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

Ausaf Ayyub
24 May 2022 4:30 AM GMT
Arbitrator Cannot Rewrite Terms Of The Agreement Merely Because It Flouts Business Common Sense: Delhi High Court
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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 the same was rejected by the arbitrator, the award was beyond the claims made by respondent.

Analysis By The Court

The Court observed that the award is based on the reasoning that the terms of the contract could not be literally interpreted if it "flouts business common sense".

The Court held that in terms of paragraph 9 of the LoA and Clause 2.8 of the agreement, the petitioner retained the right to increase or decrease the ordered quantity up to 30% during the currency of the Agreement, therefore, it was not open for the arbitrator to interpret the clause in such a manner to deprive the petitioner of its right under the said clause.

The Court held that the arbitrator held the additional order to be not within the terms of the agreement on the presumption that the price of the wagon had substantially gone up, however, it was never the case of the respondent that the petitioner could not place an additional order.

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.

It further held that a commercial contract between the parties cannot be sidestepped on the ground that one of the parties subsequently finds it commercially unviable to perform the same.

The Court held that the petitioner placed the additional orders purely in terms of the agreement and on the price originally offered by the respondent.

The Court held that by interpretation adopted by the arbitrator is not a plausible one. The Court held that the arbitrator cannot ignore the plain mandate of a term in the agreement merely because it flouts the business common sense.

The Court held that it is not open for the Arbitral Tribunal to examine the commercial wisdom of a party and rewrite the Agreement on the basis of the commercial difficulties it would face in performing the obligations.

The Court further observed that "it is not necessary that all contracts yield a profit; some result in a loss as well. This is not a factor to permit a party to avoid its contractual obligations."

According, the Court set aside the award on the ground that it is against the fundamental policy of Indian law and vitiated by patent illegality.

Case Title: UNION OF INDIA, MINISTRY OF RAILWAYS, RAILWAY BOARD & ANR. v. M/S JINDAL RAIL INFRASTRUCTURE LIMITED, O.M.P. (COMM) 227 of 2019.

Citation: 2022 LiveLaw (Del) 505

Counsel for the Petitioner: Mr Deepak Jain, Senior Panel Counsel for Ministry of Railways with Mr K.B. Pradeep, Ms Jaspreet Aulakh and Mr Tanpreet Gulati, Advocates.

Counsel for the Respondent: Mr Ranjit Kumar, Senior Advocate with Mr Manoj Singh, Mr Nilava Bandyopadhyay, Mr Prateek Dhir and Mr Nimish Chandra, Advocates

Click Here To Read/Download Order

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