Arbitral Tribunal Cannot Rewrite Executed Contract Using Internal Notings: Bombay High Court Sets Aside Award Against Konkan Railway

Introduction

While arbitration is prized both for its finality and flexibility, courts are bound to retain a supervisory role for the purpose of ensuring that arbitral awards do not contravene fundamental principles of law. One basic principle involved is that of party autonomy: an arbitral tribunal must interpret and apply the contract as the parties have executed it, and not rely on internal deliberations or uncommunicated notes to change burdens of contractual obligations. It is this basic principle which the Bombay High Court recently invoked in the case of Konkan Railway Corporation Ltd. v. M/s Dinesh Chandra R. Agrawal Infracon Pvt. Ltd. by setting aside the arbitral award that had shifted the burden of paying royalties on the contractor onto the claimant, Konkan Railway, based on its internal minutes of a tender committee. The judgment underlines that internal notings have no legal effect unless incorporated into the contract, and that arbitral tribunals must resist the temptation to rewrite contracts.

The Core Issue

The dispute arose out of a contract for execution of earthworks and supply of construction material for a rail line in Madhya Pradesh.  The letter of acceptance issued by Konkan Railway stated in express terms that the contractor would be responsible for payment of royalties on the materials extracted for the project. During arbitration, however, the majority of the tribunal found that the royalty liability was to be borne by Konkan Railway because the minutes of its internal tender committee indicated that the railway had indeed contemplated paying the royalty. The question before the High Court was whether an arbitral tribunal can look at internal notes and pre-contract deliberations to interpret or even rewrite an executed contract. The answer depended on whether such reliance amounts to “patent illegality” under Section 34 of the Arbitration and Conciliation Act, 1996.

Petitioner’s Arguments

Konkan Railway thus challenged the said award under Section 34, contended that the tribunal acted contrary to its mandate by shifting the royalty liability since it was against the plain terms of the contract. The railway’s contention is that the contract, executed after competitive tender, evinced an agreement between the parties that all royalties and taxes to be paid on the goods supplied by him should be borne by the contractor. It is his submission that the letter of acceptance formed a binding part of the agreement and did not admit of any ambiguity or vagueness. Konkan Railway thus submitted that reliance by the Tribunal on uncommunicated minutes of the internal meetings is legally unsustainable as those notes were privilege and, at any rate, never incorporated in the Agreement and, as such, never conveyed to the respondent. By using such extrinsic material to shift the liability, the Arbitrator rewrote the contract. So far as the railway is concerned, this constitutes patent illegality and attacked public policy. The petitioner relies upon Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) whereby it is held that when an arbitrator construes a contract in a way in which no fair-minded person could possibly have adopted or applies a view of the law that is patently incorrect, an award would be liable to be set aside.

Respondent’s Arguments

The contractor defended the award, contending that the tribunal had only construed the contract in the light of the parties’ intent.  It argued that internal minutes, though not part of the contract, constituted the background of the tender conditions and demonstrated that the railway originally intended to bear the royalty charges. The contractor brought out that the tender documents were ambiguous on the issue of royalty payments and that the majority of the tribunal considered extrinsic evidence to discover the true intention.  Further, it argued that s 34 allows for limited challenge to arbitral awards and does not permit a review of the merits or re-appreciation of evidence. The respondent relied on the principle that courts must show deference to the tribunal’s construction of the contract if any plausible construction is available and not substitute its own view only because another view is possible. The contractor thus contended that the tribunal acted within its jurisdiction and there was no patent illegality.

Judgement

Writing for the Bombay High Court, Justice R.I. Chagla framed the central question thus: Whether the reliance on internal notes by the tribunal amounts to rewriting the contract. The court observed that the letter of acceptance had plainly put the royalty burden on the contractor and the minutes of the tender committee were indeed internal deliberations that never attained any legal consequence till they were communicated. The court placed reliance on the settled proposition of law that no pre-contract negotiations or internal decision-making process can affect a concluded contract. In support, it referred to judgments like Nabha Power Ltd. v. Punjab State Power Corp. Ltd. (2018) and Food Corporation of India v. Surendra, where it is held by the Supreme Court that the plain language of contract is to prevail and extrinsic evidence can be used only for interpreting and not for contradicting plain terms.

The High Court also noted that the internal minutes had been treated by the majority in the tribunal as if they amended the contract.  In so doing, the tribunal overlooked the operative documents and missed considering that the contractor had quoted a rate inclusive of royalty.  The court emphasized that the contract’s terms were clear and unequivocal; they had stipulated that all taxes and royalties were to be borne by the contractor.  This being so, nothing could be read into the contract by way of unexpressed deliberation to draw an inference of a different allocation of liability.  The court ruled that such reliance on internal notings to shift the burden of a contract is patent illegality, as that would run counter to the basic principles underlying contract law. The judgment also discussed the extent of judicial interference under Section 34. 

Analysis

Justice Chagla acknowledged that courts do not sit in appeal over arbitral awards and cannot reappreciate evidence. However, he highlighted that the extent of review encompasses interference when the award is in conflict with the terms of the contract or is so irrational that it shocks the conscience. Patent illegality includes an error going to the root of the matter and appearing on the face of the award. The misinterpretation by the tribunal in the instant case met that threshold. The court drew a distinction between cases where extrinsic evidence may be admitted to resolve ambiguity and cases where such evidence is relied on to contradict clear terms. It held that internal notes and minutes, being part of a preparatory process, have no legal sanctity unless they are communicated and form part of the contract.

The High Court, therefore, set aside the award and dismissed the claim of the contractor.  It reiterated that arbitral tribunals must show deference to the sanctity of contracts and cannot rewrite them based upon extrinsic materials.  The judgment is a cautionary notice that while offering flexibility, arbitration cannot transgress fundamental notions of the rule of law.  In this case, the ruling reassures parties that courts will step in when arbitrators exceed their brief, and such a decision reinstates confidence in the arbitral process.

Conclusion

The decision by the Bombay High Court in the case of Konkan Railway v. Dinesh Chandra R. Agrawal Infracon saliently highlights the limits of arbitral discretion.  By setting aside an award that relied on internal notings to shift contractual liabilities, it has made clear that pre-contract deliberations and internal documents cannot override the written word of an executed contract.  The ruling thus reiterated the jurisprudence of the Supreme Court as far as patent illegality is concerned and thereby solidified the principle that arbitration is not a license for ignoring contractual stipulations.  The case sets a precedent in corporations and with contractors to have clear terms and understanding that internal discussions do not affect contractual obligations unless provided for duly within the contract.  The judgment adds another milestone toward predictability and integrity within arbitration in India, ensuring that party autonomy and contractual sanctity remain at the forefront.