Delhi High Court Upholds Arbitral Award In Dispute Over Interpretation Of “Revenue” In Agreement Between AAI, DIAL/MIAL

Brief Facts:

AAI filed two petitions under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the arbitral awards dated 16.07.2022. These awards were rendered in disputes between the AAI and Mumbai International Airport Ltd (MIAL) / Delhi International Airport Ltd (DIAL).

The Airports Authority of India (Amendment) Act, 2003, introduced Section 12-A, which enabled AAI to lease airport premises. The Government of India invited bids for the infusion of private equity at the Delhi and Mumbai airports. AAI selected Joint Venture Companies (JVCs) as private partners for the operation, maintenance, upgradation, modernization, and development of these airports. The concession for Chhatrapati Shivaji Maharaj International Airport was awarded to a GVK-led consortium. MIAL was incorporated as a 'Joint Venture Special Purpose Vehicle'. A GMR Group-led consortium was the successful bidder for Indira Gandhi International Airport.

Pursuant to the bidding process, the successful bidders and AAI executed the Operation, Management and Development Agreement (OMDA) on 04.04.2006. One of the provisions of OMDA related to the Annual Fee which was payable by the JVC to AAI and constituted the revenue-sharing model.

The dispute arose between AAI and JVCs over the meaning and scope of the term "Revenue" under the OMDA. The OMDA had explained Revenue to mean “all pre-tax gross revenue”. The 'Projected Revenue' was identified as that which stood disclosed in the Business Plan. The disagreement was whether the JVCs were required to pay the Annual Fee based on their gross receipts or the "Revenue" defined in OMDA, which included certain exclusions.

DIAL and MIAL had been paying Annual Fee based on gross receipts credited to their Profit & Loss accounts until they discovered a mistake in 2016 and 2019. They alleged to have overpaid due to a misinterpretation of their obligations and sought restitution for the excess payments made to AAI, amounting to Rs. 6663.25 crores for DIAL and Rs. 3582.92 crores for MIAL. The JVCs prayed that the Tribunal declare that the Annual Fee should be calculated based on "Revenue" as defined in OMDA, not on gross receipts. They also sought a refund of the excess amount paid. The AAI opposed their contentions and submitted that Revenue was to be given its ordinary meaning under OMDA and that the Respondents did not overpay.

The Minority opinion rendered by the Arbitral Tribunal rejected AAI's prayer to refund the 'excess payments' made under a mistake. The Majority opinion decided in favour of AAI. It affirmed that the Annual Fee should be calculated based on "Revenue" defined in the OMDA.

The Tribunal declared that costs related to aeronautical assets were to be excluded from the JVC's shareable revenue when calculating the Annual Fee. The JVC was entitled to a refund for excess payments made from 21.06.2015. Power, utility, property taxes, security equipment maintenance costs, and payments received for utilities (to the extent paid to third-party providers) were to be excluded from the “pretax gross revenue”. Capital asset sale revenue was also excluded. "Other Income" not from Aeronautical or Non-Aeronautical Services was also excluded. An Independent Auditor was appointed to audit JVC's accounts from 21.06.2015 to recalculate the Annual Fee.

The Petitioner challenged the award dated 16.07.2022 before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996.

Submissions:

By AAI:

• The Tribunal misinterpreted the definition of "Revenue" under the OMDA.
• The reliance on "Projected Revenue" by the Majority in the Impugned Award was erroneous since neither DIAL nor MIAL argued for such an interpretation. The Tribunal's departure from the definition of "Revenue" to "Projected Revenue" constituted a violation of due process, as the parties were not notified nor given an opportunity to address this new line of reasoning.
• The procedure adopted by the Co-Arbitrators was violative of Section 34(2)(a)(iii) of the Act as was explained by the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. vs. NHAI, where it was observed that if a tribunal considers materials without giving the parties an opportunity to comment, it constitutes a violation of due process.
• The opinion of the Co-Arbitrators also violates Section 34(2)(a)(iv) since their opinion would constitute decisions rendered on matters beyond the scope of arbitration itself. The Majority not only failed to decide the principal dispute which was the interpretation of “Revenue” as defined in the OMDA, it also proceeded to frame reliefs based on an interpretative exercise of the contract which had not even found mention in the notice of arbitration, pleadings or submissions of the claimants.
• While holding that the definition of “Revenue” was irrelevant, the Tribunal has embarked upon an expedition which amounts to rewriting of the contract itself.
• The direction for quantification by the Independent Auditor constitutes an impermissible delegation of a core judicial function by the Tribunal in contravention of the fundamental policy of Indian law.

