A Contract duly entered into between the parties cannot be substituted unilaterally without the consent of the parties: Supreme Court

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PSA Sical Terminals Pvt. Ltd. V The Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and ors.  

Civil Appeal No.3699-3700 OF 2018, Decided on July 28, 2021

BENCH- R F Nariman and B R Gavai, JJ.

FACTS– The respondent Tuticorin Port (Trust) awarded a tender to the appellant Company for certain development and operation works at the Tuticorin Port for 30 years on a Build, Operate and Transfer basis in 1998. Shorn of details, commercial differences arose between the parties relating primarily to royalty/revenue sharing model. The Company requested the Trust to amend the License Agreement to incorporate revenue sharing model in place of royalty model. This was however rejected by the Trust.

In 2012, the Company invoked arbitration clause under the License Agreement. The Arbitral Tribunal passed an award in favour of the Company directing conversion of royalty model to revenue sharing model. Thereafter, the Trust presented a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an arbitral award. This petition was rejected by the District Judge, Tuticorin. Against this, the Trust filed an appeal before the Madras High Court. The appeal was allowed and the award made by the Arbitral Tribunal was set aside. Feeling aggrieved, the Company approached the Supreme Court.


1.      (A) Whether the Arbitral Tribunal was justified in finding a change in law which entitled the Company to invoke Article 14.3 (Arbitration Clause) of the License Agreement?

(B) Whether the Arbitral Tribunal was justified in converting the contract from royalty model to revenue sharing model?

HeldTo answer both the issues the, Supreme Court considered the documents on record as well as the conduct of the parties and their intention as could be gathered from the material, and noted that entire finding of the Arbitral Tribunal was based on a premise that when the parties entered into the contract in 1998. There was an existing policy which provided royalty to be factored into the cost while fixation of tariff. Subsequently in 2003, Government of India changed the policy thereby providing that royalty will not be so factored while fixing tariff. In 2005, there was yet another change in policy vide which royalty was allowed to be factored in while fixing tariff, but subject to a maximum of the bid of second lowest bidder. According to the Arbitral Tribunal, this amounted to change in law which adversely affected the Company.

Perusing the correctness of such finding, the Court found that when Letter of Intent, which was issued to the Company in January 1998, did not contain any policy/guidelines at all. The relevant guidelines were adopted by the authority concerned Tariff Authority for Major Ports (TAMP) only in February 1998. Even the 1998 Guidelines did not provide for factoring royalty in cost while determining tariff. Notably, it was in the year 1999, that the Company presented a proposal before TAMP to revise tariff. The proposal was approved by TAMP, and royalty was allowed to be factored in cost while fixing tariff, however, this was only on account of the Trust’s conditional approval to the proposal submitted by the Company. The TAMP also made clear that its order should not be interpreted to amount to any implicit approval of royalty related issues which were left to be decided by the Trust and the Government of India.

Then the first notification released in 2003, where the Government of India decided to clarify as a matter of policy, that royalty payment shall not be factored into account as cost for fixation of tariff.

The second notification released in 2005, superseding the 1998 Guidelines. The new guidelines provided that royalty payment will not be admissible cost for tariff computation. Further, in company cases based on Build, Operate and Transfer, it was allowed that tariff computation can factor in royalty payment as cost subject however only to a maximum of the amount quoted by next lowest bidder.

The Supreme Court was of the opinion that the Arbitral Tribunal totally failed to take into consideration relevant aspects of the matter as discussed above. Court noted that the Arbitral Tribunal arrived at its decision based on ‘no evidence’ and in ‘ignorance of vital evidence’, the Court held that the findings of the Arbitral Tribunal would come in the realm of perversity.  

2.      Whether the Arbitral Tribunal was justified in substituting royalty payment model to revenue sharing model?

HeldAnswering the issue the Supreme Court held that a contract duly entered into between the parties cannot be substituted unilaterally without the consent of the parties. Gathering the intention of the parties from documents on record, the Supreme Court found that the Company wanted the License Agreement to be amended to change royalty payment method to revenue sharing method. Whereas, the Trust always opposed it and was not agreeable to any such amendment. Noting that the Arbitral Tribunal ignored the stand of the Trust to thrust upon a new term in the License Agreement, the Court observed that the Award has created a new contract for the parties by unilateral intention of the Company as against the intention of the Trust.

The Supreme Court concluded that, rewriting a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category. In such view of the matter, the Supreme Court was of the considered opinion that the impugned award passed by the Arbitral Tribunal would come under the realm of “patent illegality” and therefore it was rightly set aside by the High Court.

Cases referred: Associated Builders v. DDA, (2015) 3 SCC 49; MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163; SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131


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