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CONTRACTUAL REINTERPRETATION IN ARBITRATION: KONKAN RAILWAY V. CHENAB BRIDGE PERSPECTIVE

By Nandika Seth and Himanshu Gupta*


ABSTRACT

Though courts under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 are not empowered to reinterpret contractual provisions, they often overarch their jurisdiction and provide an alternate relief. The article analyses the Konkan Railway Corporation Limited v Chenab Bridge Project Undertaking whereby the Supreme Court demarcated the confines of the court to reinterpret the contract if an alternate view is possible. It further examines the applicability of the ejusdem generis doctrine as adopted by the Division Bench to provide an alternate relief to the aggrieved party. Though the Division bench exceeded its jurisdiction by doing so, the authors argue for the creation of a middle ground and empower Courts to reinterpret a contract if the same has been overlooked by the tribunal.


INTRODUCTION

An arbitral tribunal is the master of the arbitral proceedings as it determines the fate of the parties involved. Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (“the Act”) allow either of the parties to challenge the arbitral award on limited grounds. These grounds mainly revolve around procedural errors and travesty of injustice meted out to either of the parties which necessitates judicial intervention. These grounds do not extend to challenge merely the possibility of an alternate interpretation of a contract. However, Courts often exceed their jurisdiction and go on to interpret the contract, which is the power vested with the tribunal.

Recently, the Supreme Court in the case of Konkan Railway Corporation Limited Versus Chenab Bridge Project Undertaking (“Konkan Corporation”) cautioned the Courts from exceeding their jurisdiction in setting aside Arbitral awards on the mere possibility of an alternate interpretation of a contract.

This article analyses the Konkan Corporation judgment, the stance taken by various authorities including the arbitral tribunal, the High Court, and consequently the Supreme Court within the scope of Section 34 and 37 of the Act. It further analyses the Court’s power to interfere with an arbitral award. The authors argue for the establishment of an equitable solution and conferring the courts with the authority to reinterpret a contract if the tribunal has erred in doing so.


FACTUAL MATRIX

The parties entered into a contract for the construction of a bridge on the Udhampur-Srinagar-Baramulla rail link. However, several disputes arose between the parties during the execution of the same and hence, the parties resorted to arbitration. One of the disputes was concerning the reimbursement claim of Chenab Undertaking on payment of Entry tax. At the time of entering into the contract, the Government of J&K exempted entry tax on earth-moving instruments. However, subsequently, the exemption was withdrawn by the Government. The following issue was regarding the claim for reimbursement of the enhancement of toll tax on machinery and materials during the course of the execution of the contract. The prevailing toll tax rate at the time of submission of tender was Rs 400/ per MT, however, it was substantially increased to Rs 650/ per MT.

The Arbitral tribunal held that the Undertaking could not claim reimbursement due to the enhancement of toll tax as a clause governing ‘price variation’ restricted the Undertaking from claiming reimbursement for a generic price reimbursement calculated with a standardized formula.

The Corporation contested the award under Section 34 of the Act before the Single bench of the High Court. The Court acknowledged the presence of two interpretations of the contract however it upheld the arbitral award for the adoption of reasonable interpretation of the pertinent clauses of the contract by the tribunal and found no reason for exercising jurisdiction under Section 34 of the Act.

Consequently, the Undertaking appealed to a Division Bench under Section 37 of the Act. The Bench reinterpreted the contractual provisions and mentioned that the corporation could claim reimbursement for the escalation in toll tax as it was provided in the contractual clause itself. It reinterpreted the contractual clause and expanded its scope by including indirect tax such as Service Tax, GST, and Work Contract Tax within its ambit. The Bench applied the ejusdem generis principle to incorporate Entry tax within Clause 5.1.2. Ejusdem generis is a Latin term meaning “of the same kind.” This doctrine is applied when general words follow a genus or a class of specific words. This doctrine implies if specific class of words are followed by general words, the general words will be confined within the scope and ambit of the specific words. This facilitates in interpretation and crystallization of obscure and vague terms while interpreting a statute or contractual clauses.

The Bench suggested a holistic and harmonious interpretation of the contractual clauses by the tribunal and set aside the arbitral award thereby allowing the Corporation to recover its claims. This led to a civil appeal to the Supreme Court.

OBSERVATION OF THE APEX COURT

As per the Apex Court's ruling, a Court lacks the authority to override the Arbitral Tribunal's findings based on alternative facts or contract interpretation under Section 37 of the Act. In this regard, the Court is only permitted to evaluate the arbitral tribunal's reasoning on grounds of perversity or arbitrariness. Additionally, it mentioned that the Court is not empowered under Section 34 to function as a Court of Appeal or correct factual inaccuracies.


SCOPE OF COURT UNDER SECTIONS 34 AND 37 OF THE ACT

Courts have a limited scope of interference with arbitral awards under Sections 34 and 37 of the Act. As per both sections, they cannot review an error of law, rectify any misinterpretation of facts, or re-examine evidence submitted by the parties. They are not vested with the authority to alter the award, rather they can only set aside or remit it to the arbitral tribunal.

