Gujarat High Court
Oil & Natural Gas Corporation ... vs M/S. Enviro Engineers on 27 March, 2023
Bench: N.V.Anjaria
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 1804 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
==========================================================
1 Whether Reporters of Local Papers may be allowed to see the Yes
judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law as to No
the interpretation of the Constitution of India or any order made
thereunder ?
==========================================================
OIL & NATURAL GAS CORPORATION (INDIA) LTD.
Versus
M/S. ENVIRO ENGINEERS
==========================================================
Appearance:
MR JEET B KARIA(11991) for the Defendant(s) No. 1
==========================================================
CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
Date :27/03/2023
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE N.V.ANJARIA)
The present First Appeal under Section 37 of the
Arbitration and Conciliation Act, 1996 arises out of order dated
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5.5.2016 of learned Additional District Judge, Gandhinagar
passed in Civil Miscellaneous (Arbitration) Application No.115 of
2011. Thereby, the court below dismissed the said application
and confirmed the award dated 29.6.2011 passed by the arbitral
tribunal.
2. In the final award dated 29.6.2011 of the sole arbitrator,
the following was the operative part,
"(i) Claim of the claimant for Rs.24,85,897/-
(Rs.Twenty four lac eighty five thousand eight
hundred and ninety seven) for deduction by
respondent from bill nos.1 to 23 is allowed and
the respondent - ONGC is directed to pay this
amount with interest at the rate of 12% from
the date of declaration of this award till
realization.
(ii) The claim of Rs.10,70,000/- (Rs. Ten lac
seventy thousand) for extra work and the
claim of Rs.11,31,368/- (Rs. Eleven lac thirty
one thousand three hundred and sixty eight)
for alleged insufficient supply of effluent are
rejected.
(iii) In the facts of the case, as success is
almost equally divided between the parties,
there should be no order as to costs."
3. The appellant Oil and Natural Gas Corporation Limited
(ONGC) had entered into agreement dated 25.5.2007 with the
respondent for operation, maintenance and management of
ONGC Installation Effluent Treatment Plant, GGS-III, Navagam
and Water Injunction Plant, Vasna. The contract was for the
period of two years commencing from 4.5.2007, and to expire on
3.5.2009. It was stated that the contract specifically provided
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the mode and manner in which the respondent was required to
operate the effluent treatment plant. It also provided about the
manner for making payments to the respondents. All the
specifications of the effluent were mentioned in the contract.
3.1 The contractor completed the contract work on 3.5.2009.
The respondent raised for the first time certain claims on
5.5.2009 thereunder various amounts were claimed from the
appellant corporation. Before the arbitrator in the statement of
claim the claims which were raised, included the first claim for
Rs.24,85,897/- on the ground that the deduction was wrongly
made by the appellant ONGC from the bill Nos.1 to 23 raised by
the claimant. The second claim was in relation to extra work as
per the bill No.24 dated 5.5.2009 for Rs.10,70,000/-. Third claim
was Rs.11,31,368/- as per the bill No.25 in relation to short
supply of effluent by ONGC on the ground that it was less than
the contractual specific average quantity of the effluent per day.
Fourth claim was regarding interest on the claims at the rate of
18% per annum.
3.2 In the written statement filed on 14.2.2011 before the
Arbitrator it was inter alia contended that the claimant was
bound to act in accordance with the contract and perform the
contractual terms and conditions. It was contended that the
claimant had failed to achieve the requisite standard specified in
the contract and the level of Total Soluble Solids (TSS) was in
excess of <or=3.5 m.g and that the deduction were made in that
regard from bill Nos.1 to 23. It was contended that the
deductions were made as per the terms of the contract.
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
3.3 In the final arbitral award dated 29.6.2011, the sole
arbitrator found that the claim Nos.2 and 3 since were belatedly
raised, were not tenable. The tribunal therefore rejected the
claim No.2 which was for Rs.10,70,000/- and claim No.3 for
Rs.11,31,368/-. The arbitral tribunal, however accepted the
claim No.1 of the respondent by holding that the appellant was
liable to pay the amount of Rs.24,85,897/- towards the amount of
deduction made from the bill of the respondents for non-
compliance of the parameters required to be met regarding the
effluent.
3.4 It is in against and in respect of the said award passed for
the said claim by the arbitrator holding the ONGC liable to pay
the amount towards deduction made for not meeting with the
effluent parameters, that the present appeal is addressed. The
question is whether the arbitrator could have allowed the said
amount of Rs.24,85,897/- which was deducted by ONGC from the
bills of the respondents with regard to the not meeting with the
parameters of effluent discharge required to be met under the
terms of the contract.
