Supreme Court Partially Upholds Arbitration Award on Coal Price Escalation: Parsa Kente Collieries vs. Rajasthan Rajya Vidyut Utpadan Nigam (2019)

Introduction

Date of the Judgment: 27 May 2019
Citation: 2019 INSC 500
Judges: Arun Mishra, J., M.R. Shah, J. (authored the judgment)

When a contract’s commencement date is delayed due to unforeseen circumstances, should the price escalation be calculated from the original date or the extended date? This was the core question before the Supreme Court in a recent arbitration case. The Court examined whether the High Court was correct in overturning an arbitrator’s award regarding price adjustments in a coal supply agreement. The Supreme Court bench, comprising Justices Arun Mishra and M.R. Shah, delivered a split verdict, partially upholding the arbitrator’s decision.

Case Background

In March 2006, Rajasthan Rajya Vidyut Utpadan Nigam Limited (the respondent) issued a tender for a joint venture for coal block development, mining, and transportation. Adani Enterprises Limited (AEL) won the bid on May 12, 2006. A Letter of Intent was issued to AEL on October 23, 2006. The respondent and AEL formed a joint venture, Parsa Kente Collieries Limited (the appellant). A Coal Mining Service Agreement was then established between Parsa Kente Collieries Limited and AEL.

On July 16, 2008, a Coal Mining and Delivery Agreement (CMDA) was executed between the appellant and the respondent for coal supply. The contract’s commencement date was set for June 25, 2011. According to the CMDA, coal supply was to begin within 42 to 48 months from the date of coal block allotment, i.e., by June 25, 2011. The CMDA also included a clause for extending the commencement date. Clauses 3.2.1 defined the scope of work; clauses 4.1.3 and 4.1.4 outlined the respondent’s responsibility to inform the appellant about coal requirements in advance. Clause 4.5 specified the commencement date; clause 5.1 covered contract pricing; clause 5.2.2 detailed the calculation of the basic price; clause 5.4.3 addressed price escalation; clause 7.1 covered force majeure; and clause 7.3 defined the effect of force majeure.

There was a 21-month delay in obtaining forest and environmental clearances. The appellant began supplying coal on March 25, 2013, after this delay. The commencement date was extended by mutual agreement from June 25, 2011, to March 25, 2013. Disputes arose regarding price escalation, fixed costs, amounts in the escrow account, and the cost of railway siding construction. Consequently, the appellant invoked clause 10.2 of the CMDA and sought arbitration. A retired Judge of the Rajasthan High Court was appointed as the sole arbitrator.

Timeline:

Course of Proceedings

The appellant submitted a statement of claim before the learned Arbitrator, which was later bifurcated into four heads: (1) Price Adjustment; (2) Fixed Costs; (3) Escrow Account; and (4) Construction of Railway Siding. The learned Arbitrator passed an award on May 27, 2015, allowing the claims under ‘Price Adjustment,’ ‘Fixed Costs,’ and ‘Escrow Account,’ while rejecting the claim for ‘Construction of Railway Siding.’ The Arbitrator determined that the commencement date for price escalation was June 25, 2011, entitling the appellant to an enhanced coal price in 2013-14.

The Commercial Court at Jaipur confirmed the arbitrator’s award in an application under Section 34 of the Arbitration and Conciliation Act, 1996. The respondent then appealed to the Commercial Appellate Court/Division Bench of the High Court of Rajasthan at Jaipur under Section 37 of the Arbitration Act. The High Court allowed the appeal on February 28, 2018, setting aside the arbitrator’s award as confirmed by the Commercial Court. The appellant, feeling aggrieved, appealed to the Supreme Court.

Legal Framework

The core of this case revolves around the interpretation of the Coal Mining and Delivery Agreement (CMDA) clauses. Key clauses include:

• Clause 3.2.1: Defines the scope of work.
• Clauses 4.1.3 and 4.1.4: Stipulate the respondent’s responsibility to inform the appellant about coal requirements in advance.
• Clause 4.5: Specifies the commencement date of the contract.
• Clause 5.1: Deals with the contract price.
• Clause 5.2.2: Provides for the calculation of the basic price.
• Clause 5.4.3: Addresses the escalation in price.
• Clause 7.1: Covers force majeure events.
• Clause 7.3: Defines the effect of force majeure.
• Clause 10.2: Allows for arbitration in case of disputes.
• Clause 8.2(iii): Deals with events of default by the respondent.

The dispute particularly centers on how the “commencement date” is defined and how it affects the price escalation clause. The CMDA stipulated that coal supply should commence within 42 to 48 months from the date of allotment of coal blocks, i.e., by June 25, 2011. However, due to delays in obtaining clearances, the actual supply began on March 25, 2013. The agreement also includes provisions for extending the commencement date due to force majeure.

