Arbitrator Cannot Apply 'Trade Usages' Against The Express Understanding Of The Parties: Calcutta High Court

The bench of Justice Shekhar B. Saraf held that an arbitral award that is passed after ignoring the terms of the agreement falls within the rubric of 'patent illegality'. It held that an arbitral award can also be set aside for being against the most basic notions of justice when the arbitrator foists upon an unwilling party a bargain which it did not enter into and creates a new contract for the parties.

The Court also held that an arbitrator cannot invoke Article 14 while deciding a contractual dispute between the parties for he is the creature of the contract, derives his jurisdiction from it, and must be confined by the four-walls of the contract. It held that arbitrator cannot also invoke principles of 'public law' while deciding dispute between private parties.

Facts

Pursuant to a tender by the petitioner, the parties entered into a contract in the year 2013, whereby the respondent was to primarily handle dry bulk cargo at Berth No 4B, Haldia Dock Complex ('HDC') at Kolkata Port Trust (KoPT). While floating the tender, the petitioner had fixed the ceiling price at Rs. 52/- per ton and the respondent was awarded the tender at Rs. 51.91/- per ton.

Clause 8.2.1 was general escalation clause and provided and Clause 8.2.2 provided for price adjustment. Clause 8.1 provided for determination of the rate for handling of break bulk cargo, which though not the predominant subject of the Agreement or Tender, may have arisen in certain circumstances. It is here that the Tender incorporated usage of Schedule of Rates ('SoR') issued by Tariff Authority of Major Ports ('TAMP') in order to determine the amount payable to the respondent by the petitioner, for the services availed with respect to providing Mobile Harbour Cranes ('MHC') for handling of break bulk cargo.

In the year 2014, TAMP revised the SoR and increased the rate. However, the respondent was still being paid the amount as provided under the agreement. Thereafter, in the year 2016, the petitioner issued another tender at the rate of 62.4/- per ton, however, it could not find any bidders, therefore, it increased the price to Rs. 73.70/- per ton. Thereafter, the respondent made a representation to TAMP to further increase the rate to Rs. 89.71/- per ton for its tenders, however, the respondent was still being paid the amount at the rate of Rs. 51.91/- pet ton.

On September 15, 2018, the respondent made a representation to the petitioner with respect to the revision of the contractual rate of service owing to a significant revision in the then notified SoR by TAMP. However, the petitioner declined the request, aggrieved thereby, the respondent invoked the arbitration clause and the dispute was referred to a sole arbitrator.

The Award

The arbitrator partly allowed the claims of the respondent on the ground that TAMP had, from time to time, increased/revised the per ton rates. It concluded that if the respondent demands the revision of their rate in terms of the revision made in case of third parties from time to time following the trade usages, it cannot be said that their demand is beyond the terms of the contract in terms of sub-section 3 of Section 28 of the Act. It further held that the interpretation of the clauses of agreement cannot be confined to the terms of the agreement itself but can also include 'trade usages' in certain circumstances.

The arbitrator held the revision in the rates to be admitted ground realities which formed the trade usage and held that the tribunal must be conscious to take those into account as well while interpreting the contract between the parties.

It further held that the petitioner being a state functionary should not discriminate and treat equally in terms of Article 14 of the Constitution of India. It held that "since the guarantee of equal protection embraces the entire realm of "State action", it would extend not only when an individual is discriminated against in the matter of exercise of his rights or in the matter of imposing liabilities upon him, but also in the matter of granting privileges e.g. granting licences for entering into any business, inviting tender for entering into a contract relating to government business, etc."

Thus, the arbitrator concluded the respondent could demand revision of their rates in view of higher rate for similar work being awarded to third parties in consonance with the TAMP rates.