4. Learned advocate Mr.Ajay Mehta for the appellant ONGC
assailed the award of the arbitrator as well as the impugned
judgment and order of learned Additional District Judge,
whereby the award was confirmed by submitting that the court
below in accepting the arbitral award holding the contractor
entitled to Rs.24,85,897/-, committed an error. It was submitted
that the court below could not have approved the conduct of
arbitrator in travelling beyond the terms of the contract which
was not permissible in law. It was submitted that the amount
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granted was in respect of deductions legitimately made from
respondent's bills for non-compliance with parameters required
to be met with by the contractor in relation to effluent
treatment.
4.1 It was submitted that award of this nature of claim was not
only based on misinterpretation of the terms of the contract, but
amounted to rewriting the terms, more particularly when the
various clauses in the contract set out in detail the work-
description and also fixed the parameters regarding effluent. It
was submitted that the court below were not right in accepting
the contention of the claimant contractor that TSS prescribed
under contract of effluent after treatment of less than or equal to
3.5 mg was impossible or that it was not feasible in view of the
effluent treatment plant of the ONGC. It was also submitted that
such issue was never raised prior to filling up the tender.
4.1.1 It was next submitted that the arbitral tribunal
misdirected itself in reasoning that the pollution control board
had prescribed permissible level of TSS upto 10 mg and that
therefore the appellant was wrong in setting the standard of less
than or equal to 3.5 mg. It was submitted that it amounted to
rewriting of the contract. It was erroneous to reason that
condition with regard to the effluent discharge and the
parameters mentioned were not fundamental. They were basic
and had to be applied in conjunction of other work related
parameters, it was submitted.
4.1.2 Learned advocate for the appellant submitted that
appellant had to incur cost for arranging the coil tubing units for
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
clearing the production tubing and partially chocked reservoir
perforation zone due to high amount of TSS which was causing
low injectivity problems of the effluent disposal wells.
4.1.3 Learned advocate for the appellant relied on the
decision of the Supreme Court in Ssangyong Engineering and
Construction Company Limited Vs. National Highways
Authority of India [(2019) 15 SCC 131], to submit that the
award in question is in breach of fundamental policy of India as
the arbitrator acted beyond the terms of the contract to award
the claim. Decision in Satyanarayana Construction Company
Vs. Union of India [(2011) SCC Online SC 1372], and
several other decisions were pressed into service to emphasis
that it was not open for the arbitrator to rework the contractual
terms between the parties and to apply them under the cloak of
interpretation.
4.2 Learned advocate for the respondent Mr.Apurv Vakil
submitted that the appellant ONGC was not justified in
straightway deducting the amount. It was submitted that there
was no provision for deducting in such manner. According to
submission of learned advocate for the respondent, if the ONGC
was to deduct the amount, then Clause 7.4 of the agreement
dated 25.5.2007 ought to have been followed.
4.2.1 clause 7.4 sought to be pressed into service by the
respondent, stated that 'in the event of any dispute in a portion
or whole of any invoice, the corporation shall make payment of
undisputed portion and shall promptly notify the contractor's
representative in writing for the remaining portion in contract to
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
mutually resolve the dispute and if resolved in part or full,
payment shall be made to the contractor within 30 days of such
settlement.'
4.2.2 it was further relied on was clause 9 of the contract
which was in respect of performance, provided that 'the
contractor shall undertake to perform all services under the
contract with all-reasonable skill, diligence and care in
accordance with the sound industry practice to the satisfaction
of the corporation and accept fill responsibility for the
satisfactory quality of such services as performed by them. It
was further mentioned, any defect, deficiencies noticed in the
contractor's service will be promptly remedied by the contractor
within 10 days upon the receipt of written notice from the
corporation to improve their performance failing which the
corporation may terminate the contract by giving the contractor
30 (thirty) days written notice.'
4.2.3 It was submitted that in view of the above Clause,
during the subsistence of the contract, if any defect or deficiency
is noticed in the services rendered by the contractor, procedure
as above was required to be followed. It was submitted, any
defect or any deficiency was never notified by the ONGC. It was
submitted that the ONGC was needed to intimate the respondent
with regard to non-compliance, if any. It was submitted that on
one hand it was the case of ONGC that the parameters fixed
under the contract with regard to output of the effluent were not
met, since the ONGC did not intimate the same, it deemed to
have waived such requirement. It was further submitted that the
ONGC on the contrary addressed letter in April, 2009 to offer
the respondent to continue and extend the contract for a period
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
of six months.
