Delhi High Court
Mohan Steels Limited vs Steel Authority Of India(Sail) on 4 March, 2020
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Reserved on: 07.11.2019
Pronounced on: 04.03.2020
+ O.M.P. 488/2015
MOHAN STEELS LIMITED ..... Petitioner
Through Mr. Harsha Peechara and Ms. Kriti
Sinha, Advocates.
versus
STEEL AUTHORITY OF INDIA(SAIL) ..... Respondent
Through Mr. H.S. Phoolka, Sr. Advocate
with Mr. Joydeep Mazumdar, Mr.
Rohit Dutta, Ms. Shilpa Diwan,
Ms. Priyata Chakraborty, Mr.
Sanjeev Kumar, Advocates with
Mr. Vikas Gill, Manager (Law)
SAIL.
CORAM:
HON'BLE MS. JUSTICE JYOTI SINGH
JYOTI SINGH, J.
1. Present petition had been filed under Section 34 of the Arbitration
and Conciliation Act, 1996 (hereinafter referred to as the „Act‟) seeking
to set aside the Award dated 01.07.2015 passed by the Sole Arbitrator as
also seeking a declaration that the recovery made by the respondent is
illegal and arbitrary.
2. Brief facts germane to the present petition are that the petitioner
was appointed as a Conversion Agent for the first time in the year 2006
by the respondent which is a Government Company for conversion of
TMT Bars. A contract was entered into for a period of three years i.e.
from 2006 till 2009 (hereinafter referred to as „Contract-I‟) Under
Contract-I, conversion charges payable to the petitioner were to be
increased @ 2% every year. Consequently, the respondent revised the
conversion charges for the year 2007-2008 vide letter dated 17.03.2007 as
well as for the year 2008-2009 vide its letter dated 30.05.2008 and
accordingly reimbursed the money at increased rate every year till the
conclusion of Contract-I.
3. On 05.02.2009, petitioner entered into a fresh agreement with the
respondent (hereinafter referred to as „Contract-II‟). Contract-II had a
different clause with regard to the rates of escalation and reads as under:
"ESCALATION OF RATES
The conversion charges finalized in the tender shall be kept
firm for 1 year w.e.f the date specified for commencement of
work in the work order. At the end of one year, the conversion
charges will be revised based on the following weightage and
neutralization for each of the components:-
Components Weightage Neutralizati Basis
on
Labour 10% 100% Min or statutory
wages as per
Notification of
labour department
of the concerned
state government.
Fuel 20% 60% IOC Retail Outlet
(Furnace
Oil)
Electricity 25% 60% Unit electricity rate
as per Electricity
Provider co/ SEB in
the concerned
locality
Overheads 30% 50% End month/ end
year RBI Index on
machinery and M/c
Tools and transport
equipment and parts
on a simple average
basis
Profit 15% Nil -
4. Pursuant to Clause 8, as mentioned above, respondent after
completion of one year of the agreement vide letter dated 24.05.2010
approved the revised conversion charges w.e.f. 05.02.2010 and
consequently, the petitioner raised the invoices and was paid at the
revised rates. The charges were once again revised w.e.f. 05.02.2011 by
the respondent vide its letter dated 08.11.2011 and the petitioner was paid
at the revised rates till the conclusion of Contract-II.
5. It is the case of the petitioner that at the end of Contract-II,
respondent issued „No Dues Certificate‟ and the Bank Guarantees
submitted by the petitioner to the tune of Rs. 1.25 Crores and Rs. 75 Lacs
were released, without any demur.
6. As the chronology goes, the petitioner then entered into a third
Contract with effect from 18.02.2012 for three years valid upto
17.02.2015 referred to as Contract-III. The escalation clause in Contract-
III, according to the petitioner, was identical to the Clause in Contract-II
and the petitioner therefore, had no doubt that the escalation was based on
weightage and neutralization of various components such as labour,
electricity etc. and was to be determined every year by the respondent.
This understanding of the petitioner according to it was fortified by the
fact that even under Contract-III after completion of each year, the
respondent vide its letters dated 30.09.2013 and 12.06.2014 revised the
conversion charges for the years 2013-2014 and 2014-2015 respectively
and in accordance with Clause 8, paid at the revised rates.
