Disputed Contract, Can't Be Challenged U/s 34 Of Arbitration Act Unless finding are Unreasonable: Delhi High Court

Brief Facts:

Noble Chartering Inc. (“Noble”), a Hong Kong-based company engaged in owning, chartering, and operating vessels, had its principal place of business at Mass Mutual Tower, Hong Kong.

On August 20, 2008, Noble and SAIL entered into a Contract of Affreightment (“COA”). Under this agreement, SAIL was to load 1,800,000 MT of coking coal, with a ±5% tolerance, over three years from September 2008 to August 2011. Shipments were to be made in parcels of 70,000 MT, with an option for Noble to vary this amount by 5%, on a 'Fairly Evenly Spread' (“FES”) basis. SAIL had the option to extend the shipment period by three months, provided it declared this extension five months before the COA's end.

Initially, SAIL declared shipments for September and November 2008 but did not make further declarations until May 2009. Due to the sub-prime crisis affecting steel manufacturing, SAIL cited economic difficulties as a reason for the delays. Noble urged SAIL to declare shipments and warned of potential legal action if it failed to do so.

On September 29, 2009, the parties entered an Addendum to the COA allowing loading from Australian ports and extending the COA until February 2012. The Addendum included provisions for declaring shipments on an FES basis between May 2009 and March 2010, with deferred shipments to be performed after March 31, 2010. During the extended period, SAIL provided eight shipments but cited force majeure due to heavy rains and flooding in Australia for delays. Despite this, SAIL managed two shipments in April and May 2011. Noble contended that SAIL failed to meet its shipment obligations under the extended COA.

SAIL agreed to extend the COA until September 30, 2013, but sought to reduce the shipment quantity by 5%. Noble's solicitors confirmed this extension but insisted on FES-based performance. When SAIL terminated the COA on January 2, 2013, Noble contested the termination as wrongful and sought arbitration under the Maritime Arbitration Rules.

SAIL challenged the arbitration reference and sought a declaration that the arbitration clause did not cover the dispute. A suit was filed to restrain the arbitration proceedings, and Noble initiated a damages suit before the Delhi High Court (“High Court”). Subsequently, the parties agreed to refer the disputes to a sole arbitrator. Retired Justice S.S. Nijjar was appointed as the sole arbitrator, and both SAIL and Noble withdrew their court litigation.

The Impugned Arbitral Award:

The arbitration continued with Noble claiming damages for breaches, including the non-declaration of stems on an FES basis. Noble sought compensation for losses and incidental expenses. The sole arbitrator examined the evidence and determined that SAIL's termination of the COA was unjustified under Clause 62 and that the COA's terms required adherence to an FES basis for shipments. The arbitrator also found that SAIL was not entitled to terminate the COA without cause and that Noble was entitled to claim losses incurred due to the breaches. The sole arbitrator awarded a sum of USD 8,564,908.60 along with 3% interest in favor of Noble, to be paid by SAIL.

The Impugned Judgment:

Aggrieved by the decision of the sole arbitrator, SAIL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the High Court. The single judge partially granted SAIL's challenge to the arbitral tribunal's award. The judge identified a typographical error in the awarded sum and accepted SAIL's argument that the sole arbitrator had misinterpreted Clause 62 of the COA and erroneously assumed that the power to unilaterally terminate would render the clause void. The sole arbitrator's interpretation that Clause 62 needed to be read ejusdem generis (of the same kind) with other provisions was rejected. It was held that the clause was to be read literally. The single judge found the sole arbitrator's interpretation of termination grounds flawed and set aside the damages awarded for post-termination failures. Only the pre-termination stem damages were upheld. The method for calculating damages was deemed reasonable, but the interest rate awarded was adjusted to LIBOR plus 3% per annum.

Noble's Submissions:

Noble argued that the single judge improperly re-adjudicated the dispute and exceeded the scope of Section 34 of the Arbitration Act by substituting his judgment for that of the sole arbitrator. Noble claimed that challenges to the award should only be based on conflicts with public policy as defined in prior Supreme Court rulings. Noble also contended that the sole arbitrator's interpretation of Clause 62 was not perverse and did not warrant interference under Section 34. Additionally, the sole arbitrator's compliance with the amended Section 28(3) was appropriate and that the single judge's adjustment of the interest rate was unjustified.

