Time and again courts in India have been criticised for interfering with the decisions of the Arbitral Tribunal and setting aside the award after dwelling on the merits of the case. In yet another case the hon'ble Supreme Court, in its decision in South East Asia Marine Engineering & Construction (hereinafter referred as "SEAMEC") Ltd. v. Oil India Ltd. (hereinafter referred as "OIL")1 set aside the award on the grounds of decision being perverse and against the wording & purpose of the contract. The article analyses the judgement and highlights the key takeaways for lawyers.
SEAMEC was awarded a work order by OIL for the purpose of carrying out drilling and other ancillary operations in Assam (hereinafter referred as "Contract"). The contract contained a 'change in law clause' (hereinafter referred as "Clause 23") which read as follows:
"Clause 23: Subsequently Enacted Laws: Subsequent to the date of price of Bid Opening if there is a change in or enactment of any law or interpretation of existing law, which results in additional cost/reduction in cost to Contractor on account of the operation under the Contract, the Company/Contractor shall reimburse/ pay Contractor/Company for such additional/reduced cost actually incurred." (emphasis supplied)
During the durateon of the contract, there was a hike in the cost of High-speed diesel (HSD), a material basic for the SEAMEC's drilling operations. An executive order brought the change in the price. SEAMEC asserted that the change in cost is due to the change in law and hence requested OIL to reimburse the same in view of clause 23 of the agreement. OIL refused this reimbursement stating that the order did not amount to change in law and hence, dispute arose between the parties.
Aggrieved, SEAMEC invoked arbitration against OIL in terms of the Contract.
The question to be decided by the Arbitral Tribunal was whether the circular issued under the authority of State or Union means Law in the literal sense. The Arbitral Tribunal held that the circular issued under the authority of the state or union is "change in law" because although it is not law in the literal sense it has the "force of law".
The Supreme Court affirmed the decision of the High Court which set aside the award. The reason given by the Hon'ble court was that the interpretation of the terms of contract by the Arbitral Tribunal is erroneous and against the wording and purpose of the contract. Applying the limited powers under Section 34 of the Arbitration and Conciliation Act 1996, the High Court held that it can interfere with an award if it has been made while overlooking the terms and conditions of the contract. The Supreme Court too, under the power granted to it by section 34, and relying on the decision of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.,2 held that the court will interfere with the award only if it is perverse and no other interpretation of the terms of the contract was possible.
It is to be borne in mind while interpreting this judgment that the proceedings to challenge the award under section 34 started before 2015 and hence, the pre-2015 amendment law will be applicable. Prior to the 2015 amendments, the law gave wider power to the court to interfere in the award on the grounds of patent illegality on account of impossibility of the interpretation provided to a contract. While deciding the question of maintainability the court relied on its earlier decision in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., where it observed that "awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation, which may sustain the arbitral award". From the aforementioned judgement we can conclude that although the Arbitral Tribunal has the power to interpret the terms and conditions of the contract, the interpretation has to be based on the cases decided by the hon'ble Supreme Court and after understanding the intention of the parties while incorporating such clauses in the agreement. The Arbitral Tribunal cannot interpret the terms of the contract in a manner such that it is essentially re-writing the terms of the agreement. The hon'ble court also held that the rule of thumb remains that rule of interpretation is that the document forming a written contract should be read as a whole and so far, as possible as mutually explanator. The court also agreed that usually it would not have had delved into the merits of interpretation were such an interpretation reasonably possible.
As the law of the land is made by the Parliament and interpreted by the lawyers and the judges, there cannot be a comprehensive list of what is reasonable and what is not. Further the reasonableness of a judge can differ from another based on the evidence and conditions presented before him. Therefore, it is interesting to note here that yet again the Hon'ble Court has retained its power to decide on when to interfere and dwell on the merits of an issue (as interpreted by the Arbitral Tribunal) relying solely on the sagacity of the hon'ble justices. In the present case, the Court justified its decision of interfering with the decision of the Arbitral Tribunal based on understanding the terms of the contract, the intention of the parties to bear the consequences of change in price and overreaching liberal interpretation of the terms of the Contract by the Arbitral Tribunal.
A key takeaway for clients, legal practitioners and the readers in general is that change in law will include only actual and unexpected change in law. The change in law must be a material change and mere price fluctuations even due to the executive orders of the state may not be considered as change in law. Such price fluctuations are a business risk which the contractor undertakes in a fixed price contract. Thus, it can be said that yet again the Hon'ble Court has reaffirmed that contracts made to be executed by the contractor at fixed prices need to be fulfilled and the contractor cannot escape the business losses or additional expenses on vague grounds of changes in price. It would not be fair to call this judgement as against the ethos of arbitration practices but in fact, concludes that the Court has re-stated its stand that the contractor will not be allowed to relinquish business losses based on ingenious interpretations of the contract.
Also it is noteworthy here that SEAMEC relying upon the decision of McDermott International Inc v Burn Standard Co Ltd.3 raised the contention that where two interpretations of a contract are possible, the court should not interfere with the award. However, the Hon'ble Court held that this is not a case of two interpretations but a case of perversity and unreasonableness. Thus, a takeaway for legal practitioners is that when an award is challenged, to strengthen its maintainability (awards for which the section 34 proceeding started before 2015) the legal practitioner can use the ground of perversity and unreasonableness for explaining a faulty interpretation of the contract rather than the contention of possibility of multiple interpretations existing, as the same gives wider power of review to the courts.
1 Civil Appeal No. 673 of 2012 (decided on 11 May 2020).
2 2019 SCC Online SC 1656
3 (2006) 11 SCC 181
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.