Sanchayita Lahkar

The High Court of Bombay Single Bench of Justice R.I. Chagla set aside the majority arbitral award that had directed Konkan Railway to assume liability for royalty charges on ordinary earth used in a Madhya Pradesh infrastructure project, holding that the tribunal acted contrary to the contract and committed patent illegality by relying on internal tender-committee discussions to infer a different intention of the parties. The Court found that the dispute centred on which party was contractually responsible for the royalty demanded by State authorities, and that the contract itself placed this obligation on the contractor. Justice Chagla held that the tribunal could not rewrite the parties’ agreement on the basis of uncommunicated pre-contract deliberations or assumptions about consensus.

The dispute arose from a contract executed for the construction of a coal-transportation system for the Gadarwara Super Thermal Power Plant in Madhya Pradesh. NTPC appointed the petitioner as the Project Executing Agency, which subsequently issued a tender for works including earthwork in embankment. The respondent emerged as the lowest bidder after technical and financial bid evaluation, and a Letter of Acceptance was issued. A formal contract was executed in December 2017, and the respondent commenced work in July 2017.

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In December 2018, the Collector (Mineral Branch) issued a demand letter requiring payment of royalty on ordinary earth used for embankment. The respondent invoked arbitration, contending that no royalty was payable based on its understanding and relying on a 2009 governmental circular and communications indicating royalty exemption for ordinary earth. It also asserted that the tender committee had considered royalty as “Nil” during bid evaluation.

The petitioner maintained that the contract expressly placed all royalty obligations on the contractor and that the respondent had unconditionally accepted these terms. The petitioner relied on clauses from the Instructions to Bidders, General Conditions of Contract, Special Conditions of Contract, Schedule of Items, and supporting documents such as the Respondent’s Familiarisation Certificate. According to the petitioner, the arbitral tribunal could not rely on internal tender-committee notings that were neither communicated nor part of the concluded contract.

During arbitral proceedings, documents including tender-committee minutes, directors’ committee notes, and internal communications were produced upon the tribunal’s direction. The tribunal held, by majority, that although the contract placed the royalty burden on the contractor, the parties shared a common understanding that no royalty was payable, and directed the petitioner to pay the royalty and modify the contract under Section 26 of the Specific Relief Act.

The petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, arguing patent illegality, jurisdictional error, and reliance on materials impermissible in law.

The Court recorded that the arbitral tribunal was bound to determine liability strictly under the written agreement. It noted that “The Petitioner-Respondent and the Respondent-Claimant are ad idem that on a plain reading of the Contract, it was the Respondent Claimant's liability to pay royalty. The Arbitral Tribunal by disregarding the plain terms of the Contract, which are clear and unambiguous and inferring a different intention from that contemplated by the terms of the Contract has committed a patent illegality.” The Court observed that the tribunal, after accepting the contract’s plain meaning, could not move to examining alleged underlying intentions or pre-contract understandings.

Addressing the reliance on internal minutes, the Court stated that “Inter-departmental notings are preparatory steps with no legal effect unless communicated. They cannot create rights or liabilities nor rewrite contract terms.” It further held that “the minutes of the Tender Committee meeting at best were pre-Contract negotiations which cannot supersede the final written document.” The Court recorded that such internal deliberations could not alter obligations that were expressly crystallised once the contract was executed.

The Court noted that the tribunal had contradicted its own conclusions on contractual interpretation, recording that “the majority Arbitrators having first held that the Respondent-Claimant must pay royalty as per the Contract, have thereafter rendered an Award that shifts the burden onto the Petitioner-Respondent. This is not a permissible cause of action and renders the Award perverse apart from being patently illegal.” It observed that this internal inconsistency struck at the validity of the award itself.

The Court reiterated the primacy of the written agreement, recording that “The said Contract between the Petitioner-Respondent and Respondent Claimant overrides and supersedes any prior or collateral correspondence, minutes or opinions, unless they are incorporated into the Contract. It is well settled that once the parties have reduced their understanding into a written agreement, the said agreement becomes conclusive of their intentions. The said Contract clearly and unambiguously provides that the Respondent-Claimant is liable to bear or to pay the royalty.” It stated that any contrary assumptions or impressions prior to the issuance of the Letter of Acceptance had no legal effect.

The Court concluded that the tribunal’s reasoning suffered from jurisdictional error, impermissibly rewriting the parties’ bargain, and therefore the award could not be sustained.

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The Court directed that “the said Award impugned therein is quashed and set aside. The Commercial Arbitration Petition No. 641 of 2021 which challenges an identical Award as that challenged in Commercial Arbitration Petition No. 646 of 2021 is also allowed. The said Award impugned therein is also set aside.”

“The Commercial Arbitration Petitions are accordingly disposed of. There shall be no order as to costs. All pending Interim Applications, if any in the Commercial Arbitration Petitions, do not survive and are accordingly disposed of.”

Advocates Representing the Parties

For the Petitioners: Mr. Simil Purohit, Senior Counsel a/w Mr. Subit Chakrabarti, Ms. Srushti Thorat and Ms. Aashka Vora i/b Vidhii Partners
For the Respondents: Mr. Anil Anturkar, Senior Counsel a/w Mr. Kunal Kumbhat, Mr. Karthik Pillai, Ms. Kashish N. Chelani, Mr. Atharva Date & Mr. Harshvardhan Suravanshi i/b Ms. Sunanda R. Kumbhat

Case Title: Konkan Railway Corporation Ltd. v. SRC Company Infra Pvt. Ltd.
Neutral Citation: 2025: BHC-OS:20965
Case Number: Commercial Arbitration Petition Nos. 646 & 641 of 2021
Bench: Justice R.I. Chagla