Arbitral Awards Quashed For Ignoring Clear Contractual Terms | Delhi High Court Holds Clause 3.4.1.5 Left No Room For Interpretation
Isabella Mariam
The High Court of Delhi Division Bench of Justice Vibhu Bakhru and Justice Tejas Karia dismissed appeals filed under Section 37 of the Arbitration and Conciliation Act, 1996, challenging a judgment that had set aside arbitral awards rejecting a contractor’s claim for reimbursement of excise duty. The Court upheld the Single Judge’s ruling, affirming that the arbitral tribunal had committed patent illegality by ignoring unambiguous contractual provisions. It directed that the arbitral awards dated 10.01.2020 stand quashed, and the reimbursement claim of excise duty by the contractor must be honoured as per the contract terms.
The dispute stemmed from contracts executed between a public sector undertaking and a private infrastructure company for a pipeline replacement project on a lump sum basis. The project involved significant procurement and installation of line pipes. Following a successful bidding process, notices of award (NOAs) were issued on 25.06.2008 and 30.06.2008, specifying an inclusive contract price covering all tariffs, taxes, and duties.
Post-award, the contractor indicated difficulties in procuring line pipes domestically and proposed importation, which would attract Countervailing Duty (CVD). To facilitate this, the contractor requested reimbursement of CVD equivalent to excise duty. In response, the employer, through its letter dated 27.08.2008, agreed to an amendment permitting reimbursement of duty paid by the manufacturer to the contractor, solely for line pipes.
Consequently, Clause 3.4.1.5 of the General Conditions of Contract (GCC) was amended. It stated that “only for line pipes, company shall reimburse the Excise Duty paid by the manufacturer to the tax Authorities and invoiced to the Contractor, at actuals, in Indian Rupees against documentary evidence subject to the maximum of the amount of Excise Duty indicated in the Contract Price Schedule.” Similar amendments were made in the price schedule and milestone payment annexures.
Despite the initial plan to import, the contractor procured line pipes domestically and claimed reimbursement of excise duty paid to manufacturers. The employer rejected this claim, citing that the excise duty must be paid directly by the contractor to authorities, per its interpretation of the 27.08.2008 letter. The contractor contested that the amended Clause 3.4.1.5 required only manufacturer-paid excise to be invoiced to the contractor.
The dispute was referred to arbitration. Initially, a three-member tribunal awarded reimbursement to the contractor, but by consent, the award was set aside. A sole arbitrator then rejected the claim on 10.01.2020, interpreting that reimbursement was not permissible unless the contractor paid the duty directly.
The contractor challenged this before the High Court under Section 34 of the Arbitration and Conciliation Act. The Single Judge allowed the petition, holding that Clause 3.4.1.5 was unambiguous, and the arbitral tribunal had patently erred in relying on pre-contractual correspondence.
The Division Bench, concurring with the Single Judge, recorded that “when the language of the Clause 3.4.1.5 of the GCC is plain, clear and unambiguous, the internal aid of interpretation is impermissible.”
It observed that “the Awards rejected the claim... by reading into Clause 3.4.1.5... and placing reliance on the letter dated 27.08.2008 as an internal aid for interpretation...” which was not required, since “the terms of the contract were unambiguous.”
The Court further recorded: “The contract constitutes the entire agreement between the Company and the Contractor with respect to the subject matter of the Contract 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.”
Citing Clause 1.2.5 of the GCC, the Court noted that past communications, including the 27.08.2008 letter, could not override the executed contract. The Division Bench highlighted that the arbitrator had ignored this express provision, amounting to a violation of Section 28(3) of the Arbitration and Conciliation Act, which mandates decisions be made in accordance with the terms of the contract.
The judgment held the established principles: “When the interpretation of an award by the arbitrator is completely unsound, unreasonable and untenable, then such an award is liable to be set aside.”
It relied on prior Supreme Court precedents to state that “courts are not expected to overlook interpretations that defeat the purpose of the contract itself.”
Further, the Bench concluded that the arbitrator’s interpretation “rendered a clause of the agreement meaningless or redundant,” thereby necessitating judicial interference under Section 34.
The Court concluded: “Accordingly, the conclusion arrived in the Awards is patently illegal, perverse and amounts to re-writing of the contract.”
The Division Bench upheld the decision of the learned Single Judge, who had set aside the arbitral awards dated 10.01.2020. The Court recorded: “The impugned judgment has rightly set aside the Awards.”
Accordingly, the appeals filed by the appellant were dismissed. The Court held: “The appeals are hereby dismissed as there is no infirmity with the impugned judgment.”
There was no order as to costs.
Advocates Representing the Parties
For the Petitioners: Mr. Saurav Agrawal, Ms. Aakriti Dawar and Ms. Anshika Pandey, Advocates.
For the Respondents: Mr. Aayush Agarwala and Mr. Prakash Jha, Advocates.
Case Title: Oil and Natural Gas Corporation Ltd. v. JSIW Infrastructure Pvt. Ltd.
Neutral Citation: 2025:DHC:4430-DB
Case Number: FAO (OS) (COMM) 59/2024 & FAO (OS) (COMM) 60/2024
Bench: Justice Vibhu Bakhru, Justice Tejas Karia
[Read/Download order]