4.2.4 Learned advocate for the respondent submitted that
in the aforesaid background, the arbitrator interpreted the
Clause in the contract regarding the output parameters. It was
submitted that no fault could be attached to the arbitrator for
resorting to the interpretative process while delivering the
award. It was submitted that the condition regarding the effluent
parameter was not essential part or essential condition of the
contract. It was submitted that powers under Section 34 of the
Act was properly exercised by the arbitrator.
4.2.5 Advancing the contentions raised above, learned
advocate for the respondent relied on the decision of the
Supreme Court in Navodaya Mass Entertainment Limited
Vs. J.M.Combines [(2015) 5 SCC 698] to submit at the outset
that in absence of any perversity the court would not substitute
its own view in place of the view of the arbitrator merely
because two views were possible. Learned advocate immediately
proceeded to rely on another decision in National Highways
Authority of India Vs. ITD Cementation India Limited
[(2015) 14 SCC 21] to submit that it was permissible for the
arbitrator to enter into construction of terms of the contract
even if it gives rise to determination of question of law. It was
submitted on the basis of such decision that the arbitrator is
entitled to take view which he holds to be correct and can
construe the terms of the contract in reasonable manner. It was
submitted that merely because the arbitrator has construed the
terms of the contract by itself, it may not be a ground to set
aside the award.
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
4.2.6 Yet another decision in Associate Builders Vs.
Delhi Development Authority [(2015) 3 SCC 49] was relied
on. Also pressed into service was the decision in National
Highways Authority of India Vs. JSC Centrodorstroy
[(2016) 12 SCC 592] to submit that the arbitrator had
jurisdiction to interpret the terms of the contract. The
consideration on which the arbitrator award could be set aside
were highlighted by learned advocate for the respondent from
the decision of the Supreme Court in Haryana Tourism
Limited Vs. Kandhari Beverages Limited [(2022) 3 SCC
237]. Two other decisions of the Supreme Court in General
Manager Sri Siddeshwara Co-operative Bank Limited Vs.
Ikbal and Others [(2013) 10 SCC 83] and Bhagwati Oxygen
Limited Vs. Hindustan Copper Limited [(2005) 6 SCC 462]
were pressed into service to highlight the principle of waiver or
abandonment of contractual rights.
5. In light of the controversy emerging as above, the moot
questions are whether it is open in law for the arbitral tribunal
to proceed outside the arena of the contractual terms operating
between the parties and pass the award ? It is permissible for
the arbitrator to rework the contract in guise of interpretation of
the terms of the contract ? Whether arbitrator can interpret the
contract and to what extent ? Whether by interpreting the terms
of the contract a new term could be enforced between the
parties to foist rights and obligations accordingly ?
5.1 It is to be noted that the contract between the parties
contained various details including the salient features of the
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
ETP- effluent Treatment Plant, GGS-III at Navagam. Amongst
other details, the details of location, plant area, installed
capacity, expected average throughput rate, process description,
layout and the dimensions of the plant, built up area, the details
of plant and machinery, utility details, safety management
system were mentioned in the contract. The details were also
given about the process, major equipment, major construction of
the plant, instruments to be used, essential operations etc. in the
different appendices.
5.2 Now, the case of the appellant ONGC- the respondent
before the arbitrator was that the required standard and level of
Total Soluble Solids (TSS) was specified in the contract.
However, the contractor failed to maintain the level and since
the level was in excess of less than 3.5 mg, the deductions were
made from bill Nos.1 to 23. According to the ONGC, the
directions were made in terms of the contract as the contractor
has failed to achieve the standard relating to effluent. On the
other hand, according to the claimant, achieving the level less
than or up to 3.5 mg TSS for the effluent was impossible and for
that the claimant relied upon the certificate issued by the
Gujarat Pollution Control Board.
5.3 Annexure- chemical and Annexure- chemical 2 were the
input parameters and the output parameters. Input parameters
were for the raw effluent water brought into the effluent plant
and the output parameters were of the water treated at the
plant.
5.3.1 Average input parameters as given in the contract in
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the tabular form were as under.