7. Petitioner however avers that at the fag end of Contract-III, the
respondent in an arbitrary manner, illegally raised a demand for recovery
of the second escalation amount paid under Contract-II vide its letter
dated 09.09.2014 and consequently, vide letter dated 14.10.2014,
unilaterally recovered Rs.78,74,189/- from the conversion charges
payable under Contract-III.
8. Aggrieved by this action of the respondent, petitioner invoked the
Arbitration Clause under Contract-II and also invoked the arbitration
under Contract-III, the latter of course is not the subject matter of the
present petition.
9. The Sole Arbitrator having been appointed, petitioner submitted its
statement of claim thereby claiming reimbursement of an amount of Rs.
78,74,189/- with interest @ 18% per annum, wrongly deducted by the
respondent and a sum of Rs. 1,46,03,051/- towards damages for
electricity bills, labour charges, overhead expenses etc. and the cost of
litigation along with interest.
10. Respondent filed its reply and denied the claims of the petitioner.
Vide the impugned Award dated 01.07.2015, the Arbitrator rejected the
claim of the petitioner and the said Award is assailed by the petitioner
before this Court.
11. The principal contention of the petitioner is that the interpretation
given by the Arbitrator to Clause 8 of Contract-II is perverse and contrary
to the terms of the Contract as well as the understanding between the
parties which was unambiguously reflected in the conduct of the
respondent. It is contended that reading of the escalation clause does not
leave any doubt that conversion charges were to be firm for one year only
and were thereafter to be linked to various components such as labour,
fuel, electricity, overheads etc. as provided in detail in Clause 8, keeping
the profit margin constant @ 15%. The escalation was to be determined
by the respondent on the basis of variations in these components, every
year. With this understanding, respondent had revised the charges in the
preceding 8 years and the escalation was granted for input costs keeping
the profit margin constant.
12. It is contended by the petitioner that the Award is perverse
inasmuch as the Arbitrator has rejected the „contra proferentem‟
argument of the petitioner. It is submitted that it is a well-known rule of
construction that if the terms applied by one party are unclear an
interpretation against that party is preferred. Reliance is placed on the
judgment in the case of Bank of India and Anr. V. K. Mohandas and
Ors. (2009) 5 SCC 313. It is argued that the respondent had not only
drafted the Contract, but had also given a particular interpretation to
Clause 8 for the last several years and the Arbitrator could not have given
a contrary interpretation.
13. It is next contended that the Arbitrator has seriously erred in
appreciating that there was "accord and satisfaction" of Contract-II, way
back in the year 2012 and the payments having been made, the issue
could not have been reopened by the respondent. The parties had acted
pursuant to a certain interpretation and the respondent cannot be
permitted to retract from the understanding and course of action adopted
by it. If the Award is upheld the result would be that there would be no
sanctity of the terms of the contract and mutual understandings between
the parties.
14. Learned senior counsel for the respondent on the other hand
contends that the petitioner has not set up any grounds for interference of
the Court within the parameters of Section 34 of the Act. The Award is a
well reasoned award and the Arbitrator having interpreted the terms of
the contract it is not open to this Court to give any other interpretation.
Reliance is placed on the judgment of the Supreme Court in the case of
McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11
SCC 181 , wherein the Supreme Court had held as under:
"112. It is trite that the terms of the contract can be
express or implied. The conduct of the parties would also
be a relevant factor in the matter of construction of a
contract. The construction of the contract agreement is
within the jurisdiction of the arbitrators having regard to
the wide nature, scope and ambit of the arbitration
agreement and they cannot be said to have misdirected
themselves in passing the award by taking into
consideration the conduct of the parties. It is also trite
that correspondences exchanged by the parties are
required to be taken into consideration for the purpose of
construction of a contract. Interpretation of a contract is
a matter for the arbitrator to determine, even if it gives
rise to determination of a question of law. (See Pure
Helium India (P) Ltd. v. Oil and Natural Gas
Commission [(2003) 8 SCC 593 : 2003 Supp (4) SCR
561] and D.D. Sharma v. Union of India [(2004) 5 SCC
325].)"
