Arbitral Award Granting Demurrage Where Private Contract Does Not Expressly Provide For It Is Patently Illegal

In brief

The question

1. Whether the majority arbitral award suffered from "patent illegality" or "perversity" by incorporating statutory TAMP/MPT Act rates into a private contract that lacked an express demurrage clause?

The court held

The Court dismissed the appeal and sustained the Single Judge’s order setting aside the majority arbitral award

It also directed

It held that the majority award was "patently illegal" and "perverse" as it travelled beyond the terms of the contract (violating Section 28(3)) and was based on "no evidence" regarding the duration of cargo storage

The Division Bench concluded that the Single Judge acted within the parameters of Section 34 by identifying defects that shocked the conscience of the court. No order as to costs was made

01Facts

The Appellant (VSPL) and Respondent (SAIL) entered into a Short Term Agreement (STA) on May 06, 2008, for handling coal-cargo at Visakhapatnam Port

p. 2 · ¶ 2(a)

VSPL claimed demurrage/storage charges for cargo volumes exceeding contractual limits (60,000 MT) between 2009 and 2012, totaling approx. ₹30.83 crores

pp. 2-3

An Arbitral Tribunal rendered a split 2:1 verdict on August 30, 2015, where the majority awarded ₹19.68 crores to VSPL, while the minority member rejected the claim, citing the absence of a demurrage clause in the private contract

p. 3 · ¶ 2(f)

The Single Judge of the Calcutta High Court set aside the majority award and affirmed the minority view

p. 3 · ¶ 2(g)

02Issues

i.1. Whether the majority arbitral award suffered from "patent illegality" or "perversity" by incorporating statutory TAMP/MPT Act rates into a private contract that lacked an express demurrage clause?

pp. 26-27 · ¶ 57-58 · p. 43 · ¶ 38

ii.2. Whether the majority failed to apply the second part of Clause 5.12 of the STA regarding cargo volumes exceeding 2 million MT per annum?

p. 40 · ¶ 34-35

iii.3. Whether the Section 34 Court exceeded its jurisdiction by re-appreciating evidence or if the interference was justified under the "public policy" and "patent illegality" grounds?

pp. 46-47 · ¶ 46-48

03Law Applied

Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, regarding the limited scope of judicial interference in arbitral awards

p. 2 · ¶ 1

The "patent illegality" and "perversity" doctrines established in Associate Builders v. DDA and Ssangyong Engineering & Construction Co. Ltd. v. NHAI, noting that awards based on "no evidence" or those that "ignore vital evidence" are liable to be set aside

p. 17 · ¶ 4(n) · p. 20 · ¶ 4(cc)

Section 28(3) (arbitrator must decide in accordance with terms of the contract) and Section 31(3) (requirement of a reasoned award)

p. 18 · ¶ 4(t) · p. 22 · ¶ 4(ff)

Principles of contract interpretation from FCI v. Abhijit Paul were used to determine that extrinsic statutory rules cannot be read into a silent private contract

p. 32 · ¶ 20

Provisions in the judgment · 11 · Linked ones open on LawLens

Arbitration and Conciliation Act, 1996 11 provisions

Section 12 Section 13 Section 16 Section 28 Section 31 Section 34 Section 35 Section 36 Section 37 Section 75 Section 81

04Reasoning

The Court found the majority award perverse because it "conjured up" a contractual term for demurrage where none existed in the STA

p. 31 · ¶ 16-18

The majority erred by assuming that the Major Port Trusts (MPT) Act and TAMP notifications applied automatically to a private commercial agreement simply because the activity occurred on port land; however, the STA specifically defined penalties for other breaches but remained silent on demurrage for overstaying cargo

p. 34 · ¶ 24

The Court noted that the majority ignored vital evidence—specifically, charts showing the respondent exceeded the 2 million MT annual commitment, which, under Clause 5.12, would have increased the "free" storage limit to 120,000 MT, rendering the claim baseless even if demurrage was applicable

pp. 40-41 · ¶ 35-36

The majority awarded a lump-sum deduction of ₹40 lakhs without any mathematical reasoning, violating Section 31(3)

p. 22 · ¶ 4(ff)

The Court held that the minority arbitrator’s view—that VSPL waived its right by not raising the issue in joint review meetings—was the more plausible interpretation of the contract

p. 45 · ¶ 43-44

05Holding

The Court dismissed the appeal and sustained the Single Judge’s order setting aside the majority arbitral award

p. 47 · ¶ 49

pp. 43-44 · ¶ 38-41

The Division Bench concluded that the Single Judge acted within the parameters of Section 34 by identifying defects that shocked the conscience of the court. No order as to costs was made

p. 47 · ¶ 48-49

LawLens.Calcutta High Court

Original Court PDF