Arbitrator Cannot Rewrite Terms Of The Agreement Merely Because It Flouts Business Common Sense: Delhi High Court

[24 May 2022] The High Court of Delhi held that the arbitrator cannot re-write the terms of the agreement between the parties merely because they flout business common sense. The Single Bench of Justice Vibhu Bakhru has held that an award wherein the arbitrator re-work a bargain between the parties merely because it is commercially difficult for one party to perform the same would be against the fundamental policy of Indian Law and vitiated by patent illegality.
Analysis By The Court
The Court observed that the award is based on the reasoning that the terms of the contract could not be literally interpreted if it “flouts business common sense”. The Court held that in terms of paragraph 9 of the LoA and Clause 2.8 of the agreement, the petitioner retained the right to increase or decrease the ordered quantity up to 30% during the currency of the Agreement, therefore, it was not open for the arbitrator to interpret the clause in such a manner to deprive the petitioner of its right under the said clause.
The Court held that the arbitrator held the additional order to be not within the terms of the agreement on the presumption that the price of the wagon had substantially gone up, however, it was never the case of the respondent that the petitioner could not place an additional order.
The Court held that when the agreement confers on one party the right to place an additional order on the same terms and conditions during the currency of the contract, the condition under the agreement must be given effect to and the arbitrator cannot negate the mandate of such a stipulation.
It further held that a commercial contract between the parties cannot be sidestepped on the ground that one of the parties subsequently finds it commercially unviable to perform the same.
The Court held that the petitioner placed the additional orders purely in terms of the agreement and on the price originally offered by the respondent.
The Court held that by interpretation adopted by the arbitrator is not a plausible one. The Court held that the arbitrator cannot ignore the plain mandate of a term in the agreement merely because it flouts the business common sense.
The Court held that it is not open for the Arbitral Tribunal to examine the commercial wisdom of a party and rewrite the Agreement on the basis of the commercial difficulties it would face in performing the obligations. The Court further observed that “it is not necessary that all contracts yield a profit; some result in a loss as well. This is not a factor to permit a party to avoid its contractual obligations.” According, the Court set aside the award on the ground that it is against the fundamental policy of Indian law and vitiated by patent illegality.