits related to statutory levies or customs duties that changed after the original delivery period expired. The Petitioner argued that the contract allowed for short closure of the supply order without financial consequences under Clause 5, which permitted a 30% leeway.

The Petitioner contended that the arbitrator exceeded jurisdiction by granting reliefs based on the assumption that the short closure breached the contract without considering the contractual provisions permitting such actions.

Observations by the High Court:

The High Court noted that the first component of the claim involved the non-supply of 2596 items by the claimant for which the arbitrator awarded Rs. 35,04,600/- based on the claimant's contention that it was ready with the materials which were allegedly tailor-made and stored for Metro Railway use. The High Court noted several flaws in this decision. It was held that the claimant failed to provide evidence proving the availability of these materials as required. Further, it noted that the claimant procures rather than manufactures these items which made it implausible for them to require four months to supply.

Moreover, the High Court noted that the award failed to consider the contractual option allowing the purchaser to refuse up to 30% of the required materials.

Regarding claim nos. 2 and 3, which pertained to VAT on items not supplied, the High Court held that these claims lacked basis since VAT is levied on supplied goods, and as no goods were delivered. Similarly, the award failed to account for Clause 21 of the General Conditions of Contract which prohibited claims for statutory levy changes after the original delivery period.

The High Court also noted that the arbitrator decided to award interest. However, it noted that Clause 15.4 of the bid document expressly prohibited such claims against the purchaser. Despite the arbitrator's authority under Section 31(7) of the Arbitration Act to award interest unless otherwise agreed, the High Court held that the specific contractual bar negated this authority.

The bench held that:

“Section 31(7) empowers the arbitrator to include in the awarded sum interest at certain rates. However, Section 31(7)(a) commences with the rider “Unless otherwise agreed by the parties...”. Hence, since in the present case not only was there no agreement to impose interest but a specific bar to such imposition, the arbitrator traversed beyond the agreement and acted contrary to the agreement in granting interest against the award-debtor”

Therefore, the High Court allowed the appeal and set aside the arbitral award.

Case Title: Union Of India Vs M/S J K Enterprise

Case Number: AP/105/2021 IA NO: GA/1/2021, GA/2/2021

Advocate for the Petitioner: Mr. Satyendra Agarwal, Adv. Mr. B. Bag, Adv. Mr. G. Malik, Adv.

Advocate for the Respondent: Mr. Malay Kr. Das, Adv. Mr. Sourav Chatterjee, Adv.

Date of Judgment: 11.07.2024

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