In a recent decision, the Division Bench of the Delhi High Court in Oil and Natural Gas Corporation Ltd. (ONGC) v. JSIW Infrastructure Pvt. Ltd. [FAO(OS)(COMM) 59/2024 & 60/2024] has clarified the scope of contractual interpretation and reaffirmed the limited yet crucial role of courts under the Arbitration and Conciliation Act, 1996 ("the Act"). The judgment underscores that where the terms of a contract are clear and unambiguous, external aids such as pre-contractual correspondence cannot be relied upon to reinterpret or rewrite the agreed terms.
Background of the Dispute
The dispute arose out of a lump sum contract awarded to JSIW Infrastructure Pvt. Ltd. by ONGC for a pipeline replacement project. While JSIW had bid unconditionally, an issue cropped up regarding the reimbursement of duties specifically, Countervailing Duty (CVD), as the required pipes were to be imported due to unavailability of the same in India.
Through a series of pre-contractual correspondences, the parties agreed to amend the draft agreement to allow reimbursement of excise duty (or CVD in the case of imports) paid by the manufacturer and invoiced to JSIW. This amendment was incorporated into Clause 3.4.1.5 of the General Conditions of Contract (GCC) and was reflected in the final contract executed on 04.09.2008.
Subsequently, however, JSIW procured the pipes domestically and paid excise duty via the manufacturer's invoice. ONGC refused reimbursement on the ground that JSIW had not directly paid the duty to the authorities raising a purely technical objection. This led to conciliation, arbitration, and ultimately a prolonged court battle.
Despite two favourable recommendations by the Outside Experts Committee (OEC) and an initial arbitral award in favour of JSIW, a subsequent award by a Sole Arbitrator reversed the position, relying heavily on the August 27, 2008, letter to interpret the contractual clause. The arbitrator concluded that the amendment was only meant to cover CVD on imported pipes and not excise duty on domestic procurement, as the letter specifically pertained to duty being paid on pipes which were imported and required a payment of CVD.
JSIW challenged the award under Section 34 of the Act. The Ld. Single Judge allowed the challenge, holding that the arbitral award suffered from patent illegality. The award was set aside and the reasoning provided for the same was the reliance of the Court on Clause 1.2.5 of the GCC, which provided that the terms of the contract constituted the entire agreement and superseded all prior communications and negotiations.
The court further observed that Clause 3.4.1.5 of the GCC, post-amendment, clearly permitted reimbursement of excise duty paid by the manufacturer and invoiced to the contractor, and ONGC's denial based on a hyper-technicality i.e., non-payment by JSIW directly to the tax authority was unjustified.
The Crux of the Controversy: Interpretation of Clause 3.4.1.5
The core issue, which finally came before the Ld. Division Bench was whether the amended Clause 3.4.1.5, which expressly permitted reimbursement of excise duty paid by the manufacturer and invoiced to JSIW, could be reinterpreted by reference to the prior letter dated August 27, 2008.
JSIW argued and the courts accepted that the clause was crystal clear. The amendment made a specific exception for line pipes, clearly stating that reimbursement would be made even if the duty was paid by the manufacturer, provided documentary evidence was submitted. Thus, ONGC's insistence on proof of direct payment by JSIW had no contractual basis.
The Court held that:
"When the language of Clause 3.4.1.5 of the GCC is plain, clear and unambiguous, the external aid of interpretation is impermissible."
The Division Bench further reiterated that Clause 1.2.5 of the GCC, which formed part of the final contract, explicitly stated that:
"The Contract constitutes the entire agreement between the Company and the Contractor... and supersedes all communication, negotiations and agreement (whether written or oral) of the parties with respect thereto made prior to the date of this Agreement."
Therefore, reliance by the Sole Arbitrator on the letter dated August 27, 2008, to limit or redefine the express terms of Clause 3.4.1.5 was held to be impermissible and amounted to a patent illegality.
Anhad Law's Perspective
The judgment is a strong reminder of the principle that arbitrators are creatures of contract and cannot rewrite its terms by invoking surrounding circumstances, especially where none of the clauses are ambiguous. The Division Bench, while relying on Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum1 and South East Asia Marine Engineering & Construction Ltd. v. Oil India Ltd.2, held that:
"Ignoring an explicit clause of the contract or acting contrary to the terms of the contract amounts to patent illegality."
This decision further underscores a vital point, i.e., interpretation must remain faithful to the four corners of the contract. While ONGC's position based on the pre-contract correspondence had some contextual justification, it could not override a clearly worded, mutually agreed clause. By relying on an annexed letter to reinterpret an unambiguous clause, the Sole Arbitrator strayed beyond the scope of permissible interpretation and effectively rewrote the agreement as was mutually decided by the parties.
This judgment not only affirms the importance of contractual sanctity and finality but also reinforces the supervisory role of courts under Sections 34 and 37 of the Act.
Arbitrators must operate within the framework of the agreement and cannot rely on external material to limit or expand the rights and obligations unless ambiguity exists.
Footnotes
1. (2022) 4 SCC 463
2. (2020) 5 SCC164
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