(Lengthy Synopsis & List Of Dates) ... vs Delhi International Airport Limited on 3 February, 2023

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Delhi High Court - Orders

(Lengthy Synopsis & List Of Dates) ... vs Delhi International Airport Limited on 3 February, 2023

1. The Airports Authority of India1 has petitioned this Court under Section 34 of the Arbitration and Conciliation Act, 1996 assailing two awards dated 16 July 2022 pronounced in favour of the claimants, namely, Delhi International Airport Limited2 and Mumbai International Airport Limited3. The award rendered by the Tribunal has been authored with two of the learned arbitrators, former Justices of our Hon‟ble Supreme Court constituting the majority and the Hon‟ble Presiding Arbitrator having penned an opinion which constitutes the minority position.

2. Both the awards essentially rest upon the meaning to be assigned to the expression „revenue‟ as appearing in the Operation, Management and Development Agreement4. Since the issues raised are more or less common, the Court, for the purposes of the present order, deems it convenient to notice the relevant provisions of that agreement and the facts as they obtain in OMP (COMM) 17/2023. The narration of facts hereinafter are essentially aimed at facilitating 1 AAI 2 DIAL Signature Not Verified 3 Digitally Signed MIAL By:NEHA Signing Date:06.02.2023 14:47:05 the Court considering the nature of the interim directions that may be warranted. The Court for reasons recorded hereinafter has found that the challenge as raised would merit further consideration.

3. Having heard learned Senior Counsels as well as the learned Solicitor General at some length, it was agreed that the two petitions be put down for final disposal after according an opportunity to the respondents to file a counter affidavit in these matters within a period of ten days from today. Consequently, let notice issue. The respondents may proceed accordingly. Let the petitioners file their replies in rejoinder within a week thereafter. Let these two matters be put down for final disposal on 23.02.2023 in the category of „End of Board‟.

4. The submissions which were addressed on behalf of respective sides centered upon the correctness of the majority award and for the framing of interim directions till the matter is finally heard. In order to examine the nature of the interim directions which would be merited, the following salient facts may be noticed.

5. The OMDA insofar as DIAL is concerned is dated 04 April 2006. The expression „revenue‟ stands defined therein as follows: -

"Revenue" means all pre-tax gross revenue of JVC, excluding the following: (a) payments made by JVC, if any, for the activities undertaken by Relevant Authorities or payments received by JVC for provision of electricity, water, sewerage, or analogous utilities to the extent of amounts paid for such utilities to third party service providers; (b) insurance proceeds except insurance indemnification for loss of revenue; (c) any amount that accrues to JVC from sale of any capital assets or items; (d) payments and/or monies collected by JVC for and on behalf of any governmental authorities under Applicable Low (e) any bad debts written off provided these pertain to past revenues on which annual fee has been paid to AAI. It is clarified that annual fee payable to AAI pursuant to Article 11 and Operational Support Cost payable to AAI shall not be deducted from Revenue"

Signature Not Verified 4 Digitally Signed OMDA By:NEHA Signing Date:06.02.2023 14:47:05

6. As is evident from the above, „revenue‟ has been defined to mean all pre-tax gross revenue earned by the Joint Venture Company5 and provides for exclusions which are enumerated in clauses (a) to (e) thereof. The dispute centers around the computation of the Annual Fee [AF] which is liable to be paid to AAI by the JVC and is governed by Clause 11 which is extracted hereinbelow: -

"11.1.2 Annual Fee 11.1.2.1 The JVC shall also pay to the AAI an annual fee ("AF") for each Year during the Term of this Agreement of the amount set forth below:

AF-45.99% of projected Revenue for the said Year Where projected Revenue for each Year shall be as set forth in the Business Plan.

11.1.2.2 The AF shall be payable in twelve equal monthly instalments, each instalment (hereinafter referred to as "Monthly AF" or "MAF") to be paid on the first day of each calendar month. The JVC shall from time to time cause the Escrow Bank to make payment of the MAF to AAI in advance on or prior to the 7th day of each month by cheque drawn in favour of AAI. If AAI does not receive the payment of MAF due hereunder by the due date provided herein, the amount owed shall bear interest for the period starting on and including the due date for payment and ending on but excluding the date when payment is made calculated at State Bank of India Prime Lending Rate + 10% p.a. Notwithstanding anything contained herein, the JVC shall at all times be liable to pay the MAF in advance on or prior to the 7th day of each month.