15. Without prejudice of the aforesaid contention, it is submitted that
the terms of the tender were prescribed by SAIL and were competitive in
nature. They were governed by „Revised Conversion Policy and
Guidelines on Appointment of Conversion Agent‟ vide Marketing
Circular No. 33 of 2007, issued on 15.09.2007. In terms of the said
Guidelines, the terms and conditions relating to payment and escalation
of rates towards conversion charges were varying, depending on changing
price indices. The rates were quoted by prospective agents after going
through the terms of the Tender. It is argued that in terms of the
Marketing Circular No. 30 of 2003 issued on 18.09.2003, the conversion
charges finalized shall be kept firm for one year from the date of issue of
work order. At the end of every year, they will be increased upto 2% on
yearly basis. In terms of Circular No. 33 of 2007, the charges were to be
finalized and kept firm for one year from the date specified for
commencement of the work. At the end of one year, the charges were to
be revised based on weightages and neutralization of various components
mentioned therein. It is further argued that in terms of the circular No. 27
of 2009 issued on 02.09.2009 the conversion charges were firm for one
year from the date of commencement of work and at the end of one year
the charges were to be revised based on weightages of the component. It
is thus argued that the conversion charges in the various Circulars were
different and distinct though in all the Circulars, the charges were firm for
one year i.e. the first year of the contract. Under Circular of 2003, at the
end of every year, the charges would vary through negotiations, but under
Circulars of the years 2007 and 2009, the charges were to be revised at
the end of one year only and there was no provision for another increase
at the end of 2nd year. It is further argued that Clause 8 in Contract-II was
governed by circulars of the year 2007 and 2009, thus, the petitioner was
not entitled to any escalation for the second year.
16. It is next contended that although the respondent had cleared the
Bills of the petitioner towards second escalation, but this was an
inadvertent error and cannot justify the claim of the petitioner. Since the
petitioner failed to refund the money the same was sought to be recovered
from the Bill towards Contract-III. It is thus submitted that there is
nothing due to the petitioner and the Award deserves to be upheld.
Reliance is placed on the judgment in the case of Michigan Rubber
(India) Ltd. v. State of Karnataka (2012) 8 SCC 216 for the proposition
that fixation of the value of tender is within the purview of the Executive
and the Courts have no role to play in the same. Reliance is placed on the
judgment in the case of Chandi Prasad Uniyal v. State of Uttarakhand
(2012) 8 SCC 417 for the proposition that any amount received by a party
without authority of law can be recovered, barring few exceptions of
extreme hardships etc.
17. Learned counsel for the petitioner in rejoinder has reiterated its
arguments. In response to the argument of the respondent with respect to
the Marketing Circulars/Guidelines, the stand of the petitioner is that the
said Circulars did not form part of the Contract. The parties are bound by
the terms of the Contract and not any extraneous documents, which are
beyond the terms of the Contract or the Tender conditions.
18. I have heard learned counsels for the parties and examined their
rival contentions.
19. The Arbitrator has primarily rejected the claim of the petitioner on
the ground that perusal of the escalation clauses of the previous years
show that the respondent was explicit in mentioning about its intentions
that the escalation rates were to be revised at the end of one year alone.
