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2025 (6) TMI 673 - HC - Indian LawsSeeking claim for reimbursement of excise duty - interpretation of Clause 3.4.1.5 of the General Conditions of Contract (GCC) entered into between the parties for Pipeline Replacement Project on lump sum basis - applications under Section 34 of the Arbitration and Conciliation Act 1996 - patently illegal - manifest disregard of the terms of the contract - scope of intervention under Section 37 - HELD THAT - It is a settled position of law that the scope of Appeal under Section 37 of the Act is very limited and this Court cannot undertake an independent assessment of the evidence and merits of the award. The jurisdiction of this Court under Section 37 of the Act is circumscribed to only ascertaining whether the exercise of power under Section 34 of the Act has been within the scope of the provision. The appeal under Section 37 of the Act cannot travel beyond the restrictions laid down under Section 34 of the Act. The impugned judgment has correctly held that when the terms of the contract were unambiguous the negotiations between the parties in the contract should not have been looked into considering clause 1.2.5 of the GCC which stated that the contract constitutes an entire agreement and supersedes all past negotiations communications and agreements entered into between the parties prior to the execution of the contract. Ignoring an explicit clause of the contract or acting contrary to the terms of the contract amounts to patent illegality. The above law has been settled in the decision of the Hon ble Supreme Court in Indian Oil Corporation Ltd 2022 (2) TMI 1450 - SUPREME COURT 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. The law laid down in the decision of the Hon ble Supreme Court in South East Asia Marine Engg. Constructions Ltd. 2020 (5) TMI 242 - SUPREME COURT that a contract should be read as mutually explanatory to the extent possible has been ignored in the Awards to interpret clause 3.4.1.5 of the GCC. Accordingly the conclusion arrived in the Awards is patently illegal perverse and amounts to re-writing of the contract. The impugned judgment has rightly set aside the Awards and the law laid down in the case of Raghunath Builders 2023 (11) TMI 1377 - DELHI HIGH COURT relied on by the Appellant is not applicable in the present case as although the jurisdiction under Section 34 of the Act is limited and the Court does not sit in appeal over the finding of the arbitral tribunal nor can they revisit the findings derived after the interpretation of the contract in an appropriate case the interference by the Court is required where the arbitral tribunal s interpretation is clearly erroneous and patently illegal. If such an interpretation renders a clause of the agreement meaningless or redundant it cannot be allowed to stand. Courts are not expected to overlook interpretations that defeat the purpose of the contract itself. The proposition has been settled by the decisions of the Hon ble Supreme Court in Patel Engineering 2020 (5) TMI 733 - SUPREME COURT and DMRC Ltd 2024 (4) TMI 557 - SUPREME COURT (LB) relied upon by the Respondent. Thus the impugned judgment has rightly set aside the Awards. Accordingly the appeals are hereby dismissed as there is no infirmity with the impugned judgment. There shall be no orders as to the cost.
Issues Presented and Considered
The core legal questions considered by the Court were:
Issue-wise Detailed Analysis 1. Interpretation of Clause 3.4.1.5 of the GCC and Related Contractual Documents Legal Framework and Precedents: The Court referred to settled principles of contract interpretation, including the primacy of clear and unambiguous contractual language and the limited role of internal aids or prior negotiations when the contract terms are explicit. Key precedents included decisions holding that an entire agreement clause excludes reliance on prior communications (e.g., clause 1.2.5 of the GCC), and that internal aids are only permissible where ambiguity exists (Pandit Chunchun Jha v. Sheikh Ebadat Ali, United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal, and others). Court's Reasoning: The Court found Clause 3.4.1.5 of the GCC to be clear and unambiguous in stating that reimbursement by the Company would be limited to excise duty paid directly by the contractor to the tax authorities, except for line pipes where excise duty paid by the manufacturer and invoiced to the contractor would be reimbursed. The Court emphasized that this clause superseded all prior communications under the entire agreement clause (1.2.5). The letter dated 27.08.2008, which the arbitral tribunal had relied upon as an internal aid, was held to be subordinate to the GCC and not to override or modify the clear terms of Clause 3.4.1.5. Key Evidence and Findings: The contract documents, including the NOA, GCC, amendments, and the letter dated 27.08.2008, were examined. The amendment to Clause 3.4.1.5 and related notes in the Price Schedule and Milestone Payment Formula were scrutinized. The Court noted that the amendment was made primarily to allow reimbursement of CVD on imported line pipes, not to alter the reimbursement of excise duty when line pipes were procured domestically. Application of Law to Facts: Since the clause was unambiguous, the Court held that the arbitral tribunal erred in relying on prior correspondence to interpret the clause. The entire agreement clause precluded such reliance. The Court found that the Respondent, not being a manufacturer, could not have paid excise duty directly to tax authorities, and the contract did not obligate the Appellant to reimburse excise duty paid indirectly via the manufacturer. Treatment of Competing Arguments: The Appellant argued that the amendment and related correspondence should be read in context and as part of the contract to ascertain the parties' true intention. The Respondent contended that the excise duty was paid and documentary proof was provided, and that the Appellant's refusal to reimburse amounted to unjust enrichment. The Court rejected the Respondent's reliance on the letter dated 27.08.2008 and prior negotiations, holding that the clear contractual language prevailed. Conclusion: The Court concluded that the arbitral tribunal's interpretation was patently illegal as it ignored the express terms of the contract and relied impermissibly on prior correspondence. 