Delhi High Court applies the rule of ‘contra proferentem’ to uphold the arbitral award not being hit by ‘patent illegality’

The ground of Patent illegality gives way to setting aside an Arbitral Award with a very minimal scope of intervention. A party cannot simply raise an objection on the ground of patent illegality if the Award is simply against them. Patent illegality requires a distinct transgression of law, the clear lack of which thereof makes the petition simply a pointless effort of objection towards an Award made by a competent Arbitral Tribunal.

Delhi High Court

Delhi High Court: In a petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 by the petitioner, a Public Limited Company, primarily dealing in the area of large application pumps that has diversified into the power sector seeking to set aside the arbitral award passed by the Sole Arbitrator on the grounds of the arbitral award being ex-facie erroneous and suffering from patent illegality, Chandra Dhari Singh, J., held that on the application of the rule of contra proferentem, the Purchase Order was fittingly interpreted by the Sole Arbitrator, leaving no scope for the interference of this Court on the Award.

The Respondent was engaged by the Petitioner as the manufacturer and supplier of customized towers and other ancillary goods as per the specifications and other details provided the respondent for transmission lines to be erected for its client JUSNL. According to the Respondent, as per the contract, the Petitioner was to provide structural drawings, shop sketches, and BOM of items to the Respondent. According to the Petitioners, as per the mutual agreement between the parties, the approvals and drawings were to come from the Respondent.

The transaction between the parties lasted for a brief duration of 3 months, after which it was prematurely terminated by the Petitioner based on the alleged delay and breach of contractual obligations by the Respondent. An application under Section 9 of the Act, 1996 was filed by the respondent and a sole arbitrator was appointed who awarded a sum of Rs, 8,15,05,674/- to the Claimant/Respondent, aggrieved by which the Petitioner filed the instant petition.

The Court noted that “patent illegality” is an illegality that goes to the root of the matter but excludes the erroneous application of the law by an arbitral tribunal or re-appreciation of evidence by an appellate court. In this instant case, the Arbitral Award was a well-reasoned award, with the findings being clearly arrived at based on all the documents/evidence on record. Thus, the Petitioner cannot have the benefit of the ‘ground of patent illegality’ to assail the impugned Arbitral Award under Section 34 of the Act, 1996.

The Court observed that the principle is that if arbitrators use the contract itself to determine a dispute, clauses should, in principle, be construed ‘contra proferentem’, meaning that they should be interpreted against the party that drafted it. In the instant case, the Petitioner had drafted the Purchase Contract in which the Respondent was a signatory, the Arbitrator, having observed various interpretations of the contract, chose to endorse the interpretation that is favorable to the Respondent.

The Court remarked that the application of the rule of contra proferentem validates the Sole Arbitrator’s findings and observations regarding the interpretation of the contract to decide the question of breach of the contract.

The Court noted that the Petitioner claimed that the Arbitrator misappreciated the evidence on record, but a careful reading of the Award proves that the Arbitrator has rightly relied on relevant evidence to adjudicate.

Thus, the Court held that the impugned Arbitral Award is not in contravention of the law and has incorporated the evidence that was submitted before the Arbitral Tribunal to give well-balanced reasoning to it. The Petitioner was rightfully found to be guilty of breach of contract, which resulted in the Respondent incurring losses.

[Flowmore Limited v. Skipper Limited, 2023 SCC OnLine Del 548, decided on 02-02-2023]

Advocates who appeared in this case :

Mr. Arvind Verma, Sr. Advocate with Mr. Abhinav Mukerji, Ms. Pratishtha Vij, Mr. Rohan Jaitley, Ms. Neoma Vasdev, Mr. Pratham Mehrotra, Ms. Mahima Chauhan and Ms. Smridhi Sharma, Advocates for the Petitioner;

Mr. Nikhil Nayyar, Sr. Advocate with Mr. Saurav Gupta and Ms. Sugandha Batra, Advocates for the Respondent.

*Arunima Bose, Editorial Assistant has reported this brief.

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