11.1.2.3 (i) In the event that in any quarter the actual Revenue exceeds theprojected Revenue, then JVC shall pay to AAI the additional AF attributable to such difference between the actual quarterly Revenue and the projected quarterly Revenue within 15 days of the commencement of the next quarter; and (ii) in the event that the projected Revenue in any quarter exceeds the actual Revenue, then AAI shall pay to JVC such portion of Signature Not Verified 5 Digitally Signed JVC By:NEHA Signing Date:06.02.2023 14:47:05 the AF received as is attributable to the difference between the projected Revenue and the actual Revenue by way of an adjustment against the AF payable by the JVC to AAI in the current quarter;

provided further that in the event the actual Revenue in any quarter is greater than 110% of the projected Revenue of such quarter, the JVC shall pay to AAI interest for difference between the actual Revenue and the projected Revenue at the rate of State Bank of India Prime Lending Rate plus 300bps in the following manner:

(i) interest of three (3) months on 1/3rd of the difference between the projected Revenue and the actual Revenue:

(ii) interest of two (2) months on 1/3rd of the difference between the projected Revenue and the actual Revenue;

(iii)interest of one (1) month on 1/3rd of the between the projected Revenue and the actual Revenue.

It is clarified that if the projected quarterly Revenue is equal to or less than 110% of the actual quarterly Revenue, then no interest shall be payable; interest shall only be payable on the difference between the actual quarterly Revenue and the projected quarterly Revenue in the event the actual quarterly Revenue is greater than 110% of the projected quarterly Revenue.

11.1.2.4 The applicable Revenue used for final verification/reconciliation of the AF shall be the Revenue of the JVC as certified by the Independent Auditor every quarter." [Emphasis supplied]"

7. DIAL had laid a claim before the Arbitral Tribunal asserting that it had wrongly computed the Annual Fee which was liable to be paid to AAI and the same was based on a mistaken construction of „revenue‟ as defined under the OMDA and the provisions of clause 11 thereof. The claim essentially was that it was entitled to make various deductions towards Capital Costs before arriving at the "projected revenue" which was to be shared between the JVC and AAI. The deductions which DIAL as well as MIAL were claiming related to the Signature Not Verified Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05 costs incurred by them towards depreciation, interest on debt and return on equity. These heads were compendiously described as Capital Costs. It becomes relevant to note that insofar as the OMDA between AAI and DIAL was concerned, the sharing percentage between the two parties was fixed at 45.99% in favour of AAI and the balance being retained by the JVC. In the case of MIAL, the sharing percentage was fixed at 38.7%.

8. Chapter XII of the OMDA pertains to Tariff and the charges which the JVC could impose and collect towards Aeronautical Charges and charges for Non-Aeronautical services.

9. The minority view taken in the award has essentially held that since the expression „revenue‟ and „Annual Fee‟ stood defined explicitly under the OMDA, only those deductions which were specified therein could be taken into consideration. It has accordingly proceeded to reject the submission that Capital Costs would additionally be liable to be deducted while computing pre-tax gross revenue. The learned arbitrator who stands in the minority has consequently held that the said contention if accepted would do violence to the terms of the contract and would thus clearly be untenable.

10. The learned arbitrators constituting the majority have, however, proceeded to hold that Aeronautical Charges which would include the cost incurred by the JVC towards creation of aeronautical assets as well as the costs of maintenance and upgradation of such assets would have to necessarily be taken into consideration failing which the entire agreement would be rendered unworkable and unfeasible. The majority opinion has also referred to the projected revenue as set forth in the periodic Business Plans which were submitted Signature Not Verified as being relevant for the purposes of construing the Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05 expression „revenue‟ and clause 11 of the OMDA. They have accordingly held that all revenues that may be received by the JVC in the shape of Aeronautical Charges if included in revenue as defined, without providing for necessary deductions towards service of debt, upgradation costs would result in DIAL being unable to recover the costs relating to the same and thus seriously impacting its interests in the entire venture. The majority award has consequently proceeded to hold that deductions towards Capital Costs would be liable to be read as being available to be excluded from revenue in addition to the five specific heads which stand set forth in the OMDA.

