Arbitration and Commercial Contracts: Supreme Court Ruling on PSA SICAL vs. V.O. Chidambaranar Port Trust

The Supreme Court of India’s decision in PSA SICAL Terminals Pvt. Ltd. vs. The Board of Trustees of V.O. Chidambaranar Port Trust, Tuticorin & Others is a landmark ruling clarifying the role of arbitration in commercial agreements. The case involved a dispute over tariff fixation and revenue-sharing models in a Build-Operate-Transfer (BOT) project at the V.O. Chidambaranar Port, formerly known as Tuticorin Port.

The Court examined whether an arbitral tribunal had exceeded its jurisdiction by converting the contract’s royalty payment model to a revenue-sharing model. It also determined if changes in government policies constituted a ‘change in law’ that justified modifying the agreement. Ultimately, the Supreme Court upheld the Madras High Court’s decision to quash the arbitral award, ruling that arbitrators cannot rewrite contracts between parties.

Background of the Case

The dispute stemmed from a concession agreement signed in 1998 between PSA SICAL Terminals Pvt. Ltd. (SICAL) and the Board of Trustees of V.O. Chidambaranar Port Trust (TPT) for the development and operation of the Seventh Berth as a container terminal on a BOT basis.

Under the agreement:

SICAL was required to pay royalty fees per Twenty-foot Equivalent Unit (TEU) to TPT.
The port tariff was regulated by the Tariff Authority for Major Ports (TAMP), which determined maximum charges SICAL could impose on users.
Any changes in law that adversely affected SICAL’s rights could justify amendments under Article 14 of the agreement.

The central issue arose when TAMP, following a 2003 directive from the Ministry of Shipping, excluded royalty fees from tariff calculations, making SICAL’s operations financially unviable. SICAL sought relief under the agreement’s ‘change in law’ clause, but TPT refused to amend the contract. SICAL then initiated arbitration.

Petitioners’ Arguments

SICAL contended:

The 2003 and 2005 government directives preventing royalty inclusion in tariff calculations constituted a ‘change in law’ under Article 14.
Without factoring in royalty, SICAL’s operational costs exceeded permissible tariffs, making the project financially unsustainable.
The arbitral tribunal correctly ruled in favor of shifting to a revenue-sharing model to ensure fairness and viability.
The Madras High Court exceeded its jurisdiction by interfering with a valid arbitral award.

Respondents’ Arguments

The Board of Trustees of TPT countered:

The contract explicitly required SICAL to pay royalty fees, and no government policy had changed this obligation.
TAMP’s tariff regulations were independent and did not alter the fundamental terms of the agreement.
The arbitral tribunal had no authority to rewrite the contract by replacing royalty with revenue sharing.
The Madras High Court correctly set aside the arbitral award under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.

Supreme Court’s Observations and Judgment

Arbitral Tribunal Exceeded Jurisdiction

The Supreme Court found that the tribunal’s decision to alter the revenue model was beyond its authority:

“An arbitral tribunal cannot substitute the contractually agreed method of royalty payment with a revenue-sharing model. The tribunal’s role is limited to interpreting the agreement, not rewriting it.”

Change in Law Argument Rejected

The Court ruled that the exclusion of royalty from tariff computation did not qualify as a ‘change in law’:

“The exclusion of royalty from tariff calculations was a regulatory change, not a legislative or contractual amendment affecting the licensee’s rights.”

High Court’s Authority Upheld

The Supreme Court reaffirmed the Madras High Court’s power to set aside the arbitral award:

“Under Section 34 of the Arbitration Act, courts can intervene if an arbitral award is contrary to public policy, beyond jurisdiction, or patently illegal.”

Key Takeaways from the Judgment

Arbitrators cannot rewrite contracts – They must operate within the agreement’s framework.
Regulatory changes do not always constitute ‘change in law’ – Only substantive legal amendments can trigger contractual modifications.
Court oversight in arbitration is limited – But courts can intervene if awards violate public policy or exceed jurisdiction.
Revenue-sharing and royalty models differ fundamentally – Shifting from one to another alters commercial terms significantly.

Conclusion

The Supreme Court’s ruling in PSA SICAL vs. V.O. Chidambaranar Port Trust reinforces the sanctity of commercial contracts and limits arbitral tribunals from making unilateral changes. The judgment ensures that regulatory bodies like TAMP can function independently while preventing contractual disputes from being misused to alter fundamental business terms.

By upholding the Madras High Court’s ruling, the Supreme Court reaffirms India’s commitment to arbitration while ensuring it remains within legal boundaries.

Petitioner Name: PSA SICAL Terminals Pvt. Ltd..
Respondent Name: The Board of Trustees of V.O. Chidambaranar Port Trust, Tuticorin & Others.
Judgment By: Justice B.R. Gavai, Justice R.F. Nariman.
Place Of Incident: Tuticorin, Tamil Nadu.
Judgment Date: 28-07-2021.

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