Supreme Court Upholds Contractual Terms: PSA Sical Terminals Loses Appeal Against V.O. Chidambaranar Port Trust (28 July 2021)

LEGAL ISSUE: Interpretation of “Change in Law” clause in a contract and the extent of the Arbitral Tribunal’s power to modify contractual terms.

CASE TYPE: Arbitration Law, Contract Law

Case Name: PSA Sical Terminals Pvt. Ltd. vs. The Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin and Others

Judgment Date: 28 July 2021

Date of the Judgment: 28 July 2021

Citation: Where available, provide the case citation in the Indian Supreme Court (INSC) format.

Judges: Justice R.F. Nariman and Justice B.R. Gavai

Can an arbitral tribunal alter the fundamental terms of a contract based on a ‘change in law’ argument? The Supreme Court of India addressed this crucial question in a recent case involving PSA Sical Terminals Pvt. Ltd. and the V.O. Chidambaranar Port Trust. The court examined whether a change in government policy regarding tariff calculation could justify a shift from a royalty-based payment model to a revenue-sharing model, ultimately ruling against such a drastic alteration of the original contract.

The Supreme Court upheld the High Court’s decision, emphasizing that an arbitral tribunal cannot rewrite a contract. The core issue revolved around whether a change in tariff regulations constituted a “change in law” that warranted a fundamental shift in the contractual payment structure.

The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice B.R. Gavai.

Case Background

The dispute arose from a license agreement between PSA Sical Terminals Pvt. Ltd. (SICAL) and the Board of Trustees of V.O. Chidambaranar Port Trust, Tuticorin (TPT). The agreement, signed on 15th July 1998, granted SICAL the right to develop, operate, and maintain a container terminal at the Tuticorin port for 30 years on a Build, Operate, and Transfer (BOT) basis.

The initial bidding process began on 9th April 1997, when TPT issued a global tender. SICAL submitted its bid on 24th October 1997, and its financial offer on 19th December 1997. SICAL’s offer was accepted, leading to the Letter of Intent on 29th January 1998, and subsequently the License Agreement.

A key aspect of the agreement was the royalty payment model, where SICAL was to pay TPT a royalty fee for each container handled. However, the Tariff Authority for Major Ports (TAMP) introduced guidelines in 1998 and subsequent notifications in 2003 and 2005 which impacted how tariffs were to be calculated, particularly regarding the inclusion of royalty as a cost element.

SICAL contended that these changes in policy and guidelines constituted a “change in law” as defined in their agreement, which substantially and adversely affected their rights, making the project commercially unviable. SICAL sought an amendment to the agreement to shift to a revenue-sharing model. TPT refused, leading to arbitration.

Timeline

Course of Proceedings

The Arbitral Tribunal ruled in favor of SICAL, directing the conversion of the container terminal from a royalty model to a revenue-sharing model. TPT challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, before the District Judge, Tuticorin, who rejected TPT’s challenge.

TPT then appealed to the Madras High Court under Section 37 of the Arbitration Act. The High Court allowed TPT’s appeal, setting aside the Arbitral Tribunal’s award and the order of the District Judge. The High Court’s decision was based on the finding that the Arbitral Tribunal had exceeded its jurisdiction by rewriting the contract and that there was no “change in law” that warranted such a drastic alteration.

Legal Framework

The core legal issue revolved around the interpretation of Article 14 of the License Agreement, which deals with “Change in Law.”

✓ Article 14.1 defines “Law” as any valid act, ordinance, rule, regulation, notification, directive, order, policy, bylaw, administrative guideline, ruling, or instruction having the force of law enacted or issued by a Government authority.

✓ Article 14.2 defines “Change in Law” as any amendment, alteration, modification, or repeal of any existing law by a Government Authority, or through any interpretation thereof by a court of law, or enactment of any new law coming into effect after the date of the Agreement.

✓ Article 14.3 states that if a “Change in Law” substantially and adversely affects the rights of the Licensee so as to alter the commercial viability of the project, the Licensee may request amendments to the terms of the agreement. However, it also specifies that the Licensee shall not be entitled to any compensation from the Licensor as a result of a “Change in Law.”

The court also considered the provisions of the Arbitration and Conciliation Act, 1996, particularly Sections 34 and 37, which deal with the setting aside of arbitral awards and appeals against such orders, respectively.

Arguments

Arguments by SICAL:

• SICAL argued that the guidelines and notifications issued by the Government of India and TAMP, which disallowed the factoring of royalty into tariff calculations, constituted a “change in law” under Article 14 of the License Agreement.
• SICAL contended that this change in law substantially and adversely affected its rights, altering the commercial viability of the project, as it was obligated to pay royalty but was not allowed to recover it through tariffs.
• SICAL submitted that the definition of “law” in Article 14 is wide enough to include any policy or administrative guideline having the force of law.
• SICAL argued that Article 14.3 provides for amendment of the agreement to provide relief to the Licensee in case of a change in law, and not compensation.
• SICAL relied on the conduct of TPT, which initially understood that royalty was to be factored into the tariff.
• SICAL contended that the arbitral tribunal was correct in converting the contract from a royalty model to a revenue-sharing model, as this was necessary to restore the equilibrium of the contract.
• SICAL submitted that the High Court erred in interfering with the arbitral award, as the scope of interference under Sections 34 and 37 of the Arbitration Act is very limited.

