It is settled law that courts should not interfere with awards merely because an alternative view on the facts or interpretation of the contracts exists. The Supreme Court of India (Supreme Court) has consistently held that courts should not interfere with the view taken by an arbitral tribunal, unless an award portrays perversity unpardonable under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).
Recently, a three-judge bench of the Supreme Court in South East Asia Marine Engineering and Constructions Ltd. (Seamec Ltd.) v. Oil India Limited1 has set aside an arbitral award on the ground that the interpretation adopted by the arbitral tribunal was not a possible interpretation of the contract and therefore, did not pass the muster under Section 34 of the Arbitration Act.
FACTUAL BACKGROUND
The appellant was awarded a work order dated 20 July 1995, pursuant to a tender floated by the respondent. The contract agreement was effectuated from 05 June 1996, for the purpose of well drilling and other auxiliary operations in Assam. Although the contract was initially executed for a period of 2 (two) years, the same was extended for 2 (two) successful periods of 1 (one) year each by mutual agreement. The contract finally expired on 04 October 2000.
During the subsistence of the contract, the prices of high-speed diesel (HSD), one of the essential materials for carrying out the drilling operations, increased. The appellant claimed that the increase in the price of HSD triggered clause 23 of the contract, i.e. the "change in law" clause and requested the respondent to reimburse the appellant for the said increase in the price of HSD. However, the respondent repeatedly rejected the claim of the appellant.
The appellant eventually invoked the arbitration clause on 01 March 1999. The dispute was referred to an arbitral tribunal comprising of 3 (three) arbitrators. By way of the arbitral award dated 19 December 2003, the claim of the appellant was allowed by a majority of the arbitral tribunal. The appellant was awarded an amount of INR 98,89,564.33 (Rupees ninety-eight lakhs eighty-nine thousand five hundred and sixty-four and thirty-three paise) along with interest at the rate of 10% (ten percent) per annum from the date of the award till the recovery of the award money. The said amount of the award was subsequently revised to INR 1,32,32,126.36 (Rupees one crore thirty-two lakhs thirty-two thousand one hundred and twenty-six and thirty-six paise) on 11 March 2005.
The majority of the arbitral tribunal held that even though an increase in the price of the HSD through a circular issued under the authority of the State or the Union of India was not "law" in a literal sense, however, it had the force of law and therefore, the same would fall within the ambit of clause 23 of the contract. On the other hand, the dissenting arbitrator was of the opinion that executive orders did not fall within the ambit of clause 23 of the contract.
Aggrieved by the award, the respondent challenged the same before the district court under Section 34 of the Arbitration Act. The district court, by way of its order dated 04 July 2006, upheld the award and held that the said award did not warrant judicial intervention as the findings of the arbitral tribunal were neither without basis nor against the public policy of India.
The respondent challenged the order of the district court before the Gauhati High Court (High Court) by way of an appeal under Section 37 of the Arbitration Act. The High Court allowed the appeal and set aside the award passed by the arbitral tribunal. The High Court held that the interpretation of the terms of the contract by the arbitral tribunal was erroneous and against the public policy of India. As regards the scope of judicial review under Section 37 of the Arbitration Act, the High Court held that it had the power to set aside the award in view of the fact that the award overlooked the terms and conditions of the contract. Aggrieved by the said order of the High Court, the appellant approached the Supreme Court.
FINDINGS OF THE SUPREME COURT
At the outset, the Supreme Court delved into the ambit and scope of a court's jurisdiction under Section 34 of the Arbitration Act. The Supreme Court held that it is a settled position that a court can set aside an award only on the grounds provided in the Arbitration Act. Reliance was placed on the decision in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.2 , wherein it had been held that arbitral 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.
The Supreme Court further held that where 2 (two) views are possible, the court cannot interfere in the plausible view taken by the arbitrator. However, the question in the present case was whether the interpretation provided to the contract in the award was reasonable and fair, so as to pass the muster provided in Section 34 of the Arbitration Act.
It was noted that the arbitral award adopted the rule of liberal interpretation to construe the contract, so that the price escalation of HSD could be brought under clause 23 of the contract. The arbitral tribunal identified the said clause to be a 'habendum clause', wherein the rights granted to the appellant were required to be construed broadly.