11. The aforesaid findings as returned by the majority have been assailed by the learned Solicitor General as well as Mr. Viswanathan Learned Senior Counsel who appeared for the petitioners, submitting that the aforesaid conclusion essentially amounts to a re-writing of the contractual terms itself. It was submitted that the majority has clearly failed to notice the provisions set forth in clause 11.1.2.3 and which contemplated a reconciliation exercise being undertaken periodically in respect of projected revenue and actual quarterly revenue. It was contended that the members of the Tribunal constituting the majority have failed to take into account the aforesaid provisions and this itself renders the award manifestly perverse and suffering from a patent illegality.

12. Prima facie, the Court is of the considered opinion that the aforesaid challenge does raise issues which would warrant detailed consideration, and at least at this stage of the evaluation of rival submissions, would appear to give rise to serious questions touching upon the validity of the award itself. This the Court notes on the anvil of the perversity and patent illegality tests which must inform a Section 34 petition. It becomes pertinent to observe that if it be Signature Not Verified ultimately found that the opinion as delivered by the majority does Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05 amount to a wholesale reconstruction of contractual terms, it would clearly fall within the ambit of a Section 34 challenge on the ground of patent illegality as enunciated by the Supreme Court in Ssangyong Engineering & Construction Co. vs. NHAI6.

13. The Court at this stage, and prima facie, finds that the majority award essentially enables DIAL and MIAL to factor in deductions which are in addition to those which stand explicitly spelt out in the definition of „revenue‟. It also finds that in terms of clause 11.1.2.1 while „Annual Fee‟ was pegged at a percentage of projected revenue, clause 11.1.2.3 did envisage an exercise being undertaken for squaring up of accounts in cases where either actual revenue exceeded the projected revenue or even in a converse situation. This is also evident from the provisions enshrined in clause 11.1.2.4 of the OMDA. The majority opinion clearly fails to consider this aspect.

14. It was in the aforesaid backdrop that it was vehemently urged by the learned Solicitor General that if the majority view were to be accepted, clause 11.1.2.3 would virtually stand erased and deleted from the contract itself. The aforesaid challenges as raised thus clearly merit further consideration.

15. The Court notes for the purposes of framing interim directions that the majority award in its ultimate directions in respect of claim No. 78(a) to (f) has provisioned for the appointment of an Independent Auditor who may undertake the exercise of arriving at the actual figures which are liable to be deducted from the total receipts of the JVC and in light of the conclusions recorded in the award. The said Independent Auditor is also required to compute the amount which the petitioners are to refund to the claimants from 2015. The said Independent Auditor is yet to be appointed and undertake the exercise as contemplated under the award in terms of the directions issued Signature Not Verified 6 Digitally Signed (2019) 15 SCC 131 By:NEHA Signing Date:06.02.2023 14:47:05 while dealing with claim No. 78(d). The ends of justice would thus warrant that in the interim while the Independent Auditor may be permitted to undertake the aforesaid exercise in terms of the directions framed by the Arbitral Tribunal, no effect to its ultimate findings should be accorded since that would clearly result in the petitioners being placed under a liability to refund the asserted excess amount that were received by AAI right from 2015.

16. The Court also bears in mind that the understanding with respect to revenue sharing has prevailed right from 2006. It also notes that the award itself has been rendered with a minority opinion which does raise issues warranting further consideration. On an overall conspectus of the aforenoted facts, it is of the opinion that a status quo is clearly warranted.

17. Insofar as DIAL is concerned, the Annual Fee in terms of the OMDA is paid monthly with a review in terms of clause 11.1.2.3 being undertaken every quarter. Accordingly, till such time as the instant petitions are finally heard and disposed of, it would appear to be expedient to provide that the revenue sharing in respect of the period prior to the present order shall remain untouched by the award which stands impugned.

