[Cites 35, Cited by 0]
Delhi High Court
M/S Jsw Ispat Steel Limited (Now Known As ... vs M/S Gas Authority Of India Limited on 9 March, 2026
Author: C. Hari Shankar
Bench: C. Hari Shankar
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 12.02.2026
Judgment pronounced on: 09.03.2026
+ FAO(OS)(COMM) 4/2024
M/s JSW ISPAT STEEL LIMITED (NOW KNOWN
AS JSW STEEL LIMITED) .....Appellant
Through: Mr. Sandeep Sethi and Mr.
Ramesh Singh, Sr. Advs. with Mr. Sahil
Narang, Mr. Dhritiman Roy, Mr. Ayushman
Kacker, Mr. Krisna Gambhir and Mr. Shreya
Sethi, Advs.
versus
M/S GAS AUTHORITY OF INDIA
LIMITED ..... Respondent
Through: Ms. Madhavi Divan, Sr. Adv.
with Mr. Kapil Sankhla, Mr. Shubham
Saigal, Mr. Vipul Grover, Mr. Saurabh
Kumar Gangwar and Mr. Atharva Kotwala,
Advs.
CORAM:
HON'BLE MR. JUSTICE C. HARI SHANKAR
HON'BLE MR. JUSTICE OM PRAKASH SHUKLA
JUDGMENT
% 09.03.2026
OM PRAKASH SHUKLA, J.
1. This is an appeal filed under Section 37(1)(c) of the Arbitration
and Conciliation Act, 19961, read with Section 13 of the Commercial
Courts Act, against the judgment dated 20.12.2023 passed by the
Learned Single Judge of this Court in the O.M.P (Comm.) No.
"the Act' hereinafter
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249/2020, titled M/s Gas Authority of India Ltd. vs M/s JSW Ispat Steel
Ltd., whereby the respondent's petition under Section 34 of the 1996
Act has been partly allowed, and the award passed in favour of the
petitioner (Appellant herein), has been set aside.
FACTUAL BACKGROUND
2. The brief factual matrix necessary for the purposes of
adjudication of the present appeal is delineated below.
2.1 The Appellant is a company engaged in the operation of a sponge
iron and hot rolled coil plant located in Dolvi, District of Raigarh,
Maharashtra.
2.2 The respondent is a state owned natural gas corporation
specialising in the transmission of natural gas, petrochemicals, and city
gas distribution.
2.3 In order to obtain continuous supply of natural gas, the appellant
and the respondent entered into a contract dated 10.09.1991 (hereinafter
referred to as the "Primary Agreement"). Under this contract, the
respondent agreed to supply natural gas as per the requirement of the
appellant, subject to a maximum quantity of 1.00 Million Metric
Standard Cubic Metres per Day (MMSCMD).
2.4 The payment structure for the gas supplied under the Primary
Agreement was: (i) Price of the gas supplied, including a transportation
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charge of INR 60.60 per thousand standard cubic meter, and (ii) a
monthly service charge/transportation charge, calculated using a
specified formula, designed to recover the operational costs and
maintenance costs associated with the gas supply.
2.5 Subsequently, a supplementary agreement was entered between
the parties on 30.03.1998 (hereinafter referred to as the "Supplementary
Agreement"), which modified and substituted certain provisions of the
Primary Agreement, particularly with respect to the charges for the gas
supply.
2.6 In particular, clause 4.03 of the Primary Agreement was
substituted by a new clause 4.03, which replaced the formula based
monthly service charge with a fixed transportation charge of Rs.
38,67,600/- per month. The respondent contended that this fixed
transportation charge was introduced to recover costs such as
maintenance, operational expenses, and a minimum return on
investment.
2.7 Additionally, clause 12 of the Primary Agreement was amended,
specifying that the appellant had a period of 14 days from the receipt of
the gas supply invoice (including the price, transportation charges,
service charges and any additional charges) to raise any discrepancies
or disputes with the invoice. Failure to raise such a dispute within this
period was to be deemed a waiver of the right to raise claims or refer
the matter to arbitration.
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2.8 Thereafter, as the events unfolded, to accommodate the
appellant's increasing requirement for gas to operate its sponge iron
plant, a tripartite agreement was also executed between the respondent,
the appellant, and M/s Kalyani Mukund Limited on 21.12.1999. This
agreement resulted in the allocation of an additional 0.75 MMSCMD
of gas to the appellant, which was previously allocated to M/s Kalyani
Mukund Limited. As a result, the total gas allocation for the appellant
was increased from 1.00 MMSCMD to 1.75 MMSCMD.
2.9 The primary dispute arose when the respondent allegedly failed
to supply the committed quantity of gas to the appellant under both the
Primary and Supplementary Agreement. The respondent attributed this
failure to supply to government control over gas allocation, with the
supply being constrained due to scarcity.
2.10 The appellant raised concerns over the respondent's invoicing
practices. According to the appellant, respondent's issuance of invoices
for fixed transportation charges was wrongly calculated and wrongly
issued under both the contracts, despite the fact that the gas was only
being supplied under the Primary Agreement and not under the tripartite
agreement. The appellant argued that the respondent was wrongfully
calculating and raising invoices for transportation charges that were not
due.
2.11 Thereafter, according to appellant to resolve the issue, appellant
made several attempts to resolve the issues through communications
with the respondent, including raising formal grievances and disputing
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the transportation charges and failure to supply the contracted quantity
of gas. However, the respondent did not respond satisfactorily to these
complaints.
2.12 Due to the ongoing disputes and the respondent's failure to
resolve the issues, the appellant invoked arbitration as per the dispute
resolution mechanism stipulated in the agreements between the parties.
2.13 Being aggrieved, the arbitration proceedings were initiated, and
an arbitral tribunal was constituted to adjudicate the disputes between
the parties.
Proceedings before the arbitral tribunal
3. Statement of claim
3.1 The appellant, in the proceedings before the arbitral tribunal,
presented its claim based on a series of contentions and legal arguments
which are set out in detail below.
3.2 The appellant contended that, while entering into the contract
dated 10.09.1991, the respondent, by virtue of its monopoly status as a
state-owned gas transmission company, took unfair advantage of its
dominant position. The appellant claimed that the respondent coerced
the appellant into agreeing to pay a fixed transportation charge,
purportedly to recover the respondent's investments in laying the
pipeline and for the maintenance thereof.
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3.3 Thereafter, the appellant was persuaded to enter into a tripartite
agreement with the respondent and M/s Kalyani Mukund Limited on
21.12.1999, wherein the appellant was induced to pay additional fixed
transportation charges on the false assurance of receiving an additional
0.75 million standard cubic meters of gas per day. However, the
respondent failed to fulfil this commitment, leading to a material breach
of the agreement by the respondent. As a result, the appellant argued
that this constituted a fundamental breach of contract, as the promised
supply was not provided, and the fixed transportation charges were
retained despite the failure to supply the agreed gas.
3.4 The appellant contended that the payment of fixed transportation
charges was contingent upon the respondent fulfilling its commitment
to supply the full contracted quantity of natural gas each day. According
to the appellant, the respondent's failure to supply the requisite quantity
of gas, as specified in the contracts, extinguished the respondent's
entitlement to retain the transportation charges.
3.5 Further, the appellant asserted that the respondent's supply was
not only deficient in quantity but also failed to meet the agreed upon
specifications. The short supply and failure to meet specifications
resulted in severe operational consequences for the appellant, including
substantial production losses and a significant loss of profit.
3.6 Moreover, the appellant claimed that the financial prejudice
suffered was compounded by the fact that the appellant has made
significant expansion investments in reliance on the respondent's
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assurances of a continuous and adequate supply of gas. These
investments, which were made to scale up operations based on the
expectation of the promised gas supply, were rendered unproductive
due to the respondent's failure to deliver as contracted.
3.7 Accordingly, the appellant sought the following specific reliefs
before the arbitral tribunal, (i) Supply of the shortfall quantity of gas or,
alternatively, a refund of proportionate transportation charges; (ii)
Compensation for loss of profit for Rs. 701 crores; (iii) Compensation
for loss of use of money for Rs. 55 crores or interest at 20%; (iv)
Compensation for failed expansion for Rs. 40 crores along with interest
at 20%; (v) Reduction or refund of transportation charges, and (vi)
Costs of arbitration.
4. Statement of defence
4.1 The Respondent's first line of defence was that the appellant's
claims were barred by the statute of limitations and, in any event, were
not suitable for resolution through arbitration.
4.2 The Respondent contended that, even accepting the appellant's
case on its face, the gas supply commenced in 1994, and the contract
was executed on 10.09.1991. However, the appellant raised the dispute
regarding the excess transportation charges only in 2000, well beyond
the three-year limitation period. The respondent argued that any claims
for monetary relief that predates three years before the commencement
of the arbitration proceedings are barred by limitation, and therefore,
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the arbitral tribunal should refuse to entertain claims relating to periods
prior to the expiration of this three-year period.
4.3 The respondent further asserted that the claims relating to the
period before 1998 were invalid because the 1998 agreement replaced
or superseded the earlier contractual framework of 1991. Therefore,
claims relating to the pre-1998 period, should be deemed waived and
non-arbitrable.
4.4 The Respondent argued that the appellant had voluntarily agreed
to the modified contract terms under the 1998 agreement, which
included the new fixed transportation charges. The 1998 agreement
marked a conscious shift from a variable transportation charge
structure, as provided under the 1991 contract, to a fixed transportation
charge. This shift was not an "excess" charge but was explicitly agreed
upon by both parties as part of the renegotiated contractual terms.
4.5 The respondent emphasized that the appellant, entered into the
1998 agreement with full awareness of the gas supply situation and the
regulatory environment. The appellant, therefore, could not later claim
that the fixed transportation charges were unfair or excessive simply
because the supply situation or commercial outcomes were not as
expected.
4.6 The respondent contended that it did not breach the contract by
failing to meet the full gas supply commitments because the supply was
subject to government control and regulations. The gas supply was
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regulated by the Gas Linkage Committee and was subject to
governmental directions. Due to the scarcity based allocation system,
the respondent had limited control over the quantity of gas that could
be supplied to the appellant. The Respondent argued that, given the
regulatory control and scarcity of gas, the appellant's claims for non-
supply were based on an incorrect understanding of the contract. The
respondent emphasized that such contracts in the gas sector are subject
to government regulations and cannot be treated like ordinary
commercial contracts that are negotiated freely without such
constraints.
4.7 The respondent in response to the breach of contract allegations,
stated that, despite the constraints on supply, the appellant was
consistently supplied with 80% of the contracted quantity of gas, which
was a significant proportion of the total agreed upon supply and
consistent with the government's allocation orders. Therefore, the
respondent could not be held liable for a breach on the alleged shortfall
in supply when the constraints were beyond its control.
