The High Court of Delhi (High Court), in the recent judgment of Union of India, Ministry of Railways, Railway Board v. M/S Jindal Rail Infrastructure Limited,1 held that it is not open for the arbitral tribunal under the Arbitration and Conciliation Act, 1996 (Arbitration Act) to examine the commercial wisdom of the parties and rewrite the terms of an Agreement on the basis of commercial hardship faced by either party in performing its obligations. The High Court clarified that such rewriting of the terms of an Agreement would be patently illegal and would go against the public policy of India. In this article, we briefly navigate through the facts and findings of the High Court in the aforesaid decision.
The petitioner, Ministry of Railways (Railways) issued a 'Bid Invitation and Schedule of Requirement' ('Tender') on 13.01.2015. Pursuant to the said invitation, the respondent, Jindal Rail Infrastructure Limited (JRIL) submitted its bid, and the same was accepted as the lowest bidder by the Railways. Subsequently, Railways issued the Letter of Acceptance communicating its decision to place an order on JRIL for the supply of the wagons at the price as quoted by JRIL. Thereafter, the parties entered into the contract (Agreement), as per which the Railways issued an order for the supply of two tranches of wagons, the first having 1403 wagons and the second tranche having 468. On 28.08.2015, the Railways awarded a contract for the supply of 1075 numbers of wagons, wherein 100 were sought at the L-1 rates (lowest bid) and the rest were sought at the rate of L-2 (that was agreed with another party). Aggrieved by the dual pricing, JRIL made a representation stating that the Notice Inviting Tender did not indicate that there would be two rates applicable for the supply of wagons by different bidders.
The agreement had an 'Optional Clause' which conferred on the Railways the right to change the quantity ordered up to 30% of the ordered quantity during the currency of the Agreement, on the same price and terms and conditions, with a suitable extension in the delivery period for the optional quantity. On 08.04.2016, an amendment was made to the Agreement, wherein the Railways exercised its right reserved under the optional clause and increased the ordered quantity of wagons by 496 numbers. The delivery period for the aforesaid quantity was increased by five months from the existing delivery period. In the meantime, another tender was floated by the Railways. JRIL was again awarded this contract and was required to supply and manufacture 292 wagons. Pursuant to this award, JRIL preferred another representation requesting the Railways to revise the payment due to it at the L-2 rates. On receiving no positive response, JRIL invoked the arbitration agreement to have its claims adjudicated.
In its statement of claim, JRIL raised six claims before the arbitral tribunal. The arbitral tribunal on the issue of dual pricing, held that even if the Tender was treated as a part of the Agreement between the parties, there was no stipulation that in the event the purchase orders are placed at L-2 rates with any party, the L-1 bidder (that is, JRIL) would be entitled to L-2 rates. However, the arbitral tribunal also noted that the additional order made under the amendment was in breach of the terms of the Agreement, as when the costs of manufacture of wagons and market price for supply of wagons had gone up substantially, the Railways could not have ordered additional quantity at the same pre-decided price. Accordingly, it was held that the parties could not have intended for the Railways to exercise an option of increasing the quantity if the price in the market or the cost of production had increased, rendering it commercially unviable to manufacture and supply the said wagons.
The arbitral award rendered in the instant matter was challenged before the High Court by the Railways on several grounds, one of them being that the arbitrator had ignored the express terms of the agreement between the parties and had re-worked upon the bargain that was reached between the parties.
Whether an arbitrator can re-write the terms of the arbitration agreement if the same appears to be patently commercially unviable for any one of the parties to perform?
The High Court opined 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. In the present case, the High Court observed that the arbitral tribunal had essentially re-worked the bargain between the parties and re-written the contract which cannot be permitted by the courts. The High Court relied on the Supreme Court case of PSA Sical Terminals Pvt. Ltd v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Ors.2, wherein it was held that re-writing a contract for the parties would be a breach of fundamental principles of justice and could be only resorted to under exceptional circumstances.
While noting that an arbitral award based on a plausible interpretation of a contract cannot be interfered with under the provisions of Section 34 of the Arbitration Act, the High Court also reaffirmed that it cannot accept the arbitral tribunal's interpretation that the terms of the agreement 'flouts business common sense'. The High Court ultimately held that only in cases where the terms of the contract do not clearly express the intentions of the parties, can the courts use various tools of interpretation to ascertain the intent. However, it is not open to the courts 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. Based on the above analysis, the High Court opined that the impugned award had rewritten the terms of the contract which is in conflict with the fundamental policy of Indian law and vitiated by patent illegality. Accordingly, the impugned award was set aside.
It is well-settled position in Indian law that in the realm of private commercial contracts, once a party has agreed to the stipulations with open eyes, it cannot refute performance of its obligations stating that the contract was one-sided or onerous. The Supreme Court in the case of PSA Sical Terminals clarified that an arbitrator acting under the Arbitration Act is bound to arbitrate within the four walls of the contract. An arbitral award rewriting the contractual terms is bound to set aside on the ground of patent illegality.
*The authors would like to acknowledge the research and assistance rendered by Ms. Diya Dutta, a student of the Maharashtra National Law University, Mumbai.
1 O.M.P. (COMM) 227 of 2019.
2 PSA Sical Terminals Pvt. Ltd v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Ors., 2021 SCC OnLine SC 508.
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