By DIAL & MIAL:

• Both parties inadvertently calculated and paid the Annual Fee based on the gross receipts reflected in their Profit & Loss accounts, rather than “projected Revenue” stated in their Business Plans. This misinterpretation has led to payments exceeding their contractual obligations under the OMDA.
• AAI's challenge to the Impugned Award seeks to treat this matter as a regular appeal, overlooking the strict confines of Section 34 of the Arbitration Act. Several judgments have categorically held that the courts should not interfere with an award merely because an alternative view on facts and interpretation of contract exists. As far as Section 34 is concerned, the position is well-settled that the Court does not sit in appeal over the arbitral award. Reliance was placed upon Dyna Technologies vs. Crompton Greaves Limited. wherein it was observed that: "Arbitral awards should not be interfered with in a casual and cavalier manner... The mandate under Section 34 is to respect the finality of the arbitral award...".
• The courts must defer to the Tribunal's interpretation unless it is found to be “perverse” or unreasonable. The findings of the Tribunal on the nature of 'shareable revenue' were based on a plausible interpretation of the OMDA.

Observations:

On the Scope of Section 34

At the outset, the court observed that the recourse against an award, as constructed in terms of Section 34 of the Act, is not intended to be an appeal on the merits of the dispute. It provides a supervisory role for the court and not an appellate one. The role of the court under this section is confined to assess whether the award passed is contrary to fundamental policy of Indian law, patently illegal, perverse and beyond the scope of the arbitration agreement. “The patent perversity thus must be of a degree which exposes the very foundation of the award to an assertion of inexcusable fallacy as opposed to errors of judgment.”, the court stated.

The court further observed that:

“The remedy under Section 34 is thus neither intended to be resorted to correct an error of judgment nor is it liable to be wielded to review an award basis an independent formation of opinion of what the court may consider to be more eminent or justified. Interference with an award would also not be justified on an alternative interpretation or view which could be legitimately harboured.”

The court went on to observe that: “it is trite law that the court while examining a challenge to an arbitral award is not exercising powers akin to that of an appeal. The award as rendered must lead the court to find that one or more of the grounds of challenge set out in Section 34(2) stand attracted”. It is in order to underline the narrow confines of the challenge that the Legislature uses the expressions “only if” and “the Court finds that” in Section 34.

The court further referred to the amendment of 2016 which incorporated the term patent illegality and observed that the court stands conferred with the additional power of setting aside an award if it finds the same to be vitiated by a patent illegality which is manifest or ex facie apparent. Of equal significance is the Proviso which stands erected by virtue of sub-section (2A) to Section 34 and which introduces a note of caution by providing that no award shall be set aside merely on the ground of an erroneous application of the law or upon reappreciation of evidence.

The court referred to the Supreme Court decision in DMRC Ltd. vs. Delhi Airport Metro Express (P) Ltd. wherein it was held that in essence, the ground of patent illegality is available for setting aside a domestic award if the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at it; or the construction of the contract is such that no fair or reasonable person would take; or, that the view of the arbitrator is not even a possible view.

The court further referred to another judgment of the Supreme Court in Dyna Technologies vs. Crompton Greaves Limited in which it was held that the mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.

Interpretation of “Revenue”

The court grappled with the interpretation of the term “revenue and the expression “all pre-tax gross revenue” in the OMADA. The presiding arbitrator while interpreting this term adopted a strict rule of interpretation.

The court further referred to the Supreme Court judgment in DLF Universal Ltd. Vs. Town and Country Planning Deptt. wherein rules for interpreting the terms of the contract were discussed. The court held that the primary test of interpretation of contracts is of ascertainment of purpose and objective on the basis of which parties formed the contract. The decision thus reiterates that courts are not bound by the mere letter or the word forming part of the contract.