4.8 The respondent further defended the fixed transportation charges,
claiming that the pipeline network incur substantial fixed costs,
including capital investment, the cost of terminals, meters, safety
systems, telecommunications, monitoring, and ongoing operations and
maintenance costs. These costs must be covered by the transportation
charges, irrespective of the quantity of gas actually supplied. The
respondent argued that the fixed transportation charges are widely
recognized in the industry as a standard method to recover the costs of
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infrastructure and sustain maintenance and expansion. The appellant's
argument that the charges were "excess" was unfounded, as the charges
were based on the actual costs associated with providing the necessary
infrastructure, which are incurred regardless of gas throughput.
4.9 The Respondent denied that the gas supply obligations under the
contract were absolute and argued that the supply was always
contingent on factors beyond their control, such as gas availability and
governmental directives. The supply was thus always conditional and
could not be viewed as an absolute obligation that the respondent was
required to fulfil regardless of the circumstances.
4.10 The Respondent further argued that the appellant was fully aware
when entering into the initial agreement in 1991 and the modified
arrangement in 1998 that the gas supply would be subject to availability
constraints and government regulations. Therefore, the appellant could
not later claim damages based on the assumption that the respondent
was obligated to supply a minimum quantity of gas, unaffected by the
government's allocation policies or gas scarcity issues.
5. Framing of issues
5.1 In light of the factual matrix, legal arguments, and submissions
of both parties, the tribunal framed the following issues for
adjudication:
"1. Are the Claims or any part of them not arbitrable?
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2. Whether Respondent was justified in not supplying contracted
quantity of the gas to the Claimant? If no, to what effect?
3. Does the Respondent prove that under the terms of the contract,
the extent of supply to the Claimant of gas was dependent upon the
availability of gas at the material time as well as upon direction of
Government of India at that point of time?
4. Is the Respondent entitled to claim transportation charges from
the claimant even during the period of short supply or no supply
whatsoever?
5. Does the Respondent prove that the Claimant raised the objection
in regard to transportation charges from the first time in the year
2000? If yes, what is the effect?
6. Does the Respondent prove that on the execution of the supply
agreement dated 30.03.1998, all the claims prior thereto stood
extinguished?
7. It is shown that the Claims for transportation charges pertaining
to a period more than 3 years prior to date of the commencement of
arbitration i.e. 7.1.2003, is not arbitrable as barred by limitation?
8. Does the claimant prove that in view of the continuous and
uninterrupted process of issuing provisional invoices, the limitation
does not run against the Claimant until those invoices are reconciled
and made final?
9. Does the Claimant prove that the Respondent was wrong in
levying and recovering transportation Charges post-tri-partite
agreement for the same infrastructure against the same party under
two different agreements?
10. Whether the Respondent continuously made false assurances of
supplying the contracted quantity of gas so as to induce the Claimant
to continue to pay transportation charges?
11. Does the Respondent prove that the Claimant is stopped from
complaining about the levy of transportation charges because
throughout the contract period and even upto date and even post tri-
partite agreement, right upto 2000, they never disputed charges
recovered / levied by the Respondent?
12. Are the Claimant entitled to claim refund of corporate income
tax as per clause 4.03 of Contract?
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13. Are the Claimants entitled to interest? If so, from what date and
on what amount and at what rate?
14. Are the claimants entitled to all or any of the reliefs sought under
the Claim- Statement?
15. What order as to costs?
16. What Award?"
6. Arbitral award
6.1 On issue no.2 and 3, the tribunal concluded that the shortfall in
the supply of gas was not a breach of contract by the respondent. Instead
the shortfall was caused by the non-availability of gas after supplies
were first made to priority sectors as per the recommendation made by
the Gas Linkage Committee (GLC). This non-availability was a direct
result of governmental regulations and the allocation framework, and
the respondent was unable to supply the full contracted quantity due to
scarcity and governmental control over gas distribution.
6.2 The tribunal further noted that the Central Government holds the
power to allocate gas to priority sectors under its policy, and this takes
precedence over the contractual terms related to gas supply. The
tribunal held that Articles 5.01 to 5.03 of the Gas Supply Agreement
dated 10.09.1991 and relevant provisions of the Supplementary
Agreement dated 30.03.1998 had to be interpreted in a manner that was
consistent with the gas utilization policy enforced by the government.
The tribunal specifically relied on the judgment of the Supreme Court
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in Reliance Natural Resources Ltd. v. Reliance Industries Ltd.2 to
establish that the government's allocation decisions override any
conflicting contractual provisions, even when it results in a reduction
of the contracted gas supply.
6.3 The tribunal held that the short supply of gas, even if it could be
construed as a breach of contract, should be treated as a force majeure
even due to the government's regulatory orders. This was seen as an
external factor that disrupted the supply of gas and therefore absolved
the respondent from liability for failing to meet the contractual supply
targets.
6.4 On issue no. 4 and 5, the tribunal did not accept the appellant's
argument that force majeure automatically suspends its obligation to
pay the fixed transportation charges. The tribunal also rejected the
appellant's claim for a proportionate reduction of transportation charges
based on the principle of "part performance" under section 12(2),
Specific Relief Act, 1963.
6.5 The tribunal reasoned that while a shortfall in supply could
ordinarily constitute a breach of contract under Article 5.01 of the GSA,
when the shortfall occurs due to a force majeure event, it is not
considered a breach at all. As a result, the tribunal held that the failure
to supply gas due to governmental regulations did not create a right for
the appellant to suspend payment of full transportation charges. The
2 (2010) 7 SCC 1
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fixed transportation charge remained due regardless of the shortfall,
unless the terms explicitly provided otherwise.
6.6 The tribunal dismissed the appellant's reliance on Section 12(2)
and (3) of the Specific Relief Act, 1963. The tribunal found that, (i) the
unperformed part of the contract was not significant enough to justify a
claim for reduction of the fixed charges, as the respondent had been able
to supply gas at approximately 80% of the contracted quantity, and (ii)
even if Section 12(3) could apply, it would require the appellant to
relinquish claims for the remaining performance and compensation.
Since the appellant continued to seek damages for the shortfall, it could
not invoke the provisions of the Specific Relief Act to claim a
proportionate reduction in transportation charges.
6.7 Having rejected the claims based on legal grounds, the tribunal
turned to a more commercially sensible interpretation of the contract,
invoking the principle of business efficacy (Article 4.03). The tribunal
observed that the fixed monthly transportation charge of Rs.
38,67,600/- was meant to cover the facilities available for the supply of
gas up to the maximum capacity specified in Article 5.01 of the GSA.
However, in light of the force majeure event, the tribunal found that it
would be commercially unfair to charge the full amount when the
supply was drastically reduced.
6.8 Thus, the arbitral tribunal held that that according to the principle
of business efficacy, contracts should be interpreted in a manner that
aligns with the commercial purpose they were meant to achieve. The
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tribunal thus ruled that the fixed transportation charges should be
proportionately reduced on a month-by-month basis to reflect the actual
quantity of gas supplied. According to tribunal, this interpretation was
consistent with the commercial realities of the situation and ensured that
the respondent was not unjustly enriched at the expense of the appellant.
6.9 In addition to the contractual interpretation, the tribunal applied
the principle of "partial failure of consideration", which is recognized
under Indian law as a basis for adjustment of payments when a service
or performance is not fully delivered. This principle allows for
apportionment where part of the contracted service is not rendered. In
this case, since the transportation service corresponding to the shortfall
in gas supply was not performed in full, the tribunal ruled that
restitution or adjustment of the charges was warranted.
6.10 Thus, the respondent submitted detailed records of the total
supplies from June 1994 to January 2003, showing that the total gas
supply during this period amounted to 2,450.01 MMSCM. The
appellant calculated the month-wise transportation charges based on the
actual quantity of gas supplied and found that the fixed monthly
transportation charge should be proportionally reduced for each month.
This reduction resulted in a refund amount of Rs. 14.67 crores.
6.11 Consequently, on issue no.4, the tribunal upheld the appellant's
calculation and agreed that Rs. 14.67 crores represented the excess
transportation charges that should be refunded. This refund amount was
directly linked to the shortfall in the gas supply. The tribunal justified
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this decision both through a commercially sensible interpretation of the
contract and, alternatively, by applying the principle of partial failure
of consideration. The tribunal found that it would be unjust to allow the
full transportation charges to be paid when the full service was not
rendered due to the force majeure event.
6.12 On issue no.5, the tribunal concluded that the appellant was not
estopped from claiming a proportionate reduction in transportation
costs, even though the issue had been raised in the year 2000. The
tribunal held that the appellant was entitled to claim a refund of Rs.
14.67 crores for the period from June 1994 to January 2003. This was
based on a proper computation that reflected the shortfall in the gas
supply. The tribunal affirmed that the appellant's right to claim this
refund was not barred by any time limitation, as the contractual terms
and the principles of Indian law provided a valid basis for the claim.
6.13 On issue no. 6, the tribunal rejected the respondent's argument
that all prior claims under the 1991 agreement were waived or
extinguished upon the execution of the 1998 supplementary agreement.
The respondent had described the 1998 agreement as an amendment to
the 1991 agreement, rather than a separate, independent contract. Based
on this, the tribunal held that the 1998 agreement did not extinguish the
appellant's claims arising under the earlier contract, as the 1998
agreement was merely a modification of certain terms and not a
complete substitution of the 1991 contract.
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6.14 On Issues 7 and 8, the tribunal addressed the respondent's
objection that the appellant's claims for transportation charge refunds
were bared by limitation, particularly those claims pertaining to period
prior to three years before the initiation of arbitration, i.e., before 07.
01.2003. The respondent argued that the invoices became final after 45
days, and any claim for refunds older than three years was time-barred
and therefore not arbitrable.
6.15 The tribunal accepted the appellant's explanation that the
invoices raised throughout the contract period were provisional and that
the accounts had not been fully reconciled or finalized. The tribunal
noted that there was no evidence to suggest that these invoices were
later finalised. Even the respondent's witness did not deny that the
invoices remained provisional.
6.16 The tribunal held that since the invoices were provisional and
never finalized, the limitation period for the appellant's claims did not
commence. The tribunal did not accept the respondent's argument that
the invoices should have become final within 45 days or by the end of
the financial year. Therefore, the tribunal ruled that the claim of Rs.
14.67 crores was not barred by limitation.
6.17 Therefore, under Issue 7, the tribunal held that the appellant's
refund claim of Rs. 14.67 crores was not barred by limitation and was
arbitrable. The claim was timely, as the limitation period has not yet
begun, given the pending reconciliation of the provisional invoices.
