Delhi High Court Upholds Setting Aside Of Arbitral Award, Says Tribunal Rewrote Contract In JSW-GAIL Dispute

Under a Gas Supply Agreement dated 10 September 1991, GAIL agreed to supply natural gas to JSW's sponge iron and hot rolled coil plant located in Dolvi, Maharashtra, up to a maximum quantity of 1.00 Million Metric Standard Cubic Metres per Day (MMSCMD).

The parties executed a supplementary agreement on March 30, 1998, which modified the original contract. The amendment replaced a formula-based service charge with a fixed monthly transportation charge.

Disputes later arose between the parties when GAIL had failed to supply the contracted quantity of supply. JSW contended that despite the shortfall in supply, GAIL continued to levy fixed transportation charges, which were not justified on account of the reduced supply. The dispute was later referred to arbitration. The arbitral award held that the shortfall in gas supply was not a breach of contract by GAIL, as it arose from government-controlled allocation policies and scarcity of gas.

Despite holding that the supply was affected due to force majeure circumstances, the tribunal, by applying the doctrine of business efficacy and partial failure of consideration, directed GAIL to refund Rs 14.67 crore to JSW as excess transportation charges.

The single judge set aside the arbitral award on the ground that the arbitral tribunal had failed to consider the clauses in invoices which mandated disputes to be raised within 14 days, failing which the claim would stand waived. Aggrieved, JSW filed an appeal under section 37 of the Arbitration Act.

JSW submitted that Article 12.03 which required disputes regarding invoices to be raised within 14 days, was hit by section 28 of the Indian Contract Act as it imposed unreasonable restrictions on the right to pursue legal remedies.

Opposing the plea, GAIL contended that the arbitral tribunal had rewritten the contract which by converting fixed transportation charges into variable charges by linking it to the gas supplied

The court at the outset discussed the limited scope of interference under section 37 of the Arbitration Act, holding that the scope of examination is even narrower than review under section 34 and is restricted to examining whether the court under section 34 exceeded its jurisdiction.

The court further observed that the tribunal failed to consider Article 12.03 which required disputes regarding invoices to be raised within 14 days.

Since the arbitral tribunal did not deal with the clause which had a direct bearing on limitation and the right to invoke arbitration, the court held that the award suffered from patent illegality. It held that “the award fails to interact with crucial material on record. By rendering the award without considering this vital clause, the arbitral tribunal overlooked evidence that had direct bearing on: (i) the waiver of the appellant's claim, (ii) the appellant's right to refer the dispute to arbitration, and (iii) the issue of limitation.”

It further disagreed with the tribunal's finding on suspension of limitation period due to labelling of invoices as provisional, holding that limitation period cannot be suspended indefinitely merely on this ground.

It held that “Mere labelling of charges as “provisional” cannot override statutory limitation, and therefore cannot render the clause irrelevant. ”

The court relied on the Supreme Court's judgment in OPG Power Generation Private Limited vs Enexio Power Cooling solutions India Private Limited & Anr where it was held that although an arbitral tribunal needs not to give detailed reasoning on every issue raised before it, there should be an intelligible reasoning demonstrating that the issues raised were considered and dealt with on the basis of evidence on record.

Applying the above ratio to the facts of the present case, it held that “Upon examination of the submissions made before the tribunal, it is evident that the issue of limitation warranted reasoned examination, particularly given that the respondent had substantially raised the objection regarding limitation.In the absence of any intelligible reasoning, no fair-minded person could adopt the reasoning of the arbitral tribunal as proper or adequate.”

The court further found fault with the tribunal's application of doctrine of business efficacy in the present case.

Referring to the Supreme Court's judgment in Adani Power (Mundra) Ltd v Gujarat Electricity Regulatory Commission, it observed that the doctrine of business efficacy applies where a plain reading of the contractual terms do not disclose a real intent of the parties and therefore reading of unexpressed terms are necessary to make the contract workable.

Since in the present, there was no ambiguity as both parties had consciously agreed to fixed transportation charges, converting them into variable charges effectively amounted to rewriting of contract.

it held.

“The arbitral tribunal itself recognised that Article 4.03 stipulates a fixed charge for the facilities provided by the seller, including infrastructure, pipelines, delivery systems, personnel, and maintenance. If the contract was deliberately amended to fix the charge, no reasonable person could interpret the parties' intention as making this fixed charge variable or contingent upon the quantum of gas supplied. It cannot be invoked to insert a term not agreed upon, especially where the contract deliberately adopts a fixed-charge structure”, the court observed.

The court further observed that infrastructure based contracts often adopt fixed charges because operational costs remain constant regardless of throughput.

Accordingly, the court dismissed the appeal.

For Appellant: Senior Advocates Sandeep Sethi and Ramesh Singh with Advocates Sahil Narang, Dhritiman Roy, Ayushman Kacker, Krisna Gambhir, and  Shreya Sethi

For Respondent: Senior Advocate Madhavi Divan with Advocates Kapil Sankhla, Shubham Saigal, Vipul Grover, Saurabh Kumar Gangwar, and Atharva Kotwala