Misunderstanding Of Basic Contractual Framework Vitiates Arbitral Award: Delhi High Court

The Delhi High Court bench of Justice Sachin Datta has held that an award with misreading/misunderstanding of the basic contractual framework vitiates it at its root and makes it vulnerable to challenge under Section 34(2)(b)(ii) and 34(2A) of the Arbitration and Conciliation Act, 1996.

Section 34(2)(b)(ii) provides a basis for challenging an arbitral award on the grounds of public policy.

Section 34(2A) is reproduced below:

“(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.”

The High Court referred to the Supreme Court's decision in DMRC Ltd. v. Delhi Airport Metro Express (P) Ltd and held that mere disagreement with an arbitral award does not warrant judicial interference provided the award aligns with commercial sensibilities and the contract's terms. The Supreme Court held that an interpretation of a contract by an arbitral tribunal should be such that it is within the realm of reasonable possibilities. If an interpretation is so far-fetched that no reasonable person could accept it, the award might be deemed perverse.

The bench also referred to Ssangyong Engg. & Construction Co. Ltd. v. NHAI (2019) 15 SCC 131 where it was held that the construction of contractual terms primarily falls within the domain of the arbitrator. The High Court reiterated that a tribunal's erroneous interpretation of a contract is not a ground for interference unless it is so unreasonable that no fair-minded person would consider it a possible view.

In Indian Oil Corpn. Ltd. v. Shree Ganesh Petroleum (2022) 4 SCC 463, it was noted by the Supreme Court that if an arbitrator steps outside the bounds of the contract or addresses issues not assigned to them, it constitutes a jurisdictional error.

Similarly, the High Court referred to Satyanarayana Construction Co. v. Union of India (2011) 15 SCC 101, where it was held that an arbitrator cannot alter the agreed contract terms or grant a higher rate than that stipulated in the contract. Such an act of exceeding authority justifies overturning the award by the High Court.

The High Court referred to its decision in Union of India v. Jindal Rail Infrastructure Ltd where it was held that a commercial contract cannot be disregarded simply because it has become commercially unviable for one party.

Brief Facts:

The petitioner filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award dated March 7, 2022, issued by the learned sole arbitrator.

The matter pertained to dispute which arose from Otsuka Chemicals (India) Private Limited (Respondent) engagement of Trans Engineers India Private Limited (Petitioner) for the expansion of its plant in Rajasthan. The Respondent issued two purchase orders totaling Rs. 71 crores for the project. An agreement was also executed which outlined the Petitioner's responsibilities to supply, erect, manufacture, and commission various equipment and materials for the project.

Disputes emerged concerning the Petitioner's claim for payment for additional work performed at the Respondent's request. The Petitioner issued 26 proforma invoices for these additional works which the Respondent refused to pay. This led to arbitration. The Petitioner argued that the additional works were based on written modifications, changes, and revisions to the Piping and Instrumentation Drawings (P&IDs) which expanded the original scope of work.

The Petitioner sought Rs. 28,37,09,384 for the additional works, Rs. 5,76,30,239 for statutory dues and taxes, Rs. 1,50,00,000 for arbitration costs, and pendente lite and future interest. Conversely, the Respondent counterclaimed Rs. 3,55,00,000 for liquidated damages due to delayed completion, Rs. 43,81,278 for pending and remedial work, and Rs. 21,67,000 for cost differences.

In the arbitration, the Petitioner maintained that the original scope of work was based on the P&IDs dated July 26, 2016 and claimed entitlement to additional payments for major modifications made after this date. The Respondent, however, contended that the scope changes should be measured from the agreement date, January 20, 2017, and that the P&IDs of August 20, 2016, were part of the contractual basis.

The arbitrator's award rejected both the Petitioner's claims and the Respondent's counterclaims. It held that the petitioner failed to prove entitlement to the claimed amounts as the P&IDs and the purchase orders did not support the additional work claims. The counterclaim for liquidated damages, pending work, and cost differences were also rejected due to lack of evidence and procedural issues. The tribunal held with a "Nil" award requiring each party to bear its own costs.

The Petitioner approached the High Court and challenged the arbitral award. It argued that the arbitrator overlooked the contractual agreement and evidence, misinterpreted the MoM dated September 15, 2016 and disregarded the basis for additional payments under the agreement.

Observations by the High Court:

The High Court referred to the minutes of the meeting which set out the scope of work for the petitioner/claimant. These minutes clearly specified that the work should be performed based on the P&ID drawings finalized by 26.07.2016.

The High Court noted that the POs issued on 16.09.2016 for various components of the project made explicit reference to the P&IDs dated 26.07.201 and omitted any mention of the P&IDs dated 20.08.2016. This omission suggested that the purchase orders were based on the earlier set of drawings rather than the later revisions.

The High Court noted that the Agreement executed on 20.01.2017 further supported this interpretation. Clause 12.2 of the Agreement stated that any changes beyond the contractual terms would warrant additional payment based on mutually agreed rates.

Despite this, the arbitral tribunal concluded that the offer dated 30.08.2016 and the P&IDs dated 20.08.2016 were foundational to the agreement. The High Court held that the tribunal's finding that the claimant executed work based on both sets of P&IDs was inconsistent with the established contractual documents. The High Court criticized the award for misinterpreting the contractual framework and noted that the minutes of the meeting, the POs, and the final Agreement clearly established the P&IDs dated 26.07.2016 as the basis for assessing the work and any subsequent variations.

The High Court held that the arbitral award failed to consider the fundamental contractual context and erroneously redefined the agreement's foundation. It held that the misreading renders the award vulnerable to challenge under Section 34 of the Arbitration Act. The High Court held that while it cannot reassess factual findings, it must intervene if an award is based on a fundamental misinterpretation of evidence or contractual terms.

The High Court held that the arbitral tribunal made an error in interpreting Clause 2.4 (renumbered as Clause 2.8) of the agreement. It held that the tribunal's interpretation was deemed implausible as it misread the contractual framework.

The High Court held that the award neglected the contractual framework. Consequently, the High Court held that the arbitral award was unsustainable. It set aside the award.

Case Title:Trans Engineers India Private Limited Vs Otsuka Chemicals (India) Private Limited

Case Number: O.M.P. (COMM) 310/2022, IA Nos.11536/2022 & 1013/2023

Advocate for the Petitioner: Mr. Arvind Nigam, Sr. Advocate along with Ms. Binsy Susan, Ms. Neha Sharma, Ms. Palak Kaushal, Ms. Ayushi Thakur, Mr. Amogh Srivastava, Mr. Vishal Habloni and Mr. Arijeet Shukla

Advocate for the Respondent: Mr. Jayant Mehta, Sr. Advocate along with Mr. Amit Dhingra, Mr. Rohit Mahajan, Ms. Anu Shrivastava, Mr. Akshat Aggarwal, Ms. Kesang T. Doma and Mr. Udit Dediya

Date of Judgment: 22.07.2024

Click Here To Read/Download Order or Judgment