Under Issue 8, the tribunal held that the limitation period would
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commence once the provisional invoices were reconciled and made
final. Since this had not occurred, the claim was within the permissible
time frame.
6.18 On Issue 11, the tribunal considered whether the appellant was
estopped from challenging the transportation charges because it had not
objected to them during the contract period or up to 29.12.2000.
6.19 The tribunal held that mere failure to object earlier or until
29.12.2000, did not create estoppel, especially since the tribunal had
already determined that the claims were not barred by limitation. The
tribunal also held that the 14-day dispute mechanism did not
automatically impose estoppel if not invoked. Additionally, the refund
of Rs. 4.22 crores after the 1998 revision did not preclude the appellant
from claiming other amounts due and accepting payments or revisions
without protest did not bar a lawful claim. Therefore, the tribunal ruled
that the appellant was not estopped from seeking refund of
proportionate transportation charges.
6.20 At last, the tribunal awarded Rs. 14.67 crores to the appellant as
a refund for proportionate transportation charges, based on a
commercial interpretation of the contract and the principle of partial
failure of consideration. The tribunal held that fixed transportation
charges should be reduced in line with the shortfall in supply due to
force majeure.
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6.21 The tribunal awarded interest at 6% per annum from 29.12.2000,
exercising discretion under Section 31(7) of the Arbitration and
Conciliation Act, 1996, as the contract did not specify interest. This
decision compensated the appellant for the delayed payment of the
refund.
7. Impugned Judgment
7.1 Aggrieved by the arbitral award, the respondent filed a petition
under Section 34 petition of the Arbitration and Conciliation Act, 1996
before this court, seeking to set aside the award passed by the Arbitral
Tribunal.
7.2 Section 34 of the Act provides the mechanism for setting aside
an arbitral award in specific grounds, including when the award is in
conflict with the public policy of India. In this case, the learned Single
Judge of this court considered the section 34 petition and ultimately set
aside the arbitral award. The reasons and findings for this decision are
delineated below:
7.3 The learned Single Judge first considered the respondent's
challenge to the arbitral tribunal's decision to reduce the fixed
transportation charges on a pro-rata basis, as well as the tribunal's
reliance on the business efficacy principle and the partial failure of
consideration. The respondent argued that under the 1991 Agreement
and the 1998 Supplementary Agreement, the transportation charges
were fixed and not contingent on the quantity of gas supplied. As such,
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they contended that reducing the transportation charges to a pro-rata
basis was legally flawed.
7.4 The respondent argued that the arbitral tribunal's reliance on
business efficacy was legally erroneous and inconsistent with its own
force majeure findings. The tribunal had essentially found that the
failure to supply gas was due to force majeure, but simultaneously
applied partial failure of consideration to reduce the transportation
charges. The respondent argued that this created a contradiction, as
force majeure and partial failure of consideration should not co-exist in
the manner applied by the tribunal.
7.5 While the learned Single Judge acknowledged the respondent's
argument that the transportation charges were fixed and not linked to
supply levels, the learned single Judge also noted that contractual
interpretation was within the domain of the arbitral tribunal. The
learned Single Judge observed that the tribunal's interpretation,
although contentious, was a plausible and reasonable construction of
the contract. Since the tribunal's view was within the ambit of
reasonable interpretation, the learned Single Judge declined to
reappraise the merits of the interpretation. In other words, the learned
single Judge refused to interfere with the arbitral award on the grounds
of merits-based reconsideration.
7.6 The learned Single Judge refrained from engaging in a merits-
based review, reiterating that the role of the court under Section 34 is
not to substitute its own interpretation for that of the arbitrator and
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contractual interpretation remains a matter for the arbitral tribunal as
long as the tribunal's interpretation was within the reasonable bounds
of contract law, the court would not interfere.
7.7 On Issue No. 5,7,8, and 11, the learned Single Judge focused on
the amended Clause/Article 12.03 of the Supplementary Agreement
dated 30.03.1998. The amended clause specifically outlined the
consequences of failing to lodge a claim within 14 days of receiving
invoices for transportation charges. It was clearly stated that failure to
do so would constitute an absolute waiver of the claim and the right to
refer the matter to arbitration.
7.8 The learned Single Judge highlighted that the failure of the
appellant to raise any claim within the prescribed 14-day period under
Article 12.03 was a crucial aspect that had to be considered. However,
the arbitral tribunal had not taken this into account, ignoring the clear
stipulation in the agreement. As a result, the learned Single Judge
concluded that the tribunal's failure to consider waiver meant that it had
overlooked a critical issue affecting the jurisdiction of the tribunal itself.
7.9 The learned single judge found that the issue of waiver and the
jurisdiction of the tribunal were not addressed by the arbitral tribunal,
despite the fact that Article 12.03 of the contract was central to the
dispute. The failure of the tribunal to even address this provision was
found to be a serious oversight.
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7.10 The learned Single Judge recorded that the framework of Article
12.03, which governs the dispute resolution process and time limits for
raising claims, had been ignored by the tribunal. The tribunal's
reasoning that the invoices were provisional and therefore did not
trigger the limitation period was criticized. The learned Single Judge
held that even if the invoices were provisional, this did not extend the
time indefinitely for raising claims.
7.11 The learned Single Judge further rejected the tribunal's
conclusion that the invoices being provisional prevented the limitation
period from running. The learned Single Judge ruled that if the invoices
were indeed provisional, they cannot be open-ended, and the appellant
should have raised disputes within a reasonable time. The failure to do
so was deemed a violation of the 14-day limitation period set out in the
contract, which would bar the claims under Section 34 of the Limitation
Act, 1963.
7.12 Additionally, the learned Single Judge pointed out that the
appellant's primary claim was for loss of profit due to the wrongful levy
of transportation charges. However, the tribunal had treated the claim
as one for a partial refund of transportation charges, awarding Rs. 14.67
crores based on that assumption. The learned Single Judge found that
this was a discrepancy, as the appellant had never formally sought a
refund of transportation charges in its Statement of Claim.
7.13 The learned Single Judge further emphasized that the award
granted by the tribunal did not align with the appellant's pleaded case.
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The claim for loss of profit was distinct from a claim for partial refund
of transportation charges, yet the tribunal awarded the latter despite the
fact that the appellant had abandoned any claim related to the 1999
Tripartite Agreement, and consequently, this issue was formally framed
as Issue No. 9.
7.14 The learned Single Judge noted that the appellant's primary
grievance was related to the transportation charges under the 1999
Tripartite Agreement. However, during the arbitration, the appellant
itself clarified that disputes under the Tripartite Agreement were not
part of the reference. Despite this, the tribunal proceeded to award a
refund based on the 1991 and 1998 agreements, which the learned
Single Judge found to be inconsistent with the appellant's pleaded case
and the issue framing.
7.15 The learned Single Judge noted that the tribunal had awarded
relief under contracts other than those originally pleaded by the
appellant. This was deemed an error, as it departed from the actual
dispute and the issues framed during arbitration.
7.16 The learned Single Judge concluded that the arbitral award was
legally flawed and inconsistent with the contractual stipulations,
particularly with respect to the issue of waiver under Article 12.03 and
the claims raised by the appellant. The failure to properly consider these
critical issues, along with the error in awarding a refund based on a
different contractual framework, led the learned Single Judge to set
aside the arbitral award.
FAO(OS)(COMM) 4/2024
7.17 As a result of the aforementioned findings, the learned Single
Judge allowed the Section 34 petition filed by the respondent and set
aside the arbitral award.
Proceedings before us
8. Rival submissions
8.1 Mr. Sandeep Sethi, learned Senior Counsel for the appellant,
argued that the learned Single Judge wrongly held that the appellant had
waived its claim by failing to dispute the transportation invoices within
the 14 day period prescribed under Article 12.03 of the Supplementary
Agreement. It was submitted that the arbitral tribunal had considered
and rejected the plea of waiver and estoppel under Issues 5, 6 and 11,
referencing Article 12.03 in its award. The counsel argued that these
factual findings by the tribunal were beyond interference by the court
under Section 34 of the Act.
8.2 It was further argued that Article 12.03 itself was void under
Section 28 of the Indian Contract Act, 1872, as it restricted and
extinguished the rights of the appellant in an unjust manner. According
to the appellant, waiver requires a positive act, not mere silence or
payment of provisional invoices. The appellant maintained that Article
12.03 could not extinguish its rights to claim due to the lack of a clear
and explicit waiver under Indian contract law principles.
FAO(OS)(COMM) 4/2024
8.3 The learned Senior Counsel submitted that the impugned arbitral
award had rendered its finding only after carefully considering and
setting out the submissions from both sides. As such, the counsel argued
that the award expresses a clear application of mind by the tribunal and
was in conformity with section 31 (3) of the Act, which mandates that
an arbitral award must state the reasons for its decision.
8.4 The appellant's Senior Counsel submitted that the lack of
detailed reasoning in the award should not be a ground for interference
under Section 34. The counsel referred to precedents suggesting that
minimal reasoning does not automatically justify setting aside an
arbitral award under the Indian law framework.
8.5 It was further argued that the claims were within the prescribed
period of limitation, emphasizing several grounds:
i. The Agreement for supply of gas formally ended on
31.12.2000, although the actual supply continued till January
2003. The appellant contended that it could only ascertain the
total shortfall in gas supply after 31.12.2000, when the contract
period formally concluded. Therefore, cause of action arose only
after 31.12.2000, and the invocation of arbitration on 07.01.2003
was well within the three-year limitation period prescribed under
Section 3 of the Limitation Act, 1963.
ii. Even for the alternative claim for refund of proportionate
transportation charges, limitation would begin at the earliest from
31.12.2000 when the contractual period ended.
FAO(OS)(COMM) 4/2024
iii. The shortfall in gas supply occurred throughout the
contract period, making it a continuing breach, which, according
to the appellant, extends the limitation period.
iv. The invoices were marked "provisional" by the
respondent, and there was no final reconciliation of accounts,
meaning the claim could not properly arise until the final
reconciliation took place.
v. The arbitral tribunal accepted these arguments and held
that the claim was within time. The learned counsel criticized the
learned Single Judge's reliance on the Reliance Industries case,
asserting that it only upheld the tribunal's findings on limitation
and that waiver/estoppel were questions of fact, not of law. The
Supreme Court had clarified that legal questions in the case
remained open.
8.6 It was also urged that the representations of the appellant were
considered by the Respondent only on 15.07.2002, after which mutual
consultations or settlement discussions ended, and the cause of
arbitration arose. According to the appellant, until that point, any claim
would have been premature.