Contention of the Parties

The petitioner challenged the award on the following grounds:

• The arbitrator could not have applied the TAMP against the express terms of the contract as the parties had specifically provided where all the TAMP rates were to be applied and the nature of work the respondent was discharging was not to be governed by TAMP rates but by the rates mutually agreed between the parties.
• In absence of an escalation clause or a clause making TAMP rates, revised time to time, applicable to the contract, the arbitrator could not have done so.
• The application of TAPM rates by the arbitrator has resulted in the re-writing of the contract between the parties and the same is impermissible under the Act.
• The arbitrator could also not have applied Article 14 to the dispute between the parties as 'public law' principles do not apply to private disputes.
• The award passed by the arbitrator ignoring the express agreement is contrary to Section 28(3) of the A&C Act, therefore, for all these reasons, the award is liable to be set aside.

The respondent countered the above submissions by making the following submissions:

• The contract, in several places, provides for applicability of TAMP rates and the petitioner cannot selectively choose the provisions to which it would only apply, therefore, the respondent was justified in seeking a revision as per the TAMP rates.
• The arbitrator is the best authority to interpret the terms of the agreement and the impugned award is based on appreciation of law and fact.
• The scope of Section 34 does not permit the Court to re-appreciate the evidence or interpret the terms of the agreement.
• Section 48 of TAMP makes it mandatory for service providers as well as port trusts to follow TAMP rates, revised time to time.
• After the 2015 Amendment, the scope of arbitrator's discretion is increased under Section 28(3) ad he can very well take into account, the general trade usage and market practice to decide the dispute between the parties.

Analysis by the Court

The Court held that an arbitrator can rely on trade usages when the agreement between the parties is either silent or ambiguous on certain aspects, however, it cannot be used to undermine explicit understanding of the parties as recorded in the agreement.

The Court referred to Note to Clause 1.1.a and Clause 8.1.vii of the agreement and held that TAMP rates were made applicable to only a fraction of work that was not within the regular scope of contract and was required to be done in exceptional circumstances, however, for the primary work under the contract, the rates were as mutually agreed between the parties, i.e., Rs. 51.91 per ton.

The Court held that the interpretation of the arbitrator is one that no fair-mined or reasonable person would have taken. The Court held that the arbitrator has ignored the specific language and intention of the parties and applied TAMP rates to the entire scope of work.

The Court held that the fact that the parties had only applied TAMP rates in exceptional circumstances and excluded it for the majority of works was a clear indicator of the intention of the parties regarding its non-applicability for which they had provided a general escalation clause.

The Court further held that the arbitrator erred in applying Article 14 of the Indian Constitution to the present dispute. The Court also held that an arbitrator cannot invoke Article 14 while deciding a contractual dispute between the parties for he is the creature of the contract, derives his jurisdiction from it and must be confined by the four-walls of the contract. It held that arbitrator cannot also invokes principles of 'public law' while deciding dispute between private parties.

The Court held that the arbitrator, by applying TAMP rates, has created a new contract for the parties and foisted upon the petitioner a bargain it never entered into. The Court held that the act of the arbitrator has resulted into the re-writing of the agreement and it goes against the notion of justice and morality.

Next, the Court considered the objection regarding automatic application of TAMP rates in view of Section 48 of Major Port Act, 1963. The Court held that there is no such provision under the Ports Act regarding automatic applicability of revised TAMP rates. Moreover, provisions f Major Port Act, 1963 cannot be utilised to go beyond the categorical understanding between the parties as emanating from the agreement.

Accordingly, the Court set aside the arbitral award.

Case Title: M/S. UNIVERSAL SEAPORT PRIVATE LIMITED VS THE CHAIRMAN, BOARD OF TRUSTEES FOR THE PORT OF KOLKATA, EC/98/2022

Date: 03.11.2022

For the Petitioner/Award Debtor: Mr. Abhrajit Mitra, Sr. Adv. Mr. Pranit Bag, Adv. Mr. Snehashis Sen, Adv. Mr. Abhishek Banerjee, Adv. Mr. Aditya Sarkar, Adv. Mr. Sourav Ghosh, Adv.

For the Respondent/Award Holder: Mr. Ratnanko Banerji, Sr. Adv. Ms. Vidushi Chokhani, Adv. Mr. Vikram Wadehra, Adv. Ms. Nupur Rathi, Adv. Mr. Raunak Bose, Adv. Mr. A. Sen, Adv.

Citation: 2022 LiveLaw (Cal) 332 

Click Here To Read/Download Order