The Delhi High Court has ruled that the principle of business efficacy cannot be invoked to rewrite the express terms of a contract or to imply a term that contradicts the agreed-upon structure, such as converting a deliberately chosen fixed charge into a variable one. An interpretation that does so is not a ‘plausible view’ but an ‘impossible one’ that amounts to perversity and is a ground for setting aside the award.
The Court clarified that an arbitral award is patently illegal and liable to be set aside if the Arbitral Tribunal fails to consider a vital contractual clause imposing a time limit for disputes and a waiver of rights, that goes to the root of the dispute, affecting jurisdiction, limitation, and the maintainability of the claims.
The Court also asserted that an arbitral award must contain intelligible reasoning that discloses the evidentiary path to its conclusions, especially on contested issues like limitation. Merely stating that one party’s contention is ‘correct’ without addressing the opponent’s arguments does not meet the standard of a reasoned award under Section 31(3) of the Arbitration and Conciliation Act, 1996, and can be a ground for setting aside the award for patent illegality.
Hence, an award that contains irreconcilable internal contradictions, such as finding that an obligation to pay is unaffected by an event but simultaneously ordering a refund based on that same event, is perverse, flawed, and legally untenable, added the Court.
The Division Bench comprising Justice C. Hari Shankar and Justice Om Prakash Shukla agreed with the Single Judge that the tribunal’s failure to consider the amended Article 12.03 was a fatal flaw. It held that this clause was a vital contractual stipulation going to the root of the matter, as it directly affected the maintainability of the claim, limitation, and the tribunal’s jurisdiction.
The Bench also concurred with the Single Judge that the tribunal’s reasoning on limitation was inadequate and legally unsound, as the award failed to provide any intelligible reasoning for rejecting GAIL’s contentions on limitation and merely stated that JSW’s argument was correct.
The Bench however, disagreed with the Single Judge’s finding that the tribunal’s view on merits was plausible, and held that the tribunal’s application of the ‘business efficacy’ principle was a misapplication, and the contract was deliberately amended to a fixed charge, and implying a term to make it variable amounted to rewriting the contract.
Further, the Bench found the award to be internally contradictory, as the Tribunal first held that the force majeure event did not affect the obligation to pay fixed charges, but then directed a proportionate reduction of those very charges. This inconsistency was held to be a flaw that rendered the award untenable.
Briefly, the appellant, JSW Ispat Steel Limited, operating as a sponge iron plant, had entered into a primary agreement with the respondent, Gas Authority of India Limited (GAIL), for the supply of natural gas up to a maximum of 1.00 MMSCMD. The payment structure included the price of gas and a monthly service/transportation charge calculated by a formula. Later, a ‘Supplementary Agreement’ amended the Primary Agreement, replacing the formula-based service charge with a fixed monthly transportation charge of Rs. 38.67 Lakh. This agreement also stipulated that any dispute regarding an invoice must be raised within 14 days, failing which the right to claim or arbitrate would be waived. Later, a tripartite agreement increased JSW’s total gas allocation to 1.75 MMSCMD.
The primary dispute arose from GAIL’s failure to supply the committed quantity of gas, which GAIL attributed to government control and scarcity. JSW contested GAIL’s invoices for fixed transportation charges, arguing they were wrongly calculated and issued despite the short supply. After failed attempts at resolution, JSW invoked arbitration.
In the arbitration, JSW claimed that GAIL, using its monopoly position, coerced it into paying fixed transportation charges and failed to supply the promised additional gas under the tripartite agreement. JSW argued that the payment of fixed charges was contingent on the full supply of gas and sought reliefs including a refund of proportionate transportation charges, compensation for loss of profit of Rs. 701 crores, and other damages.
GAIL defended by arguing that JSW’s claims were barred by limitation, as the dispute over charges was raised only in 2000, years after the supply began. GAIL contended that the short supply was not a breach but was due to government regulations and scarcity, and that it had consistently supplied about 80% of the contracted quantity. It argued that fixed transportation charges were standard industry practice to cover substantial fixed costs for infrastructure, regardless of the quantity of gas supplied, and were explicitly agreed to in the 1998 Supplementary Agreement.
On the issue of short supply, the Arbitral Tribunal found that the shortfall in gas supply was not a breach of contract by GAIL, and it was caused by the non-availability of gas due to government policy, which constituted a force majeure event. On the issue of transportation charges, the Tribunal held that while the force majeure event absolved GAIL of liability for short supply, it did not automatically suspend JSW’s obligation to pay fixed transportation charges. However, invoking the principle of business efficacy, the tribunal held it would be commercially unfair to charge the full fixed amount when the supply was drastically reduced. The tribunal thus awarded a refund of Rs. 14.67 crores to JSW.
The matter reached the High Court, where the Single Judge declined to interfere with the tribunal’s finding on the proportionate reduction of charges, stating that contractual interpretation is within the arbitrator’s domain and the view taken by the tribunal was a plausible and reasonable construction of the contract. However, the Single Judge set aside the award primarily on the ground that the tribunal had completely ignored the amended Article 12.03 of the Supplementary Agreement, which stipulated that failure to dispute an invoice within 14 days constituted an ‘absolute waiver’ of the claim and the right to arbitrate. The Judge found that this was a vital clause affecting jurisdiction, waiver, and limitation, and the tribunal’s failure to consider it was a serious oversight amounting to patent illegality.
Appearances:
Senior Advocates Sandeep Sethi and Ramesh Singh, along with Advocates Sahil Narang, Dhritiman Roy, Ayushman Kacker, Krisna Gambhir and Shreya Sethi, for the Appellants
Senior Advocate Madhavi Divan along with Advocates Kapil Sankhla, Shubham Saigal, Vipul Grover, Saurabh Kumar Gangwar and Atharva Kotwala, for the Respondents
