Supreme Court

South East Asia Marine Engineering and Constructions Ltd. Vs. Oil India Limited

MANU/SC/0441/2020

11.05.2020

Arbitration

A Court cannot interfere in the plausible view taken by the arbitrator which is supported by reasoning

In facts of present case, Appellant was awarded the work order dated 20th July, 1995 pursuant to a tender floated by the Respondent in 1994. The contract agreement was for the purpose of well drilling and other auxiliary operations in Assam. Although, the contract was initially only for a period of two years, the same was extended for two successive periods of one year each by mutual agreement, and finally the contract expired on 4th 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. Appellant raised a claim that increase in the price of HSD, an essential component for carrying out the contract triggered the "change in law" Clause under the contract (i.e., Clause 23) and the Respondent became liable to reimburse them for the same. When the Respondent kept on rejecting the claim, the Appellant eventually invoked the arbitration Clause vide letter. The dispute was referred to an Arbitral Tribunal.

The Arbitral Tribunal issued the award. The majority opinion allowed the claim of the Appellant. The Arbitral Tribunal held that while an increase in HSD price through a circular issued under the authority of State or Union is not a "law" in the literal sense, but has the "force of law" and thus falls within the ambit of Clause 23. On the other hand, the minority held that, the executive orders do not come within the ambit of Clause 23 of the Contract.

Aggrieved by the award, the Respondent challenged the same under Section 34 of the Arbitration And Conciliation Act, 1996 (Arbitration Act) before the District Judge. The learned District Judge, upheld the award. The Respondent challenged the order of the District Judge by filing an appeal under Section 37 of the Arbitration Act, before the High Court. By the impugned judgment, 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 is erroneous and is against the public policy of India. On the scope of judicial review under Section 37 of the Arbitration Act, the High Court held that the Court had the power to set aside the award as it was passed overlooking the terms and conditions of the contract. Aggrieved by the same, the Appellant has filed this present appeal. The question in the present case is whether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passes the muster under Section 34 of the Arbitration Act.

It is a settled position that, a Court can set aside the award only on the grounds as provided in the Arbitration Act as interpreted by the Courts. It is also settled law that where two views are possible, the Court cannot interfere in the plausible view taken by the arbitrator supported by reasoning.

The High Court, in its reasoning, suggests that Clause 23 is akin to a force majeure clause. Under Indian contract law, the consequences of a force majeure event are provided for under Section 56 of the Contract Act, which states that on the occurrence of an event which renders the performance impossible, the contract becomes void thereafter.

The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co., held that when the parties have not provided for what would take place, when an event which renders the performance of the contract impossible, then Section 56 of the Contract Act applies. When the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the contract becomes void.

Under Indian contract law, the effect of the doctrine of frustration is that it discharges all the parties from future obligations. 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. The interpretation of Clause 23 of the Contract by the Arbitral Tribunal, to provide a wide interpretation cannot be accepted, as the thumb Rule of interpretation is that the document forming a written contract should be read as a whole and so far as possible as mutually explanatory. In the case at hand, this basic Rule was ignored by the Tribunal while interpreting the clause.

It can be said that the contract was based on a fixed rate. The party, before entering the tender process, entered the contract after mitigating the risk of such an increase. There is no gainsaying that there will be price fluctuations which a prudent contractor would have taken into margin, while bidding in the tender. Such price fluctuations cannot be brought under Clause 23 unless specific language points to the inclusion.

The interpretation of the Arbitral Tribunal to expand the meaning of Clause 23 to include change in rate of HSD is not a possible interpretation of this contract, as the Appellant did not introduce any evidence which proves the same. Present Court is not inclined to interfere with the impugned judgment and order of the High Court setting aside the award. The appeal is accordingly dismissed.

Tags : Award Quashing of Legality

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