Mansimran Kaur

New Delhi, May 24, 2022: The Delhi High Court has observed that the Arbitral Tribunal can interpret a contract in a manner that would make commercial sense.  However, it is not open to re-work a bargain that was struck between the parties on the ground that it is commercially difficult for one party to perform the same.

Mentioning that a 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 Bench of Justice Vibhu Bakhru said, “There is no dispute that the interpretation of a contract falls within the jurisdiction of an arbitral tribunal and an arbitral award based on a plausible interpretation of a contract cannot be interfered with under the provisions of Section 34 of the A&C Act.”

Factual background of the case was such that JRIL was engaged in the manufacture of Railway Rolling Stock for Indian Railways. The Railways issued a “Bid Invitation and Schedule of Requirement” inviting electronic bids for manufacture and supply of the wagons.  Thereafter, the petitioner and the respondent entered into a contract.  In terms of the Agreement, the Railways issued an order for manufacture and supply of 1403 numbers of wagons for a total contract price of Rs.151, 52, 40,000/- without excise duty and VAT, as the first tranche. The order for the balance 468 numbers of wagons was withheld and required to be released in the second tranche.

However, there was dispute between the parties with respect to double pricing of wagons. In pursuance of the same, JRIL invoked the Arbitration Agreement to adjudicate its claim with respect to dual pricing of wagons. The Railways responded to the aforesaid communication on September 20, 2016 and nominated an Executive Director, Railway Stores (C) of the Railway Board as the sole arbitrator. Thereafter, the Arbitral Tribunal directed the Railways to pay the awarded amount of Rs.18,35,20,000. The petitioners filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 wherein they assailed the arbitral award.

The Court took into consideration Para 9 of the LOA wherein the Railways retained the right to increase or decrease the order quantity upto 30 % during the currency of the agreement. Thus, it was not a disputed fact that the Railways was entitled to increase the order of quantity wagons up to 30 %. However, at the same time the Court noted that JRIL accepted that the Railways was entitled to increase the said quantity by 30% in terms of Clause 2.8 of the Agreement (initially numbered as Clause 2.4 of the Agreement) and accordingly, claimed that its obligation to supply wagons was discharged with the supply of 796 numbers of wagons (612 plus 30% additional, in terms of the Optional Clause). 

The Court further opined that decision of the Arbitral Tribunal to interpret Clause 2.4 of the Agreement (renumbered as Clause 2.8 of the Agreement), in a manner so as to curtail the right of the Railways to increase the quantity procured under the Agreement is, ex facie, erroneous. A plain reading of the clause indicated that the Railways was conferred the power under the said clause to increase the quantity of the wagons during the currency of the Agreement by up to 30%.  It further stated that the Arbitral Tribunal had, essentially, re-worked the bargain between the parties and re-written the contract and the same was clearly impermissible.

Additionally, the Court observed that in the instant case, the Arbitral Tribunal’s interpretation of the said clause was not a plausible one and the same was re-interpreted contrary to its plain language as it flouts business common sense.  It is not open for the Arbitral Tribunal to examine this commercial wisdom and re-write the Agreement on the basis of the commercial difficulties faced by JRIL in performing its obligations, the Court remarked.  It was further stated that it is not necessary that all contracts yield a profit; some result in a loss as well. This is not a factor to permit a party to avoid its contractual obligations.

Thus in light of the aforesaid observations, the Court stated that the decision of the Arbitral Tribunal to award the difference between the price quoted by the tenderers and the price quoted by JRIL was unsustainable. The Court also stated that the impugned award was also in conflict with the fundamental policy of Indian law and was vitiated by patent illegality.Accordingly, the petition was allowed. 

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