In a number of judgements passed by the Hon’ble Supreme Court and various High Courts they have refused to interfere with an Arbitral Award unless it shocks the conscience of the court. An arbitral award would be against justice and morality if it shocks the conscience of the Court. Or when a decision is perverse, based on no evidence or ignores vital evidence in arriving at the decision. That has been the standard set adopted by the Supreme Court for interfering with arbitral awards.
It has been held that even if there is a plausible explanation to the Arbitration Award, the same would be upheld.
The scope under Section 34 and 37 of the Arbitration Act, 1996 is very limited and are summary in nature. The scope of enquiry in any proceedings under Section 34 of the Act has been limited to consider whether any of the grounds mentioned in Section 34(2) or Section 13(5) or Section 16(6) are made out to set aside the award, the grounds for which are specific. In a recent decision passed by the Hon’ble Supreme Court in Canara Nidhi Ltd Vs M Shashikala , it was held that under Section 34 of the Act, cases should be decided only with reference to pleadings and evidence adduced before the arbitral tribunal and the superior court cannot enter into fresh evidence.
South East Asia Marine Engineering & Construction (SEAMEC) Ltd. v. Oil India Ltd. (“OIL”) is yet another instance when the Supreme Court intervened and set aside an award, although it was conscious of the limited scope of review and also cautioned that domestic awards should not be interfered with in a casual and cavalier manner under Section 34 of the Arbitration & Conciliation Act, 1996 (the ‘A&C Act’). Interference was justified only where some perversity of the award went to the root of the matter and no possible alternative interpretation was available that could sustain the award.
In SEAMEC, the Supreme Court agreed with the Guwahati High Court, which (in an appeal against a judgment upholding the award) had set aside the award as it was passed overlooking the terms and conditions of the contract. While doing so, the Court weighed into detailed provisions of the relevant contract, ruling that its interpretation by the Arbitral Tribunal was simply not a possible one.
OIL awarded a contract (effective from June 5, 1996) to SEAMEC for drilling oil wells and auxiliary operations (the “Contract”). During its subsistence, the price of High-Speed Diesel (“HSD”), an essential material for carrying out drilling operations, increased, and SEAMEC raised a claim on OIL for reimbursement of the excess cost. SEAMEC contended that the increase in HSD price, by virtue of a circular issued by the Ministry of Petroleum & Natural Gas, Government of India, triggered the ‘change in law’ clause under the Contract, such that the additional cost to SEAMEC must be reimbursed by OIL. OIL rejected the claim, leading to disputes and an arbitration between the parties.
The relevant Clause 23 is reproduced below:
“Subsequent to the date of price of Bid Opening, if there is a change 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.”
The Award as passed by the Arbitral Tribunal:
The arbitral tribunal, through a majority award, held that an increase in HSD price by virtue of the Ministry’s circular was not a ‘law’ in the literal sense, but on a liberal and harmonious construction of the Contract, the circular had the ‘force of law’. It thus amounted to a ‘change in law’, that fell within the ambit of Clause 23 and accordingly, OIL was liable to reimburse to SEAMEC, the additional costs incurred. On the other hand, the minority differed and held that the circular was an executive order, which would not amount to ‘law’ and accordingly, SEAMEC was not entitled to reimbursement.
The District court ruling:
The District Court upheld the Award and noted that it did not warrant judicial interference as there is no perversity in the award or and the scope of interference in a section 34 petition is very narrow. It further held that the findings of the tribunal were not without basis or against the public policy of India or patently illegal and did not warrant judicial interference.
On the other hand, in an appeal (under Section 37 of A&C Act), the High Court set aside the Award, on the basis that it was passed overlooking the terms and conditions of the contract and therefore erroneous and contrary to the public policy of India. Surprisingly, the Court added additional grounds to the reasoning of the arbitral tribunal, interpreting Clause 23 as being akin to a force majeure provision. Going further, it also declared that it was pari materia to the “doctrine of frustration and supervening impossibility”, which would apply to Clause 23. The matter was then taken up to the Hon’ble Supreme Court.
Issues for consideration before the Supreme Court
The main grounds of challenge before the Supreme Court were:
a) that interpretation of contractual terms falls within the domain of the arbitral tribunal to decide and the High Court is conferred with only a supervisory role which cannot impart its own view;
b) as there exists no patent illegality in the award, the questions of law decided by the arbitral tribunal were beyond the judicial review of the High Court under Section 34 of the
The key issue before the Supreme Court was the scope and ambit of the
Court’s jurisdiction to scrutinize the award on matters of interpretation.
The Supreme Court referred to and relied upon its earlier judgment in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Limited wherein it was held that if there are two plausible interpretations on fact and terms of contract, the court should defer to the view taken by the arbitral tribunal, unless such view portrays perversity which is ‘unpardonable’.
In light of the judgment in Dyna Technologies (supra), the Supreme Court set out to determine “Whether the interpretation provided to the contract in the award of the tribunal was reasonable and fair, so that the same passes muster under Section 34 of the Act?”
Supreme Court held:
The Supreme Court delved into the reasons offered by both the arbitral tribunal and the High Court. It did not subscribe to either and offered its own reasoning to uphold the setting aside of the award.
The Supreme Court observed that the interpretation of Clause 23 by the arbitral tribunal is contrary to the thumb rule of interpretation of contract i.e., a written contract should be read as a whole and so far as possible as mutually explanatory.
On examining the terms of the Letter of Intent and other clauses of the contract, the Court reached the conclusion that as the contract was based on a fixed price, the appellant had taken into account the risk of price variations before entering the tender process. Therefore, the purpose of the tender being to mitigate the risk of price variations, the interpretation of the arbitral tribunal that change in price of HSD is akin to change in law cannot be said to be a possible interpretation of Clause 23.
The Court also observed that the provision of change in law in Clause 23 cannot be stretched so far so as to include price fluctuations, which if intended by the parties, would have been specifically included in the contract.
The Supreme Court also laid emphasis on certain terms of the contract which specifically provided that
a) rates, terms and conditions under the contract were to continue in force until the completion and abandonment of the contract;
b) ‘Consolidated Statement of Equipment and Services furnished by the Contractor’ which specified that fuel was to be supplied by the contractor at his expense.
Such clauses, the Court observed, clearly indicated that the prices stipulated in the contract were not open for modification and the interpretation of Clause 23 given by the arbitral tribunal was not possible. Hence, it was well within the scope of Section 34 of the Act to set aside the award.
It is settled law that matters of construction of contract primarily fall within the domain of the arbitrator and an error in interpretation does not warrant interference with the award, as elucidated in various judgements in Associate Builders vs. Delhi Development Authority and McDermott International Inc. vs. Burn Standard Co. Ltd..
The SEAMEC judgment does not deviate from that settled position, however itis an example where the Court, as a matter of exception, intervenes when the error of interpretation in the award is unpardonable and perverse on the face of it.