Arbitrator Cannot Rewrite Terms Of The Agreement Merely Because It Flouts Business Common Sense: Delhi High Court

The High Court of Delhi held that the arbitrator cannot re-write the terms of the agreement between the parties merely because they flout business common sense. The Single Bench of Justice Vibhu Bakhru has held that an award wherein the arbitrator re-work a bargain between the parties merely because it is commercially difficult for one party to perform the same would be against the fundamental policy of Indian Law and vitiated by patent illegality. The Court held that when the agreement confers on one party the right to place an additional order on the same terms and conditions during the currency of the contract, the condition under the agreement must be given effect to and the arbitrator cannot negate the mandate of such a stipulation. Facts The Ministry of Railways (petitioner) invited tenders for the manufacture and supply of certain wagons. JIRL (respondent) submitted its bid and was declared the lowest bidder. Accordingly, the petitioner issued a Letter of Acceptance (LoA) to the respondent for the supply of wagons. Thereafter, the parties entered into the contract (agreement) and the petitioner issued an order for supply of 1871 wagons. The supply was to be made in two transactions. The agreement had an Optional Clause (Clause 2.8) which conferred on the petitioner the right to increase/decrease the ordered quantity up to 30% of the ordered quantity during the currency of the Agreement, on the same price and terms and conditions, with a suitable extension in the delivery period for the optional quantity. Certain amendments were incorporated into the agreement. Thereafter, the petitioner awarded a contract for supply of 1075 wagons to L-2 tenderer at the rates quoted by the said tenderer. Aggrieved by the dual pricing followed by the petitioner, the respondent raised its grievance with the petitioner and sought parity of treatment and fixation of uniform pricing for the wagons. In the meantime, the third amendment was made to the agreement and the petitioner exercised its right to place an order for additional quantity at the same price. Thereafter, the respondent was awarded another contract for supply and manufacture of 292 BOXNHL wagons at a much higher price. The respondent again requested the petitioner to agree to its demand and increase the price of the wagon under the additional order. On receiving no positive response, the respondent invoked the arbitration clause for the adjudication of its claims qua the dual pricing of wagons. The respondent nominated its executive director, however, the respondent did not concur with the nominated appointed and filed a petition under Section 11 of the A&C Act which was allowed by the Court. The Award The respondent raised certain claims before the arbitrator. The respondent contested the claims without raising any counter-claims. The arbitrator rejected the claims of the respondent, however, it held that the petitioner had no right to issue the third amendment vide which it had placed additional orders on the respondent. The arbitrator held the additional order to be in breach of the terms of the agreement. The Arbitral Tribunal held that the costs of manufacture of wagons and market price for supply of wagons had gone up substantially and, the Railways could not have ordered additional quantity at the same price. The arbitrator held that the petitioner could not place the additional order when the cost of manufacture was more than the price of the wagon. The Arbitral Tribunal held that the parties could not have intended for the Railways to exercise an option of increasing the quantity if the price in the market or the cost of production had increased substantially, rendering it commercially unviable to manufacture and supply the said wagons. The arbitrator held that in terms of Section 73 and 74 of the Indian Contract Act, the petitioner is liable to compensate the respondent for the damage caused to it on account of supply of additional wagons at a price lower than the cost of the manufacturing. The Grounds Of Challenge The petitioner challenged the award on the following grounds: The arbitrator has ignored the express terms of the agreement between the parties. The arbitrator has re-written the terms of the agreement between the parties and re-worked a bargain reached between the parties. In terms of Clause 2.8 of the agreement, the petitioner was well within its right to either reduce or increase the quantity of the wagons, therefore, the third amendment and the additional order were expressly in terms of the agreement. The respondent had unconditionally accepted the third amendment and the additional order. The respondent did not challenge the validity of Clause 2.8, therefore, it was not open for the arbitrator to give a finding on such an issue. The respondent had raised an issue qua the dual pricing only and when...

Arbitrator Cannot Rewrite Terms Of The Agreement Merely Because It Flouts Business Common Sense: Delhi High Court

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