Business efficacy test cannot be applied to alter the express terms of agreement: Delhi High Court

Business efficacy test cannot be applied to alter the express terms of agreement: Delhi High Court

The bench set aside the arbitral tribunal's award and allowed the challenge petition    

The High Court of Delhi has held that the arbitrator cannot alter the express terms of the agreement by applying the business efficacy test when there is no ambiguity about the intention of the parties.

The bench of Justice Vibhu Bakhru held that the Penta Test as propounded by the Supreme Court in Nabha Power Ltd vs Punjab State Power Corp. Ltd. was only for the purpose of determining the intention when the terms of the agreement were not express or silent on an aspect.

The court stated that even if the tribunal believed that the arrangement between the parties was inequitable, it could not alter the terms of the agreement to work out an equitable bargain between the parties.

In July 2015, the parties entered an agreement whereby the respondent was selected as a Developer-Cum-Operator (DCO) to develop and operate food grains handling, storage and transportation facilities.

The work was to be completed within 36 months and it was for 20 years from the date of operation. The date was agreed to be the date on which the facilitates of the circuit were commissioned. The respondent provided the services on a commercial basis.

According to the agreement, the respondent was to be paid on Storage-Cum-Handling Charges (SCH) on a monthly basis. This was subject to the variation in proportion to the Wholesale Price Index (WPI). The charges were to be increased every year based upon 70 percent of the inflation rate recommended by the Government of India by taking the previous year's WPI as the base.

While there was a delay in the completion of the entire project, the respondent constructed certain depots, which were capable of being used by the petitioner. Accordingly, the parties reached an arrangement whereby the depots were to be used by the petitioner and the respondent to be paid on actual utilization basis as an interim arrangement till the entire work was completed.

As per the November 2013 letter, the SCH charges were to be determined by taking September 2013 as the date of the operation. In January 2014, the respondent issued a letter stating it would be willing to accept September 2013 as the date of operation if the 20-year service period also commenced at the same time.

The petitioner declined the proposition and reiterated that the 20-year period commenced in May 2007 when the interim arrangement was made.

Aggrieved, the respondent invoked the dispute resolution mechanism and the parties were referred to arbitration.

When the arbitral tribunal ruled in favor of the respondent, the petitioner challenged the order. It held that the period of 20 years would commence from September 2013.

The court held that the respondent could not complete the project in 36 months as provided under the agreement. But it had completed certain depots that the petitioner agreed to use on an actual utilization basis. As there was no ambiguity on the terms of the contract, there was no reason for the arbitral tribunal to apply the business efficacy test by ignoring the supplementary agreement and the correspondence between the parties.

The bench stated that an award would be vitiated by patent illegality if the express terms of the agreement were ignored or contravened by the arbitrator.

It ruled that under the Arbitration and Conciliation Act, 1996, it could not mean that an arbitral tribunal could render an award contrary to the contract between the parties.

Setting aside the arbitral award and ruling that the service period would commence from 2013, the court allowed the challenge petition.