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The Arbitrator Cannot Alter The Express Terms Of The Agreement Between The Parties By Applying The Business Efficacy Test: Delhi High Court

Ausaf Ayyub
27 July 2022 2:45 PM GMT
The Arbitrator Cannot Alter The Express Terms Of The Agreement Between The Parties By Applying The Business Efficacy Test: Delhi High Court
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The High Court of Delhi has held that the arbitrator cannot alter the express terms of the agreement by applying the business efficacy test when there is no ambiguity as to the intention of the parties.

The Bench of Justice Vibhu Bakhru held that Penta Test as propounded by the Supreme Court in Nabha Power Ltd v. Punjab State Power Corp. Ltd. is only for the purpose of determining the intention when the terms of the agreement are not express or silent on an aspect, and would have no application when there is no ambiguity as to the contract between the parties.

The Court further held even if the tribunal is of the view that the arrangement between the parties is inequitable, it cannot alter the terms of the agreement to work out an equitable bargain between the parties.

Facts

The parties entered into an agreement dated 18.07.2005 whereby the respondent was selected as Developer-Cum-Operator (DCO) to develop and operate food grains handling, storage and transportation facilities as specified in the Agreements.

The work for developing the facilities was to be completed within 36 months from the date of the agreement and it was for 20 years from the date of operation. The Operations Date was agreed to be the date on which the facilitates in respect of the Circuit were commissioned and the respondent commenced providing the services on a commercial basis.

In terms of the agreement, the respondent was to be paid on Storage-Cum-Handling Charges (SCH) on a monthly basis which was subject to the variation in proportion to the Wholesale Price Index (WPI). The Charges were to be increased every year based upon 70% of the inflation rate determined based Wholesale Price Index (WPI) recommended by the Government of India by taking the previous year's WPI Index as the base.

There was a delay in the completion of the entire project work, however, the respondent had constructed certain depots which were capable of being used by the petitioner. Accordingly, the parties reached an arrangement whereby the depots were to be used by the petitioner and the respondent was to be paid on actual utilization basis as an interim arrangement till the entire work was completed.

The parties in various letters had agreed that the period of 20 years would begin from the date of interim arrangement. Thereafter, the parties also entered into a Supplementary Agreement when the project work stood substantially completed

By a letter dated 19.11.2013, the SCH charges were to be determined by taking 28.09.2013 as the operations date. Thereafter, the respondent issued a letter dated 10.01.2014 and stated that it would be willing to accept 28.09.2013 as the date of operation if the twenty-year service period also commences from the said date. The petitioner did not agree with the said proposition and reiterated that twenty-year period commenced on 11.05.2007 when the interim arrangement was made.

Aggrieved by the refusal of the petitioner to accede to its request, the respondent invoked the dispute resolution mechanism and the parties were referred to arbitration.

Arbitration Award

The arbitral tribunal partly allowed the claims of the respondent, it held that the twenty-year service period would commence from 28.09.2013 and the WPI for financial year 2013-14 would be considered as the base price for determining the SCH.

The challenge to the Award

The petitioner challenged the arbitral award to the extent that it held that the period of 20 years would commence from 28.09.2013, it made the following submissions:

  • The award is contrary to the express agreement between the parties that the twenty-years period would be calculated from May, 2007.
  • The arbitrator has erred in holding that by virtue of Section 28(3) of the A&C Act, it was not bound by the express agreement between the parties.
  • The arbitrator also erred in applying the Penta Test as propounded by the Supreme Court in Nabha Power Ltd. v. Punjab State Power Corporation Ltd.: (2018) 11 SCC 508 to contradict the express terms of the contract.

The respondent countered the submissions made by the petitioner on the following grounds:

  • It is open for the arbitral tribunal to read the agreement between the parties in a way that makes business sense and the arbitrator has merely done so.
  • Interpretation of the terms of the agreement is expressly within the domain of the arbitrator, therefore, an objection on the basis of interpretation of the contract is beyond the grounds mentioned under Section 34 of the A&C Act.
  • If the arbitral award is set aside, it should be set aside in its entirety and the question of whether respondent is entitled to escalation based on WPI as on May, 2007 ought to be left open.

Analysis by the Court

The Court held that admittedly, the respondent could not complete the entire project work in 36 months as provided under the agreement but it, however, by that time had completed certain depots that the petitioner agreed to use on actual utilization basis.

The Court observed and held that by letters dated 04.05.2007, 09.05.2007 and, 05.06.2007 the parties had expressly agreed 20-year service period would commence on 11.05.2007 and this was also recorded in the Minutes of Meeting held on 04.12.2012 and the supplementary agreement dated 12.02.2013, therefore, there was no ambiguity as to the terms of contract between the parties.

The Court held that as there was no ambiguity as to the terms of the contract, therefore, the was no occasion for the arbitral tribunal to apply the business efficacy test by ignoring the supplementary agreement and the correspondence between the parties.

The Court observed and held that the arbitrator could not alter the express terms of the agreement by applying the business efficacy test when there was no ambiguity as to the intention of the parties.

The Court held that Penta Test as propounded by the Supreme Court in Nabha Power Ltd v. Punjab State Power Corp. Ltd. is only for the purpose of determining the intention of the parties, and would have no application when there is no ambiguity as to the contract between the parties. Consequently, the tribunal could not apply the said test to the dispute between the parties.

The Court further held even if the tribunal is of the view that the arrangement between the parties is inequitable, it cannot alter the terms of the agreement to work out an equitable bargain between the parties.

The Court held an award would be vitiated by patent illegality if the express terms of the agreement are ignored or contravened by the arbitrator.

The Court also observed that Section 28(3) of the A&C Act as amended cannot be read to mean that an Arbitral Tribunal can render an award contrary to the contract between the parties and an n arbitral award that is contrary to the material terms of the contract between the parties would undeniably vitiate the award on the ground of patent illegality if the same goes to the root of the dispute.

Accordingly, it allowed the challenge petition and set aside the arbitral award to the extent it held that service period would commence from 2013.

Case Title: Food Corporation of India v. Adani Agri Logistics Ltd. O.M.P. (COMM) 82 of 2022

Citation: 2022 LiveLaw (Del) 718

Date: 05.07.2022

Counsel for the Petitioner: Mr Gourab Banerjee, Senior Advocate with Mr. Manoj, Ms. Aparna Sinha & Mr. M.T. Reddy, Advs

Counsel for the Respondent: Mr. Ramji Srinivasan, Sr. Adv. with Ms. Simran Brar, Mr. Srisatya Mohanty, Ms. Ambika, Ms. Rajshree Chaudhary, Mr. Pawan Yadav & Mr. Amit Garg, Advs.

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