Sr.No. Parameter Unit Value
1 PH - 8.11-8.53
2 Total Solids mg/L 5454-6784
3 TDS mg/L 5286-6728
4 TSS mg/L 53-168
5 Oil and Grease mg/L 21-139
6 Turbidity NTU 18.5-37.0
7 Chlorides mg/L 1675-6304
8 Sulphates mg/L 37-38
9 Sulphides mg/L 5.4-9.6
5.3.2 Annexure- chemical 2 also part of the contract, gave
details of output parameters as under.
Sr.No. Parameters Operating Limits
1 Total Suspended Solids (mg/l) <3.5
2 Turbidity (NTU) <1.0
3 Filterability through 0.45 um filter, 20 psi <5.0
(ltr/30min)
4 Oil and Grease (mg/l) <10
5.4 Though the above parameters were part of the agreed
conditions incorporated in the contract, the contractor raised
contention that TSS under the contract of the effluent after
treatment less than or equal to 3.5 mg was on higher side and
impossible to achieve. Raising a contention and advancing the
case that it was not feasible to meet with the said conditions
regarding parameters once the standard was erroneously set.
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Bills in that regard were liable to be paid and the deduction
effected by the appellant was not justified.
5.5 The deductions made from Bill Nos.1 to 23 was based on
condition No.5.2.1 of the contract. This condition was as under.
"5.2.1 Quality and quantity checks should be
regularly carried out and logged as per
stipulated periodicity. In case of non-
conformance to output quality for the reasons
attributed to contractor's performance, ONGC
may not allow dispatch and even if allowed,
this quantity will not be accounted and
wherever possible recycling and reprocessing
will be done by the contractor without any
extra cost. Shortage in quantity thus arising
will attract deduction as per clause 5.1 above,
in case of random check by ONGC, if quality
is not found in compliance and in
contradiction to reports at the plant, then
entire quantity processed from the
commencement of the particular shift will be
deducted for arriving at actual quantity. For
this purpose shift commencement time will be
effective 0600/1400/2200 hours respectively.
Important parameters to be monitored by
sampling every two hours are listed.
Contractor will have option to either analyze
each two hourly sample and log results or one
composite sample can be analyzed in one
shift. In case of deviation in output
specifications in composite sample analysis,
quantity processes since last sample will be
deducted. In case of deviation in output
specification in respect of parameters which
are required to be analyzed on quarterly basis
(like bacterial activity, corrosion rate, scaling
etc) deduction would be @3.5% per
parameter of the amount payable to the
contractor in the previous quarter. For
example if deviations are noted in the sample
tested in the quarter commencing April and
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two parameters are observed to be in
deviation then deduction will be 7% of actual
payment in the quarter Jan-Mar."
5.6 The arbitrator observed in its award to finally grant the
claim of Rs.24,85,897/- in favor of the contractor.
"From the aforesaid facts and contractual
provisions, it can be safely inferred as follows:
(i) That the parties had not intended to
consider the level of TSS < OR 3.5 mg. as a
fundamental condition of the contract. Had it
been a fundamental terms of the contract, the
respondent ONGC would have and should
have exercised its contractual right to notify
to the contractor and put it to notice either
for termination of the contract or for
remedying the defects within ten days.
(ii) There is nothing to point out on record
that on account of contractor having failed to
achieve the TSS leval of < or = 3.5 mg. there
was any loss caused to the respondent ONGC.
Contention of the respondent that it had to
incur extra cost for coil and for clearing the
pipes due to higher level of TSS, can not be
believed for the simple reason that during the
performance period of the contract,
respondent never notified and declared to the
claimant though it could do so, under the
contract.
(iii) High level of standard, even more than
what is prescribed by the Gujarat State
Pollution Control Board and that too without
any ceiling limit for deduction, apparently
appears to be in the nature of penalty. It
appears to have been provided in terrorum to
secure better performance from the
contractor.
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(iv) As there is no loss to the respondent on
account of higher level of TSS then specified
in the contract, levy of penalty would amount
to unjust enrichment.
(v) If a party accepts such standard and short
supply of commodity agreed to be supplied,
without avoiding the contact and if it had
suffered no loss on this count and if it
subsequently withholds the payments on the
ground that the commodity supplied was
substandard, the Courts have held that such
conduct amounts to waiver of contractual
rights."
6. What was observed by the Supreme Court in General
Assurance Society Limited Vs. Chandumul Jain (AIR 1966
SC 1644) in relation to interpreting documents relating to
insurance contract, would be the principle applicable in respect
of all types of contracts, that the words in the contract should be
interpreted by giving effect to the meaning and intent which
emerge from the terms of the contract. It was observed that,
"...the duty of the court is to interpret the words in
which the contract is expressed by the parties
because it is not for the court to make a new
contract, however, reasonable, if the parties have
not made it themselves."