Arguments

Appellant’s Submissions:

• The High Court should not have interfered with the concurrent findings of the learned sole Arbitrator and the learned Commercial Court under Section 34 of the Arbitration Act by giving an alternate construction to the CMDA.
• The High Court exceeded its jurisdiction in interfering with the award while exercising powers under Section 37 of the Arbitration Act.
• Under Section 37 of the Arbitration Act, the scope of judicial inquiry is narrow and does not entail giving own construction to the contract.
• The interpretation made by the learned sole Arbitrator on the clauses of CMDA was a plausible construction/interpretation and therefore the same could not have been substituted by the High Court.
• The price agreed in 2008 for payment in 2011 would not remain the same in 2013-14. Even though the commencement date was extended to 25.03.2013 due to force majeure, the original commencement date of 25.06.2011 should be considered for price escalation.
• Clause 4.5.2 allows for the extension of the commencement date in cases of force majeure, but no corresponding clause is present in clause 5.4.3 (price escalation).
• The intention of the parties was not to unilaterally extend the first operating year referred to in clause 5.2.2. Price escalation should be applied from the contractually stipulated date, i.e., 25.06.2011.
• The respondent’s inability to take delivery of coal for the financial year 2013-14 resulted in a loss to the appellant, as per clause 8.2(iii) of the CMDA.
• The appellant had to operate its plant at a sub-optimal level due to the respondent’s failure to lift coal, resulting in fixed costs.
• The High Court erred by disallowing the claim for fixed costs on the ground that the loss was incurred by AMPL (sub-contractor) and that the loss of Rs.78 crores was not substantiated.
• The High Court erroneously held that the respondent was entitled to make deductions from the appellant’s bills for payments made in the escrow account.
• The issue of deduction would arise only after 30 years at the time of closure of the mining plant.
• The deposit of amount in the escrow account had arisen due to the guidelines issued by the Ministry of Coal, which was subsequent to the execution of the CMDA.

Respondent’s Submissions:

• The High Court was justified in reversing the award as the claims allowed by the learned sole Arbitrator were contrary to the relevant clauses of the CMDA.
• The learned Arbitrator cannot substitute the terms of the contract or interpret the clauses in a way that makes them nugatory.
• The award, being in contravention of clear provisions of the CMDA, is in conflict with the public policy of India.
• The term “commencement date” has the same meaning as given in clause 4.5.1. As per clause 4.5.3, the date of commencement is the essence of the contract.
• The commencement date was extendable, and with mutual agreement, it was extended to 25.03.2013. The term “commencement date” is the date on which the actual supply of coal begins.
• The appellant is entitled to price escalation only after 12 months from the commencement date, i.e., 25.03.2013.
• There is no question of price escalation for F.Y. 2013-14.
• The respondent lifted the full quantity of the fixed quantity of coal. The appellant failed to adduce any evidence of actual loss.
• The “escrow account” was required to be opened as per the circular issued by the Ministry of Coal. The appellant consented to open the escrow account.
• The money was being recovered from the appellant’s running bills to be deposited in the escrow account as per the guidelines issued by the Ministry of Coal.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether in the facts and circumstances of the case, the Division Bench of the High Court is justified in interfering with the award passed by the learned Arbitrator, confirmed by the learned Commercial Court, in an appeal under Section 37 of the Arbitration Act?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

On the scope of interference with arbitral awards:

• Associate Builders v. Delhi Development Authority [CITATION: (2015) 3 SCC 49] – Supreme Court of India: This case discussed the limits of a court’s power to interfere with an arbitral award under Section 34 of the Arbitration Act, stating that interference is justified only when the award conflicts with public policy, including patent illegality.
• Steel Authority of India Limited v. Gupta Brother Steel Tubes Limited [CITATION: (2009) 10 SCC 63] – Supreme Court of India: This case reinforced the principle that courts should not interfere with an arbitrator’s interpretation of a contract unless it is unreasonable or perverse.
• Ssangyong Engineering & Construction Co. Limited v. National Highways Authority of India (NHAI) [CITATION: 2019 SCC Online SC 677] – Supreme Court of India: This recent decision further clarified the limited scope of judicial review under Section 37 of the Arbitration Act.
• National Highways Authority of India v. ITD Cementation India Limited [CITATION: (2015) 14 SCC 21] – Supreme Court of India: This case reiterated that courts should not act as appellate bodies in arbitration matters and should respect the arbitrator’s findings on facts.

On the interpretation of contracts:

• McDermott International Inc. v. Burn Standard Co. Ltd. [CITATION: (2006) 11 SCC 181] – Supreme Court of India: This case highlighted that an arbitral tribunal must decide in accordance with the terms of the contract.
• Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran [CITATION: (2012) 5 SCC 306] – Supreme Court of India: This case emphasized that the construction of contract terms is primarily for the arbitrator to decide unless the interpretation is unreasonable.