18. It was stated by learned counsels appearing for respective sides that the next period and for which the issue of revenue sharing would arise and in connection with which payments would have to be made post the rendering of the award would be due only on 07 March 2023. Thus, no interim directions for the periods falling post the present order need be framed at this stage since the Court contemplates disposing of the petitions prior to the aforenoted date. The revenue sharing arrangement which held the field prior to the impugned award being rendered would thus continue to hold the field.

19. Signature Not Verified Insofar as MIAL is concerned, the Court is apprised that in a Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05

related arbitration which is pending inter partes, the Arbitral Tribunal by way of an interim order 22 December 2021 has put in place the following arrangement:

"(c) Respondent No. 1 shall issue instructions to Respondent No.2 to transfer (not later than immediately subsequent working day) 38.7% of the actual Revenue received in the Proceeds Account (i.e. calculated on a cash basis, as opposed to accrual basis), for the day, from the date of the order passed in the present application, from the Proceeds Account to the AAI Fee Account (subject to satisfaction of Statutory Dues). Till such instructions are received, all receivables shall remain in the Proceeds Account, and shall not be transferred either to the AAI Fee Account or to the Surplus Account. The actual Revenue received for a given day shall be intimated by MIAL by the immediately subsequent day for each given day, on the basis of which the amounts to be transferred into the AAI Fee Account will be calculated. For an illustration, after satisfaction of Statutory Dues, the annual fee of 16th December 2021 (from 00:00 hours to 23:59 hours) shall be paid (i.e. transferred to AAI Fee Account) by 17th December (or immediately next working day) based on the intimation of the amount of actual revenue received by MIAL on 17th December 2021 (or immediate next/subsequent working day). Thereafter, the entire balance amount in the Proceeds Account be transferred to the Surplus Account (after satisfaction of the Statutory Dues Account and after payment of Annual Fee to AAI as per the mechanism above) and the Claimant be allowed to disburse and utilize the same without restrictions in the utilization by the Claimant, in terms of the OMDA. The actual Revenue received shall be verified and reconciled by the Independent Auditor on a monthly basis (in addition to the Independent Auditor's existing duties in respect of verification, reconciliation and certification of Revenue etc. under Chapter XI of the OMDA), and the parties agree that any shortfall in payment of 38.7% of actual Revenue paid on receipt basis (as calculated by the Independent Auditor) shall be transferred to the AAI Fee Account with interest (at the rate of State Bank of India Prime Lending Rate plus 300 bps, upto the date such payment is made, similar to the rate specified in Article 11.1.2.3 (ii) of the OMDA), in respect of which Respondent No. 1 shall issue the necessary instructions to Respondent No.2. It is clarified that the above mechanism of daily sharing of revenue as per actual would be subject to the satisfaction of Statutory Dues, and would be triggered only thereafter."

20. Considering the serious challenge which stands raised to the validity of the award, this Court is of the view that the aforesaid interim arrangement should continue till the next date of listing.

Signature Not Verified Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05

21. Insofar as the appointment of an Independent Auditor undertaking the exercise for reworking the amount of Annual Fee which is liable to be refunded by AAI to MIAL in terms of the conclusions arrived at by the majority of the Arbitral Tribunal, the said exercise shall abide by the observations entered hereinabove and on terms identical to that provided for in the case of DIAL.

22. Accordingly, and for the aforesaid reasons, the Court provides as under.

23. For reasons aforenoted and in the interim it is provided that while the process to be undertaken by the Independent Auditor in terms of the majority award in respect of claim No.78(d) shall continue, its findings shall not be given effect to nor shall any refunds become payable in terms thereof till the final disposal of the present matter.

24. Insofar as payments for the future months are concerned and insofar as they relate to DIAL, undisputedly, the payments for the ensuing months would firstly fall on 07 March 2023. Since the Court proposes to finally hear these petitions and dispose them of prior to the said date, no additional interim orders may be framed at this stage. All liabilities of parties for the period prior to the present order shall continue as per the revenue sharing understanding which prevailed prior to the impugned award being rendered.

25. Turning to MIAL, the interim arrangement which presently holds the field in light of the interim order passed in the related arbitration, the same shall prevail till the next date of listing.

YASHWANT VARMA, J.

FEBRUARY 03, 2023/bh Signature Not Verified Digitally Signed By:NEHA Signing Date:06.02.2023 14:47:05

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Delhi High Court - Orders