Arbitrator's Decision To Defer Compliance With Essential Pre-Condition In Agreement Amounted To Rewriting Contract, Vitiated It: Delhi HC
The Delhi High Court Bench of Justice Jasmeet Singh while allowing a petition under Section 34, Arbitration and Conciliation Act (“ACA”) observed that when the contract required the bidder to establish an office in India as a pre-requisite to performance, the decision by the Arbitrator holding that compliance could be deferred, amounted to rewriting the contract. Such a holding...
The Delhi High Court Bench of Justice Jasmeet Singh while allowing a petition under Section 34, Arbitration and Conciliation Act (“ACA”) observed that when the contract required the bidder to establish an office in India as a pre-requisite to performance, the decision by the Arbitrator holding that compliance could be deferred, amounted to rewriting the contract. Such a holding violated fundamental policy of Indian law and the award was liable to be set aside.
Facts
The present petition was filed under Section 34, ACA challenging the Arbitral Award dated 03.07.2020 passed by the Arbitrator. The Petitioner is a public sector undertaking and the Respondent is a foreign company incorporated under the laws of China. As a part of the bidding process for the tender issued by the Petitioner, the Respondent submitted a Project Execution Methodology (“PEM”), in which the Respondent assured the Petitioner for local supplies, it would either open an office in India or partner with an Indian firm. Clause 1 of the PEM provided that the Respondent will set up a local office in India and open an Indian bank account to facilitate the execution of the contract.
Based on the same, the Petitioner issued three letters of award (“LOA”) in favour of the Respondent which were accepted by the Respondent. Thereafter, on several occasions, the Respondent failed to open a local office in India and did not furnish details of an Indian bank account as proposed in the PEM. Instead, the Respondent proposed that it can be permitted to use the office and the bank account of an associated Indian company, namely, M/s Longking Engineering India Pvt. Ltd. To which, the Petitioner denied and insisted on strict adherence to the PEM.
Subsequent to exchange of several communications, the Respondent on 12.10.2018 invoked Clause 32.1 i.e. arbitration clause of General Conditions of Contract (“GCC”). The Respondent made claims amounting to Rs. 3,04,12,768 and the Petitioner made counter-claims equivalent to Rs. 2,12,47,107 along with litigation cost. The impugned arbitral award was passed by the Arbitrator on 03.07.2020 whereby the Petitioner was directed to pay a sum of Rs. 13,65,000/- along with interest. Aggrieved by the impugned arbitral award, the Petitioner filed the present petition.
Contentions
The Counsel for the Petitioner submitted that the award was arbitrary, perverse and thus liable to be set aside. The Arbitrator failed to appreciate that under the PEM agreed between the parties, opening of a project office in India for execution of Indian component was a pre-requisite as per the RBI guidelines. The Respondent had itself proposed to set up an Indian office and open an Indian bank account to receive India Rupee, instead of opting for a Letter of Credit (“LC”). The finding of the Arbitrator that the payment could be made through an LC was beyond the pleadings. The finding that payment could have been through M/s Longking Engineering India Pvt Ltd was arbitrary as it was impermissible in law to remit contractual payments to a third party unconnected with the contract.
The Counsel further submitted that the Respondent never pleaded or argued that it sought payment through an LC. The parties were not given any opportunity to present arguments on this issue. Once the parties had agreed that the respondent would open an Indian bank account in compliance with the RBI guidelines, the matter was not open to reinterpretation by the Arbitrator.
The Counsel for the Respondent argued that while the Respondent proposed using the office and bank account of M/s Longking Engineering India Pvt. Ltd, this was consistent with the accepted conditional LoA. The Respondent was still executing the project in accordance with the LoA and PEM when the Petitioner illegally terminated the contract. The contention, raised for the first time in these proceedings, that purchase orders could not be issued until the Respondent opened its Indian office and bank account, was neither pleaded nor argued before arbitrator and no such requirement was ever communicated prior to 26.05.2017.
The Counsel further submitted that the reliance of the Arbitrator on Note to Clause 9.6, GCC was sound and supported by the record. The LoA's payment terms stipulated that 85% payment for imported supply would be released through a 60-day usance LC against receipted LR. Payment for imported items was thus to be made only through LC, rendering the insistence of the petitioner on an Indian bank account contrary to the contract.
Observations
The Court observed that Clause 1, PEM which was part of the bid of the Respondent and was accepted by the Petitioner, contained clear undertakings by the Respondent to open an office in India and an Indian Bank Account before the commencement of the execution of the Indian component of the contract. This was not a mere formality but it was central to compliance with the RBI guidelines.
The Court further observed that from a conjoint reading of the PEM, LoA and GCC leaves no scope for payment to any unrelated third party or for waiver of the local office/bank account requirement without the consent of the Petitioner. The finding of the Arbitrator that the requirement to establish a project office and bank account could be deferred until after drawing approval and even substituted by the use of a third party's bank account, was a direct departure from the contractual framework agreed to between the parties. Additionally, the Respondent had never denied the obligation of opening an Indian office and bank account but only highlighted its inability to do so.
The Court held that by disregarding these stipulations and denying the obligations, the Arbitrator had in effect re-written the contract. The PEM was not ancillary, but was integral to the project framework and together with the LoA and GCC, imposed the obligations for execution of the Indian component, including the establishment of a project office in India and
the opening of an Indian bank account to receive INR payments.
On the issue of LCs being an acceptable mode of payment, the Court observed that while applying the Note to Clause 9.6, GCC, the Arbitrator completely ignored Annexure VIII, GCC which clearly mentioned that note deviation from GCC terms is generally acceptable and only in exceptional circumstances, the deviations are applicable. Additionally, the reliance on the said note was a violation of Section 18, ACA which guarantees a full opportunity to the party to present its case. The Petitioner was given no opportunity to lead evidence or argue about the issue of payment through LC. This procedural shortcoming also vitiated the impugned Arbitral Award.
The Court concluded that, the Impugned Arbitral Award, by altering the agreed preconditions under the PEM, LoA and GCC and substituting a new contractual regime, violated the fundamental policy of Indian law and the principles of natural justice. Accordingly, the Court allowed the application and set aside the impugned Arbitral Award.
Case Title – BHEL v. Xiamen Longking Bulk Material Science and Engineering Co.
Case No. – O.M.P. (COMM) 529/2020 & I.A. 10230/2020
Appearance-
For Appellant – Mr. Arvind Chaudhary, Mr. Vinay Kumar & Mr. Sachin Chaudhary, Advs.
For Respondent – None
Date- 21.08.2025