Delhi High Court Verdict In Airports Authority Of India Case Is A Renewed Call To Uphold The Spirit Of The Arbitration Act

However, despite the usual platitudes and ubiquitous lip service, recent experience would show that not only are our courts regularly willing to widen the otherwise limited scope of Section 34 of the Arbitration and Conciliation Act, 1996 (Act), they are also inclined to interfere and reverse tribunal findings as late in the day as at the stage of curative.

Amidst most courts favoring judicial interference, the recent decision of the single-judge bench of the Delhi High Court dated 18.10.2024 in Airports Authority of India versus Delhi International Airport Ltd/Mumbai International Airport Ltd (O.M.P. (COMM) 17/2023), while upholding the majority opinion of the arbitral tribunal, reposes much required confidence in the adjudication process of the tribunal. The judgment is landmark not only for its meticulous tracing of the actual import of Section 34 but also for not taking an alternative view, especially given that the award translates to substantial losses to the coffers of the Airports Authority of India (AAI)- a State instrumentality- in a high stakes dispute.

Brief Overview of the Dispute

The dispute in the present case revolves, inter alia, around the definition of the terms 'Revenue' and 'Projected Revenue' under the Operation, Management and Development Agreement (OMDA) executed between AAI and the Delhi International Airport Ltd/Mumbai International Airport Ltd (hereinafter, collectively referred to as the JVCs), as also the computation of the 'Annual Fee' payable to AAI and the heads of income which were liable to be excluded therefrom.

The JVCs asserted that 'Annual Fee' ought to be payable on 'Revenue' as defined in the OMDA and not on the basis of the gross receipts credited to the 'Profit & Loss Account'. For this purpose, the JVCs pleaded certain deductions from the 'Annual Fee' on account of, inter alia, (i) capital costs; (ii) income derived from sources other than 'Aeronautical Services' as well as 'Non-Aeronautical Services' (hereinafter, Other Income); and (iii) 'exclusions' in the form of payments received by the JVCs from the provision of electricity, water, sewerage etc. to the extent of amounts paid for such utilities to third party service provider.

AAI, on the other hand, contended, inter alia, that since the term 'Revenue' is exhaustive, it would mean the cumulative value of all revenue of the JVCs recognised in the 'Profit & Loss Account' without any deduction for taxes payable and no deductions or exclusions- except the five specific exclusions permitted under the definition of 'Revenue'- are permissible.

Decision of the Arbitral Tribunal

The award consisted of two parts- one made by the Presiding Arbitrator which was the minority view; and the other made by the other two Co-Arbitrators which comprised the majority view, and therefore, the decision of the Tribunal.

Holding that both parties had misconstrued the obligations of the JVCs under the OMDA, the majority opinion took the view that the obligation of the JVCs was to share 'Projected Revenue' as opposed to 'Revenue' and then proceeded to locate the meaning of this expression as occurring in the OMDA. Thereafter, the majority held, inter alia, that for computing the 'Annual Fee' payable by the JVCs, the amounts representing the 'costs relating to aeronautical assets' have to be excluded from the 'Projected Revenue' of the JVCs. On the other hand, the minority view plainly held that 'Annual Fee' is payable on the 'Revenue' as defined in OMDA.

On the aspect of deduction of Other Income, while the minority opinion rejected the plea of deduction observing that the JVCs would have been in no position to earn Other Income but for the grant embodied under the OMDA, the majority held that amounts falling under Other Income are liable to be excluded for computing the 'Annual Fee' payable by the JVCs.

Proceedings Before the High Court

Appearing for AAI, the Solicitor General submitted, inter alia, that the majority opinion went on a roving inquiry, one which was never suggested by the parties and regarding which the parties were not put to notice. Per the Solicitor, the premise that the obligation to pay 'Annual Fee' is answered not with reference to 'Revenue' but with 'Projected Revenue' finds expression for the first time in the majority view and was not the case of either of the parties before the Tribunal. AAI thus contended that the decision of the majority amounted to a rewriting of the contract between the parties, and fell within the ambit of Section 34 of the Act in so far as it contained decisions on matters beyond the scope of the submission to arbitration. AAI further submitted that this was a fit case for the High Court to invoke its powers conferred under Section 34 and set aside the award.

The JVCs responded by pleading that the interpretation of the term 'Revenue' for calculating 'Annual Fee' constituted the core of the dispute between the parties, and it was therefore imperative for the tribunal to identify the constituents of 'shareable revenue'. The JVCs pointed out that it had been their consistent case that computation of 'Annual Fee' revolves around the contractual obligation of providing 'shareable revenue' and in order to identify the streams of income which would form part of 'shareable revenue', the tribunal had no option but to examine the concepts of 'Projected Revenue' and 'Business Plan' which stood incorporated in the OMDA.

In addition to their arguments on merits, the JVCs pleaded that AAI's challenge required the High Court to evaluate the validity of the award as if the High Court proceedings were akin to a regular appeal. In doing so, the JVCs placed reliance on judicial pronouncements which expound upon the contours of the Section 34 power.

Reasoning of the High Court

After noting the submissions of the parties and terms of the contract in detail, the Bench comprising Justice Yashwant Varma undertook the arduous task of delineating leading judgments of the apex court as well as comparative jurisdictions which trace the limits of Section 34 of the Act. Thereafter, Justice Varma's description of Section 34 powers provides a faithful representation of the real purport of the provision:

”180. Thus, the fundamental and default rule which informs Section 34 is of minimal curial intervention. This rule is in turn based upon the principle of party autonomy and resting upon parties having entrusted the dispute resolution function to a body of their own choosing. The validity of an award would be liable to be tested on the principles of patent illegality and which in turn would require a curative court to come to the firm conclusion that the decision rendered is so perverse and irrational that no reasonable person would have arrived at that conclusion. An award would be equally susceptible if it ignores the evidence on record or where its conclusion be ex facie contrary to the uncontested terms of the contract.”

Having done so, Justice Varma proceeded to hold that the view taken by the majority was based on a cumulative consideration of the legislative objective of the Act, the envisaged commercial enterprise agreed between the parties and the rule of business efficacy. The minority opinion, on the other hand, took a diametrically opposite view in holding that the project agreements could not guide the OMDA. Per Justice Varma, narrow construction of a definition clause, as undertaken by the presiding arbitrator, would lead to an interpretation which would struck at the very root and foundation of the commercial principles underlying the contract.

Most importantly, Justice Varma holds that the reasoning adopted by the majority 'not only appears to be a view which could have possibly been taken, but it, in any case, cannot be said to suffer from the vice of unpardonable perversity.' Having said so, Justice Varma concludes that the dissenting award does not constitute an enforceable award and the majority award alone can be considered valid for execution.

Accordingly, the High Court found no ground to interfere with the awards as rendered by the tribunal and dismissed the petitions under Section 34.

Justice Varma's crucial judgment on the contours of Section 34 comes at a time when arbitration- and its viability for business interests- faces an existential test in India. Of late, bureaucracy and risk-averse behaviour implicit in the functioning of Indian Public Sector Undertakings has ensured that arbitration, despite being an expensive and time-consuming process, is unable to reduce the burden on the courts. This has invariably delayed the final resolution of disputes which threatens to render the very purpose of the Act otiose. Courts would, therefore, do well to take a leaf out of Justice Varma's verdict in cases where tribunal awards reflect party autonomy and are well-reasoned.

The author is an Advocate practicing in New Delhi, views are personal.