Reliance has been placed on the various Master Circulars, submitted by
the respondent to show that the escalation rates were different for
different years and the intent to revise the escalation rates was different
for the different contracts. The Arbitrator has interpreted the Escalation
Clause in Contract-II to mean that the conversion charges finalized in the
tender were firm for one year and were liable to be revised at the end of
one year alone and that the Clause did not permit revision of escalation
charges each year under the 2009 Contract. The Arbitrator has further
held that the wordings of Clause 8 were unambiguous based on perusal of
the Circulars placed on record and thus rejected the argument of the
petitioner regarding the doctrine of „contra proferentem‟. Relevant part
of the Award is as under:
"Perusal of the escalation clauses of the previous years
show that the Respondent is explicit in mentioning about
its intentions that the escalation rates are to be revised at
the end of one year alone. The principle of interpretation
of contract essentially signifies that the words in the
contract are to be construed in their ordinary and popular
sense. The underlining principle being that parties to a
contract, as reasonable men must have intended to use the
word in its commonly used sense. If the wording of a
clause is ambiguous, and one reading produces a fairer
result than the alternative, the reasonable interpretation
should be adopted. In view of the same, I am of the
opinion that present contract is clearly non-ambiguous
for this clause based on perusal of the circulars placed on
record, therefore, the doctrine of Contra Proferentum
relied by the Claimant has no basis and the argument of
the Respondent that the said escalation charges were paid
inadvertently and the same is liable to be returned as it
would cause loss to public exchequer, is allowed. I see no
merit in the plea to interpret the clause by stretch of
imagination to extend the explicit escalation clause to
mean otherwise. Further, the Arbitrator has no power to
write the contract between the parties to give it a
interpretation desired by either party except for a role to
interpret the clause of the contract as per law. Further,
the Conversion Agent was fully aware of the terms and
conditions of contract. Simply an inadvertent
payment/payment made under mistake of fact, if made by
a party in a contract would not mean, that the clause in
the contract would be interpreted differently. Additionally,
the Claimant has not placed on records any law that
prevent recovery of payment of dues under a contract
determined by time. They only state the same is void ab
initio but fail to draw attention and therefore the
argument has no basis to stand."
20. There can be no quarrel with the proposition that interpretation of
the clauses of the contract is purely in the domain of the Arbitral
Tribunal. This has been so held clearly in several judgments of the
Supreme Court as well as this Court. However, equally well-settled is the
proposition of law that the Arbitrator is a creature of the Contract and
therefore, cannot decide contrary to or outside the ambit of the terms of
the contract between the parties. In fact, Section 28(3) of the Act
mandates so. It has been held by the Supreme Court in Associate
Builders vs. Delhi Development Authority (2015) 3 SCC 49 as under:-
"42.3. (c) Equally, the third subhead of patent illegality is
really a contravention of Section 28(3) of the Arbitration
Act, which reads as under:
"28.Rules applicable to substance of
dispute.--(1)-(2)***
(3) In all cases, the Arbitral Tribunal shall
decide in accordance with the terms of the
contract and shall take into account the
usages of the trade applicable to the
transaction."
This last contravention must be understood with a caveat.
An Arbitral Tribunal must decide in accordance with the
terms of the contract, but if an arbitrator construes a term
of the contract in a reasonable manner, it will not mean
that the award can be set aside on this ground.
Construction of the terms of a contract is primarily for an
arbitrator to decide unless the arbitrator construes the
contract in such a way that it could be said to be
something that no fair-minded or reasonable person could
do.
xxxx xxxx xxxx
44. In MSK Projects (I) (JV) Ltd. v. State of
Rajasthan [(2011) 10 SCC 573 : (2012) 3 SCC (Civ)
818], the Court held: (SCC pp. 581-82, para 17)
"17. If the arbitrator commits an error in the
construction of the contract, that is an error
within his jurisdiction. But if he wanders
outside the contract and deals with matters not
allotted to him, he commits a jurisdictional
error. Extrinsic evidence is admissible in such
cases because the dispute is not something
which arises under or in relation to the
contract or dependent on the construction of
the contract or to be determined within the
award. The ambiguity of the award can, in
such cases, be resolved by admitting extrinsic
evidence. The rationale of this rule is that the
nature of the dispute is something which has to
be determined outside and independent of what
appears in the award. Such a jurisdictional
error needs to be proved by evidence extrinsic
to the award. (See Gobardhan Das v. Lachhmi
Ram [AIR 1954 SC 689] , Thawardas
Pherumal v. Union of India [AIR 1955 SC
468] , Union of India v. Kishorilal Gupta &
Bros. [AIR 1959 SC 1362] , Alopi Parshad &
Sons Ltd. v. Union of India [AIR 1960 SC
588], Jivarajbhai Ujamshi Sheth
v. Chintamanrao Balaji [AIR 1965 SC 214]
and Renusagar Power Co. Ltd. v. General
Electric Co. [(1984) 4 SCC 679 : AIR 1985 SC
1156] )"
21. In the present case, it is significant to note that the interpretation
given by the Arbitrator to the Escalation Clause 8 is based purely on the
Master Circulars which were placed on record by the respondent with
their written arguments. It is to be noted that neither was the ground of
Master Circulars pleaded by the respondent in the reply to the Statement
of Claim nor were the circulars annexed to the reply. These documents
were placed on record of the arbitrator on 20.06.2015, whereas the third
and final hearing of the Arbitral Tribunal was held on 18.06.2015.