6.1 In Satyanarayana Construction Company (supra) was
a case before the Supreme Court where the arbitrator was found
to have awarded higher rate than rate agreed in the contract,
which was held to be beyond the competency and authority of
the arbitrator.
6.1.1 In Satyanarayana Company (supra), the Supreme
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Court observed after noticing the details of rates to be applied,
which were prescribed for cutting types of soils in the contract
to finally hold that the High Court did not committed any error
in upsetting the award of the arbitrator with regard to the claim
No.4 concerned of the statement of claim.
"Thus, as per the contract, the contractor was
to be paid for cutting the earth and sectioning
to profile, etc @ Rs.110 per cubic meter.
There may be some merit in the contention of
Mr.Tandale that the contractor was required
to spend huge amount on the rock blasting
work but, in our view, once the rate has been
fixed in the contract for a particular work, the
contractor was not entitled to claim additional
amount merely because he has to spend more
for carrying out such work. The whole
exercise undertaken by the arbitrator in
determining the rate for the work at Serial
No.3 of Schedule A was beyond his
competence and authority. It was not open to
the arbitrator to rewrite the terms of the
contract and award the contractor a higher
rate for the work for which rate was already
fixed in the contract. The arbitrator having
exceeded his authority and power, the High
Court cannot be said to have committed any
error in upsetting the award passed by the
arbitrator with regard to claim 4."
(para 11)
6.2 In Ssangyong Engineering and Construction Company
Limited (supra), the Supreme Court considered the yardstick
of contravention of public policy of India as ground for
challenging the arbitral award in the context of Section 32(2)(b)
(ii), 48 and 34(2-A) as they stand after the amendment of 2015.
While elucidating the expression 'Public Policy of India'
proceeded to held that one of the limb thereof was fundamental
principle of justice and when the arbitrator acts beyond the
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terms of the contract resulting into alteration of contract at the
hands of the arbitrator, the award would liable to be set aside.
6.2.1 Following was observed in Ssangyong (supra) in
that regard.
"However, when it comes to the public policy
of India argument based upon "most basic
notions of justice", it is clear that this ground
can be attracted only in very exceptional
circumstances when the conscience of the
Court is shocked by infraction of fundamental
notions or principles of justice. It can be seen
that the formula that was applied by the
agreement continued to be applied till
February, 2013 - in short, it is not correct to
say that the formula under the agreement
could not be applied in view of the Ministry's
change in the base indices from 1993-94 to
2004-05. Further, in order to apply a linking
factor, a Circular, unilaterally issued by one
party, cannot possibly bind the other party to
the agreement without that other party's
consent. Indeed, the Circular itself expressly
stipulates that it cannot apply unless the
contractors furnish an undertaking/affidavit
that the price adjustment under the Circular
is acceptable to them. We have seen how the
appellant gave such undertaking only
conditionally and without prejudice to its
argument that the Circular does not and
cannot apply. (Para 76)
6.2.2 It was then stated by the Apex Court,
"...It is clear that the majority award has
created a new contract for the parties by
applying the said unilateral Circular and by
substituting a workable formula under the
agreement by another formula de hors the
agreement. This being the case, a fundamental
principle of justice has been breached, namely,
that a unilateral addition or alteration of a
contract can never be foisted upon an unwilling
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party, nor can a party to the agreement be liable
to perform a bargain not entered into with the
other party. Clearly, such a course of conduct
would be contrary to fundamental principles of
justice as followed in this country."
6.2.3 It was held,
"Under no circumstance can any Court interfere
with an arbitral award on the ground that
justice has not been done in the opinion of the
Court. That would be an entry into the merits of
the dispute which, as we have seen, is contrary
to the ethos of Section 34 of the 1996 Act, as
has been noted earlier in this judgment."
(Para 76)
6.3 The decision in PSA SICAL Terminals (P) Limited Vs.
Board of Trustees of V.O. Chidambranar Port Trust
Tuticorin [(2021) SCC Online SC 508], is also a torch-bearer
on the point. There was a tender contract between Board of
Trustees of Chidambranar Port Trust Tuticorin and appellant
PSA SICAL Terminals Private Limited. The SICAL wanted the
agreement to be amended to change the 'royalty payment
method' to 'revenue sharing method', to which Board of Trustees
of Chidambranar Port Trust Tuticorin was opposed to. The court
noted that the intention of TPT was clear from various
communications as well as from its stand before the arbitrator.
