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An Arbitral tribunal is not a court of law: SC

It has been held that an Arbitral Tribunal is not a Court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its powers ex debito justitiae. It has been held that the jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject ­matter of reference (Para 87).


CIVIL APPEAL NOS. 3699­-3700 OF 2018

Decided on July 28, 2021.

The two-judge bench comprising Justice R.F. Nariman and Justice B.R. Gavai decided the present case. The Supreme Court dismissed the appeal stating that the impugned judgment given by the High Court stand correct.

On April 9th, 1997, The Board of Trustees of V.O. Chidambranar Port Trust, Tuticorin(TPT), the first respondent issued a global tender inviting bids for development of the Seventh Berth at V.O. Chidambranar Port, Tuticorin as a Container Terminal and for operating and maintaining the same for 30 years on a Build, Operate and Transfer basis. ­PSA Sical Terminals Pvt. Ltd.(SICAL), the appellant submitted its bid on the tender on 24th October 1997 and since its bid was the highest, it was accepted and a Letter of Intent was issued on 29th January, 1998 following which License Agreement was issued on 15th July 1998.

The Tariff Authority for Major Ports(TAMP) which is an authority constituted under the Major Port Trusts Act, 1963 adopted a guidelines on 26th/27th February 1998. SICAL submitted its tariff proposal with regard to the Container Terminal on 28th September 1999 and on 8th October, 1999 SICAL, submitted a new proposal including royalty as an element of cost which was approved by the TAMP. On 8th February 2002, SICAL further submitted another proposal increasing in royalty to be paid as an element of cost and an increase in the tariff. TPT, on 10th April 2002, objected to the proposal. The proposal to increase the tariff was rejected, which lead to SICAL filing a writ petition before the Madras High Court, which was allowed and SICAL was permitted to increase the tariff.

A notice by the Ministry of Shipping in Government of India(GoI ) dated 29th July 2003 clarified that revenue sharing/royalty payments shall not be considered as part of the cost of fixing/revising tariff by TAMP, and directed that such a statement be clearly included in subsequent bid documentation. Following which on 31st March 20055, TAMP notified the revised guidelines thereby disallowing royalty as an element of cost. To prevent likely loss to the operator due to not including revenue share royalty in the bid process finalized before 29th July 2003, tariff computation will take revenue/royalty share into account as cost for tariff fixation.

On 17th August 2005, between SICAL, GoI and TAMP a Memorandum of Compromise was filed. It was declared that SICAL was to submit a proposal to the Ministry of Shipping and Transport, GoI in the matter of permitting royalty to be allowed to be factored into cost while fixation of tariff for the period prior to 31st March 2005 and it was further stated that the advantages/ gains, if any, that SICAL has enjoyed by virtue of not implementing the 2002 Tariff, will be quantified by TAMP and such advantages/gains will be adjusted/set­off in the proposed new tariff and such setoff will be spread over a period of three years. With regard to the proposal, GoI rejected the request of SICAL for claiming a part of royalty. SICAL also requested TPT to amend the Licence which was rejected by the TPT.

SICAL filed a writ petition which was allowed by the High Court and TPT was ordered to make necessary amendment SICAL also filed another writ petition challenging the TAMP order which was allowed to succeed by the High Court, where it was ordered to the TAMP and GoI to pass fresh order after giving opportunity of hearing to the SICAL. However TPT again rejected the amendment in the License and the change in tariff was again rejected by the TAMP, which again lead to filing of writ petition by SICAL and the appeal was allowed ordering TAMP to issue fresh tariff order after obtaining necessary proposal from SICAL and after according sufficient opportunity including personal hearing to SICAL.

On 28th June 2011, SICAL filed a complaint with the District Judge, Tuticorin, under Section 9 of the Arbitration Act, alleging that the royalty payable for each Twenty-foot Equivalent Unit exceeded tariff which was allowed by the District Judge.