SAIL's Submissions:

SAIL supported the single judge's finding that the sole arbitrator's interpretation of Clause 62 was incorrect and led to an erroneous award. SAIL argued that this misinterpretation rewrote the contract and violated public policy. It further contested the single judge's decision to uphold certain damages despite setting aside the award based on Clause 62's interpretation, citing that modifying an arbitral award was impermissible. SAIL also challenged the assumption of damages for the December 2012 stem, questioned the validity of the damages calculation based on spot market rates, and noted the lack of evidence from Noble to substantiate its claimed losses.

Observations of the High Court:

The High Court observed that SAIL's primary challenge focused on Clause 62 of the COA. SAIL claimed that this clause provided it with a right to terminate the COA at will as it was a "no-fault" termination clause. However, the sole arbitrator interpreted Clause 62 differently, concluding that it did not allow SAIL to terminate the COA at will and that the clause might be rendered void under Sections 23 and 28 of the Indian Contract Act, of 1872. The single judge dismissed the arbitrator's interpretation and stated that a clause enabling unilateral termination could not be deemed void on grounds of public policy. Noble did not argue before the sole arbitrator that Clause 62 was void. Instead, it contended that SAIL could not terminate the COA without reason or due to its own default.

Therefore, the question before the High Court was whether the sole arbitrator's interpretation of Clause 62 was flawed and whether this rendered the award contrary to public policy under Section 34(2)(b)(ii) of the Arbitration Act.

The High Court held that it was wrong to contend that the COA's language could only be plainly interpreted. It held that a contract must be interpreted as a whole, with the intent of the parties ascertained by reading the written contract in its entirety rather than through a literal interpretation of isolated clauses. The sole arbitrator had undertaken this comprehensive approach.

The High Court further held that the interpretation of a contract is within the jurisdiction of the sole arbitrator, which is the final adjudicator on such matters. The arbitrator's decisions on contract construction are not to be interfered with unless his view is deemed implausible. Reliance was placed on Assam State Electricity Board & Ors. v. Buildworth (P.) Ltd. [(2017) 8 SCC 146], which upheld that contract interpretation falls within the arbitral tribunal's domain and is not subject to merit review unless the interpretation is unreasonable.

Further, the High Court referred to Associate Builders v. Delhi Development Authority[(2015) 3 SCC 49], where the Supreme Court confirmed that an arbitrator's reasonable construction of a contract term cannot be the sole ground for setting aside an award. Based on these case laws, the High Court concurred that the sole arbitrator's interpretation of Clause 62 was plausible and based on the COA's context.

The High Court held that the single judge failed to consider that the arbitral award was part of an international commercial arbitration, where challenges on the ground of patent illegality are not permissible as per Section 34(2A) of the Arbitration & Conciliation Act. Instead, challenges must be based on whether the award conflicts with the public policy of India.

Further, it was held that public policy grounds for challenging an arbitral award are very narrow. Misinterpretation of contract terms does not automatically equate to a breach of public policy. The Supreme Court in Ssangyong Engineering and Construction Co. Ltd. v. National Highways Authority of India [(2019) 15 SCC 13] held that public policy does not cover mere errors of interpretation but is limited to violations of fundamental principles of Indian law or morality.

The High Court also addressed the single judge's modification of interest rates awarded by the sole arbitrator. The sole arbitrator had awarded 3% interest from the date of COA termination and 9% future interest. The High Court found no basis for modifying this award and held that the sole arbitrator's decision did not conflict with public policy and did not involve impermissible dual interest rates.

As a result, the High Court allowed Noble's appeal and set aside the impugned judgment of the single judge. The parties were left to bear their own costs.

Case Title: Noble Chartering Inc. vs Steel Authority of India Ltd.

Case No.: FAO(OS) (COMM) 121/2019 and CM Appl. 26007/2019

Advocate for the Appellant: Mr V.K. Ramabhadran with Mr J.K. Ashar, Mr Abhishek Singh, Mr Sudhanshu Sikka and Ms Nancy Thapar.

Advocate for the Respondent: Mr Raj Shekhar Rao with Mr Ashish Tiwari, Mr Anurag Tiwari and Mr Sahib Patel

Date of Pronouncement: 15.07.2024

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