The arbitral tribunal however, ignored the stand of the TPT and
by substituting the royalty payment method to the revenue
sharing method, a new term was thrust upon.
6.3.1 The Supreme Court observed that it was clear that
the award had created a new contract of the parties by
unilateral intention of SICAL as against the intention of TPT. The
Supreme Court referred to Ssangyong Engineering and
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Construction Company Limited (supra) holding that when
unilateral addition or alteration of a contract has been foisted
upon an unwilling party, the arbitral award thus rendered would
be liable to be set aside on the ground of breach of fundamental
principle of justice.
6.3.2 The court in PSA SICAL Terminals (P) Limited
(supra) held,
"It has been held that the role of the
Arbitrator is to arbitrate within the terms of
the contract. He has no power apart from
what the parties have given him under the
contract. If he has travelled beyond the
contract, he would be acting without
jurisdiction." (para 89)
6.3.3 It was also held,
It has been held that an Arbitral Tribunal is
not a Court of law. Its orders are not judicial
orders. Its functions are not judicial functions.
It cannot exercise its powers ex debito 27
(2004) 9 SCC 619 justitiae. It has been held
that the jurisdiction of the arbitrator being
confined to the four corners of the agreement,
he can only pass such an order which may be
the subjectmatter of reference. (para 91)
6.4 In Indian Oil Corporation Ltd. Vs. M/s Shree Ganesh
Petroleum Rajgurunagar, Through its Proprietor, [(2022)
4 SCC 463], facts were that the appellant took a plot of land on
lease from the respondent pursuant to the lease deed dated
20.9.2005 and set up at the site of retail outlet. The respondent
was appointed as dealer of the said retail outlet. A separate
dealership agreement was executed between the appellant and
respondent. There was provision in the lease agreement to refer
the disputes to the arbitrator who was to be Managing Director.
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The dealership agreement also provided for reference of
disputes to the sole arbitrator. When the disputes arose between
the parties, the appellant terminated the dealership and called
upon the respondent to vacate the retail outlet and to handover
the peaceful possession. The arbitrator was appointed in terms
of dealership agreement.
6.4.1 The Supreme Court held that the lease agreement
and the dealership agreement were distinct and independent of
each other. It was further held that the award of the arbitrator
when it pertained to the lease rent and lease period was patently
beyond the scope of competence of arbitrator appointed in terms
of the dealership agreement. The award of the arbitrator was set
aside to the extent that the arbitrator had increased monthly
lease rent from Rs.1750/- to Rs.10,000/-.
6.4.2 In Indian Oil Corporation (supra), the Supreme
Court referred to the law laid down in PSA SICAL Terminals
(P) Limited (supra) while holding the award insofar as it
pertained to the lease rent to be beyond the scope of the
competence of the arbitrator holding thus,
"The lease agreement which was in force
for a period of 29 years with effect from
15th April, 2005 specifically provided for
monthly lease rent of Rs.1750 per month
for the said plot of land on which the retail
outlet had been set up. It is well settled
that an Arbitral Tribunal, or for that
matter, the Court cannot alter the terms
and conditions of a valid contract executed
between the parties with their eyes open."
6.5 The Delhi High Court in Union Of India, Ministry Of
Railways, Railway Board Vs.M/S Jindal Rail Infrastructure
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
Limited, [(2022) SCC OnLine Del. 1540], which was relied
on by learned advocate for the appellant, laid down that the
commercial contract between the parties cannot be avoided on
the ground that one of the parties subsequently finds it
commercially unviable to perform the same. The Delhi High
Court found that the arbitrator had rewritten the contract of the
parties. The arbitrator had interpreted the Clause 2.4 of the
agreement.
7. Therefore, it has to be observed and stated that the role
and function of arbitrator is to arbitrate within the terms of the
contract. The four corners of the terms and conditions of the
contract under which the arbitrator is appointed becomes the
functional realm of the arbitrator. It defines the jurisdictional
bounds of the arbitrator.
7.1 The arbitrator will be deciding the disputes between the
parties which are arbitrable in nature. The disputes which are
arbitrable in nature have to be there genesis to be traced only
for the terms of the contract operating between the parties. It is
only in the context of and by confining to the terms and
agreement mutually agreed upon by and between the parties to
the arbitration, that the arbitrator is required to deliver his
award.