8.7 Lastly, the appellant's counsel submitted that, even assuming the
claims were partially barred, the Appellant would still be entitled to a
sum of Rs. 8.5 Cr. (out of 14.67 Cr.) as a refund, and after calculating
the interest accrued, the total amount would be Rs. 44.86 Cr. as of
10.01.2024.
FAO(OS)(COMM) 4/2024
8.8 Per contra, Ms. Madhavi Divan, learned Senior Counsel for the
respondent, submitted that the appellant could not now seek a refund of
the fixed transportation charges under the 1991 contract. The
respondent pointed out that when the 1991 Contract was amended in
1998, the appellant did not raise any concern about the fixed
transportation charges despite knowing that the charges were not linked
to the actual supply of gas. The 1998 Supplementary Agreement clearly
stipulated the fixed transportation charges, which were agreed to by
both parties.
8.9 Learned Senior Counsel for the respondent contended that the
Tripartite issue had been settled, and the respondent had refunded Rs.
4.22 crores through a credit note for the transportation charges. The
appellant accepted this refund without objection, and therefore, the
claims before 30.03.1998 were settled and waived. The respondent
argued that the appellant had agreed in 1998 to change the
transportation charges to a fixed monthly amount of Rs. 38,67,600/-,
fully aware that these charges were independent of the amount of gas
supplied. The respondent submitted that any objections to the invoices
should have been raised within 14 days, but the appellant did not do so,
creating estoppel under the terms of the contract.
8.10 The respondent submitted that it had duly supplied the contracted
quantity of gas under the 1991 Contract. According to the respondent,
the appellant was not entitled to claim a refund of "fixed transportation
charges" on the basis of short supply, as the contractual requirement
was not breached. It was noted that Clause 5.02 of the 1991 Agreement
FAO(OS)(COMM) 4/2024
specifically contemplated reduced supply and provided a formula for
such situations. The respondent met the 80% supply threshold set in the
contract, which was more than the minimum guaranteed supply
required.
8.11 The respondent argued that under the amended Article 12.03 of
the Supplementary Agreement, the appellant was required to raise
objections to the invoices within 14 days and failing to do so meant that
the appellant's claim for refunds was barred by the limitation period
under the contract. The respondent emphasized that the invoices were
final once the 14-day period elapsed, and any objections raised later
were inadmissible.
8.12 Lastly, the respondent highlighted that the arbitral tribunal itself
had acknowledged that reduced supply was contractually envisaged
under the 1991 Contract. As per Article 5.01, the fixed transportation
charges were not linked to the actual quantity of gas supplied. Reduced
supply was always contemplated, and the Tribunal's attempt to order a
pro-rata refund was inconsistent with the contractual terms. Moreover,
the tribunal's conclusion on force majeure as contradictory, as it
simultaneously justified reduced supply due to external factors yet
ordered a pro-rata refund of transportation charged.
Reasoning and findings
9. We have heard learned senior counsel and learned counsels who
appeared before us at a considerable length and on various dates. The
record has also been carefully perused in its entirety.
FAO(OS)(COMM) 4/2024
10. Scope of interference
10.1. In a challenge to an arbitral award, the most important starting
point is to recognize the limited scope of judicial interference, as
enshrined in Part-I of the Arbitration and Conciliation Act, 1996 ("the
Act"). The framework of the Act, particularly Section 34, is premised
on minimal intervention by courts to ensure that arbitration remains an
effective and efficient alternative dispute resolution mechanism. It is
essential to understand that judicial review of arbitral awards is not
intended to serve as an appeal on the merits of the case. Rather, it is
confined to a limited set of circumstances as prescribed by the Act.
10.2. To clarify the boundaries of judicial intervention, the Supreme
Court has consistently emphasized, through a catena of decisions, the
restrictive and narrow nature of interference under Section 34 of the
Act. The Appellate Court under Section 37 is even more constrained
than the Section 34 Court, as it is not authorized to conduct a merit
based review of the award. However, to avoid prolixity, and keep the
analysis concise, it is best to refer only a select few key authorities to
understand the binding principles without overloading the discussion
with excessive details.
10.3. The apex court in its decision of Jan De Nul Dredging India
Pvt Ltd. versus Tuticorin Port trust 3, after taking into account the
decisions in MMTC Limited vs. Vedanta Limited4, Konkan Railway
3 2026 INSC 34
4 (2019) 4 SCC 163
FAO(OS)(COMM) 4/2024
Corpn. Ltd. v. Chenab Bridge5, Punjab State Civil Supplies Corpn.
Ltd. v. Sanman Rice Mills Project6, UHL UHL Power Company
Limited vs. State of Himachal Pradesh7and Bombay Slum
Redevelopment Corporation Private Limited vs. Samir Narain
Bhojwani8 clearly stated that the appellate power under Section 37 of
the Act is restricted to verifying whether the Section 34 court has
exceeded its jurisdiction or failed to exercise its powers appropriately.
The Supreme Court noted that appellate intervention should only occur
if the Section 34 court has misapplied the scope of its jurisdiction or
made an error in law. The relevant observation is as follows:
30. That being the position, the award of the Arbitral Tribunal
was not liable to be disturbed under Section 34 of the Act and was
rightly not disturbed. It is settled in law that the appellate powers
under Section 37 are limited to the scope of Section 34 and cannot
exceed beyond it. Certainly, therefore, if an award is not liable to
be disturbed under Section 34 of the Act, the same could not have
been interfered with in exercise of powers under Section 37 of the
Act.
31. In MMTC Limited vs. Vedanta Limited9, this Court has
very succinctly laid down the powers of Appellate Court under the
Act. It held as under :-
"14. As far as interference with an order made under
Section 34, as per Section 37, is concerned, it cannot be
disputed that such interference under Section 37 cannot
travel beyond the restrictions laid down under Section 34. In
other words, the court cannot undertake an independent
assessment of the merits of the award and must only
ascertain that the exercise of power by the court under
Section 34 has not exceeded the scope of the
provision. Thus, it is evident that in case an arbitral
award has been confirmed by the court under Section 34 and
5 (2023) 9 SCC 85
6 2024 SCC OnLine SC 2632
7 (2022) 4 SCC 116
8 (2024) 7 SCC 218
9 (2019) 4 SCC 163
FAO(OS)(COMM) 4/2024
by the court in an appeal under Section 37, this Court must
be extremely cautious and slow to disturb such concurrent
findings."
32. In Konkan Railway Corpn. Ltd. v. Chenab Bridge
Project10, a three-judge bench of this Hon'ble Court has
extensively dealt with the jurisprudence around Sections 34 and 37
of the Arbitration Act. This Court has held that:
"18. At the outset, we may state that the jurisdiction of
the court under Section 37 of the Act, as clarified by this
Court in MMTC Ltd. v. Vedanta Ltd.7, is akin to the
jurisdiction of the court under Section 34 of the Act. Scope
of interference by a court in an appeal under Section 37 of
the Act, in examining an order, setting aside or refusing to
set aside an award, is restricted and subject to the same
grounds as the challenge under Section 34 of the Act.
19. Therefore, the scope of jurisdiction under Section 34
and Section 37 of the Act is not akin to normal appellate
jurisdiction. It is well-settled that courts ought not to
interfere with the arbitral award in a casual and cavalier
manner. The mere possibility of an alternative view on facts
or interpretation of the contract does not entitle courts to
reverse the findings of the Arbitral Tribunal."
33. In Punjab State Civil Supplies Corpn. Ltd. v. Sanman Rice
Mills11, this Hon'ble Court, while examining the scope of Section
34 and Section 37 of the Arbitration Act, has held that:
"20. In view of the above position in law on the subject,
the scope of the intervention of the court in arbitral matters
is virtually prohibited, if not absolutely barred and that the
interference is confined only to the extent envisaged under
Section 34 of the Act. The appellate power of Section 37 of
the Act is limited within the domain of Section 34 of the Act.
It is exercisable only to find out if the court, exercising
power under Section 34 of the Act, has acted within its limits
as prescribed thereunder or has exceeded or failed to
exercise the power so conferred. The Appellate Court has no
authority of law to consider the matter in dispute before the
arbitral tribunal on merits so as to find out as to whether the
decision of the arbitral tribunal is right or wrong upon
reappraisal of evidence as if it is sitting in an ordinary court
of appeal. It is only where the court exercising power under
10 (2023) 9 SCC 85
11 2024 SCC OnLine SC 2632
FAO(OS)(COMM) 4/2024
Section 34 has failed to exercise its jurisdiction vested in it
by Section 34 or has travelled beyond its jurisdiction that the
appellate court can step in and set aside the order passed
under Section 34 of the Act. Its power is more akin to that
superintendence as is vested in civil courts while exercising
revisionary powers. The arbitral award is not liable to be
interfered unless a case for interference as set out in the
earlier part of the decision, is made out. It cannot be
disturbed only for the reason that instead of the view taken
by the arbitral tribunal, the other view which is also a
possible view is a better view according to the appellate
court.
21. It must also be remembered that proceedings under
Section 34 of the Act are summary in nature and are not like
a full-fledged regular civil suit. Therefore, the scope of
Section 37 of the Act is much more summary in nature and
not like an ordinary civil appeal. The award as such cannot
be touched unless it is contrary to the substantive provision
of law; any provision of the Act or the terms of the
agreement."
34. In UHL Power Company Limited vs. State of Himachal
Pradesh12, a three judges Bench of this Court observed as under:-
"The jurisdiction conferred on the courts under Section 34 of the
Arbitration Act is fairly narrow, when it comes to the scope of an
appeal under Section 37 of the Arbitration Act, the jurisdiction of
the Appellate Court in examining an order, setting aside or refusing
to set aside an order, is all the more circumscribed."
35. In a recent case of Bombay Slum Redevelopment
Corporation Private Limited vs. Samir Narain Bhojwani13, a
Bench of this Court, of which one of us (P. Mithal, J.) was a
member, had held that the jurisdiction of the Appellate Court
dealing with an appeal under Section 37 of the Act against the
judgment in a petition under Section 34 of the Act is more
constrained than the jurisdiction of the court dealing with a petition
under Section 34 of the Act.
36. The gist of the aforesaid decisions is that the jurisdiction of
the court under Section 37 of the Act is akin to the jurisdiction of
the court under Section 34 of the Act, and, therefore, the scope of
interference by the court in appeal under Section 37 cannot go
beyond the grounds on which challenge can be made to the award
under Section 34 of the Act. Moreover, the courts exercising
12 (2022) 4 SCC 116
13 (2024) 7 SCC 2018
FAO(OS)(COMM) 4/2024
powers under Sections 34 and 37, do not act as a normal court, and
therefore, ought not to interfere with the arbitral award on a mere
possibility of an alternative view.