On the public policy of India:

• ONGC v. Saw Pipes Limited [CITATION: (2003) 5 SCC 705] – Supreme Court of India: This case discussed the concept of public policy in the context of arbitration and when an award can be set aside for being against public policy.
• Hindustan Zinc Limited v. Friends Coal Carbonisation [CITATION: (2006) 4 SCC 445] – Supreme Court of India: This case further elaborated on the grounds for setting aside an arbitral award for being in conflict with public policy.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on the authorities to support its reasoning, particularly on the limited scope of interference with arbitral awards. The Court followed:

• Associate Builders v. Delhi Development Authority [CITATION: (2015) 3 SCC 49]* to emphasize that courts should not act as appellate bodies and should only interfere when the award is against public policy.
• Steel Authority of India Limited v. Gupta Brother Steel Tubes Limited [CITATION: (2009) 10 SCC 63]* to highlight that courts should not substitute the arbitrator’s interpretation of the contract unless it is unreasonable.
• Ssangyong Engineering & Construction Co. Limited v. National Highways Authority of India (NHAI) [CITATION: 2019 SCC Online SC 677]* to further clarify the limited scope of judicial review under Section 37 of the Arbitration Act.
• National Highways Authority of India v. ITD Cementation India Limited [CITATION: (2015) 14 SCC 21]* to reinforce that courts should respect the arbitrator’s findings on facts.
• McDermott International Inc. v. Burn Standard Co. Ltd. [CITATION: (2006) 11 SCC 181]* to support the view that an arbitral tribunal must decide in accordance with the terms of the contract.
• Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran [CITATION: (2012) 5 SCC 306]* to emphasize that the construction of contract terms is primarily for the arbitrator to decide.
• ONGC v. Saw Pipes Limited [CITATION: (2003) 5 SCC 705]* and Hindustan Zinc Limited v. Friends Coal Carbonisation [CITATION: (2006) 4 SCC 445]* to define the scope of public policy in arbitration.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors:

• Interpretation of Contract: The Court emphasized that the arbitrator’s interpretation of the contract regarding price escalation was plausible and should not have been overturned by the High Court. The Court noted that while the commencement date was extended, there was no corresponding amendment in the price escalation clause, and the arbitrator’s interpretation was a reasonable one given the circumstances.
• Limited Scope of Interference: The Court reiterated that the High Court should not have interfered with the arbitrator’s award unless it was against public policy or patently illegal. The Court found that the arbitrator’s decision on price escalation was not against public policy, and the High Court had exceeded its jurisdiction in re-interpreting the contract.
• Evidence and Facts: The Court agreed with the High Court that the appellant did not provide sufficient evidence to support its claim for fixed costs and that the High Court was correct in setting aside the award on this point. Similarly, the Court upheld the High Court’s decision on the escrow account, noting that the account was opened as per the Ministry of Coal guidelines, and the appellant had consented to it.
• Force Majeure: The Court acknowledged that the delay in the commencement date was due to force majeure (delay in obtaining clearances). The Court noted that the price was quoted in 2007-08, applicable from 2011, and that there would have been a hike in labour and transportation charges, making the arbitrator’s interpretation a reasonable one.

Sentiment Analysis Ranking

Fact:Law

The Supreme Court’s reasoning was primarily based on legal principles and the interpretation of contract clauses (70%), with a lesser emphasis on the factual aspects of the case (30%).

Logical Reasoning

Final Verdict

The Supreme Court partially allowed the appeal. The Court held that:

• The High Court was not justified in interfering with the arbitral award on price adjustment/escalation (Claim No. 1). The Supreme Court restored the award passed by the learned Arbitrator with respect to price escalation.
• The High Court was correct in setting aside the award on fixed costs (Claim No. 2).
• The High Court was correct in setting aside the award on escrow account (Claim No. 3).

The Supreme Court set aside the impugned judgment and order passed by the High Court to the extent of price adjustment/escalation (Claim No. 1). The remaining part of the judgment and order passed by the High Court was upheld. The appeal was partly allowed, with no order as to costs.

Implications

This judgment has several important implications for arbitration law and contract interpretation:

• Limited Judicial Interference: The Supreme Court has once again emphasized the limited scope of judicial interference in arbitral awards. Courts should not act as appellate bodies and should only interfere when the award is against public policy or patently illegal.
• Plausible Interpretation: Arbitrators’ interpretations of contracts, if plausible, should be respected. Courts should not substitute their own interpretation unless the arbitrator’s interpretation is unreasonable or perverse.
• Force Majeure: The judgment clarifies that while force majeure can extend the commencement date of a contract, it does not necessarily affect other clauses, such as price escalation, unless explicitly stated in the contract.
• Evidence of Loss: Claimants need to provide sufficient evidence to support their claims, especially for damages like fixed costs. General claims without specific evidence may not be accepted.
• Contract Interpretation: The judgment underscores the importance of clear and unambiguous contract clauses. Parties should ensure that all aspects of the contract, including price escalation, are clearly defined to avoid disputes.

Conclusion

The Supreme Court’s decision in Parsa Kente Collieries vs. Rajasthan Rajya Vidyut Utpadan Nigam provides valuable insights into the interpretation of arbitration clauses and the limits of judicial intervention in arbitral awards. The Court’s partial upholding of the arbitrator’s award on price escalation demonstrates the importance of respecting arbitrators’ interpretations of contract clauses, provided they are plausible. The judgment also highlights the need for parties to provide sufficient evidence to support their claims and to draft contracts with clear and unambiguous language. This case serves as a reminder that arbitration awards should not be easily overturned, and courts should only intervene when there is a clear violation of public policy or a patent illegality. The partial victory for Parsa Kente Collieries underscores the complexities of contract interpretation and the importance of a robust arbitration process.