The Bombay High Court in a notable ruling has overturned two arbitral awards that had wrongly transferred the responsibility of paying royalty from a contractor to Konkan Railway Corporation Ltd. (KRCL). Justice R.I. Chagla ruled that the Arbitral Tribunal went beyond its powers by relying on internal government notes and by effectively changing the terms of the written contract.

The Case:

The National Thermal Power Corporation (“NTPC”) had proposed setting up a Super Thermal Power Plan (“STPP”) in Tehsil Gadarwara, District Narsinghpur, Madhya Pradesh. Konkan Railway Corporation Ltd.(KCRL) was appointed as the project management consultant, and a letter of Award was issued on 25th June 2014.

KRCL (the Petitioner-Respondent) then invited tenders for the project. SRC Company Infra Pvt. Ltd. (the Contractor, Respondent-Claimant) won the bid, and a Letter of Intent was issued for approximately ₹122.33 crore.

The Contractor began work in July 2017. During this time, the Collector’s Office (Mineral Branch), Madhya Pradesh, demanded royalty for the earth used in embankment filling.

The Contractor issued a notice invoking Arbitration on 13 June 2019. The Arbitral Tribunal later issued an award holding that Konkan Railway was responsible for paying the royalty on the ordinary earth used in the project, and directed it to make the payment. However, the presiding arbitrator disagreed and said the liability should fall on the Contractor.

Konkan Railway challenged this award under Section 34 of the Arbitration Act. The Court noted that, in the award, the Arbitral Tribunal had actually accepted the plain meaning of the contract, which said that royalty payments were to be paid by the Contractor.

The court stated,“The Petitioner - Respondent and the Respondent-Claimant are ad idem that on a plain reading of the Contract, it was the Respondent Claimant's liability to pay royalty. The Arbitral Tribunal by disregarding the plain terms of the Contract, which are clear and unambiguous and inferring a different intention from that contemplated by the terms of the Contract has committed a patent illegality."

The judgment further notes that the Contractor’s use of the decisions in — Konkan Railway Corporation Limited v. Chenab Bridge Project Undertaking (supra), McDermott International Inc. (supra), and Ivory Properties & Hotels Private Limited (supra) — to support their argument is misplaced, as this case does not involve two competing interpretations of the contract.

The court mentioned that the Arbitral Tribunal has in the present case improperly invoked Section 26 of the Specific Relief Act, 1963 by effectively rewriting the Contract. The court further held that, “the majority Arbitrators having first held that the Respondent-Claimant must pay royalty as per the Contract, have thereafter rendered an Award that shifts the burden onto the Petitioner-Respondent. This is not a permissible cause of action and renders the Award perverse apart from being patently illegal.”

“The said Contract between the Petitioner-Respondent and Respondent Claimant overrides and supersedes any prior or collateral correspondence, minutes or opinions, unless they are incorporated into the Contract. It is well settled that once the parties have reduced their understanding into a written agreement, the said agreement becomes conclusive of their intentions. The said Contract clearly and unambiguously provides that the Respondent-Claimant is liable to bear or to pay the royalty”.

Keeping all facts and arguments in view, the Court held that the Arbitral Tribunal had wrongly rewritten the contract between Konkan Railway and the Petitioner-Respondent by relying on internal Tender Committee notes instead of the contract’s clear terms, which placed the royalty liability on the Petitioner-Respondent. The Court found the award to be affected by patent illegality and therefore set aside both arbitral awards.

Conclusively, all interim applications were disposed of with no order as to costs.

Case Title: Konkan Railway Corporation Ltd. Versus M/s. SRC Company Infra Private Ltd.

Mr. Simil Purohit, Senior Counsel a/w Mr. Subit Chakrabarti, Ms. Srushti Thorat and Ms. Aashka Vora i/b Vidhii Partners for the Petitioner.

Mr. Anil Anturkar, Senior Counsel a/w Mr. Kunal Kumbhat, Mr. Karthik Pillai, Ms. Kashish N. Chelani, Mr. Atharva Date & Mr. Harshvardhan Suravanshi i/b Ms. Sunanda R. Kumbhat for the Respondent.