37. In other words, the scope of interference of the court with
the arbitral matters is virtually prohibited, if not absolutely barred.
The powers of the Appellate Court are even more restricted than
the powers conferred by Section 34 of the Act. The appellate power
under Section 37 of the Act is exercisable only to find out if the
court exercising power under Section 34 of the Act, has acted
within its limits as prescribed thereunder or has exceeded or failed
to exercise the power so conferred. The Appellate Court exercising
powers under Section 37 of the Act has no authority of law to
consider the matter in dispute before the Arbitral Tribunal on merits
so as to hold as to whether the award of the Arbitral Tribunal is
right or wrong. The Appellate Court in exercise of such power
cannot sit as an ordinary court of appeal and reappraise the
evidence to record a contrary finding. The award of the Arbitral
Tribunal cannot be touched by the court unless it is contrary to the
substantive provision of law or any provision of the Act or the
terms of the agreement.
11. In the decision of M/s Larsen Air Conditioning and
Refrigeration Company vs. Union of India & Ors14 the Supreme Court
held that Section 37 of the Act provides a narrower scope for reviewing
arbitral awards, especially when the award has been substantially
upheld under Section 34. The Court reiterated that appeals under
Section 37 should be limited to ensuring compliance with the
jurisdictional boundaries defined in Section 34 and cannot be used for
a reassessment of facts or law.
12. Thus, the law on judicial review of arbitral awards, as crystallized
by the Supreme Court, can be summarised as follows:
i. The powers of Section 37 court are strictly confined within the
limits prescribed by Section 34. The section 37 court cannot go
14 2023 INSC 708
FAO(OS)(COMM) 4/2024
beyond the grounds available for setting aside an arbitral award
under section 34.
ii. Section 37 empowers the appellate court only to determine
whether the Section 34 court has acted within its jurisdiction.
The scope of Section 37 intervention is restricted and akin to
jurisdiction of the Section 34 court, which is confined to
reviewing specific grounds such as excess of authority, lack of
jurisdiction, violation of public policy and patent illegality.
iii. The judicial review of arbitral awards under Section 34 and 37
is extremely limited. Courts must refrain from intervening
merely because they might prefer a different view or
interpretation of the facts or law. Unless these is a manifest error
of law, contravention of public policy, or a substantial
miscarriage of justice, the tribunal's decision should be allowed
to stand.
iv. One of the primary objective of the Act is to respect the
autonomy of the arbitral process and minimize judicial
intervention. Therefore, judicial intervention should be
exercised with extreme caution and in a restrictive manner. If
courts excessively intervene in arbitral awards, it would not only
undermine the efficiency and finality of arbitration but also
defeat the very purpose of arbitration.
13. Thus, as discussed above, the court's role under Section 37 is
confined to examining whether the Section 34 court has acted within its
jurisdiction and not exceeded the limited grounds for setting aside an
FAO(OS)(COMM) 4/2024
arbitral award. Hence, to examine whether the learned Single Judge
acted within its jurisdiction, we deem it relevant to also briefly
understand the jurisdiction conferred upon section 34 courts to set aside
an award.
14. The apex court in its decision of Consolidated Construction
consortium limited vs. Software technology parks of India15
emphasized that an arbitral award cannot be set aside simply because
the award is illegal or erroneous in law, as that would require re-
appraisal of evidence, which is not permissible under Section 34. The
observation with regards to section 34 reads as below:
"22. Sub-section (1) of Section 34 provides that an application may
be made to the competent court for setting aside an arbitral award.
This is the only remedy available for setting aside an arbitral award.
The conditions for setting aside an arbitral award are mentioned in
sub-sections (2) and (2A). Sub-section (2) provides for situations
such as the agreed party was under some incapacity or the arbitration
agreement is not valid under the law or the aggrieved party did not
receive proper notice regarding appointment of arbitrator or of the
arbitral proceedings which prevented it from presenting its case or
the arbitral award deals with a dispute not contemplated by or not
falling within the terms of arbitration or the composition of the
arbitral tribunal or the procedure adopted in arbitration were not in
accordance with the agreement of the parties or the subject matter of
dispute is not capable of settlement by arbitration or the arbitral
award is in conflict within the public policy of India. In terms of sub-
section (2A), an arbitral award may also be set aside on the ground
of patent illegality appearing on the face of the award. Sub-section
(3) provides for the time limit for filing of an application for setting
aside arbitral award. Therefore, the grounds on which an arbitral
award can be set aside are clearly mentioned in Sections 34(2) and
34(2A) of the 1996 Act. An arbitral award cannot be set aside on a
ground which is beyond the grounds mentioned in sub-sections (2)
and (2A) of Section 34.
23. Scope of Section 34 of the 1996 Act is now well crystallized by
a plethora of judgments of this Court. Section 34 is not in the nature
15 2025 INSC 574
FAO(OS)(COMM) 4/2024
of an appellate provision. It provides for setting aside an arbitral
award that too only on very limited grounds i.e. as those contained
in sub-sections (2) and (2A) of Section 34. It is the only remedy for
setting aside an arbitral award. An arbitral award is not liable to be
interfered with only on the ground that the award is illegal or is
erroneous in law which would require re-appraisal of the evidence
adduced before the arbitral tribunal. If two views are possible, there
is no scope for the court to re-appraise the evidence and to take the
view other than the one taken by the arbitrator. The view taken by
the arbitral tribunal is ordinarily to be accepted and allowed to
prevail. Thus, the scope of interference in arbitral matters is only
confined to the extent envisaged under Section 34 of the Act. The
court exercising powers under Section 34 has perforce to limit its
jurisdiction within the four corners of Section 34. It cannot travel
beyond Section 34. Thus, proceedings under Section 34 are
summary in nature and not like a full-fledged civil suit or a civil
appeal. The award as such cannot be touched unless it is contrary to
the substantive provisions of law or Section 34 of the 1996 Act or
the terms of the agreement
24. Therefore, the role of the court under Section 34 of the 1996 Act
is clearly demarcated. It is a restrictive jurisdiction and has to be
invoked in a conservative manner. The reason is that arbitral
autonomy must be respected and judicial interference should remain
minimal otherwise it will defeat the very object of the 1996 Act."
15. Upon a plain reading of the above, it is clear that the role of
Section 34 court is narrow and restricted. The court cannot re-appreciate
the evidence, nor can it correct mere factual or legal errors made by the
arbitral tribunal. The court is not an appellate authority and cannot
substitute its own view simply because another view is possible. The
principle behind Section 34 is to uphold arbitral autonomy and respect
the object of the Act, and Courts must exercise a minimal-interference
approach to avoid undermining the arbitral process.
16. Additionally, in the decision of ONGC limited v. Saw Pipes
Limited16 the apex court enumerated the grounds under Section 34 on
(2003) 5 SCC 705
FAO(OS)(COMM) 4/2024
which an arbitral award can be set aside. These grounds are, (a)
contravention of fundamental policy of Indian law; or (b) violation of
the interest of India; or (c) violation of justice or morality, or (d)
patently illegal. The Court made it clear that the grounds for
interference under Section 34 are limited, and an award can only be set
aside on these specific grounds. Further, it was held that patent
illegality, as a ground for setting aside an award, is an exception and
requires a careful and cautious approach.
17. Coming to the impugned award under challenge, upon a careful
perusal thereof, we find that the order does not explicitly refer to any of
the aforesaid grounds while setting aside the award. However, the
reasoning adopted by the learned Judge appears to proceed on the
premise of patent illegality, albeit without expressly articulating this
ground.
18. In light of the above, it is apposite to briefly examine the contours
of patent illegality under Section 34 of the Act.
19. Apex court in its decision of Ramesh Kumar Jain v. Bharat
Aluminium Company Limited(BALCO)17 has extensively elaborated
on the concept of patent illegality. The relevant observations makes an
interesting read and are as follows:
"35. Considering the aforesaid precedents, in our considered view,
the said terminology of 'patent illegality' indicates more than one
scenario such as the findings of the arbitrator must shock the judicial
conscience or the arbitrator took into account matters he shouldn't
17 2025 INSC 1457
FAO(OS)(COMM) 4/2024
have, or he must have failed to take into account vital matters,
leading to an unjust result; or the decision is so irrational that no fair
or sensible person would have arrived at it given the same facts. A
classic example for the same is when an award is based on "no
evidence" i.e., arbitrators cannot conjure figures or facts out of thin
air to arrive at his findings. If a crucial finding is unsupported by any
evidence or is a result of ignoring vital evidence that was placed
before the arbitrator, it may be a ground the warrants interference.
However, the said parameter must be applied with caution by
keeping in mind that "no evidence" means truly no relevant
evidence, not scant or weak evidence. If there is some evidence, even
a single witness's testimony or a set of documents, on which the
arbitrator could rely upon or has relied upon to arrive at his
conclusions, the court cannot regard the conclusion drawn by the
arbitrator as patently illegal merely because that evidence has less
probative value. This thin line is stood crossed only when the arbitral
tribunal's conclusion cannot be reconciled with any permissible
view of the evidence."
20. From the above exposition, it is clear that patent illegality
encompasses situations where (i) the arbitrator's findings shock the
conscience of the court, (ii) the findings are based on considerations
that ought not to have been taken into account, (iii) the award ignores
vital evidence that should have been considered, or (iv) the findings are
so irrational that no fair-minded person could have arrived at the same
conclusion on the available material. Also, a clear distinction is drawn
between "weak evidence' and "no evidence", with interference being
justified only when the tribunal's conclusions are irreconcilable with
any permissible view of the evidence on record.
21. In Ssangyong Engineering and Construction Company Limited
vs. National Highways Authority of India18 and National Highways
Authority of India vs. ITD Cementation India Limited 19 the Apex
18 (2015) 15 SCC 131
19 (2015) 14 SCC 21
FAO(OS)(COMM) 4/2024
Court reiterated that the construction of contractual terms is primarily
within the domain of the arbitrator. Judicial interference is warranted
only if the arbitrator's interpretation is so unreasonable that no fair-
minded person could adopt it.
22. With the above legal principles clarified, we must now examine
whether the learned single judge in the impugned judgment exceeded
its jurisdiction or failed to exercise the jurisdiction vested in it while
setting aside the impugned arbitral award under the ground of patent
illegality.
23. On a careful appraisal of the facts, it is pertinent to note that the
learned Single Judge of this Court, even after affirming the arbitral
award on merits, proceeded to set aside the same on the grounds of
limitation and alleged ignorance of a vital contractual clause. In doing
so, the court appears to have substituted its own evaluation of evidence
and contractual interpretation for that of the arbitrator. This raises a
critical question as to whether such interference transgressed the
permissible scope of judicial review under Section 34, particularly in
the context of patent illegality, which is meant to address manifestly
unjust or irrational findings, and not merely to reassess the merits of the
award.