Arguments by TPT:

• TPT argued that the guidelines and notifications relied upon by SICAL did not constitute a “change in law” within the meaning of Article 14, as they were merely policy decisions and not statutory enactments.
• TPT contended that the original contract and bid documents were based on a royalty payment model, and SICAL was fully aware of this.
• TPT submitted that SICAL was attempting to rewrite the contract by seeking a shift to a revenue-sharing model, which was not permissible.
• TPT argued that the arbitral tribunal exceeded its jurisdiction by altering the fundamental terms of the contract.
• TPT contended that SICAL was engaging in approbate and reprobate by taking a different stance in the writ petitions and arbitration proceedings.
• TPT submitted that SICAL was taking undue advantage of the interim orders passed by the High Court, which allowed it to continue to charge tariffs based on the 1999 order.
• TPT argued that the arbitral tribunal had no power to create a new contract for the parties against its wishes.

Innovativeness of the Argument: SICAL’s argument that policy changes constituted a “change in law” was innovative, as it sought to expand the interpretation of contractual clauses to include policy shifts beyond formal legal enactments.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the Arbitral Tribunal was justified in finding a change in law, which entitled the Licensee to invoke Article 14.3 of the Agreement?
2. Whether the Arbitral Tribunal was justified in converting the contract from a royalty payment module to a revenue-sharing module?

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:

The Court also referred to the UNIDROIT Principles of International Commercial Contracts, which provide rules for interpretation of contracts, emphasizing the common intention of the parties.

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 MMTC Limited v. Vedanta Limited* to reiterate the limited scope of interference with arbitral awards and the meaning of “public policy of India”.
• The Supreme Court cited Associate Builders v. Delhi Development Authority* to explain the grounds for interference with an arbitral award, including perversity and violation of public policy.
• The Supreme Court relied on Ssangyong Engineering and Construction Company Limited v. National Highway Authority of India (NHAI)* to explain the grounds for interference with arbitral awards, particularly the concept of “patent illegality” and “fundamental principles of justice.”
• The Supreme Court cited Bharat Coking Coal Ltd. v. Annapurna Construction* to highlight the distinction between an error within jurisdiction and an error in excess of jurisdiction.
• The Supreme Court cited Md. Army Welfare Housing Organization v. Sumangal Services (P) Ltd.* to emphasize the limited powers of an arbitral tribunal.
• The Supreme Court referred to Sandvik Asia Private Limited v. Vardhman Promoters* and Hansalaya Properties v. Dalmia Cement (Bharat) Limited* to support the interpretation of contracts based on the common intention of the parties.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Fact: The Court emphasized that the Arbitral Tribunal’s finding of a “change in law” was not supported by evidence. The court noted that the 1998 guidelines did not guarantee the factoring of royalty into costs, and subsequent tariff orders did not confirm such a practice.
• Law: The Court highlighted that an arbitral tribunal cannot rewrite a contract. The tribunal’s decision to convert the royalty model to a revenue-sharing model was a fundamental alteration of the contract, going beyond its jurisdiction and violating the principles of justice.

The sentiment analysis of the reasons given by the Supreme Court is as follows:

The Supreme Court’s decision emphasized the importance of contractual integrity and the limited jurisdiction of arbitral tribunals. The court prioritized adherence to the terms of the contract and rejected attempts to rewrite it based on policy changes.

Ratio Decidendi

The ratio decidendi of the judgment can be summarized as follows:

• An arbitral tribunal’s jurisdiction is limited to interpreting and applying the terms of the contract; it cannot rewrite or modify the contract based on a perceived “change in law” if the change does not fundamentally alter the legal basis of the contract.
• A change in policy or administrative guidelines does not automatically constitute a “change in law” as defined in a contract unless such changes are specifically included in the definition or if they fundamentally alter the legal basis of the contract.
• Arbitral awards must be based on evidence and cannot be based on assumptions or misinterpretations of facts.

Obiter Dicta

The obiter dicta of the judgment includes:

• The Supreme Court reiterated the limited scope of judicial interference in arbitral awards, emphasizing that courts should not re-appreciate evidence or substitute their own interpretation of the contract for that of the arbitral tribunal, except in cases of patent illegality or violation of public policy.
• The Court also emphasized that business efficacy is a relevant consideration while construing business contracts, but this should not be used to rewrite the contract.

Conclusion

The Supreme Court’s judgment in PSA Sical Terminals Pvt. Ltd. vs. The Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin and Others is a significant ruling that reinforces the sanctity of contracts and the limited jurisdiction of arbitral tribunals. The court held that an arbitral tribunal cannot rewrite a contract based on a “change in law” argument, especially when the change does not fundamentally alter the legal basis of the contract. The judgment underscores the importance of contractual integrity and the need for parties to adhere to the terms of their agreements.

The case serves as a reminder that while contracts can contain clauses to address changes in law, such clauses cannot be used to fundamentally alter the agreed-upon terms and conditions. Parties must carefully consider the scope and implications of such clauses when drafting contracts.

Flowchart of the Case