Rewriting Commercial Contractual Terms Is Fatal To An Arbitral Award: Delhi High Court

The Court held that the finding of the arbitral tribunal that though the amendment contemplated by the "Amendment to the Share Holders Agreement" was not in fact carried out by the parties, however, the original Share Holders Agreement stood altered, extinguishing the liability of the party, was erroneous in law.

The Single Bench of Justice C. Hari Shankar ruled that rewriting of a contract between two parties, especially a commercial contract, is completely impermissible in law and that rewriting of commercial contractual terms is fatal to an arbitral award.

The Bench added that the finding of the Tribunal that a party was no longer obligated to comply with the obligations contained in the agreement, in view of the shift in control over an enterprise, amounted to rewriting the agreement.

Calcom Cement India Ltd. (Calcom) was incorporated by the Bawri Group along with the Assam Industrial Development Corporation (AIDC), to build and operate a cement plant in Assam. Subsequently, Dalmia Cement (Bharat) Ltd. (Dalmia Cement) joined the parties for collaboration.

The parties, along with Saroj Sunrise Pvt. Ltd. (SSPL), a company of the Bawri Group, executed various agreements, including a Share Pledge Agreement (SPA) and a Share Holders Agreement (SHA).

Thereafter, the parties executed an "Amendment to the Share Holder Agreement (SHA)".

As per the "Amendment to SHA", the voting rights of Dalmia Cement on the board of Calcom were enhanced, as a result of which Dalmia Cement took over control of Calcom. In compliance with the terms of the agreements executed between the parties, Dalmia Cement made certain payments to the Bawri Group. However, Dalmia Cement allegedly failed to make the payment of additional consideration.

After certain disputes arose between the parties, the Bawri Group initiated arbitral proceedings against Dalmia Cement and Calcom. The Bawri Group, in its statement of claims filed before the Arbitral Tribunal, claimed the amounts due from Dalmia Cement as per the relevant agreement executed between them.

In the counter-claims filed before the Arbitral Tribunal, Dalmia Cement alleged that the Bawri Group had failed to comply with the Project Conditions, as stipulated in the original Share Holders Agreement (SHA). Hence, it contended that the amounts claimed by the Bawri Group were not payable by it.

To this, the Bawri Group contended that the original SHA had been rendered unenforceable and ineffective by the "Amendment to SHA".

The Arbitral Tribunal opined that the Project Conditions, as enumerated in the relevant clause of the original SHA, were required to be fulfilled by the Bawri Group only so long as they retained control of Calcom. Since, the control over Calcom, which was initially held by the Bawri Group, shifted to Dalmia Cement, the Arbitral Tribunal ruled that the Bawri Group was no longer obligated to comply with the Project Conditions as specified in the original SHA. Further, the Tribunal held that, in view of the shift in control over Calcom, the responsibility of fulfilling the Project Conditions became the obligation of Dalmia Cement.

The Tribunal further noted that as per the 'Amendment to SHA', the parties had agreed to amend, by mutual negotiations, the relevant clause contained in the original SHA, pertaining to the Bawri Group's obligation to comply with the Project Conditions. The Tribunal observed that though the said amendment relating to the Bawri Group's obligation, as envisaged by the 'Amendment to SHA', was not made; however, it did not mean that there was no alteration in the original SHA.

Hence, the Tribunal held that the requirement of fulfilling the Project Conditions, as contemplated in the original SHA, stood eviscerated and waived off. Thus, the Arbitral Tribunal passed an award in favour of the Bawri Group.

Challenging the arbitral award, the parties, including Dalmia Cement, filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court.

The petitioner/ Dalmia Cement submitted before the High Court that the relevant clause of the original SHA specifically required that all the amendments to the SHA be made in writing and be duly signed by all the parties to the SHA. Therefore, it argued that there could be no deemed amendment of the SHA.

Dalmia Cement referred to the finding of the Arbitral Tribunal, that though there was no formal amendment made to the relevant clause of the SHA, pertaining to the Bawri Group's obligation to comply with the Project Conditions, the said clause, however, stood altered. The petitioner argued that the said finding arrived at by the Tribunal was an impossible interpretation and that it amounted to rewriting the original SHA. Thus, Dalmia Cement argued that the award was patently illegal.

The High Court noted that there was no complete compliance by the Bawri Group with the Project Conditions, as stipulated in the relevant clause contained in the original SHA.

The bench ruled that the findings of the Arbitral Tribunal, that the Bawri Group was no longer obligated to comply with the Project Conditions in view of the shift in control over Calcom, clearly amounted to rewriting the relevant clause of the original SHA. The Court took into account that the relevant clause contained in the original SHA specifically required the Bawri Group to fulfil the specified obligations.