Apparently, for this reason, the petitioner did not have the opportunity to
rebut the applicability of the said Circulars.
22. Moreover, what is significant is that these Master
Circulars/Guidelines are internal guidelines for the respondent and are
only meant for internal circulation as has been noted by the Arbitrator
himself. The said Circulars were never a part of the tender conditions or
the Contract dated 05.02.2009. The petitioner has taken a categorical
stand in its pleadings before this Court that the Circulars were never a
part of the Contract. Once the circulars are beyond the terms of the
Contract and were not within the knowledge of the contracting parties, it
is not open for the respondent to rely upon them for interpreting the
clauses of the contract. It is pertinent to note that if the respondent had
intended that the Master Circulars or the guidelines were to form the basis
of revision/fixation of conversion charges then the same should have been
mentioned in the Contract or at least the tender documents and the bidder
should have been put to notice that the revision of conversion charges
will be as given in the Master circulars. In my opinion, it was not open
for the Arbitrator or the respondent to even place reliance on the Master
Circulars. Thus, the Arbitrator has committed a patent illegality by
placing reliance on these Circulars to interpret Clause 8. Relevant part of
the Award is extracted as under for emphasis:
"...I am of the opinion that present contract is clearly
non-ambiguous for this clause based on perusal of the
circulars placed on record..."
23. The petitioner is right in its contention that in the absence of the
Master Circulars, which were not a part of the Contract, the only
interpretation that can be given to clause 8 is that the conversion charges
would be revised each year during the currency of the Contract. The
words used in the clause are „at the end of one year‟ and not „one year
alone‟ as has been interpreted by the Arbitrator. The conspicuous
absence of the word „alone‟ is not without significance. This is fortified
by the fact that even in the past, the respondents had granted escalation on
a year to year basis. Even otherwise, in the trade usages and business
sense, this is the only interpretation which can be given to the clause.
The components such as labour charges, electricity charges, overheads,
fuels etc. are varying components and cannot remain static during the
entire currency of a contract extending over three years. This is the
reason that the conversion charges have been made variable depending on
the weightage and neutralization of the components. If the logic of
revising the conversion charges is seen in this perspective, the
interpretation of restricting the revision to one year alone becomes
illogical. In fact, the petitioner is also right in its contention that the
respondent itself understood the clause in this manner and which is why it
had initially paid the revised conversion charges and release the Bank
Guarantees, without any demur.
24. In my view, therefore, the interpretation of the Arbitrator based on
documents extraneous to the contract between the parties is patently
illegal and the Award rejecting the claim of the petitioner for
reimbursement of Rs. 78,74,189/- deserves to be set aside. Award is also
set aside to the extent it validates the recovery by the respondent from the
dues of the petitioner under Contract-III.
25. The judgment relied upon by the respondent in the case Michigan
Rubber (supra) would not help the respondent since the proposition laid
down therein is that the fixation of the value of a tender is in the domain
of the executive. The said controversy does not arise for consideration in
the present petition. In so far as the judgment in the case of Chandi
Prasad (supra) is concerned, there cannot be a quarrel with the
proposition laid down therein that any amount received by a party
unauthorizedly can be recovered. However, in view of the finding by this
Court above, it cannot be said that the petitioner was not entitled to
reimbursement of the money and it is wrong for the respondent to
contend that respondent was entitled to recover money from the
petitioner. The said judgment also does not help the respondent.
26. The present petition is accordingly allowed, leaving the petitioner
to agitate its claims in accordance with law.
JYOTI SINGH, J
th
MARCH 4 , 2020
yg/rd/
