Arbitrator's Decision To Defer Compliance With Essential Pre-Condition In Agreement Amounted To Rewriting Contract, Vitiated It: Delhi HC

The Delhi High Court Bench of Justice Jasmeet Singh while allowing a petition under Section 34, Arbitration and Conciliation Act (“ACA”) observed that when the contract required the bidder to establish an office in India as a pre-requisite to performance, the decision by the Arbitrator holding that compliance could be deferred, amounted to rewriting the contract. Such a holding violated fundamental policy of Indian law and the award was liable to be set aside. Facts The present petition was filed under Section 34, ACA challenging the Arbitral Award dated 03.07.2020 passed by the Arbitrator. The Petitioner is a public sector undertaking and the Respondent is a foreign company incorporated under the laws of China. As a part of the bidding process for the tender issued by the Petitioner, the Respondent submitted a Project Execution Methodology (“PEM”), in which the Respondent assured the Petitioner for local supplies, it would either open an office in India or partner with an Indian firm. Clause 1 of the PEM provided that the Respondent will set up a local office in India and open an Indian bank account to facilitate the execution of the contract. Based on the same, the Petitioner issued three letters of award (“LOA”) in favour of the Respondent which were accepted by the Respondent. Thereafter, on several occasions, the Respondent failed to open a local office in India and did not furnish details of an Indian bank account as proposed in the PEM. Instead, the Respondent proposed that it can be permitted to use the office and the bank account of an associated Indian company, namely, M/s Longking Engineering India Pvt. Ltd. To which, the Petitioner denied and insisted on strict adherence to the PEM. Subsequent to exchange of several communications, the Respondent on 12.10.2018 invoked Clause 32.1 i.e. arbitration clause of General Conditions of Contract (“GCC”). The Respondent made claims amounting to Rs. 3,04,12,768 and the Petitioner made counter-claims equivalent to Rs. 2,12,47,107 along with litigation cost. The impugned arbitral award was passed by the Arbitrator on 03.07.2020 whereby the Petitioner was directed to pay a sum of Rs. 13,65,000/- along with interest. Aggrieved by the impugned arbitral award, the Petitioner filed the present petition. Contentions The Counsel for the Petitioner submitted that the award was arbitrary, perverse and thus liable to be set aside. The Arbitrator failed to appreciate that under the PEM agreed between the parties, opening of a project office in India for execution of Indian component was a pre-requisite as per the RBI guidelines. The Respondent had itself proposed to set up an Indian office and open an Indian bank account to receive India Rupee, instead of opting for a Letter of Credit (“LC”). The finding of the Arbitrator that the payment could be made through an LC was beyond the pleadings. The finding that payment could have been through M/s Longking Engineering India Pvt Ltd was arbitrary as it was impermissible in law to remit contractual payments to a third party unconnected with the contract. The Counsel further submitted that the Respondent never pleaded or argued that it sought payment through an LC. The parties were not given any opportunity to present arguments on this issue. Once the parties had agreed that the respondent would open an Indian bank account in compliance with the RBI guidelines, the matter was not open to reinterpretation by the Arbitrator. The Counsel for the Respondent argued that while the Respondent proposed using the office and bank account of M/s Longking Engineering India Pvt. Ltd, this was consistent with the accepted conditional LoA. The Respondent was still executing the project in accordance with the LoA and PEM when the Petitioner illegally terminated the contract. The contention, raised for the first time in these proceedings, that purchase orders could not be issued until the Respondent opened its Indian office and bank account, was neither pleaded nor argued before arbitrator and no such requirement was ever communicated prior to 26.05.2017. The Counsel further submitted that the reliance of the Arbitrator on Note to Clause 9.6, GCC was sound and supported by the record. The LoA's payment terms stipulated that 85% payment for imported supply would be released through a 60-day usance LC against receipted LR. Payment for imported items was thus to be made only through LC, rendering the insistence of the petitioner on an Indian bank account contrary to the contract. Observations The Court observed that Clause 1, PEM which was part of the bid of the Respondent and was accepted by the Petitioner, contained clear undertakings by the Respondent to open an office in India and an Indian Bank Account before the commencement of the execution of the Indian component of the contract. This was not a mere formality but it was central to...

Arbitrator's Decision To Defer Compliance With Essential Pre-Condition In Agreement Amounted To Rewriting Contract, Vitiated It: Delhi HC

Arpita Pande

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