Ignorance of vital contractual clause
24. One of the principle grounds for interference, as held by the
learned Single Judge, was the arbitral tribunal's alleged ignorance of or
FAO(OS)(COMM) 4/2024
failure to take note of amended Article 12.03. According to the learned
Single Judge, Article 12.03 was of direct relevance to multiple critical
aspects of the dispute, namely, (i) the absolute waiver of any claim of
appellant (ii) the appellant's right to refer the dispute to arbitration, and
(iii) the issue of limitation. The learned Single Judge observed that,
being a vital contractual stipulation going to the root of the matter,
Article 12.03 ought to have been considered by the arbitral tribunal. The
relevant findings of the impugned judgement on this aspect is as
follows:
"48. It is evident that Article 12.03 as amended vide the
Supplementary Agreement dated 30.03.1998, clearly prescribes the
consequences of the respondent/claimant not lodging the claim
within the period of 14 days from the date of receipt of the relevant
invoices for transportation charge. It specifically provides that
failure to put-forward any claim within the said time period, shall be
"an absolute waiver of the claim", as also respondent/claimant's
right to refer the matter to arbitration. Although the issue of waiver
squarely and clearly arose for consideration in the context of issue
nos.5 and 11, the aforesaid contractual stipulation has not been taken
note of while deciding the said issues, or anywhere else in the entire
arbitral award. Likewise, whether or not the respondent/claimant
was entitled to seek reference to arbitration in derogation of the
aforesaid contractual stipulation was an issue that directly arose for
consideration, and also had a direct bearing on the jurisdiction of the
arbitral tribunal. The above stipulation also has a vital bearing on the
issue of limitation. However, the impugned award does not even take
note of the aforesaid provision, much less deal with it."
25. Consequently, the question for determination which falls before
us is whether the arbitral tribunal overlooked a vital contractual clause
that had a direct bearing on the matters in dispute, and if so, whether
such oversight vitiates the award at its foundation.
26. Before evaluating the alleged oversight, it is essential to assess
whether amended Article 12.03 is itself so relevant as tot go to the root
FAO(OS)(COMM) 4/2024
of the dispute. In this regard, amended and unamended Article 12.03 is
reproduced:
Unamended Amended
In case of any discrepancy/ dispute, the In case of any discrepancy/dispute, the
BUYER shall lodge a claim with the BUYER shall lodge a quantified claim
SELLER within the period of 14 with the SELLER within the period of
(Fourteen) days from the date of receipt 14 ( Fourteen) days from the date of the
of invoice. To the extent the claim receipt of the related invoice. To the
admitted by the SELLER shall issue a extent the claims are admitted by the
credit note in favour of the BUYER and SELLER, the SELLER shall issue a
adjust the same in the next invoice to Credit Note in favour of the BUYER
be raised. The SELLER, undertakes to and adjust the same in the next invoice
settle the claim of BUYER within a to be raised. The SELLER undertakes
period of 30 (Thirty) days from the to settle the claims with the BUYER
receipt of such claim, if found within a period of 30 ( Thirty ) days
acceptable from the date of receipt of such claim,
if and to the extent found acceptable.
Failure of the BUYER to put forward
any claim within the time specified
above shall be an absolute waiver of
any claim as also the BUYER's right to
refer the matter to Arbitration.
27. A comparison between the original and amended clauses reveals
that while both clauses impose a strict 14-day window for the appellant
to dispute an invoice and contemplate issuance of credit notes, the
amended clause introduces an express consequence for delay.
Specifically, it provides that failure to raise a claim within the stipulated
time period constitutes: (i) an absolute waiver of the claim, and (ii) a
waiver of the appellant's right to refer the matter to arbitration, a bar
that was entirely absent in the original clause.
28. The amendment operates as a condition precedent and constitutes
a contractual bar which can determine, at the threshold, whether any
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claim survives at all and whether the dispute-resolution mechanism can
be invoked.
29. Therefore, any failure to consider this amendment necessarily
goes to the root of the matter, since it directly affects the maintainability
of the claim, limitation issues, waiver, and the very jurisdictional basis
upon which an arbitral reference could proceed.
30. It is settled law that non-compliance with conditions precedent to
invoking arbitration can be treated as a jurisdictional objection. The
jurisdiction of the arbitral tribunal is contingent upon the existence of a
dispute that the contract permits to be referred to arbitration.
31. In the present case, the facts and circumstances compel the
conclusion that whether the appellant was entitled to seek reference to
arbitration in view of amended Article 12.03 was a critical issue directly
arising for consideration. Further, this issue had a direct bearing on the
jurisdiction of the arbitral tribunal.
32. On a detailed perusal of the arbitral award, it is evident that the
arbitral tribunal has not dealt with the amended clause at all. Although
the arbitral award records submissions pertaining to Article 12.03, it
does not return any finding thereon, nor does it provide reasoning for
ignoring or bypassing the clause. In other words, the award fails to
interact with crucial material on record. By rendering the award without
considering this vital clause, the arbitral tribunal overlooked evidence
that had direct bearing on: (i) the waiver of the appellant's claim, (ii)
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the appellant's right to refer the dispute to arbitration, and (iii) the issue
of limitation.
33. The contention of the appellants that the arbitral tribunal had
effectively addressed Article 12.03 under Issues 5, 6, and particularly
Issue 11, cannot be accepted. A thorough reading of the award reveals
no reasoning or explanation as to Article 12.03.
34. As regards the submission that Article 12.03 is hit by Section 28
of the Indian Contract Act, 1872, it is pertinent to note that the learned
Single Judge rightly relied on the decision in Reliance Industries
Limited (supra). Mere labelling of charges as "provisional" cannot
override statutory limitation, and therefore cannot render the clause
irrelevant.
35. In view of the foregoing, it is evident that the learned Single
Judge correctly concluded that the arbitral tribunal ignored a vital
contractual stipulation, and such omission directly affected the
jurisdiction, limitation, and maintainability of the claim.
Limitation
36. Another ground for interference, as relied upon by the learned
Single Judge, was that the arbitral tribunal's treatment of the issue of
limitation. According to the learned Single Judge, the view adopted by
the arbitral tribunal was not a possible or tenable view. Simply labelling
the invoices as "provisional" does not, in law, result in an indefinite
FAO(OS)(COMM) 4/2024
extension of the limitation period. It was further observed that the
impugned award does not contain any cogent reasoning as to why the
objections raised by the petitioner deserve to be rejected.
37. In this regard, it is instructive to refer to the decision of the
Supreme Cout in OPG Power Generation Private Limited vs Enexio
Power Cooling solutions India Private Limited & Anr.20, which
provides guidance on the standard of reasoning expected in arbitral
awards. The Court observed that an arbitral tribunal's reasoning, (i)
need not be a long or detailed narration of every submission or evidence
exchanged between the parties;(ii) is not required to set out every step
of reasoning or respond to every argument; (iii)is sufficient if the
tribunal states its findings and explains the evidentiary path by which it
reached such finding. The relevant portions reflecting the observation
of the apex court are reproduced below, -
"71.1 As to the form of a reasoned award, in Russell on Arbitration
(24th Edition, page 304) it is stated thus:
"6.032. No particular form is required for a reasoned award
although 'the giving of clearly expressed responsive to the
issues as they were debated before the arbitrators reduces
the scope for the making of unmeritorious challenges'.
When giving a reasoned award the tribunal need only set
out what, on its view of the evidence, did or did not happen
and explain succinctly why, in the light of what happened,
the tribunal has reached its decision, and state what that
decision is. In order to avoid being vulnerable to challenge,
the tribunal's reasons must deal with all the issues that were
put to it. It should set out its findings of fact and its
reasoning so as to enable the parties to understand them and
state why particular points were decisive. It should also
indicate the tribunal's findings and reasoning on issues
argued before it but not considered decisive, so as to enable
20 2024 INSC 711
FAO(OS)(COMM) 4/2024
the parties and the court to consider the position with
respect to appeal on all the issues before the tribunal. When
dealing with controversial matters, it is helpful for the
tribunal to set out not only its view of what occurred, but
also to make it clear that it has considered any alternative
version and has rejected it. Even if several reasons lead to
the same result, the tribunal should still set them out. That
said, so long as the relevant issues are addressed there is no
need to deal with every possible argument or to explain why
the tribunal attached more weight to some evidence than to
other evidence. The tribunal is not expected to recite at great
length communications exchanged or submissions made by
the parties. Nor is it required to set out each step by which
it reached its conclusion or to deal with each and every point
made by the parties. It is sufficient that the tribunal should
explain what its findings are and the evidential route by
which it reached its conclusions.
71.2 On the requirement of recording reasons in an arbitral award
and consequences of lack of, or inadequate, reasons in an arbitral
award, this Court in Dyna Technologies (supra) held:
"34. The mandate under section 31 (3) of the Arbitration
Act is to have reasoning which is intelligible and adequate
and, which can in appropriate cases be even implied by the
courts from a fair reading of the award and documents
referred to thereunder, if need be. The aforesaid provision
does not require an elaborate judgment to be passed by the
arbitrators having regard to the speedy resolution of
dispute.
35. When we consider the requirement of a reasoned order,
three characteristics of a reasoned order can be fathomed.
They are: proper, intelligible and adequate. If the
reasonings in the order are improper, they reveal a flaw in
the decision-making process. If the challenge to an award is
based on impropriety or perversity in the reasoning, then it
can be challenged strictly on the grounds provided in
section 34 of the Arbitration Act. If the challenge to an
award is based on the ground that the same is unintelligible,
the same would be equivalent of providing no reasons at all.
Coming to the last aspect concerning the challenge on
adequacy of reasons, the court while exercising jurisdiction
under section 34 has to adjudicate the validity of such an
award based on the degree of particularity of reasoning
required having regard to the nature of issues falling for
consideration. The degree of particularity cannot be stated
FAO(OS)(COMM) 4/2024
in a precise manner as the same would depend on the
complexity of the issue even if the court comes to a
conclusion that there were gaps in the reasoning for the
conclusions reached by the tribunal, the court needs to have
regard to the document submitted by the parties and the
contentions raised before the tribunal so that awards with
inadequate reasons are not set aside in casual and cavalier
manner. On the other hand, ordinarily unintelligible awards
are to be set aside, subject to party autonomy to do away
with the reasoned award. Therefore, the courts are required
to be careful while distinguishing between inadequacy of
reasons in an award and unintelligible awards."