2. Scope of Judicial Interference under Section 34 and Section 37 of the Act Legal Framework and Precedents: The Court reiterated the limited scope of interference under Section 34 of the Act, which permits setting aside an arbitral award only on specific grounds such as "patent illegality." The appellate scope under Section 37 is even narrower, restricted to examining whether the Section 34 court acted within its jurisdiction. The Court relied on authoritative judgments emphasizing that courts do not sit in appeal over findings of fact or contract interpretation unless the award is perverse or patently illegal (Bombay Slum Redevelopment Corporation Pvt. Ltd. v. Samir Narain Bhojwani, Raghunath Builders (P) Ltd. v. Anant Raj Ltd., Patel Engineering Ltd. v. Northern Eastern Electric Power Corporation Ltd., and others). Court's Interpretation and Reasoning: The Court found that the learned Single Judge had correctly applied the principles of law and did not exceed the permissible scope of interference under Section 34. The Single Judge identified that the arbitral tribunal's award was patently illegal because it ignored the explicit contract terms and relied on impermissible internal aids. The Court emphasized that such patent illegality strikes at the core of the dispute and justifies judicial intervention. Key Evidence and Findings: The Court noted that the arbitral tribunal's failure to give due regard to the express terms of the contract and to apply the entire agreement clause amounted to a flagrant breach of Section 28(3) of the Act. The Court also observed that the tribunal's interpretation rendered the clause meaningless and allowed the Appellant to avoid liability on a hyper-technical ground. Application of Law to Facts: Applying the settled law, the Court upheld the Single Judge's setting aside of the arbitral awards, holding that the tribunal's interpretation was not a plausible view and amounted to re-writing the contract. Treatment of Competing Arguments: The Appellant contended that the Single Judge had conducted a factual review and substituted his own view for that of the tribunal, which was impermissible. The Court rejected this contention, distinguishing between impermissible appellate review and legitimate interference where the award is patently illegal. The Respondent supported the Single Judge's approach as consistent with the law. Conclusion: The Court held that the Single Judge's interference was justified and within the scope of Section 34, and that the appeal under Section 37 did not reveal any error in the exercise of jurisdiction. 3. Hierarchy and Entire Agreement Clause Legal Framework and Precedents: The Court considered the contractual hierarchy clause (recital (b)) which provides that in case of conflict, the GCC shall prevail over bidding documents and prior correspondence. The entire agreement clause (1.2.5) explicitly excludes reliance on pre-contractual communications. Court's Reasoning: The Court held that since the letter dated 27.08.2008 formed part of the bidding documents, it was subordinate to the GCC. Therefore, the clause 3.4.1.5 of the GCC had precedence. The Court emphasized that the entire agreement clause barred the use of prior communications to alter or override the contract terms. Application of Law to Facts: The Court found no ambiguity or conflict between the GCC and other contract documents. Hence, the internal aids were irrelevant, and the arbitral tribunal erred in giving weight to the letter dated 27.08.2008. Conclusion: The Court affirmed the primacy of the GCC and the entire agreement clause, reinforcing the principle that the contract must be read as a whole and the hierarchy of documents respected. Significant Holdings "When the language of the Clause 3.4.1.5 of the GCC is plain, clear and unambiguous, the internal aid of interpretation is impermissible." "Ignoring an explicit clause of the contract or acting contrary to the terms of the contract amounts to patent illegality." "An arbitrator's failure to render a decision in accordance with the terms of the contract attracts the ground of 'patent illegality' under Section 34 of the Act." "The entire agreement clause (clause 1.2.5 of the GCC) supersedes all prior negotiations, communications and agreements and precludes reliance on such for interpretation of unambiguous contract terms." "The scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996 is limited and does not permit a court to sit in appeal over the arbitral tribunal's findings unless the award is patently illegal or perverse." "The appellate court under Section 37 of the Act is confined to examining whether the Section 34 court acted within its jurisdiction and did not exceed the permissible scope of interference." "Where the interpretation by the arbitral tribunal is clearly erroneous and patently illegal, the court is justified in setting aside the award." "The contract must be read as a whole with due regard to the hierarchy of documents, and the entire agreement clause must be respected to avoid re-writing or undermining the contract." "The learned Single Judge did not err in setting aside the arbitral awards which ignored the express terms of the contract and relied on impermissible internal aids." "The appeal under Section 37 is dismissed as there is no infirmity in the impugned judgment."
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