Of Harmony and Interference: Delhi High Court Sets Aside Award for Arbitrator’s Erroneous Interpretation of Contract

[Ritvik M. Kulkarni is an associate with Wadia Ghandy & Co., Mumbai. Views are strictly personal]

In Altus Group India Pvt. Ltd. v. Darrameks Hotels and Developers Pvt. Ltd., the Delhi High Court has set aside an arbitral award (the Award) after finding folly in the arbitrator’s interpretation of the termination clause contained in a ‘Professional Service Agreement for the appointment of a Project Manager and Cost Consultant’ (the Agreement).

The relevant provisions of the Agreement read as follows:

9 TERMINATION

[the Respondent] may terminate the Agreement with a prior notice of 30 days.

[the Petitioner] may terminate this agreement only in case [the Respondent] fails to pay its correctly invoiced fees within 30 days of receipt of a reminder by courier letter informing [the Respondent] of due amounts. […]

Either party may upon Thirty (30) days notice in writing to the other terminate this Agreement. […]

The Petitioner terminated the Agreement by serving a 30-day notice, but without any reasons, under Clause 9(IV). Aggrieved, the Respondent invoked the arbitration clause in the Agreement and sought an award for damages.

The Arbitrator’s Decision

While the Petitioner claimed that a termination under Clause 9(IV) was plain and unquestionable, the Respondent argued that the Petitioner could have validly terminated the Agreement only on the occurrence of the specific default enumerated in Clause 9(II).

The Arbitrator found a clear contradiction between Clauses 9(II) and 9(IV) of the Agreement. He noted that the Agreement must therefore be read in a harmonious manner; and that an interpretation which renders any clause redundant must be avoided. The Arbitrator concluded that if the Petitioner was allowed to terminate under Clause 9(IV) merely by serving a 30-day notice, then Clause 9(II) would become redundant since it clearly provides for a limited right of termination. Accordingly, the Arbitrator ruled against the Petitioner and awarded damages to the Respondent on account of wrongful termination of the Agreement.

Challenge Accepted

Essentially aggrieved by the Arbitrator’s interpretation of the Agreement, the Petitioner impugned the Award before the Delhi High Court under section 34 of the Arbitration and Conciliation Act, 1996 (the Act).

On a perusal of the Award, the Court found that the “the Arbitrator has completely misguided himself”. The Court further observed that commercial contracts by their very nature are determinable and that a reasonable prior notice of termination cannot be challenged when the underlying Agreement allows termination by either party. Having concluded thus, the Court supplemented its conclusions with precedents on interpretation of termination clauses in contracts.

Interestingly, the Court refused to entertain the Petitioner’s request for setting aside the arbitrator’s findings in respect of refund of amounts and interest awarded thereon.

Comment

While the horse has been unruly for at least more than a decade, the 2015 amendments to the Act and subsequent judgments have considerably limited the scope for a successful challenge under section 34 of the Act.

In the context of the present inquiry, the Court ought to have exercised this power only if the award were in conflict with the public policy of India under section 34(2)(b)(ii) or vitiated by patent illegality on the face of the award within the meaning of section 34(2-A). However, the proviso to subsection (2-A) of section 34 further mandates that an award cannot be set aside merely on erroneous application of the law.

The Delhi High Court concluded that the award was vitiated by the arbitrator’s fundamental error in holding that a limited right to terminate must survive a co-existent clause that permits termination without any reasons.  However, as the Supreme Court has previously held in McDermott International v. Burn Standard Co. (2006), the construction and interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to a question of law. Further, in MSK Projects v. State of Rajasthan (2011), the Apex Court observed that even when an arbitrator commits an error in the construction of contract, that is an error within his jurisdiction.

Interestingly, the Delhi High Court in its order has cited the Supreme Court’s decision in Associate Builders v. Delhi Development Authority (2014), wherein it was held that construction of the terms of the contract is primarily for the arbitrator to decide, unless the arbitrator construed the contract in such a way that no fair-minded and reasonable man would do. Having noted this principle, the Delhi High Court nevertheless observed that the arbitrator had, under the pretext of interpretation, in fact rewritten the contract. 

In the present dispute, there was a clear contradiction within the termination mechanism provided in the Agreement. While the arbitrator held that clause 9(II) must survive clause 9(IV) as a result of a harmonious construction of the Agreement, the Court upheld the overriding effect of clause 9(IV) and observed that there was no question of interpretation at all. However, it is clear that the termination clause was capable of (at least) two interpretations.

One may argue that the Delhi High Court’s interpretation is sounder in law; but it is nevertheless apparent that the view taken by the arbitrator is clearly a possible one; if not a plausible one. It was observed by the Supreme Court in Rashtriya Ispat Nigam v. Dewan Chand (2012) that in such circumstances, the arbitrator cannot be said to have travelled outside his jurisdiction, or that his view is inconsistent with the contract. Given this position, it was held that there was no reason for the High Court in question to have interfered with the award and substituted its view in place of the arbitrator’s interpretation.

The aforesaid decisions are squarely applicable to the dispute before the Delhi High Court. Each of the aforesaid decisions, which have been referred in Associate Builders, has not been appreciated by the Delhi High Court in its decision to set aside the award. As stated above, the proviso to section 34 (2-A) too, clearly mandates that an award shall not be set aside merely on grounds of an erroneous application of the law. In view of the foregoing, the Delhi High Court ought not to have interfered with the award. 

Ritvik M. Kulkarni

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