However, the High Court, had taken the view that clause 23 was inserted in the contract to meet uncertain and unforeseen eventualities and not for revising a fixed rate of contract. The High Court in its reasoning had further held that the parties had agreed to a force majeure clause, which was akin to clause 23. Based on the said suggestion of the High Court, the Supreme Court examined the utility and the implications of a force majeure clause.
The Supreme Court held that under Indian contract law, the consequences of a force majeure event are provided for under Section 56 of the Indian Contract Act, 1872 (Contract Act), which states that the occurrence of an event which renders the performance of a contract impossible, renders the contract void. It was clarified that when an agreement does not contemplate the consequence of the occurrence of a force majeure event, Section 56 of the Contract Act applies. In this regard, reliance was placed on the decision in Satyabrata Ghose v. Mugneeram Bangur & Co.3 The Supreme Court further held that parties may also choose the consequences that would flow on the happening of an uncertain future event, in terms of Section 32 of the Contract Act.
The Supreme Court held that in India, the Contract Act recognizes the harsh consequences of frustration of a contract to some extent and had provided for a limited mechanism to ameliorate the same under Section 65 of the Contract Act, which imposes the obligation of restitution on the person who received advantage under the void agreement or the contract that become void.
It was noted that in the present case, the contract explicitly recognized force majeure events to include "systems and acts and regulations of the Government of India". Apart from this, the Supreme Court took note of the fact that under clause 22.23 of the contract, the parties had agreed for a payment of force majeure rate to tide over any force majeure event, which was temporary in nature.
The Supreme Court stated that it did not agree with the reasoning of the High Court, whereby it held that clause 23 was inserted in furtherance of the doctrine of frustration. It was held that under the Contract Act, the effect of doctrine of frustration is that it discharges all the parties from future obligations. Therefore, in order to mitigate the harsh consequences of frustration and to uphold the sanctity of the contract, the parties with their commercial wisdom chose to mitigate the risk under clause 23 of the contract.
With regard to the finding of the arbitral tribunal, the Supreme Court held that it did not agree with the reasoning given in the awards. The Supreme Court took the view that although the arbitral tribunal had correctly held that a contract needs to be interpreted taking into consideration all the clauses of the contract, it failed apply the same while interpreting clause 23 of the contract. It was held that the wide interpretation of clause 23 of the contract, adopted by the arbitral tribunal could not be accepted since the thumb rule of interpretation is that a document forming a written contract should be read as whole and as mutually explanatory. The Supreme Court came to the conclusion that this basic rule of interpretation had been ignored by arbitral tribunal while interpreting clause 23 of the contract.
The Supreme Court went on to observe that contract in question was entered into between the parties on basis of a fixed rate and the appellant entered into the contract after mitigating the risk of an increase in the price of HSD. It was held that any prudent contractor would have taken into margin, price fluctuations while submitting its bid for a tender and therefore, such price fluctuations cannot be brought under clause 23, unless specific language pointed to the inclusion.
The Supreme Court held that the interpretation of the arbitral tribunal to expand the meaning of clause 23 to include change in the rate of HSD, was not a possible interpretation of the contract as the appellant did not introduce any evidence which provided the same. It was further held that other contractual terms also suggested that the interpretation of clause 23 as suggested by the arbitral tribunal was perverse. Accordingly, the Supreme Court did not interfere with the order passed by the High Court and the appeal was dismissed.
CONCLUSION
In the present case, the Supreme Court has examined the merits of the interpretation of the contractual provisions adopted by the arbitral tribunal, so as to determine whether the award passed the muster provided in Section 34 of the Arbitration Act. In doing so, the Supreme Court came to the conclusion that the basic principles of interpretation had been ignored by the arbitral tribunal. It does appear that the Supreme Court has set aside the arbitral award by reinterpreting the contractual provisions and has set aside the interpretation of the arbitral tribunal.
Footnotes
1 Civil appeal number 673 of 2012 along with civil appeal number 900 of 2012; 2020 SCC OnLine SC 451 Decided on 11 May 2020
2 2019 SCC OnLine SC 1656
3 AIR 1954 SC 44
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.