While observing that there was no provision contained in the original SHA, which envisaged any "transfer of obligation" at any stage, the Court held that rewriting of a contract between two parties, especially a commercial contract, is completely impermissible in law.

The Court ruled that the findings arrived at by the Arbitral Tribunal to the effect that Dalmia Cement was required to complete the Project Conditions, in view of the transfer in control of Calcom, amounted to replacing the relevant clause contained in the SHA with an entirely new clause. The Court added that the same was permissible only if the parties chose to do so with consensus ad idem.

Referring to the decisions of the Apex Court in N.H.A.I. versus Bumihiway DDB (JV) (2006) and in P.S.A. Sical Terminals Pvt Ltd versus Board of Trustees (2021), the Court reiterated that rewriting of the contract between the parties by an arbitral tribunal is against the law of the land. Further, an arbitral tribunal is required to arbitrate within the four walls of the contract, and an arbitral award which does otherwise, or rewrites the contract, is bound to be set aside.

The bench noted that the "Amendment to SHA" only contemplated a mutual agreement among the parties, for making amendments to the relevant clause contained in the original SHA. The said clause in the original SHA enumerated the Bawri Group's obligation to fulfil the Project Conditions. The Court added that the said amendment contemplated by the "Amendment to SHA", was merely in the nature of an "agreement to agree". Thus, it ruled that since no amendment as contemplated by the "Amendment to SHA" was actually carried out, the Bawri Group's obligation was not wiped off.

Therefore, the Court held that the findings arrived at by the Arbitral Tribunal were patently illegal, within the meaning of Section 34(2A) of the A&C Act.

"The finding of the learned Arbitral Tribunal that Clause 3.20 of the Amendment to the SHA was not an agreement to agree, therefore, being opposed to the very wording of the said Clause, constitutes an error apparent on the face of the record and, with respect, a "patent illegality" within the meaning of Section 34(2A)¹⁷ of the 1996 Act."

The Court rejected the contention raised by the claimant/ Bawri group that the "Amendment to SHA" indicated the intention of Dalmia Cement to waive off the Bawri Group's obligation to fulfil the Project Conditions. The bench added that waiver of a contractual right, in law, has to be a conscious act and that the intention to waive must be unmistakable.

"In the particular circumstances of the present case, therefore, the learned Arbitral Tribunal could not have re-written Clause 9.1 of the SHA, thereby eviscerating the responsibility of the Bawris to ensure completion of the Project Conditions, as required by the said Clause, and transferring the responsibility to Dalmia. The fact that, during the tenure of the SHA, there may have been a change in the shareholding pattern in Calcom, or even a substantial shift of managerial control over Calcom, from the Bawris to Dalmia, cannot justify such an exercise. The learned Arbitral Tribunal could not have provided for circumstances to which the contract executed among the parties did not cater."

The bench referred to the finding of the Arbitral Tribunal to the effect that, though no amendment, as envisaged by the 'Amendment to SHA', was made to the original SHA, however, it did not imply that there was no alteration in the original SHA. While holding that the said finding of the Tribunal was erroneous in law, the Court, after referring to Section 62 of the India Contract Act, 1872, ruled that there is no distinction in law between "alteration" and "amendment".

Therefore, while ruling that rewriting of commercial contractual terms is fatal to an arbitral award and that an "agreement to agree" is not enforceable in law, the Court set aside the arbitral award.

Holding that the arbitral award was patently illegal within the meaning of Section 34(2A) of the A&C Act, the bench ruled that all claims raised by the Bawri Group before the Arbitral Tribunal stood rejected. The Court directed that in view of the failure of the Bawri Group to comply with the Project Conditions, the specified counter claims raised by Dalmia Cement must be reconsidered de novo in the arbitral proceedings.

Case Title: Calcom Cement India Ltd. versus Binod Kumar Bawri & Ors. And Dalmia Cement (Bharat) Limited versus Binod Kumar Bawri & Ors.

Citation: 2022 LiveLaw (Del) 1003

Counsel for the Petitioner (Calcom): Mr.Mahesh Agarwal, Mr. Saurabh Seth and Ms. Niyati Kohli, Advs

Counsel for the Petitioner (Dalmia Cement): Mr. Sandeep Sethi, Sr. Advocate with Mr. Mahesh Agarwal, Mr. Rishi Agrawala, Ms. Niyati Kohli, Mr. Rishabh Parikh, Ms. Manavi Agarwal and Mr. Shravan Niranjan, Advs

Counsel for the Respondents: Mr. Aman Sinha, Sr. Advocate with Mr. Pravesh Thakur, Ms. Shivangi Pareek, Ms. Nupoor Sinha, Ms. Ishita Sinha, Mr. Rahul Narayanan and Dr. V. Chandra Maurya, Advs

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