Delhi HC Upholds Ratnagiri Gas Award, Says Patent Illegality Unavailable In International Arbitration

The Delhi High Court on 17 August dismissed Ratnagiri Gas and Power Private Limited's challenge to an arbitral award directing it to refund USD 714,760.74 with 6% simple interest to Singapore-based Dinowic Pte Ltd. in a dispute concerning the sale and lifting of Naphtha from Dabhol, Maharashtra.

A Bench comprising Justice Mini Pushkarna held that the scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996 is narrower in an international commercial arbitration, and that a challenge to an arbitral tribunal's interpretation of contractual terms cannot be raised on the ground of “patent illegality”. She observed:

“The ground of 'patent illegality' in Sub-Section (2-A) of Section 34 of the Arbitration Act, cannot be sustained in case of International Commercial Arbitration. Further, any challenge to an award in respect of construction of terms of a contract by an Arbitral Tribunal falls under 'patent illegality', and is no longer available as a ground of challenge of an award arising out of an International Commercial Arbitration.”

The dispute arose after Ratnagiri Gas and Power Private Limited, a joint venture promoted by NTPC Limited and GAIL (India) Limited, floated an e-auction on 19 March 2014 for the sale of about 40,000 metric tonnes of Naphtha at Dabhol.

Dinowic emerged as the successful bidder and deposited USD 1.666 million as earnest money. Ratnagiri Gas issued a Sale Order on 2 April 2014 for about Rs. 160.03 crore. The Naphtha was to be lifted within prescribed timelines. However, delays occurred in opening Letters of Credit, making payments and lifting the material.

Ratnagiri Gas allowed Dinowic to continue with the transaction, and Dinowic lifted quantities on 25 April and 10 May 2014. Ratnagiri Gas subsequently deducted liquidated damages from Dinowic's security deposit. Dinowic disputed the deduction and invoked arbitration on 31 January 2015. Former Rajasthan High Court Chief Justice Anil Dev Singh was appointed as the sole arbitrator.

In an award dated 3 September 2019, the arbitrator directed Ratnagiri Gas to refund USD 714,760.74 with 6% simple interest from 17 June 2014, while rejecting Ratnagiri Gas's counterclaims.

The arbitrator found that Ratnagiri Gas had accepted Dinowic's delayed performance without reserving its right to claim damages. It therefore held that Ratnagiri Gas had waived strict compliance with the contractual timelines. The tribunal also found that Ratnagiri Gas had not followed the contractual procedure for deducting liquidated damages or established the requisite loss.

Ratnagiri Gas challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. It argued that it had accepted the delay only to mitigate its losses and that the arbitrator had wrongly relied on Sections 55 and 63 of the Indian Contract Act, 1872 to infer waiver and require proof of loss.

Dinowic argued that Ratnagiri Gas had accepted the delayed performance without reserving its right to damages and had failed to follow the contractual mechanism, which required it to first raise a claim and give Dinowic seven days to make the payment.

The Court upheld the arbitrator's finding that Ratnagiri Gas had waived the contractual timelines. It held that the finding was based on the parties' conduct and could not be reopened by re-appreciating evidence in a Section 34 proceeding. It stated:

“Once such waiver is established and the finding of learned Arbitrator on the aspect of waiver is sustained, the petitioner cannot subsequently recover any charge founded upon the same delay in payment and lifting of Naphtha.”

It therefore held that Ratnagiri Gas could not recover delayed-payment interest, exchange-rate losses or ground rent when those counterclaims were founded on delays that it had already waived.

On the deduction of liquidated damages, the Court held that the right to make such a deduction flowed entirely from the contract and could be exercised only after complying with the prescribed pre-conditions. It observed:

“The power to deduct liquidated damages is not an inherent right, but flows entirely from the contract, so that where the contract prescribes a procedure as a condition precedent to such deduction, that procedure must be adhered to. A unilateral deduction made in disregard of the prescribed procedure is impermissible and amounts to a wrongful withholding of the amount due.”

The Bench upheld the arbitrator's interpretation that Ratnagiri Gas first had to raise a liquidated damages claim and give Dinowic seven days to make the payment. It held that challenging this interpretation of the contractual terms would amount to raising “patent illegality”, which is not a permissible ground for challenging an award arising from an international commercial arbitration.

Accordingly, the High Court dismissed Ratnagiri Gas and Power Private Limited's Section 34 petition, finding no violation of the fundamental policy of Indian law or public policy.

Appearances for petitioner (Ratnagiri Gas and Power Pvt. Ltd.): Senior Advocate Puneet Taneja and Advocates Manmohan Singh Narula, Amit Yadav.

Appearances for respondent (Dinowic Pte Ltd.): Advocates Giriraj Subramanium, Jaisal Baath, Reaa Mehth, Aadhyaa Khanna.