India - Arbitral Award Based On No Evidence And/or Passed In Ignorance Of Evidence Would Come Under The Realm Of Patent Illegality.
Legal News & Analysis - Asia Pacific - India - Dispute Resolution - Intellectual Property
8 September 2021
The Hon’ble Supreme Court recently in the matter of PSA SICAL Terminals (P) Ltd. vs. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and others, decided on 28th July 2021, has reiterated that an Arbitrator cannot rewrite the contract between the parties and has further held that an Arbitral Award based on no evidence or passed in ignorance of vital evidence shall come within the realm of patent illegality.
The Appellant before the Supreme Court had challenged the order dated 1st November, 2017 passed by the division bench of the Madras High Court by which (i) Appeal filed by Respondent No.1 under section 37 (1) (c) of the Arbitration & Conciliation Act, 1996 (‘Act’) was allowed; (ii) Arbitral Award dated 14th February, 2014 (‘Award’) was set aside; and (iii) Order dated 25th February, 2016 passed by the District Judge rejecting the Application filed by Respondent No.1 under section 34 of the Act was also set aside.
FACTS AND ISSUES
The Appellant was the successful bidder of the global tender issued by Respondent No. 1 on 9th April, 1997 for development, operations and maintenance of the seventh berth at V.O. Chidambranar Port. Pursuant thereto, a Licence Agreement dated 15th July, 1988 (‘License Agreement’) came to be executed between the parties.
In furtherance of the aforesaid arrangement, the tariff proposal made by the Appellant on 8th October 1999 was approved by the Tariff Authority of Major Ports (“TAMP”), an authority constituted under the Major Port Trust Act, 1963, whereby, royalty was included as an element of cost. Subsequently, the Ministry of Shipping, Government of India vide a notification dated 29th July 2003 clarified that revenue sharing/royalty payment shall not be factored into as cost for fixation/revision of tariff by TAMP and the same shall be clearly indicated in the bid document. On 31st March 2005, TAMP notified the revised guidelines thereby disallowing royalty as an element of cost, however, provided that in BOT cases where bidding process was finalized before 29th July 2003, the tariff computation will take into account royalty/revenue share as cost for tariff fixation so as to avoid loss to the operator. This was subject to a maximum of amount quoted by the next lowest bidder and would be allowed only for a period up to which such likely loss would arise. The aforesaid changes in government guidelines were contended by the Appellant as change in law which had significantly and adversely altered the commercial viability of the project and the rights of the Appellant under the License Agreement.
In view of the aforesaid, dispute and differences arose between the parties primarily in relation to their commercial arrangement involving the factoring of royalty into costs while fixation of tariff. The Appellant’s case was essentially that after the execution of the License Agreement there had been substantial changes in law which had adversely affected commercial viability of the project and the rights of the Appellant. Accordingly, the Appellant relying upon Article 14 License Agreement sought for amendment to the License Agreement so as to incorporate revenue sharing method in place of royalty model. The Article 14 of the License Agreement allowed the Appellant to request for amendment of the License Agreement if after the date of agreement there is a change in law which substantially or adversely affected rights of the Licensee and alters the commercial viability of the project. This was rejected by Respondent No.1.
In the aforesaid background as briefly set out above, the Appellant on 19th November 2012 invoked arbitration clause under the License Agreement. In furtherance thereto, Arbitral Tribunal passed the Award dated 14th February, 2014 in favour of the Appellant thereby holding that there was a change in law and accordingly it directed conversion of container terminal of Respondent No.1 from royalty model to revenue share model. The Award dated 14th February, 2014 was challenged by Respondent No.1 under section 34 of the Act before the District Judge, Tuticorin. The District Judge, Tuticorin vide order dated 25th February, 2016 dismissed the section 34 Petition of Respondent No.1. Being aggrieved thereby, Respondent No.1 filed an appeal before the Madras High Court which came to be allowed vide the Impugned order. The Impugned order passed by the Madras High Court was challenged in the present matter before the Supreme Court.
