Arbitrator is a Creature of Contract: Calcutta High Court Sets Aside Award for Unsupplied Items and VAT Claims

Justice Sabyasachi Bhattacharyya emphasizes adherence to contractual terms in arbitral awards, voiding interest and VAT claims contrary to agreement.

The Calcutta High Court has nullified an arbitral award granted in favor of M/S J K Enterprise against the Union of India. The court held that the arbitrator acted beyond his jurisdiction by awarding claims for unsupplied items and VAT components, and by granting interest contrary to the explicit terms of the contract. Justice Sabyasachi Bhattacharyya’s judgment underscores the necessity for arbitrators to strictly adhere to the contractual provisions agreed upon by the parties.

The Union of India challenged an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The award, passed by a sole arbitrator, allowed claims by M/S J K Enterprise for the price of unsupplied conductor rail support insulators, associated VAT components, and interest. The petitioner argued that the arbitrator exceeded his jurisdiction by granting claims barred by specific contractual provisions and by awarding interest in contravention of the tender document’s terms.

Justice Bhattacharyya emphasized the importance of contractual terms in arbitral awards. The judgment clarified that Section 28(3) of the Arbitration and Conciliation Act mandates arbitrators to consider the terms of the contract. The court found that the arbitrator overlooked critical provisions such as Clause 15.4 of the tender document, which precluded any interest claims against the purchaser. “The arbitrator is a creature of the contract and must act within its confines,” noted the judge.

The court noted that the arbitrator failed to consider that the items in question were never supplied by the claimant. Justice Bhattacharyya highlighted the absence of evidence proving that the claimant had the materials ready for supply. “In the absence of any proof that the claimant had kept the materials ready, the question of loss suffered by the claimant does not arise,” the judgment stated.

Addressing the VAT claims, the court referred to Clause 21 of the General Condition of Contract, which barred any benefit from changes in statutory levies after the expiry of the original delivery period. The VAT components claimed by the respondent were for a period beyond the original delivery period, thus precluded by the contract. “The VAT claims were fictitious and had no material basis,” observed the judge.

Justice Bhattacharyya elaborated on the legal principles underpinning the judgment, citing Section 31(7) of the Arbitration and Conciliation Act. The section allows arbitrators to award interest unless otherwise agreed by the parties. Given the explicit prohibition of interest claims in the contract, the arbitrator’s decision to award interest was deemed illegal. “The award granting interest is contrary to the specific terms agreed upon by the parties and hence beyond the arbitrator’s jurisdiction,” the judgment asserted.

“The arbitrator is a creature of the contract and must act within its confines,” remarked Justice Bhattacharyya. He further stated, “The absence of sufficient pleading and proof to substantiate the claimant’s loss renders the arbitral award patently illegal.”

The Calcutta High Court’s decision to set aside the arbitral award reinforces the judiciary’s commitment to upholding contractual sanctity in arbitration proceedings. By emphasizing the necessity for arbitrators to adhere strictly to the terms of the contract, the judgment underscores the legal framework governing arbitration in India. This decision is expected to influence future arbitral proceedings, ensuring that awards are aligned with the contractual obligations of the parties involved.

Date of Decision: 11^th July 2024

Union of India vs. M/S J K Enterprise