Delhi High Court Rules Arbitrations Vitiated By Contractual Misreading Are Vulnerable To Challenge

Delhi High Court Rules Arbitrations Vitiated By Contractual Misreading Are Vulnerable To Challenge

Justice Sachin Datta of the Delhi High Court recently ruled that an arbitral award tainted by a fundamental misreading or misunderstanding of the basic contractual framework is subject to challenge under Section 34(2)(b)(ii) and Section 34(2A) of the Arbitration and Conciliation Act, 1996.

In its judgement, the High Court referenced the Supreme Court's decision in DMRC Ltd. v. Delhi Airport Metro Express (P) Ltd. The Supreme Court held that a mere disagreement with an arbitral award does not justify judicial interference if the award aligns with commercial sensibilities and the contract's terms. The Supreme Court also noted that an interpretation by an arbitral tribunal must be within reasonable possibilities; if an interpretation is so far-fetched that no reasonable person could accept it, the award may be considered perverse.

The High Court also cited Ssangyong Engg. & Construction Co. Ltd. v. NHAI, which established that the construction of contractual terms primarily falls within the arbitrator's domain. The Court reiterated that an arbitrator’s erroneous interpretation of a contract does not warrant interference unless it is so unreasonable that no fair-minded person would regard it as a possible view.

In Indian Oil Corp. . Ltd. v. Shree Ganesh Petroleum, the Supreme Court highlighted that an arbitrator stepping outside the bounds of the contract or addressing issues not assigned to them constitutes a jurisdictional error. The High Court also referred to Satyanarayana Construction Co. v. Union of India, where it was held that an arbitrator cannot alter agreed-upon contract terms or grant a higher rate than stipulated. Such excesses in authority justify overturning the award by the High Court.

The petitioner challenged an arbitral award dated March 7, 2022, issued by a sole arbitrator, under Section 34 of the Arbitration and Conciliation Act, 1996. The dispute arose from a contract between Otsuka Chemicals (India) Private Limited (the respondent) and Trans Engineers India Private Limited (the petitioner) for the expansion of a plant in Rajasthan. The contract involved two purchase orders totaling Rs. 71 crore and covered the supply, erection, manufacturing, and commissioning of equipment and materials.

Disputes emerged over the petitioner's claim for additional payments for work requested by the respondent. The petitioner had issued 26 pro forma invoices for these additional works, which the respondent refused to pay, leading to arbitration. The petitioner argued that the additional work was based on modifications to the Piping and Instrumentation Drawings (P&IDs) and sought Rs. 28,37,09,384 for these works, along with other claims. The respondent counterclaimed Rs. 3,55,00,000 for liquidated damages and other costs.

The arbitral tribunal rejected both the petitioner's claims and the respondent's counterclaims, finding insufficient evidence to support the claims and counterclaims. The tribunal awarded a nil award, requiring each party to bear its own costs.

The High Court noted that the minutes of a meeting set out the scope of work based on the P&IDs dated July 26, 2016. The purchase orders issued on September 16, 2016, referenced these P&IDs, not the later revisions dated August 20, 2016. The agreement executed on January 20, 2017, also supported this interpretation, specifying that changes beyond the contractual terms would warrant additional payment based on mutually agreed rates.

The High Court found that the tribunal's conclusion that the work was based on both sets of P&IDs was inconsistent with the established contractual documents. It criticised the tribunal for misinterpreting the contractual framework and noted that the minutes of the meeting, the purchase orders, and the final agreement clearly established the P&IDs dated July 26, 2016, as the basis for assessing work and variations.

The Court held that the arbitral award’s failure to consider the fundamental contractual context and its erroneous redefinition of the agreement's foundation rendered it vulnerable to challenge under Section 34 of the Arbitration Act. The High Court ruled that while it could not reassess factual findings, it must intervene if an award is based on a fundamental misinterpretation of evidence or contractual terms.

The High Court concluded that the arbitral tribunal's error in interpreting Clause 2.4 (renumbered as Clause 2.8) of the agreement rendered the award unsustainable. The Court set aside the arbitral award, emphasising the need for correct interpretation of contractual documents to ensure fair adjudication.