The Hon’ble Supreme Court initially revisited the position of law regarding scope of interference of courts with the arbitral award passed in India. In doing so, the Supreme Court referred to its recent judgements and reiterated that in an Application under section 34 of the Act, the Court is not expected to act as an appellate Court and re-appreciate the evidence. That the scope of interference of a Court would be limited to the grounds provided under section 34 of the Act and judicial intervention on account of interfering with the merits of an award would not be permissible.
The Supreme Court also asserted that interference of court would be warranted when the award is in violation of violation of public policy of India i.e. the fundamental policy of Indian law. The Supreme Court recognised that an award can also be challenged on the basis of violation of principles of natural justice as contained in section 18 and 34 (2) (a) (iii) of the Act which essentially safeguards a party from prejudicial treatment and gives parties equal opportunities to present their case. Additionally, the Supreme Court also recognized that a court can set aside an award on the ground of it being in conflict with most basic notion of justice and morality when such arbitral award shocks the conscience of the court.
Furthermore, the Supreme Court held that an award could also be set aside by a court on the ground of patent illegality appearing on the face of such award, which goes to the root of the matter. However, it was held that reappreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the Award. To test perversity, the Supreme Court restated the test of perversity as set out in Associate Builders vs. Delhi Development Authority wherein the Supreme Court had cumulated the findings of its earlier decisions (on this issue) and held that a decision could be perverse or so irrational that no reasonable person would have arrived at the same when:
a finding is based on no evidence; or
an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
ignores the vital evidence in arriving at its decision;
To examine the aforesaid position of law in the present matter, the Supreme Court examined the bid document submitted by the Appellant and the Licence Agreement executed between the parties. The bid document revealed that financial offer of the Appellant which, among other things, provided for the royalty fee payable by the Appellant and that the tariff to be charged by the Appellant was not to exceed the maximum rate as approved by the Government/Authority. It was also noted by the Supreme Court that the qualified bids were evaluated and ranked on the basis of the royalty fee(s) quoted by the bidder. The Supreme Court then perused the payment terms, setting prices and other relevant clauses of the License Agreement. The Supreme Court then also evaluated the changes in the government policies post the bid submission by the Appellant and its effect of the Appellant
In the aforesaid background, the Supreme Court examined the Award passed in the present matter. Upon which, the Supreme Court observed that the entire basis of the Award is reliant on the fact that there were changes in government policy, which amounted to change in law, which in turn adversely affected the Appellant. However, the Supreme Court noted that Arbitral Tribunal failed to consider that the subsequent tariff orders which were passed post bidding which essentially provided that royalty was not permitted to be factored in the cost while determining tariff. The Supreme Court further noted that in fact there were no guidelines at all when the bid was made by the Appellant and thus the finding of the Arbitral Tribunal that there was an existing law that allowed royalty as pass through in cost while fixation of tariff is based on ‘no evidence’. The Supreme Court also noted that even the findings in the Award that there was a change in law in 2003 and 2005 are based on without taking into account the vital evidence in respect thereof. Thus, the Supreme held that the Award would fall within the realm of patent illegality as the relevant findings therein were based on evidence and also passed in ignorance of vital evidence.
The Supreme Court thereafter also considered as to whether the arbitral tribunal vide the Award was justified in substituting the royalty payment module to revenue sharing module. For which, the Supreme Court initially observed that it is clear that the Award has created a new contract between the parties, against the intention/willingness of Respondent No.1. In this regard, the Supreme Court relying upon the findings of Ssangyong Engineering and Construction Company Limited vs. National Highways Authority of India and other decisions held that re-writing of contract for the parties would be a breach of fundamental principal of justice as any unilateral addition or alteration to an agreement cannot be foisted upon an unwilling party. Also, that the role of arbitrator is to arbitrate within the terms of the agreement and when an arbitrator travels beyond the contract then its acting without jurisdiction.
In view of the aforesaid findings, the Supreme Court disallowed the Appeal and upheld the order dated 1st November, 2017 passed by the division bench of the Madras High Court.
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