Recourse To External Correspondences To Interpret Clause Despite Clear & Unambiguous Terms Amounts To 'Patent Illegality': Delhi High Court

Brief Facts

The Appellant entered into contracts with the Respondent for a Pipeline Replacement Project. The Respondent was the successful bidder and received the Notices of Award (NOAs). The Respondent informed the Appellant that it was facing difficulty in procuring line pipes domestically and would need to import them, thereby incurring Countervailing Duty (CVD) in lieu of excise duty.

The Respondent sought an amendment to the contract for reimbursement of the CVD to be paid at the same rate as the excise duty in lieu of payment of the excise duty. The Appellant agreed to allow reimbursement of duty paid to the manufacturer, but only for line pipes. The parties modified Clause 3.4.1.5 of the General Conditions of Contract (GCC) to incorporate this understanding and executed the final contracts on 04.09.2008. The Respondent eventually procured the line pipes domestically and sought reimbursement for excise duty.

The Respondent requested the Appellant to release the payment of excise duty on the premise that the amended clause did not require the Respondent to pay the excise duty directly to the tax authorities. The Appellant clarified that the amendment applied only to imported line pipes where CVD was incurred. Since the Respondent had neither imported the pipes nor directly paid excise duty to tax authorities, the Appellant refused reimbursement.

Disputes arose regarding the scope of Clause 3.4.1.5 of the GCC. The Respondent invoked arbitration. A three-member tribunal rendered an award dated 20.02.2015 in the Respondent's favour. The parties set aside this award by consent and appointed a Sole Arbitrator. The Sole Arbitrator rejected the Respondent's claims in its awards dated 10.01.2020.

Aggrieved by the award, the Respondent filed petitions under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge allowed the petitions and set aside the awards by judgment dated 20.12.2023 with the finding that clause 1.2.5 of the GCC stipulated that the terms of the contract supersede all communications, negotiations and agreement entered into prior to the date of the execution of the contract. The impugned judgment concluded that no ambiguity existed in Clause 3.4.1.5 and that the GCC would prevail over the Bidding Documents in case of conflict, as per the contract. Since the Tribunal relied on extraneous materials despite clear language of the contract, the Court found the awards patently illegal and set them aside. The Appellant filed the appeals under Section 37 challenging the impugned judgment.

Submissions

Mr. Saurav Aggarwal, counsel for the Appellant, submitted that the Single Judge went beyond the scope of interference under section 34 and erroneously set aside well-reasoned Awards. He submitted that the amendment to clause 3.4.1.5 was made at the Respondent's request, on the assumption that line pipes would be imported. The amendment was only meant to deal with the reimbursement of Countervailing Duty (CVD), not excise duty paid by suppliers. Therefore, it cannot be stretched to include reimbursement of excise duty. He argued that the added line in clause 3.4.1.5 should not be read in isolation. It must be interpreted in light of the background and context in which the amendment was made.

He submitted that the interpretation of the terms of the contract falls within the exclusive domain of the arbitrator under Section 28(3) of the Act. He relied on HRD Corporation v. GAIL (India) Ltd. to contend that courts should not interfere with the interpretation of the arbitrator unless it is completely unreasonable.

Mr. Aayush Agarwala, counsel for the Respondent submitted that courts have a limited scope of interference under Section 37. He argued that appellate courts must only examine whether the Single Judge exercised discretion under Section 34 judiciously and in accordance with law. He submitted that Clause 3.4.1.5 was clear and unambiguous. Therefore, the Arbitrator should not have relied on internal aids of interpretation. By doing so, the Arbitrator re-wrote the contract, which the law does not permit.

Counsel argued that the awards wrongly allowed the Appellant to retain the excise duty reimbursement merely because the Respondent did not make direct payment to the tax authorities. Moreover, the Arbitrator relied on correspondence between the parties to interpret Clause 3.4.1.5, even though the clause was unambiguous. He submitted that courts must not use internal aids of interpretation when the language of the contract is clear and straightforward. He then placed reliance on Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum to argue that an award which fails to consider the material terms of the contract must be set aside.

Observations

The Court observed that the jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 is limited and circumscribed by the restrictions laid down in Section 34. The scope of Section 37 is to ensure that the Section 34 court has not exceeded its jurisdiction. It relied upon Bombay Slum Redevelopment Corpn., where the Supreme Court held that the main role of the appellate court under Section 37 is to determine whether the jurisdiction under Section 34 has been properly exercized.

The Court observed that when the language of Clause 3.4.1.5 of the GCC was plain, clear and unambiguous, the internal aid of interpretation was impermissible. It held that the arbitral tribunal wrongly relied on negotiations and correspondence that were explicitly excluded by the contract. “Ignoring an explicit clause of the contract or acting contrary to the terms of the contract amounts to patent illegality”, the Court held.

The court held that the conclusion arrived in the Awards was patently illegal, perverse and amounted to re-writing of the contract. The Court relied on the Supreme Court's judgment in State of Chhattisgarh v. Sal Udyog, where the Supreme Court held that an arbitrator's failure to render a decision in accordance with the terms of the contract attracts the ground of 'patent illegality'. Such a lapse constitutes a flagrant breach of Section 28(3) of the Act.

It further observed that:

“When there is only one view possible, it is open for the Court while exercising jurisdiction under Section 34 of the Act to set aside the Award when the view expressed by the arbitrator is not a plausible view.”

The Court held that even though courts do not sit in appeal over an award under Section 34, interference is justified where the award is clearly erroneous and patently illegal, especially where such an interpretation renders a clause of the agreement meaningless or redundant. Courts are not expected to overlook interpretations that defeat the purpose of the contract itself.

The court held that the impugned judgment rightly set aside the Awards. It therefore dismissed the appeals.

Case Title: Oil and Natural Gas Corporation Ltd. v. JSIW Infrastructure Pvt. Ltd.

Citation: 2025 LiveLaw (Del) 692

Case Number: FAO (OS) (COMM) 59/2024 & FAO (OS) (COMM) 60/2024

For the Appellant: Mr. Saurav Agrawal, Ms. Aakriti Dawar, and Ms. Anshika Pandey, Advocates

For the Respondent: Mr. Aayush Agarwala and Mr. Prakash Jha, Advocates

Date of Judgment: 27.05.2025

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