The Court Can't Re-Appreciate Evidence Or Re-interpret Contracts While Examining Patent Illegality : Calcutta High Court

Brief Facts:

A gas purchase and sale agreement dated May 11, 2011, was entered between the petitioner, SRMB Srijan Limited (SRMB) and Great Eastern Energy Corporation Ltd (the Claimant/Respondent). The agreement was to supply Coalbed Methane Gas to SRMB until April 30, 2034. SRMB was required to adhere to a Minimum Guaranteed Offtake (MGO) and to compensate for any shortfall in MGO by paying for the entire amount.

During the contract period, SRMB sought a waiver of the MGO Clause. SRMB alleges that a consensus was reached where the MGO was to be waived with an increase in the gas purchase price by Rs. 5/- per SCM. The Claimant disputed this by asserting that no concluded agreement was made for the waiver. Based on the presumed waiver of MGO, SRMB stopped renewing the bank guarantee required under the contract. Consequently, the Claimant suspended the gas supply after notifying SRMB of the non-renewal of the guarantee. On July 7, 2014, SRMB terminated the agreement in writing, alleging the stoppage of gas supply as the reason.

The Claimant invoked the arbitration clause in the agreement. The Arbitral Tribunal passed an award declaring that SRMB's termination was invalid and that the agreement was still in effect. The Tribunal permitted the Claimant to remove its underground gas pipelines from SRMB's premises with a seven-day notice. SRMB was ordered to pay the Claimant Rs. 58,50,45,169/- plus interest at 7% per annum from February 2015 until the award date. SRMB's counterclaims were rejected.

SRMB, aggrieved by the arbitral award, filed the present application challenging the award under Section 34 of the Arbitration and Conciliation Act, 1996.

Arguments

By the Counsel appearing for the Petitioner/SRMB

• The Tribunal erred in concluding that the correspondence between April 22, 2014, and May 29, 2014, did not result in an agreement to waive the MGO Clause. The correspondence from April 24, 2014, was an offer to waive the MGO Clause upon a price increase. The May 29, 2014 letter from SRMB was an acceptance, thus forming a concluded contract. The Tribunal's treatment of SRMB's response as a counter-offer is perverse and constitutes a patent illegality.
• The Tribunal incorrectly found the termination notice dated July 7, 2014, wrongful. SRMB was entitled to terminate under Section 39 of the Indian Contract Act due to the claimant's refusal to perform its obligations.
• The Tribunal's award of Rs. 58,50,45,169/- in damages is not based on any evidence of loss or damage suffered by the claimant.
• The agreement dated May 11, 2011, is vitiated by fraud and misrepresentation for suppressing Show-Cause Notices and court orders, and laying the pipeline in violation of these orders constitutes fraud, making the agreement voidable. Reliance was placed on Venture Global Engineering vs. Satyam Computer Services Limited [(2010) 8 SCC 660] to support the contention.

By the Counsel appearing for the Claimant/Respondent

• The scope of interference under Section 34 of the 1996 Act is limited to specific grounds. The court cannot sit in appeal over the Arbitral Tribunal's decision, especially if there is no patent illegality, and reappreciation of evidence is not permitted. The Counsel placed reliance on Ssangyong Engg. & Construction Co. Ltd. vs. NHAI [(2019) 15 SCC 131] and Govt. of NCT of Delhi vs. Shonk Technologies International Ltd. [2023 SCC OnLine Del 8323].
• The Tribunal's findings were within the pleadings. The allegation of modification/novation of the MGO Clause was duly dealt with in the claimant's rejoinder. The Tribunal correctly concluded that the MGO Clause was not waived.
• The termination by SRMB was in breach of the Gas Purchase Agreement as none of the contractual grounds for termination occurred.
• SRMB's failure to renew the required bank guarantee resulted in a notice of discontinuance of gas supply issued by the claimant. This suspension did not constitute a breach that would justify termination of the contract under Section 39 of the Contract Act. The Tribunal had correctly observed that the suspension of gas for three days with prior notice in the event SRMB does not renew the bank guarantee does not go to the root of the contract.
• The agreement between the claimant and SRMB was valid and subsisting until April 30, 2034. SRMB wrongfully terminated the agreement, which constituted a breach. The claimant was entitled to recover damages for the loss it would have incurred had the contract continued for its full term.
• SRMB's claim that the claimant suffered no loss or damage due to the contract termination was rejected by the Tribunal. The Tribunal noted that 28.48% of the gas produced in 2015-2016 had to be flared due to the lack of market caused by the termination of the contract by SRMB. The very fact that the gas had to be flared up ipso facto means that there was no buyer for the same. Thus, the flaring up of gas is itself proof of loss.
• The claimant is entitled to the lost revenue from SRMB, the minimum whereof is as stipulated in the MGO value. The Supreme Court in Dwarka Das vs. State of M.P. [(1999) 3 SCC 500] has deemed it fair to assess future loss or profit expected to be obtained from a wrongfully terminated contract based on guesswork.