71.3. We find ourselves in agreement with the view taken in Dyna
Technologies (supra), as extracted above. Therefore, in our view, for
the purposes of addressing an application to set aside an arbitral
award on the ground of improper or inadequate reasons, or lack of
reasons, awards can broadly be placed in three categories:
(1) where no reasons are recorded, or the reasons recorded
are unintelligible;
(2) where reasons are improper, that is, they reveal a flaw
in the decision- making process; and
(3) where reasons appear inadequate.
71.4. Awards falling in category (1) are vulnerable as they would
be in conflict with the provisions of Section 31(3) of the 1996 Act.
Therefore, such awards are liable to be set aside under Section
34, unless (a) the parties have agreed that no reasons are to be
given, or (b) the award is an arbitral award on agreed terms
under Section 30.
71.5. Awards falling in category (2) are amenable to a challenge on
ground of impropriety or perversity, strictly in accordance with the
grounds set out in Section 34 of the 1996 Act. 7
71.6. Awards falling in category (3) require to be dealt with care. In
a challenge to such award, before taking a decision the Court must
take into consideration the nature of the issues arising between the
parties in the arbitral proceedings and the degree of reasoning
required to address them. The Court must thereafter carefully peruse
the award, and the documents referred to therein. If reasons are
intelligible and adequate on a fair-reading of the award and, in
appropriate cases, implicit in the documents referred to therein, the
award is not to be set aside for inadequacy of reasons. However, if
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gaps are such that they render the reasoning in support of the award
unintelligible, or lacking, the Court exercising power under Section
34 may set aside the award."
38. The Apex Court also categorized awards under review for
reasoning deficiencies into three broad categories, (i) where no reasons
are recorded or reasons are unintelligible, such awards are vulnerable
and liable to be set aside, (ii) where reasons are improper or reveal a
flow in decision making, such awards can be challenged on the ground
of perversity, (iii) where reasons are adequate, these awards must be
approached with judicial restraint.
39. The arbitral tribunal, in the present case, recorded its reasoning
on the issue of limitation as follows:
"In our opinion, the contention of the learned senior counsel for the
claimant is correct and we agree that the invoices were provisional
and they continued to be provisional. We are unable to accept that
beyond 45 days of the presentation of the invoice, they would become
final. As these invoices were and continued to be provisional, the
question of the bar of limitation does not arise. Therefore, the issue
is arbitrable."
40. Thus, applying the principles laid down by the Apex Court, it is
clear that while the arbitral tribunal was not required to set out every
step of its reasoning, it was nonetheless required to indicate the
evidential route by which it reached its conclusions. Upon examination
of the submissions made before the tribunal, it is evident that the issue
of limitation warranted reasoned examination, particularly given that
the respondent had substantially raised the objection regarding
limitation.
FAO(OS)(COMM) 4/2024
41. The respondent contended, inter alia, that (i) invoices cannot
remain provisional indefinitely; and (ii) in terms of Article 12.03, the
dispute had to be raised within 45 days of presentation of the invoice.
However, the arbitral tribunal fails to record any reason as to why these
contentions of the appellant were accepted or rejected. The so only
reasoning in the award i.e. "the contention of leaned senior of counsel
for the claimant is correct" and "we are unable to accept that beyond
45 days of the presentation of the invoice, they would become final",
does not disclose the evidentiary path or reasoning by which the tribunal
arrived at its conclusion.
42. In the absence of any intelligible reasoning, no fair-minded
person could adopt the reasoning of the arbitral tribunal as proper or
adequate. The award, therefore, falls squarely within Category (i) as
classified by the Apex Court and is consequently liable to set aside on
this ground.
43. The appellant contended that the limitation could only be
determined after the agreement concluded and that the shortfall
persisted throughout the contractual period. The learned Single Judge,
however, rightly referred to the decision in Reliance Industries Limited
v. Gail (India) Limited(supra), wherein it was held that merely
labelling an invoice as provisional cannot extend the period of
limitation indefinitely.
44. The learned counsel for the appellant sought to distinguish the
Reliance Industries decision on two grounds, (i) that the judgment
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concerned the issue of gas price, and (ii) that the respondent contended
that its provisional invoices never triggered limitation.
45. Such attempts to distinguish the Reliance industries limited v.
Gail (India) limited (supra) are untenable as labelling invoices as
provisional cannot indefinitely postpone limitation and the issue of
limitation cannot be distinguished on the ground that it concerned gas
price or transportation charges. Thus, the aforesaid judgment is equally
applicable to the present dispute. The respondent's attempt to achieve a
result by indefinitely labelling invoices as provisional is squarely
contrary to settled law. Accordingly, the learned Single Judge did not
err in relying upon the said judgment.
46. In view of the foregoing, we find no error in the reasoning
adopted by the learned Single Judge on the issue of limitation. The
findings of the learned Single Judge are legally sound, intelligible, and
in conformity with established principles of law relating to limitation
and arbitral awards.
Cross objections
47. The respondent has filed cross-objections challenging the
observation recorded in Para 45 of the judgment, where the learned
Single Judge upheld the arbitral award on merits and held that the view
taken by the arbitral tribunal was a "plausible view". According to the
learned counsel for the respondent, the arbitral tribunal, in granting the
relief, effectively re-wrote the contract and blurred the distinction
FAO(OS)(COMM) 4/2024
between two types of transportation charges. In the submission of the
respondents, such an approach cannot be characterised as a plausible or
reasonable view within the ambit of judicial review under Section 34 of
the Act.
48. According to respondent, the arbitral tribunal has observed that
the reduced supply of gas by the respondent was justified on the
grounds of force majeure, and therefore, did not affect the obligation to
pay fixed transportation charges. Despite this, the tribunal proceeded to
grant a proportionate reduction in the transportation charges.
49. The tribunal justified the reduction on the principles of business
efficacy and partial failure of consideration, effectively recognising that
while the contractual obligation to pay transportation charges existed,
the reduced performance warranted a proportionate adjustment.
50. Thus, the question for determination is whether the arbitral
tribunal took a plausible view in granting reduced transportation
charges in light of the business efficacy model and partial failure of
consideration.
51. The principle of business efficacy has been extensively explained
and summarised by the Apex Court in M/s Adani Power (Mundra) Ltd.
vs. Gujarat Electricity Regulatory Commission and Ors, 21, wherein
the Court underscored that the doctrine of business efficacy allows an
21 (2019) 19 SCC 9
FAO(OS)(COMM) 4/2024
implied term to be read into a contract only under very limited
circumstances. The relevant observation reads as under
"20. It could thus be seen that it is more than well settled that the
clauses in the agreement ought to be given the plain, literal and
grammatical meaning of the expression used in the same. No
doubt, that the courts will also try to gather as to what intention the
parties wanted to give them. As has been held by Ranjan Gogoi, J.
(as His Lordship then was) the principle of business efficacy could
be invoked only if by a plain literal interpretation of the term in the
agreement or the contract, it is not possible to achieve the result or
the consequence intended by the parties acting as prudent
businessmen. This test requires that a term can only be implied, if
it is necessary to give business efficacy to the contract, to avoid
such a failure of consideration that the parties cannot as reasonable
businessmen have intended. If the contract makes business sense
without the term, the courts will not imply the same. It is amply
clear that courts can imply a clause only if it is found that the plain
and literal meaning given to the expression used in the terms is not
in a position to make out the intention of the parties. Reading an
unexpressed term in an agreement would be justified on the basis
that such a term was always and obviously intended by and
between the parties thereto. An unexpressed term can be implied if
and only if the court finds that the parties must have intended that
term to form part of their contract. It is not enough for the court to
find that such a term would have been adopted by the parties as
reasonable men if it had been suggested to them. It must have been
a term that went without saying, a term necessary to give business
efficacy to the contract, a term which, although tacit, forms part of
the contract. As held in the case of Nabha Power Ltd. (supra), for
invoking the business efficacy test and carving out an implied
condition, not expressly found in the language of the contract, the
following five conditions will have to be satisfied:
(1) Reasonable and equitable;
(2) Necessary to give business efficacy to the contract;
(3) It goes without saying i.e. the Officious Bystander Test;
(4) Capable of clear expression; and
(5) Must not contradict any express term of the contract.
FAO(OS)(COMM) 4/2024
52. From the judicial exposition, it is clear that the principle of
business efficacy can be invoked only if the plain meaning of the
express terms of the contract does not disclose the intention of the
parties. In other words, the reading of an unexpressed term in an
agreement is justified only if such a term was obviously intended by the
parties at the time of contracting. Further, it is not sufficient that the
court considers that term would have been reasonable or desirable from
the perspective of a third party; rather, it must be a term which the
parties must be taken to have intended, though left unexpressed,
because it is so obvious as to "go without saying.
53. The "officious bystander" test, as explained in the said judgment,
provides a practical method to determine whether a term can be implied.
Under this test, a term may be implied only if it is so obvious that, had
an independent bystander asked the parties at the time of contracting
whether such a term applies, both parties would have immediately
responded, "Of course". If the proposed term could have elicited any
real possibility of a different answer from either party, it cannot be
treated as an implied term.
54. In view of the above, the arbitral award must be examined against
the twin principles of, Business Efficacy, which permits implying terms
necessary to make the contract workable when the parties' intention is
otherwise ambiguous; and The Officious Bystander test, which ensures
that no term is implied unless it is so obvious and self-evident that the
parties must be taken to have intended it.
FAO(OS)(COMM) 4/2024
55. The enquiry, therefore, focuses on whether the tribunal's grant of
proportionate reduction in transportation charges, despite recognising
force majeure and fixed payment obligations, falls within the ambit of
a plausible view consistent with these principles, or whether it
constitutes an impermissible rewriting of the contract.
56. Upon a careful perusal of the arbitral award, the tribunal has
articulated its reasoning for invoking the principle of business efficacy
and granting proportionate reduction of transportation/service charges
in the context of reduced gas supply due to force majeure. The tribunal's
reasoning may be summarized and elaborated as follows:
"1) Interpretation of Article 4.03 of the 1998 contract in a
commercial and business sense:
It is well settled that a commercial the contract must be construed in
a manner that yields business common sense and reflects the
commercial intentions of the parties. Courts and tribunals, in
interpreting contracts in commercial transaction, should not defeat
the efficacy of documents upon which the parties have acted, and
should adopt a practical approach that gives effect to the substance
rather than the form. This principle has been repeatedly emphasized
in Mulla's Commentary on the Contract Act (14th Edition 2012,
p.213), wherein it is stated that judicial interpretation should uphold
the commercial purpose of contractual provisions.
Applying these principles to the present case:
Article 4.03 of the 1998 contract stipulates a fixed sum of
Rs.38,67,600.00, which is expressly stated to cover "for the
facilities provided by the seller for supply of the gas from Thai
to Delivery point located at the Buyer's premises."