7.2 The arbitrator is concerned with the application of terms of
the contract and not their interpretation. The interpretation of
conditions of the contract is not the function permitted for the
arbitrator. Rewriting of the contract and delivering the award is
impermissible. The arbitrator cannot rework the bargain
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between the parties. It is here that the arbitral tribunal is
different from court of law in discharge of functions and in
deciding the disputes.
7.3 What the court could not do while interpreting the terms of
the contract, the arbitral tribunal can also certainly not do. It
cannot resort to interpretative process so as to rewrite or create
new contract between the parties. The task is to simple apply
the terms and conditions of the agreement as agreed between
the parties, while rendering the arbitration award.
8. At this stage proceeding to deal with the decisions relied
on by the respondents, in Associate Builders (supra) the
Supreme Court explained what is 'public policy' of India. It was
highlighted that the fundamental policy of Indian Law would
include compliance with the statute and judicial precedents,
need for judicial approach, observance of natural justice and
Wednesbury reasonableness. The interest of India, justice in
modality and patent illegality are other heads and if the arbitral
award is in contact with those mentioned considerations, it is
liable to be interfered with. Similar principles were highlighted
in Haryana Tourism Limited (supra).
8.1 The decision in General Manager, Shri Siddheshwara
Co-operative Bank Limited (supra) was in the context of
security interest (enforcement) Rules, 2002 in which the
Supreme Court explained the expression 'written agreement' to
hold that it meant mutual understanding of arrangement as to
relative rights and duties of parties and that it is manifestation
of mutual assent in writing. In Bhagwati Oxygen Limited
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(supra), the principle of waiver of abandonment of contractual
rights was mentioned, in the facts of the case it was found that
the arbitrator was justified in making award in favor of
Bhagwati Oxygen Limited (supra) allowing all its claims
including all unpaid dues for oxygen that had been supplied.
8.2 In JSC Centrodorstroy (supra) the proposition that the
construction of the terms of the contract was for arbitral
tribunal to decide was in different context under Clause 70.8.
The conditions provided for payment for additional cost or
deduction of reduced cost from contract price due to change in
any statute, ordinance or decree or other law or regulations or
by laws of any local authority. The arbitral tribunal awarded
claims as the compensation for additional cost on account of
increase in service tax and insurance premium and on bank
guarantee charges on the ground that the additional cost a
result of revision in service tax which respondent- claimant was
required to bare.
8.3 The Supreme Court held that since in light of the Clause
No.70.8 of the conditions, the arbitral tribunal was entitled to
construe the terms of the contract and in instant case increase
in the rate of service tax in respect of the bank guarantee and
insurance premium was directly relatable to the terms of the
contract and performance under the contract was a possible
view, there was no justification of interference by the court in
the award. Thus, in that case, the arbitral tribunal had awarded
additional cost on account of increase in service tax and
insurance premium as was permitted in the condition of the
contract itself. The facts of the said case differs from the facts of
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the case on hand.
8.4 When in ITD Cementation India Limited (supra), the
facts were different, the contract was awarded to the respondent
ITD Cementation by National Highway Authority of India for
widening the lanes. The State Government increased royalty on
stone, sand and earth upto 30%. The respondent requested for
price adjustment under Clause 70.8 of the conditions of the
contract. It was denied by appellant on the ground that the said
aspect was considered under price adjustment formulae under
Clause 70.3, arbitral tribunal took view that provision for cost
escalation based on the agreed price adjustment formulae was
different from provision for compensation for additional cost
resulting from a subsequent legislation. Claimant was held
entitled to be compensated for additional cost. The award of the
arbitrator was in the nature of applying the terms of the contract
rather contractual, interpreting the same to work out new
conditions.
9. From above position of law discussed, what therefore
finally emerges is that generally stated the arbitral tribunal
cannot travel outside the arena of terms and conditions agreed
upon in the contract. The interpretation of these terms have to
be on the basis of what is expressly stipulated. Express terms
are the intention of the parties best expressed. The scope of
interpretation of the terms and conditions of the contract would
arise where the conditions are not clear or not capable of dual
understanding. In this regard also the interpretation has to be in
accordance with the intention of the parties to be gathered from
the terms and conditions. While this cannon of interpretation of
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contractual terms and the limitations thereof, which are true for
the courts, stand equally binding to be observed by the
arbitrator while giving award based on the contract between the
parties.