Observations by the Court:

At the outset, the Court observed that the two letters, dated April 24, 2014 (from the claimant) and May 29, 2014 (from SRMB), did not constitute an offer and acceptance, thereby forming a contract and that they must be considered in the broader context of several correspondences between the parties. The Court further observed that the April 24, 2014 letter, viewed by SRMB as an independent offer, was actually a response to SRMB's earlier request of April 22, 2014, seeking waiver of the MGO Clause. The use of the words “may” and “only if” in the April 24 letter indicated it was not a firm offer but conditional on SRMB accepting the price increase.

Further, the Court observed that SRMB's reply on May 16, 2014 did not accept the claimant's terms but instead called the price increase “unreasonable” and sought unconditional waiver of the MGO Clause, which amounted to a repudiation of the claimant's offer. The Court noted that even if the April 24, 2014 letter was treated as an offer, SRMB's response on May 16, 2014 was a repudiation, as it refuted the price increase, which was a non-negotiable condition of the offer. The court found that by May 19, 2014, the claimant's offer of April 24, 2014 had been conclusively repudiated by SRMB. The Court observed that the Claimant's response on May 23, 2014, offering a reduction of the MGO from 80% to 75% further indicated that the original offer to waive the MGO was no longer available. By May 29, 2014, the original offer of April 24, 2014 was effectively closed. Thus, the Court held that SRMB's attempt to revive the April 24, 2014 offer in its May 29, 2014 letter by purportedly “accepting” it was legally untenable as the offer was no longer valid. In this context, the court observed:

“It is not the law that after an offer has been repudiated and becomes deadwood, the same can be revived at any point of time by the offeree by arbitrarily choosing a prior date when the offer was made to "accept the same", even after much water has flown and the parties have irreconcilably repudiated the offer.”

The court noted that the correspondences showed no clear consensus on the waiver of the MGO, meaning no concluded contract was formed. In this context, the court, referring to Ssangyong Engg., observed that the court cannot interfere by re-appreciating evidence under the proviso to Section 34(2-A) of the Arbitration Act, 1996. It held that there is no basis for the court to interfere with the Tribunal's finding that there was no waiver of the MGO Clause.

The next issue before the court was whether SRMB's termination of the contract was lawful. The court noted that termination was outside the purview of the agreement, as the contract required a prior three-month period of non-supply before termination, which was not provided. The contract also stipulated that the MGO Clause would operate regardless of emergencies or stoppages in gas supply, and SRMB was obligated to maintain a Bank Guarantee, which it failed to renew. Instead of renewing the Bank Guarantee, SRMB issued a termination notice on July 7, 2014. Thus, SRMB's termination was wrongful, being de hors the provisions of the agreement. The court also observed that SRMB's reliance on Section 39 of the Contract Act was misplaced, as the suspension of the gas supply did not go to the root of the contract.

The court also rejected SRMB's argument that there was no evidence of loss to justify the award of damages, stating that the MGO Clause does not require proof of actual future loss.

The court, thus, upheld the award, finding no infirmity or patent illegality.

Case Title: Great Eastern Energy Corporation Ltd vs SRMB Srijan Ltd

Case Number: EC/80/2023 [GA/2/2023]; AP-COM/281/2024 [Old No: AP/833/2022]; IA NO: GA/2/2023

Appearance:

Petitioner: Mr. Aspi Chinoy, Sr. Adv., Mr. Sakya Sen, Adv., Mr. A. Das, Adv., Mr. P. Roy, Adv., Mr. Akash Yadav, Adv.

Respondent/Claimant: Mr. Ratnanko Banerji, Sr. Adv., Mr. Sarvapriya Mukherjee, Adv., Mr. K. Kejiriwal, Adv., Mr. V.V.V. Sastry, Adv., Mr. D. Basu, Adv., Mr. D. Saha, Adv.

Date of Judgment: 05.09.2024