Article 5.01 of the 1991 contract provides that "the seller agrees to
sell and, deliver the gas at the aforesaid point of delivery to. the
Buyer as per requirement of the Buyer subject to the maximum of
1.00 (one point zero zero) million standard cubic meters per day .....".
FAO(OS)(COMM) 4/2024
The fixed charges under Article 4.03 are linked to the capital
investment, operation, and maintenance of the pipelines, and other
infrastructure necessary to supply the maximum contractual quantity
of gas. These costs are computed with reference to the maximum
supply envisaged under Art. 5.02.
The tribunal observed that, in circumstances where the respondent
cannot supply gas as per the claimant's requirement due to
Government directives falling under the force majeure clause
(Article 10), the monthly transportation/service charges must be
correspondingly reduced, proportionate to the quantity of gas
actually supplied.
The maximum transportation/service charges of Rs.3 8,67,600.00
p.m. are applicable only when the respondent is able to supply the
gas as per the claimant's requirements under Art.5.01.
When the respondent's supply is curtailed on account of
Government directives falling under force majeure clause (Article
10), charging the full fixed sum would be commercially
unreasonable and absurd.
As an illustrative, if the respondent supplies only 1% of the
contracted quantity, it would be unfair and commercially unsound to
require payment of the full transportation charges of
Rs.38,67,600.00. Such a literal interpretation would contradict
common business sense and produce an inequitable result, which the
doctrine of business efficacy seeks to avoid.
The tribunal further observed that there is a direct link between the
fixed sum of Rs.38,67,600.00 and the facilities provided by the
sellers contemplated under Art. 11 of the contract. Consequently,
wherever the contracted supply is reduced, whether due to force
majeure or other events covered under the contract, the fixed sum
must be reduced proportionately.
Accordingly, on a holistic construction of Articles 4.03, 5.01, 5.02,
and 10 of the contract, the tribunal concluded that:
The fixed transportation/service charges of Rs.38,67,600.00 shall be
proportionately reduced whenever the supply of gas by the
respondent is less that the contracted quantity due to reasons covered
under the force majeure clause (Art. 10). Such interpretation is
commercially reasonable, aligns with business sense, and reflects
what a third party with knowledge of the facts and circumstances
would reasonably conclude.
FAO(OS)(COMM) 4/2024
57. Upon careful examination of the arbitral award, it is evident that
the reasoning adopted by the tribunal represents a misapplication of the
business efficacy principle in a manner that no reasonable person could
have adopted. It is undisputed that in the present matter, Clause 4.03 of
the contract was amended in 1998, replacing the earlier variable
monthly service charge with a fixed transportation cost of Rs.
38,67,600/-.
58. The arbitral tribunal itself recognised that Article 4.03 stipulates
a fixed charge for the facilities provided by the seller, including
infrastructure, pipelines, delivery systems, personnel, and maintenance.
If the contract was deliberately amended to fix the charge, no
reasonable person could interpret the parties' intention as making this
fixed charge variable or contingent upon the quantum of gas supplied.
59. By imputing a proportional reduction of the fixed charge, the
tribunal assumed that the fixed charge must vary in accordance with
supply to achieve commercial sense. However, if the parties had
intended such proportionality, they could have, (i) retained the original
variable charge structure, or (ii) expressly linked the fixed charge to the
actual delivered quantity. The absence of such express linkage
demonstrates that the tribunal's proportionality reasoning effectively
rewrites the contract, rather than interpreting it.
60. Further, the tribunal's illustrative example, that if only 1% of gas
is supplied, the respondent cannot collect the full transportation
charges, is not a legitimate application of commercial common sense.
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The business efficacy principle is not intended to allow courts or
tribunals to insert terms merely because they appear reasonable. For a
term to be implied, it must, (i) be necessary to make the contract
workable, and (ii) "go without saying" i.e., be so obvious that the parties
must have intended it, though left unexpressed.
61. Clearly, the proportionate reduction of charges does not satisfy
this test. There is nothing in the contract to indicate that such
proportionality was obvious, necessary or intended by the parties. On
the contrary, the adoption of a fixed monthly charge is a standard
commercial practice in infrastructure intensive contracts, where capital
and maintenance costs are not contingent upon variable supply.
62. Applying these principles, it is apparent that no reasonable
businessperson, reading the contract as a whole and applying the
business-efficacy principle in its proper limits, would have interpreted
the contract to convert a fixed facility/transportation charge into a pro-
rata, variable charge linked to actual supply.
63. The principle of business efficacy is intended solely to give effect
to the parties' expressed bargain when the language is genuinely
ambiguous or commercially unworkable. It cannot be invoked to insert
a term not agreed upon, especially where the contract deliberately
adopts a fixed-charge structure. A reasonable person in the parties'
position would understand Article 4.03 as fixing the charge for keeping
the facilities ready for use, regardless of the actual quantum of supply.
FAO(OS)(COMM) 4/2024
64. Thus, we are in agreement with the submissions of the learned
senior counsel for the respondent that the business efficacy principle
cannot be applied in a manner that results in complete variance from
the parties' original intention. Accordingly, the conclusions reached by
both the learned Single Judge and the arbitral tribunal cannot be
sustained.
65. The arbitral tribunal also sought to justify the pro-rata reduction
on the alternative ground of partial failure of consideration, reasoning
that if relief were not granted, there would be unjust enrichment, which
had to be neutralised via restitution, provided apportionment was
feasible.
66. The principle of partial failure of consideration applies only
where the consideration for which money was paid has wholly or partly
failed in substance, meaning that the very basis of the payment has not
materialised. In the present case, the fixed monthly charge of Rs.
38,67,600.00 is expressly for the operation and maintenance of
facilities and is not contingent upon the gas supplied. The consideration,
therefore, lies in keeping the facilities ready for use, not in the quantity
delivered.
67. It is also pertinent to note that the possibility of reduced supply
was expressly contemplated with the contractual clauses, as
acknowledged in the tribunal's findings on Issues Nos. 2 and 3. Despite
this, while deciding Issue No. 4, the tribunal directed the respondent to
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refund the fixed transportation charges proportionate to the alleged
reduction in supply, invoking partial failure of consideration.
68. Thus, on this issue, we agree with the submissions of the learned
senior counsel for the respondent that once the tribunal held that
reduced supply was anticipated within the contractual framework, there
can be no question of failure of consideration.
69. Additionally, the tribunal itself concluded that, in view of the
force majeure event, there was no breach, and the reduced supply could
not affect the obligation to pay fixed transportation charges. Yet, in the
later part of the Award, the tribunal directed precisely such a pro-rata
reduction, which is internally inconsistent and legally unsustainable.
70. In consequence, the view adopted by the arbitral tribunal is an
impossible one, and no reasonable person could have reached such a
conclusion on a proper construction of the contract.
71. For the foregoing reasons, we set aside the findings of both the
learned Single Judge and the arbitral tribunal insofar as they directed a
proportionate reduction of the fixed transportation charges. Such a
reduction cannot be justified in view of the express terms of the
contract, the proper limits of the business efficacy principle, and the
absence of any partial failure of consideration.
FAO(OS)(COMM) 4/2024
Conclusion
72. In conclusion, after a comprehensive evaluation of the issues
raised, we disagree with the findings of both the learned Single Judge
and the Arbitral Tribunal. In particular, we are of the view that, while
applying the business efficacy principle, the Arbitral Tribunal exceeded
its mandate by effectively re-writing the terms of the contract. It is a
well settled principle in contract law that a tribunal is not authorized to
alter the terms of a contract based on its subjective perception of
business efficacy unless such alterations are clearly warranted by the
express or implied intentions of the parties.
73. We are further of the opinion that, upon a careful reading of the
contract in its entirety, no reasonable person, upon reading of any
contractual term could have concluded the fixed transportation charges
into a variable, pro-rata charge. Further, no contractual term was so
inherently obvious that it must be implied that the parties intended the
fixed transportation charge to be read as pro-rata charge. The notion of
business efficacy cannot be invoked to introduce terms that were not
agreed upon by the parties, nor can it be used to imply provisions that
fundamentally alter the agreed contractual structure without a clear and
unambiguous basis for such an inference.
74. Additionally, the Arbitral Tribunal, in its reasoning, has
contradicted itself in a manner that cannot be reconciled. Initially, the
Tribunal held that the force majeure event, which justified a reduced in
gas supply, did not affect the obligation to pay the fixed transportation
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charges. However, in a subsequent part of the Award, the Tribunal
directed that the same fixed transportation charges be reduced or
refunded in proportion to the actual gas supplied. This is inherently
contradictory as the fixed charges, once deemed payable despite the
reduced supply, cannot simultaneously be subject to reduction or refund
based on the supply variation. This inconsistency renders the Award
flawed and untenable, as no reasonable person would have arrived at
such conflicting conclusions.
75. On the issue of limitation, we find ourselves in agreement with
the findings of the learned Single Judge, which relied on the
authoritative judgment in Reliance industries limited v. Gail (india)
limited(supra). The learned Single Judge's reliance on this judgment
was well placed, and we find that there was a lack of sufficient
reasoning in the Arbitral Tribunal's decision regarding the objection
raised on limitation. The Tribunal failed to provide any cogent rationale
as to why the objection pertaining to limitation was dismissed, and this
omission is material and legally significant. Consequently, the
Tribunal's findings on this point are liable to be set aside and the
findings of the learned single judge are upheld.
76. Finally, in regard to the Tribunal's failure to address a crucial
contractual clause, namely Article 12.03, which directly impacts the
issues of limitation, arbitrability, and waiver, we concur with the
findings of the learned Single Judge. The provisions of Article 12.03
are central to the dispute and bear directly on the core issues of the case.
The Tribunal's failure to consider this vital clause constitutes a clear
FAO(OS)(COMM) 4/2024
instance of neglecting material evidence, which significantly
undermines the credibility and fairness of the arbitral process and
amount to patent illegality. The omission of such an important
contractual stipulation constitutes a serious flaw and must be regarded
as an error that calls for judicial intervention.
77. In light of the above discussed findings, it is clear that the arbitral
award is vitiated by perversity and patent illegality. The award is
therefore set aside. Furthermore, the cross-objections raised by the
respondent are hereby allowed.
78. Accordingly, we dismiss the present appeal, along with any
pending applications, if any. The order of the learned Single Judge is
partly upheld to the extent that it concurs with the conclusions reached
in this judgment.
79. There shall be no order(s) as to cost.
OM PRAKASH SHUKLA, J
C.HARI SHANKAR, J
MARCH 09, 2026/pa
FAO(OS)(COMM) 4/2024
