T Ltd. (Respondent) awarded a tender for the development of Kolkata Port, to P Pvt. Ltd. (Appellant) for 30 years on a build, operate and transfer (BOT) basis. Afterwards, the Appellant submitted its tariff proposal whic

CS Professional · Arbitration, Mediation and Conciliation · PYQS · December 2024
T Ltd. (Respondent) awarded a tender for the development of Kolkata Port, to P Pvt. Ltd. (Appellant) for 30 years on a build, operate and transfer (BOT) basis. Afterwards, the Appellant submitted its tariff proposal which included payment of royalty as an element of cost (Royalty payment model). This bid was approved by the Tariff. Authority for Major Ports (TAMP). Accordingly, the parties entered into a license agreement (License Agreement). The Ministry of Shipping issued a notification clarifying that revenue sharing/royalty payment will not be factored into as cost for fixation or revision of the tariff by TAMP. Accordingly, TAMP revised the guidelines disallowing royalty as an element of cost (the notification). However, its applicability was precluded in cases where the bidding process was finalised so as to avoid a loss to the operator. Subsequently, a dispute arose between the parties on their royalty payment model. Article 14.3 of the license agreement authorised the Appellant to request amendments in the agreement if there was a change in law. In furtherance of the notification, the Appellant requested the Respondent to amend the License Agreement to incorporate a revenue-sharing model in the agreement. The Respondent declined. The Appellant invoked the arbitration clause under Article 15.3 of the License Agreement. The tribunal passed an award in favour of the Appellant, holding that there was a change in law. The tribunal's observation was based on the assumption that there was an existing policy, at the time the contract was entered into, stipulating that royalty is to be factored into cost while fixation of tariff. Hence, the tribunal concluded that there was a subsequent change in policy through the notification, which resulted in a change in law. Consequently, the Respondent was directed to convert its container terminal from a royalty payment model to a revenue-sharing model. The Respondent unsuccessfully challenged the award before the District Court of Kolkata. The Respondent then filed an appeal before the Kolkata High Court under Section 37 of the Arbitration Act. The High Court upheld the Respondent's challenge and set aside the arbitral award on the ground of patent illegality. Aggrieved, the Appellant approached the Supreme Court. Discuss the matter with reference to a case law and comment whether respondent T Ltd can succeed the case.

Answer & Explanation:

The facts of the given situation are similar to the case of PSA Sical Terminals Pvt. Ltd v. The Board of Trustees of V.O. Chidambranar Port Trust Tuticorin (Judgment dated 28.07.2021 in CIVIL APPEAL NOS. 3699-3700 OF 2018). In the matter, the rationale was as under: Supreme Court's decision The primary questions before the Supreme Court were whether the arbitral tribunal exceeded its jurisdiction by modifying the terms of the parties' contract and whether such award would be perverse under Section 34 of the Arbitration and Conciliation Act, 1996. The key findings of the Court are as follows: 1. Tribunal's jurisdiction The Court reiterate that an arbitral tribunal is not a court. Its orders are not judicial orders, its functions are not judicial functions, and it cannot exercise its power ex debito justitiae. The Court further clarified that the role of an arbitrator is to arbitrate within the terms of the contract and can only pass orders which are the subject matter of reference. The tribunal has no power apart from what has been given to it by the parties under the contract. If it has travelled beyond the contract, which the tribunal did by thrusting upon a new term in the agreement, it would be acting without jurisdiction. 2. Judicial interference The Apex Court had held that that the court may interfere with an award if it is against the public policy under Section 34(3)(b)(ii) of the Arbitration and Conciliation Act, 1996. Interference does not entail a review of the merits of the dispute. It is limited to situations where the arbitrator's findings are arbitrary, capricious, and perverse; when the conscience of the court is shocked; or when the illegality is not trivial and goes to the root of the matter. 3. Contractual terms and patent illegality The Court held that such a change in the formula was de hors the agreement. The tribunal had created a new contract for the parties. A unilateral addition or alteration of contract cannot be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered into with the other party. The award was held to be contrary to the fundamental principles of justice and, resultantly, was set aside. In view of the above mentioned case, it may be said that T Ltd. may succeed in the given circumstances.

Topics: Arbitral Award Setting Aside

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