The Hon’ble Supreme Court in Numaligarh Refinery Ltd. v. Daelim Industrial Company Ltd. and Union of India v. Best Cast Construction (Pvt.) Ltd.) held that while an Arbitrator is entitled to interpret a clause in the contract, he has to act within his jurisdiction. If the construction is within his jurisdiction and concerning the terms of the contract, as such, the Court should not interfere, even if another construction is possible. “But when the construction made by the Arbitral Tribunal would be tantamount to an act without jurisdiction or an interpretation of the clause of the agreement which is wholly contrary to law, the Court would be entitled to set things right.”

Similarly, in G. Ramachandra Reddy v. Union of India, it was held that the interpretation of a contract may come under the jurisdiction of the Arbitrator. A reasoned award may not be interfered with unless it is perverse or built on an erroneous proposition of law. “If two views are possible, it is trite, the Court will refrain itself from interfering.”

Further in Associate Builders v. Delhi Development Authority, The Supreme Court ruled that if there are two plausible readings of the clauses of a contract, the arbitrator's interpretation must be recognised, and the Court is prohibited from substituting its opinion over the Arbitrator's under Section 34. Similarly, in the case of Tamil Nadu Civil Supplies Corporation Limited v. Albert and Co., the Court has held that as per Section 34 of the Act, the Award of the Arbitrator can be set aside only on limited grounds and the Award cannot be interfered with simply because another view is possible on the available materials.

Through a catena of cases, Courts have reiterated the contours of judicial interference under Sections 34 and 37 of the Act. Thus, in the presence of an alternate interpretation of a contractual clause, Courts under Sections 34 and 37 of the Act cannot reinterpret the contractual provisions since that power is concentrated with the Arbitral tribunal.


EJUSDEM GENERIS, WHEN APPLICABLE?

The Division Bench of the High Court while setting aside the Arbitral Award and providing alternate relief reasoned the application of Ejusdem Generis principle. The Supreme Court in Amar Chandra Chakraborty vs. The Collector of Excise, Government of Tripura and Ors. has held that “the ejusdem generis rule strives to reconcile the incompatibility between specific and general words. This doctrine applies when (i) the statute contains an enumeration of specific words; (ii) the subjects of the enumeration constitute a class or category; (iii) that class or category is not exhausted by the enumeration; (iv) the general term follows the enumeration and (v) there is no indication of a different legislative intent.”

Clause 5.12 of the Contract in the present matter deals with a specific set of taxes to be paid followed by the enumeration ‘any other taxes.’ The principle mandates the presence of an enumeration of specific words that constitute a genus. All the taxes mentioned under this clause such as the addition of service tax, GST, Works Contract Tax, etc., are indirect taxes. This satisfies the presence of enumeration of a specific class of words i.e. constituting indirect tax. The following requirements of the principle are that the class is not consumed by the enumeration in the clause itself and hence it follows a general term. The class of indirect taxes mentioned in the contractual clause is not exhaustive in nature and leaves scope for the inclusion of various taxes of a similar type as it is followed by a general term of ‘any other tax’. With respect to the last requirement, there was no clause in the contract that expressed anything to the contrary that curtailed the latent presence of entry tax under ‘any other tax’.

Since all prerequisites for applying the said doctrine are satisfied, the Bench applied a sound rationale of adopting the ejusdem generis principle, thereby giving greater voice to the contract. It overturned concurring principles adopted by two competent authorities and arrived at a distinct conclusion by resorting to an alternative interpretation of the contract and granted relief to the Undertaking on account of increased liability incurred due to the imposition of Entry tax. Though, the High Court exceeded its jurisdiction by setting aside the Arbitral Award due to the presence of an alternate possible view, the reasoning of the bench was passed/issued in good faith.


CONCLUDING REMARKS

Though the Division bench overarched its power vested to it under Section 37 of the Act, it acted in good faith and provided a holistic interpretation of the contract in the possibility of an alternative interpretation of the same. It applied the ejusdem generis principle to provide a more comprehensive construct to the clause. The Division bench should have sent the award back to the tribunal in consonance with Section 34(4) which enables the enforcement of the award after providing the tribunal the opportunity to rectify their errors. The Supreme Court correctly rectified the procedural error committed by the Division bench and laid down that an award cannot be set aside due to an alternate interpretation.

However, the authors are of the opinion that Courts should be conferred with the discretion to reinterpret contractual provisions if the same were overlooked by the arbitral tribunal to provide a remedy to the aggrieved. If a more holistic perspective of the interpretation of a contract is available which shall serve a larger purpose, the Courts should be allowed to interfere and create a middle ground in order to resolve a dispute for the mutual benefit of both parties. If in such a scenario, Courts are prohibited from interpreting, it could compromise the credibility of arbitration if only the tribunal's views are considered, which may not be holistic.


Nandika Seth is a current law student

Himanshu Gupta is a third-year law student at NMIMS. You can reach out to him here.


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