The court disagreed with the interpretation given by the presiding arbitrator and held that In the considered opinion of this Court, the view expressed by the Presiding Arbitrator with respect to the question of “Revenue” is based on an extremely narrow and constricted construction of the OMDA and fails to bear in consideration the interplay and reciprocity which parties intended to convey while alluding to Project Agreements as constituting the family of nine agreements which formed a compendious bargain. If the view as expressed by the Presiding Arbitrator were to be accepted, it would essentially amount to factors such as recovery of costs as well as the principles of tariff fixation rendered wholly otiose and completely excluded from consideration.

The court further observed that while narrowly construing a definition clause, the Presiding Arbitrator has essentially canvassed an interpretation which struck at the very root and foundation of the commercial principles underlying the contract.

The court further held that in the considered opinion of the Court, the test of shareable revenue which came to be ultimately adopted by the Majority clearly appealed to reason and was correctly identified as assuming a position of centrality and crucial to the resolution of the dispute which stood raised.

Based on the above, the court came to the conclusion that the aforesaid reasoning 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 as propounded by courts. It would, therefore, be fundamentally incorrect for AAI to contend that the Co-Arbitrators had constructed an entirely new case, re-written the contract or travelled outside its contours.

Other Income

The court observed that the 'shareable revenue' was liable to be quantified on the basis of the income that the JVC would have earned from the charges which it imposed and collected in the course of performing and providing Aeronautical and Non-Aeronautical Services. The investment activity which it independently undertook was not in discharge of any contractual obligation. The investments which the JVC ultimately chose to make was in order to undertake a prudent deployment of surplus funds and was clearly a business activity which the JVC undertook of its own volition and which was neither guided by nor subject to regulation by the OMDA or the other Project Agreements.

The court held that the Co-Arbitrators have principally borne in consideration the contractual obligations which stood imposed upon the JVCs to hold that income earned independent of 'Airport Business' could not have formed part of 'shareable revenue'. The view so expressed appealed to reason and had been taken on a reasonable and plausible interpretation of the contractual terms. The court concluded that said finding cannot be said to be either manifestly erroneous or suffering from the vice of perversity.

The Role of the Independent Auditor

The court noted that the Independent Auditor under the OMDA while undertaking the exercise of computation has not been entrusted with any essential decision-making power. It is to merely quantify the amounts payable to the claimants based upon the findings in the Award and the material existing on the record. The Court noted that what the law proscribes is the power to make a decision or the arbitral tribunal abdicating its obligation to render a judgment on the disputes which may be raised.

The court concluded that the submission of AAI that fresh evidence would have to be led and presented before the Independent Auditor or that a core decision-making function had been placed upon that authority was erroneous. The Court thus, and on an overall conspectus of the aforesaid, held that the argument of abdication or delegation of an essential adjudicatory function could not be sustained.

The court upheld the award and dismissed the petitions.

Case Title: Airports Authority of India vs. Delhi International Airport Ltd. & Anr.

Case Numbers: O.M.P. (COMM) 17/2023 & IA Nos. 785/2023, 787/2023; O.M.P. (COMM) 18/2023 & IA Nos. 788/2023, 790/2023

Counsel for the Petitioner: Mr. Tushar Mehta, SG with Mr. Raghav Shankar, Mr. Prateek Arora, Mr. Karan, Mr. Anubhab Atreya, Ms. Rishieka Ray, and Ms. Pallavi Misra, Advs.

Counsel for the Respondents: Mr. Sandeep Sethi, Sr. Adv. with Mr. Milanka Chaudhury, Ms. Naina Dubey, Ms. Harshita Agarwal, Mr. Ravneet Singh, Mr. Lynn Pereira, and Mr. Chaitanya Kaushik, Ms. Seema Mehta, Mr. Vikalp Mudgal, Mr. Saket Sikri, Ms. Priya Singh, Advs. for Delhi International Airport Ltd.

Mr. Kapil Sibal, Mr. Rajiv Nayyar, Sr. Advs. with Mr. Saket Sikri, Mr. Mahesh Agarwal, Mr. Manu Krishnan, Ms. Pallavi, Mr. R.K. Mohit, Mr. Ajay Pal Singh, Mr. K.V. Srinivas, Ms. Priya Singh, Mr. Vignesh Raj, Mr. Ankur Chawla, Mr. Aditya Samaddar and Mr. R.K. Mohit Gupta, Advs. for Mumbai International Airport Ltd.

Date of Judgment: 18.10.2024