10. In the present case, the parties had agreed about the
parameters to be observed with regard to the TSS quantity in
the effluent plant of the ONGC which was to be maintained and
operated by the contractor. The parameter was expressly set
and agreed upon by the parties forming part of the express
condition of the contract which is reproduced herein above. The
parameter of TSS was less than or upto 3.5 mg TSS.
10.1 When the said parameter was not observed by the
contractor, the consequential deduction in the amount by the
ONGC could not have been excepted by the arbitrator on the
spacious ground that achieving the said standard was not
feasible or possible. This condition was contractual condition
agreed upon by the parties and the arbitrator was not expected
to travel beyond its corners and to award the amount to the
contractor which was legitimately deducted by the ONGC on the
ground of breach of said parameter.
10.2 The arbitrator proceeded to interpret the said term, and
virtually substituted his own applied conditions and passed
award on that basis. It could be said to be an approach by the
arbitrator, not just interpretation of the term to be properly
apply it, but the arbitrator thereby indeed reworked the entire
bargain between the parties, which was precisely not
permissible in law. Interpretation of the term in the contract so
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as to render it anew in its application and thereby to determine
rights and obligations of the parties is not the jurisdiction of the
arbitrator. The arbitrator has to decide and pass an award within
the compass of the conditions of the contract. The conditions in
the contract binds the arbitrator in rendering the award. In the
instant case, the arbitrator evidently acted without jurisdiction
to rework the condition about the effluent parameters.
10.3 Finally noticing, the observations of arbitrator in its
award to allow the claim of Rs.24,85,897/-, which are
reproduced in paragraph as above, were his own inferences, not
backed by agreed by terms and conditions of the contract. The
arbitrator implanted his view to award the claim. By applying
the standard of the pollution control board in respect of the
effluent parameter, the arbitrator clearly introduced new
condition in relation to the said aspect which was not in the
contract between the parties. The condition regarding the
effluent parameter mentioned in the clause was discarded and it
was substituted by new consideration. The approach of the
arbitrator was outside the purview of his jurisdiction. The award
of the claim was not based on application of the condition agreed
upon but it amounted to rewriting of contract between the
parties which was clearly not permissible.
10.4 In view of above principles to be applied and the
position of law emerging, the appellant is entitled to succeed.
10.5 At this stage, it may be noted that this court passed
following order on 9.1.2017 in Civil Application for stay No.8695
of 2016, the order was passed extracting the relevant.
C/FA/1804/2016 CAV JUDGMENT DATED: 27/03/2023
"Having regard to the submissions made by
learned advocates for the parties at the stage of
considering confirmation or otherwise of ad-
interim relief granted in terms of para 14(A) of
this application, the applicant has already
deposited the entire amount so awarded by the
Tribunal and accordingly, registry of this Court
is directed to invest such amount in a fixed
deposit receipt of a Nationalised Bank accruing
periodical interest initially for a period of three
years and to be renewed from time to time till
final disposal of the petition and interest which
may accrue thereon shall be released in favour
of respondent upon filing an undertaking within
two weeks from today that in case the appeal
filed by the appellant is allowed same shall be
refunded as ordered by the Court finally. "
10.5.1 As the award of the award of the arbitrator as well as
the impugned order of the court below confirming the same,
stand liable to be set aside with the findings that the arbitrator
could not have allowed the claim in question. The amount
invested as per the aforementioned order in the Fixed Deposit
shall be returned to the appellant.
10.5.2 In view that the claim in question is not allowed and
the judgment and order is set aside, the interest earned on the
said Fixed Deposit which was directed to be paid to the
respondent cannot be retained by the respondents. Therefore
the respondents shall pay back the interest received by it during
the pendency of the appeal from the Fixed Deposit, to the
appellant herein within three weeks from the date of the receipt
of this order.
11. As a result of above, order dated 5.5.2016 confirming
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the award of the arbitrator, passed by learned Additional District
Judge, Gandhinagar in Civil Miscellaneous (Arbitration)
Application No.115 of 2011, is set aside. The respondent shall
not be entitled to the amount towards claim No.3 awarded by
the arbitrator. The appeal stands allowed.
(N.V.ANJARIA, J)
(SANDEEP N. BHATT,J)
FURTHER ORDER
At this stage, learned advocate Mr. Jeet Karia requested
that the operation of this judgment and order may be stayed in
order to enable the respondent to approach higher forum.
In the facts and circumstances of this case, the present
judgment and order and the directions regarding the return of
the amount deposited shall remain in abeyance for a period of
four weeks.
(N.V.ANJARIA, J)
(SANDEEP N. BHATT,J)
Manshi