On 5th April 2013, SICAL filed its Statement of Claim in the arbitration proceedings, which was passed in favour of the SICAL. The award of Arbitral Tribunal dated 14th February, 2014 came to be challenged by TPT by filing a petition under Section 34 of the Arbitration Act being OP No. 389 of 2014 before the Madras High Court. By order dated 9th June 2015, the Madras High Court held that the petition filed by TPT under Section 34 of the Arbitration Act was not tenable on the ground of jurisdiction. As such TPT re­presented its Section 34 petition on 30th June 2015, before the District Judge, Tuticorin being Ar.O.P. No. 260 of 2015. The District Judge, Tuticorin vide order dated 25th February 2016, dismissed the Section 34 petition filed by TPT. Being aggrieved thereby, TPT filed an appeal before the Madras High Court which came to be allowed by the order dated 1st November 2017, vide which the award of the Arbitral Tribunal dated 14th February 2014 and the order passed by the District Court dated 25th February 2016, came to be set aside. Being aggrieved thereby, SICAL approached the Supreme Court by way of the present appeals.

Dr. A.M. Singhvi and Shri Gopal Jain, learned Senior Counsel on behalf of the appellant argued that Article 14 of the License Agreement specifically provides that if after the date of the agreement, there is a change in law which substantially and adversely affects the rights of the Licensee under the said agreement, so as to alter the commercial viability of the project, the Licensee may, by written notice, request amendments to the terms of the agreement.

Furthermore, Dr. Singhvi argued that the situation at SICAL is very precarious. The submission was that on one hand it must pay TPT a royalty based on an annual increment, however the tariff it can charge has been set so as not to allow royalty to be passed through.

As per Smt. Divan, the learned ASG, SICAL's financial offer was made on 19th December 1997 i.e. many months before the 1998 Guidelines were made public. Moreover, it was alleged that SICAL has engaged in approbate and reprobate conduct.

The court stated that, “A conjoint reading of all these documents would reveal that when the bid document was published in April 1997; SICAL tendered its bid in October, 1997 and submitted its financial offer in December,1997; and the LoI was issued to SICAL on 29th January, 1998, there were no guidelines at all. Even the guidelines of February 1998 do not provide for royalty being factored as cost while fixation of tariff. On the contrary, the tariff order of 1999 specifically clarifies that it has left the royalty issue to be decided by TPT and the GoI. It has specifically clarified that the approval by TAMP should not be interpreted to be amounting to any implicit approval of royaltyrelated issue. Further, the tariff order issued on 20th September, 2002 specifically rejects the claim of SICAL for factoring any royalty as cost while tariff/price fixation. As already stated herein above, SICAL has challenged the said order before the Madras High Court by way of writ petition, which petition has been allowed. It is also not in dispute, that on account of interim order passed by the Madras High Court dated 8th November, 2002, SICAL is still continuing to charge at rates notified in the 1999 tariff order.” (Para 76)

The Court further stated that, “As such, we are of the view, that since the finding of the Arbitral Tribunal, that there was an existing law to the effect that the royalty payable shall be permitted as a pass­through in cost while fixation of tariff, is based on ‘no evidence’ and the finding, that there was a change in law in 2003 and 2005 is based on without taking into consideration the relevant evidence, would come in the realm of perversity as explained by this Court in paragraph 31 of the Associate Builders (supra). The findings are based on ‘no evidence’ and ‘ignorance of vital evidence’ in arriving at its decision.” (para 78).

With regards to the next issue, the court stated that, “However, ignoring the stand of TPT, by the impugned Award, the Arbitral Tribunal has thrust upon a new term in the Agreement between the parties against the wishes of TPT. The ‘royalty payment method’ has been totally substituted by the Arbitral Tribunal, with the ‘revenue­ sharing method’. It is thus clear, that the Award has created a new contract for the parties by unilateral intention of SICAL as against the intention of TPT.” (Para 81).

With regard to the arbitral court, the supreme court stated that, “It has been held that an Arbitral Tribunal is not a Court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its powers ex debito justitiae. It has been held that the jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject ­matter of reference” (Para 87)


Utkarsh Kumar Jayaswal


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