The Delhi High Court has ruled that an Arbitral Tribunal, being a creature of the contract, is bound to act strictly within the terms of the contract under which it is constituted. The arbitrator has no power apart from what the parties have conferred upon him under the contract, and if an arbitrator travels beyond the contract’s parameters, the award is considered an act without jurisdiction.
The Court pointed out that an award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored its specific terms. In the present case, the absence of a contractual clause permitting the deduction for a shortfall in the minimum guaranteed CENVAT credit (MGCC) meant that the arbitrator’s decision to uphold such a deduction was beyond the contract’s four corners. This action constitutes a patent illegality apparent on the face of the award, justifying the award being set aside.
A Single Judge Bench of Justice Avneesh Jhingan observed that while Article 2.1 of the contract provides for an MGCC to be passed on, it does not specify the consequences of a shortfall. The contract, specifically under Clause 14.5.2 of the General Conditions of the Contract (GCC), only stipulates that if the contractor fails to submit the necessary documents for the employer to avail CENVAT credit, the amount of Excise Duty on such equipment shall not be paid (i.e., not reimbursed) to the contractor. The Bench noted that there is no clause in the contract that permits the deduction of an amount for a shortfall in MGCC from the contractor’s invoices.
The Bench analysed the financial structure of the contract, where the gross contract price was Rs. 18.45 Crores, and after the intended MGCC of Rs. 2.16 crores, the net cost to the respondent would have been Rs. 16.29 Crores. Due to the shortfall, the actual CENVAT credit available was Rs. 1.08 crores. Thus, by not reimbursing the shortfall amount of Rs. 1.07 Crores, the respondent had already retained this sum, and the net cost of the contract for the respondent remained unaffected at Rs. 16.29 crores.
Therefore, making a further deduction of the same amount from the invoices was not justified and amounted to adding terms to the contract, which is impermissible in law, added the Bench.
Further, the Bench found that the arbitrator had travelled beyond the terms of the contract to reject the petitioner’s claim. It said the arbitrator had erred by justifying the deduction by referencing a non-existent clause that supposedly entitled the petitioner to 50% of any excess CENVAT credit.
The Bench held that the arbitrator’s failure to decide in accordance with the terms of the contract amounted to a patent illegality, which is a ground for setting aside an award under Section 34 of the Arbitration and Conciliation Act, 1996. The arbitrator correctly noted that the petitioner had to ensure the MGCC but overlooked that the contract did not provide for a deduction in case of a shortfall; the only consequence specified was non-reimbursement of the duty.
Briefly, the petitioner and the respondent executed a contract for the installation of a ‘Power Supply Facility’ at the Bhilai Steel Plant (BSP). The total contract price was Rs. 18.45 Crores and the work was to be completed within fifteen months. A key term of the contract, under Article 2.1, stipulated that the petitioner was required to pass on a minimum guaranteed CENVAT credit (MGCC) of Rs. 2.16 Crores to the respondent. The work was completed, with the commission certificate and final acceptance certificate being issued on June 20, 2012 and Dec 12, 2013, respectively.
When the petitioner submitted its final invoices, the respondent deducted a sum of Rs. 1.07 Crores on account of a shortfall in the guaranteed CENVAT credit. After conciliation attempts failed, arbitration was invoked, where the arbitral tribunal decided against the petitioner, upholding the deduction.
Appearances:
Advocates Rajesh Markanda, Keshri Kumar and Saurav Markanda, for the Petitioner
Senior Advocate Siddharth Yadav, along with Advocates Ashish Tiwari, Anurag Tiwari and Sahib Patel, for the Respondent
