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Case Reviews, The Law

Mohan Steels Ltd. VS. Steel Authority Of India (SAIL)

The present case deals with Section 34 the Arbitration and Conciliation Act, 1996 to set aside the order passed by the Sole Arbitrator as also seeking a declaration that the recovery made by the Respondent is illegal and arbitrary. 

By: Lourdes Anthony, a 3rd-year law student pursuing BBA LLB (Hons) from the School Of Law, University Of Mumbai.

CITATION – O.M.P 488/2015

FACTS:

  • The Petitioner was appointed as a Conversion Agent by the Respondent, the first contract being from 2006-2009, where the conversion chargers payable to the Petitioner were to be increased by 2% every year
  • The Respondent accordingly revised the conversion charges and reimbursed the money at an increased rate every year until the conclusion of the first contract.
  • In 2009, a fresh agreement was issued (from 2009-2011), wherein the escalation rates were different from the first contract, wherein the conversion charges shall be kept firm for 1-year w.e.f. the date specified for the commencement of work in the work order and at the end of 1 year, conversion charges will be revised as per the weights and neutralization for each component ( such as Labour, Fuel, other overheads, etc) as mentioned in the clause of the contract
  • Thus, the Respondent accordingly followed the earlier chronology and paid the Petitioner at the revised rate until the conclusion of the second contract.
  • Later, a third contract was entered into for the year 2012-2015, where according to the Petitioner, the Escalation Clause, in the present contract, was identical to the Escalation Clause in the second contract.
  • The Respondent followed the similar Chronology as well and paid the Petitioner according to the revised rates at the end of each year until the conclusion of the Third Contract.
  • But, at the end of the Third Contract, the Respondent illegally issued a demand for the recovery of the second escalation amount paid under the Second Contract and recovered Rs.78,74,189/- from the conversion charges payable under the third contract. 
  • The Petitioner invoked the Arbitration clause under the second contract and the third contract. 
  • The Claim of the Petitioner was to be reimbursed for the amount of Rs. 78,74,189/- at 18% interest per annum that was wrongly deducted by the Respondent and a sum of Rs. 1,46,03,051/- towards damages for electricity bills, Labour charges, Overhead expense, etc
  • The claim was rejected by the Arbitrator, and this award is assailed by the Petitioner before the Court.

ISSUES:

  1. Whether the Arbitrator commits jurisdictional error even though the interpretation of clauses of the contract is purely the domain of the Arbitral Tribunal?
  2. Whether the reliance on Master Circulars is valid when they have not been mentioned in the contract?

ARGUMENTS OF THE PETITIONER:

The interpretation given by the Arbitrator to the Escalation clause of the Second contract is perverse and contrary to the terms of the contract as well as to the understanding between the Parties. 

  1. The Respondent has not only drafted the Contract but had also given a particular interpretation to the Escalation clause for the last several years and the Arbitrator could have not given a contrary interpretation, thus, the Award is perverse. 
  2. That, since the parties had acted under a certain interpretation, the Respondent cannot be permitted to detract from the understanding and course of action adopted by it. Thus, if the award is upheld, there would be no sanctity of the terms of the contract and mutual understanding between the parties 
  3. The Petitioner in the rejoinder also reiterated its argument by pointing out that Marketing circulars/ Guidelines did not form the part of the contract and that the Parties are bound only by the terms of the Contract.

ARGUMENTS BY THE RESPONDENTS:

  1. The Escalation Clause in the second contract was governed by the circulars of the year 2007 and 2009 and that the conversion charges in various circulars were different and distinct, though, in all the circulars, the charges were firm for 1 year (ie the first year of the contract). For the 2007 and 2009 circular, the charges were to be revised at the end of 1 year only and there was no provision for another increase at the end of the 2nd year.

2. The Respondent clearing the bills of the Petitioner towards the end of the second escalation was an error and since the Petitioner failed to refund the money, the same was sought to be recovered from the bill towards the end of the third contract, thus, nothing is due to the Petitioner. 

3. The Petitioner had not set up any grounds for the interference of the Court within the parameters of Section 34 of the Arbitration and Conciliation Act, 1996.

DECISION BY THE COURT:

The Court held that the Arbitrator is a creature of the Contract and thus, cannot decide contrary to or outside the ambit of the terms of the contract between the parties. 

Furthermore, the Court agreed with the Petitioners that the Master Circular/ Guidelines were never a part of the tender conditions of the Contract.

The Award rejecting the claim of the petitioner for reimbursement of Rs. 78,74,189/- was set aside to the extent it validates the recovery by the respondent from the dues of the petitioner under the third contract.

PRECEDENT:

1) Associate Builders vs. Delhi Development Authority

“….An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do…

2) In MSK Projects (I) (JV) Ltd. v. State of Rajasthan

“….If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error…”

COUNSELS:

For the Petitioner –  Mr. Harsha Peechara and Ms. Kriti Sinha

For the Respondent – Mr. H.S. Phoolka, Sr. Advocate with Mr. Joydeep Mazumdar, Mr. Rohit Dutta, Ms. Shilpa Diwan, Ms. Priyata Chakraborty, Mr. Sanjeev Kumar

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