Setting Aside an Arbitral Award based on the Interpretation of Contract: Delhi High Court.

In a recent decision of ONGC Ltd. v. JSIW Infrastructure Pvt. Ltd. (FAO (OS) (COMM) 59/2024), the Delhi High Court upheld the decision of the Section 34 Court to set aside the Award as the arbitrator's interpretation of the contract was not a plausible one. 

Facts of the case: a section 37 appeal was filed against the decision of the Section 34 Court, wherein the Award was set aside. The Award was set aside for being patently illegal and being in disregard of the terms of the contract. Disputes had arisen in the case basis a Pipeline Replacement Project on lump sum basis (the "Project") entered into between the parties. The work involved installation and commissioning of line pipes. After the Notice of Award, there arose a difficulty on part of the Respondent in procuring line pipes domestically, thereby, necessitating the Respondent to pay Countervailing Duty ('CVD') on import of the line pipes. Respondent had sought amendment to the contract seeking reimbursement of the CVD. Modifications were made to the contract as per the mutual understanding between the parties. Later the line pipes were procured domestically and the Respondent had sought reimbursement of the duty amount. However, certain disputes arose between the parties with respect to reimbursement of excise duty, pursuant to which the arbitration was invoked. 

The Award was rendered in 2015 in favour of the Respondent holding that the Respondent is entitled to reimbursement of excise duty, the said award was said aside, and by consent of the parties a Sole Arbitrator was appointed to adjudicate the disputes. The Sole Arbitrator rejected the claim of the Respondent, holding that the Respondent was not entitled for reimbursement. The Respondent filed a Section 34 Petition, wherein the Award was set aside. The Award was set aside by reading into a Clause of the contract and a letter. 

For clarity, Clause 3.4.1.5 of the contract, is reproduced herein below: 

	Existing Clause	Amendment (in bold)
	The Contractor shall furnish documentary evidence in support of payment of Customs Duty, Excise Duty, Service Tax and VAT/Sales tax on works/ work Contract tax (central or state) as identified in the contract price schedule for the purpose of claiming such amounts from the company. The Company shall reimburse the custom duty, excise duty, service tax and VAT/sales tax on works/ work contract Tax (central or state) paid by the contractor directly to the tax authorities at actual in Indian rupees against documentary evidence subject to the maximum of the amount of duty/tax indicated in the contract schedule.	The Contractor shall furnish documentary evidence in support of payment of Customs Duty, Excise Duty, Service Tax and VAT/Sales tax on works/ work Contract tax (central or state) as identified in the contract price schedule for the purpose of claiming such amounts from the company. The Company shall reimburse the custom duty, excise duty, service tax and VAT/sales tax on works/ work contract Tax (central or state) paid by the contractor directly to the tax authorities at actual in Indian rupees against documentary evidence subject to the maximum of the amount of duty/tax indicated in the contract schedule. However, only for line pipes, company shall reimburse the Excise Duty paid by the manufacturer to the tax Authorities and invoiced to the Contractor, at actuals, in Indian Rupees against documentary evidence subject to the maximum of the amount of Excise Duty indicated in the Contract Price Schedule (emphasis supplied)

The Hon'ble Court held as under: 

1. The scope of interference is very limited and the Court cannot take an independent assessment of evidence and merits of the award. 
2. Jurisdiction of Court under Section 37 is circumscribed to only ascertaining whether powers under Section 34 have been exercised within the scope of the provisions. 
3. Scope under Section 37 is narrowed than Section 34, only to identify whether or not the Section 34 Court has gone beyond the permissible limit.
4. The Clause in the given case was unambiguous, plain, clear and express. Ignoring an explicit clause of the contract or acting contrary to the terms of the contract amounts to patent illegality.
5. The Awards had relied on the letter dated 27.08.2008 to hold that the Respondent was not entitled for reimbursement of the excise duty, whilst ignoring an explicit term of the contract. 
6. Court agreed with the view that in an appropriate case, the interference by the Court is required where the arbitral tribunal‟s interpretation is clearly erroneous and patently illegal. 
7. In view of the Clause 3.4.1.5, of the Contract, the Respondent had requested the Appellant for the reimbursement of excise duty as the Clause did not provide for payment of excise duty to the tax authorities. The Appellant had refused the release of the excise duty as in a letter it was mentioned that the condition for reimbursement was valid only for CVC, as the excise duty was not paid by the Respondent to the tax authorities directly, the reimbursement of duty was refused. The crux of the argument put forth by the Appellant was that according to the Clause and the letter reimbursement was only permissible if the Respondent had paid duty directly to the authorities, which was not the case. The contention/submission  of the Appellant is impracticable as only manufacturer of the pipes could have paid the duty directly to the authorities, which in the present case the Respondent is not. The Sole Arbitrator had read in the requirement of direct payment to the authorities, even when there was no such requirement. 
8. The Awards relied on the letter dated 27.08.2008 to hold that the Respondent was not entitled for reimbursement of the excise duty, whilst ignoring an explicit term of the contract. 

Therefore, Court held that the impugned judgment has rightly set aside the Awards, thereby the appeal was dismissed.

Read the judgement at ~ https://delhihighcourt.nic.in/app/showFileJudgment/68727052025FAC592024_155502.pdf