Safiya Malik

The Bombay High Court has dismissed a petition challenging an arbitral award concerning a dispute between the Union of India, represented by Central Railway, and Emami Agrotech Ltd. The court upheld the tribunal’s decision, rejecting the railway’s contention that a lower contract price with another railway justified a retrospective price reduction, stating that the pricing structures of the two contracts were not comparable.

The dispute arose from a contract between Central Railway and Emami Agrotech Ltd. for the supply of biodiesel to railway depots in Maharashtra. Following a tendering process in October 2015, Emami Agrotech emerged as the lowest bidder, agreeing to supply biodiesel at an all-inclusive rate of Rs. 44,000 per kiloliter (KL) on a Free on Rail (FOR) on Destination basis. The purchase order was issued in January 2016 for 3,335 KL out of the total 4,100 KL contract.

Subsequently, in February 2016, Eastern Railway placed a separate purchase order with Emami Agrotech for the supply of 500 KL of biodiesel at a rate of Rs. 42,100 per KL, which included a base price of Rs. 39,000 per KL and a freight charge of Rs. 1,150 per KL.

Central Railway invoked the Fall Clause provision in the purchase order, arguing that since Eastern Railway had secured a lower price for the same product, the price payable under the Central Railway contract should also be reduced to Rs. 42,100 per KL. Consequently, Central Railway withheld Rs. 48,75,400 from Emami Agrotech’s dues and insisted on procuring additional biodiesel at the reduced rate.

Emami Agrotech objected, asserting that the two contracts were structured differently. While the Central Railway contract was based on an all-inclusive rate where the supplier bore the freight cost, the Eastern Railway contract explicitly included a separate freight charge. Emami contended that these differences rendered the comparison invalid and initiated arbitration to resolve the dispute.

The High Court extensively reviewed the arguments and evidence presented before the arbitral tribunal. The key issue examined was whether the Fall Clause was applicable and whether the two pricing structures were comparable. The court examined the contractual terms and stated:

“The price contracted under the purchase order is not comparable with the price contracted under the Eastern Railway order. The terms of the pricing structure, including the inclusion and exclusion of freight costs, were distinct and could not be equated.”

The judgment noted that the Central Railway contract required Emami Agrotech to bear the cost of transportation, whereas the Eastern Railway contract provided a separate freight charge of Rs. 1,150 per KL. Given that the two contracts had differing cost structures, a direct price comparison without adjustment for freight was deemed inappropriate.

The court further observed:

“To compare the price derived from differently structured price provisions without adjusting for variations would be arbitrary and irrational.”

The arbitral tribunal had considered factors such as freight differentials, the distance between supply locations, and variations in contractual obligations. The tribunal found that the cost of transporting biodiesel from Emami Agrotech’s Kolkata facility to Eastern Railway’s location in Bihar was significantly lower than the cost of transportation to Central Railway’s locations in Maharashtra. The freight component was a critical factor in pricing, and the tribunal held that a fair comparison required adjusting for these logistical differences.

The court examined the railway's argument that Emami Agrotech had quoted zero freight cost in the Central Railway bid and concluded that this did not mean that freight was free, but rather that the supplier had absorbed the cost within its all-inclusive rate. In contrast, the Eastern Railway contract had explicitly allocated a separate freight charge, making a like-to-like price comparison impossible.

After examining the tribunal’s findings and reasoning, the High Court found no grounds to interfere with the arbitral award. The judgment directed:

1. The amounts deposited in court shall be released within two weeks.

2. Any additional dues arising from the award shall be paid within the same period.

3. No order as to costs, acknowledging that a valid question of law had been raised by the railway authority.

Case Title: Union of India Through PCMM, Central Railway vs. Emami Agrotech Ltd.
Case Number: Arbitration Petition No. 458 of 2021
Bench: Justice Somasekhar Sundaresan

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