Arbitrator cannot rewrite contract for parties; Arbitral award based on no evidence or in ignorance of vital evidence comes in realm of patent illegality: SC   

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that an arbitral award which is based on no evidence and/or in ignorance of evidence would come under the realm of patent illegality. The Court also held that an arbitrator cannot rewrite the contract for the parties.

Facts and Appeal

In 1998, the respondent−Tuticorin Port Trust (“Trust”) awarded a tender to the appellant−Company for certain development and operation works at the Tuticorin Port for 30 years on a Build, Operate and Transfer basis. Shorn of details, commercial differences arose between the parties relating primarily to royalty/revenue sharing model. The Company requested the Trust to amend the License Agreement to incorporate revenue sharing model in place of royalty model. This was however rejected by the Trust.

In 2012, the Company invoked arbitration clause under the License Agreement. The Arbitral Tribunal passed an award in favour of the Company directing conversion of royalty model to revenue sharing model. Thereafter, the Trust presented a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an arbitral award. This petition was rejected by the District Judge, Tuticorin. Against this, the Trust filed an appeal before the Madras High Court. The appeal was allowed and the award made by the Arbitral Tribunal was set aside. Aggrieved, the Company approached the Supreme Court.

Analysis and Observations

Scope of interference with an arbitral award in India      

Relying on a catena of judgments including MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163 and SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131,  the Supreme Court noted it to be settled legal position that in an application for setting aside an arbitral award filed under Section 34 of the Arbitration Act, the court does not act as an appellate court and reappreciate the evidence. The scope of interference is limited to grounds provided under Section 34. Interference would be warranted when the award is in violation of public policy of India. A judicial intervention on account of interfering on the merits of the award would not be permissible.

Principles of natural justice as contained in Sections 18 and 34(2)(a)(iii) of the Arbitration Act continue to be grounds of the challenge of an award. Awards that shock the conscience of the court can be set aside for being in conflict with justice or morality. An award can be set aside on the ground of patent illegality appearing on the face of the award as such, which goes to the roots of the matter.

Merits of the case

Article 14 of the License Agreement

The bone of contention between the parties was Article 14 of the License Agreement which dealt with ‘Change in Law’. Article 14.3 provided that the Licensee (appellant−Company) may request for amendments in terms of the License Agreement if after the date of the License Agreement there is any change in law which substantially affects rights of the Licensee. The questions before the Court were:

(i) Whether the Arbitral Tribunal was justified in finding a change in law which entitled the Company to invoke Article 14.3 of the License Agreement; and

(ii) Whether the Arbitral Tribunal was justified in converting the contract from royalty model to revenue sharing model.

The Court said that for answering the questions, it will have to consider documents on record as well as the conduct of the parties and their intention as could be gathered from the material. For such propsition, reliance was placed on MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163.

Findings of the Arbitral Tribunal

It was noted by the Court that entire finding of the Arbitral Tribunal was based on a premise that when the parties entered into the contract in 1998, there was an existing policy which provided royalty to be factored into the cost while fixation of tariff. That, subsequently in 2003, Government of India changed the policy thereby providing that royalty will not be so factored while fixing tariff. In 2005, there was yet another change in policy vide which royalty was allowed to be factored in while fixing tariff, but subject to a maximum of the bid of second lowest bidder. According to the Arbitral Tribunal, this amounted to change in law which adversely affected the Company.

Examining the correctness of such finding, the Court found that when Letter of Intent was issued to the Company in January 1998, there was no policy/guidelines at all. The relevant guidelines were adopted by the authority concerned (Tariff Authority for Major Ports “TAMP”) only in February 1998. Even these 1998 Guidelines did not provide for factoring royalty in cost while determining tariff.

Notably, it was in the year 1999, that the Company presented a proposal before TAMP to revise tariff. The proposal was approved by TAMP, and royalty was allowed to be factored in cost while fixing tariff, however, this was only on account of the Trust’s conditional approval to the proposal submitted by the Company. The TAMP also made clear that its order should not be interpreted to amount to any implicit approval of royalty related issues which were left to be decided by the Trust and the Government of India.

Then came the first notification in 2003, where the Government of India decided to clarify, as a matter of policy, that royalty payment shall not be factored into account as cost for fixation of tariff.

Next came the second notification in 2005, superseding the 1998 Guidelines. The new guidelines provided that royalty payment will not be admissible cost for tariff computation. Further, in Build, Operate and Transfer cases such as that of the Company, it was allowed that tariff computation can factor in royalty payment as cost subject however only to a maximum of the amount quoted by next lowest bidder.

On a conjoint reading of all documents, the Court concluded that:

In this scenario, the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, in our view, is a finding based on ‘no evidence‘.

The Court was of the opinion that the Arbitral Tribunal totally failed to take into consideration relevant aspects of the matter as discussed above. Noting that the Arbitral Tribunal arrived at its decision based on ‘no evidence’ and in ‘ignorance of vital evidence’, the Court held that the findings of the Arbitral Tribunal would come in the realm of perversity as explained in Associated Builders v. DDA, (2015) 3 SCC 49.

Conversion of royalty payment model to revenue sharing model

The next issue was whether the Arbitral Tribunal was justified in substituting royalty payment model to revenue sharing model. While considering this, the Court opined that:

A contract duly entered into between the parties cannot be substituted unilaterally without the  consent of the parties.

Gathering the  intention of the parties from documents on record, the Court found that the Company wanted the License Agreement to be amended to change royalty payment method to revenue sharing method. Whereas, the Trust always opposed it and was not agreeable to any such amendment. Noting that the Arbitral Tribunal ignored the stand of the Trust to thrust upon a new term in the License Agreement, the Court observed:

It is thus clear that the Award has created a new contract for the parties by unilateral intention of [the Company] as against the intention of [the Trust].

Reiterating that a party to the Agreement cannot be made liable to perform something for which it has not entered into a contract, the Court concluded that:

In our view, rewriting a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.

Decision

In such view of the matter, the Supreme Court was of the considered opinion that the impugned award passed by the Arbitral Tribunal would come under the realm of “patent illegality” and therefore it was rightly set aside by the High Court. [PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, 2021 SCC OnLine SC 508, decided on 28-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

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