Time and again, the Hon’ble Supreme Court (“Court”) had maintained the standard that the ambit of Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) is narrow and thus Court cannot sit as a court of appeal while checking the sanctity of the award. In the recent case of South East Asia Marine Engineering And Constructions Ltd. (SEAMEC Ltd.) vs Oil India Limited [1], Hon’ble Court, presided over by a three-Judge bench, set aside an arbitral award on the ground that the rule applied by the arbitral tribunal for interpretation of the contract was incorrect. 

Brief Facts

SEAMEC Ltd. (“Appellant”) was awarded the work order dated 20.07.1995 pursuant to a tender floated by the Oil India Ltd. (“Respondent”) in 1994. The contract agreement was for the purpose of well drilling and other auxiliary operations in Assam, and the same was effectuated from 05.06.1996. 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 by Government Order. Appellant raised a claim that an increase in the price of HSD, triggered the “change in law” clause under the contract (i.e., Clause 23) and the Respondent became liable to reimburse them for the same. Clause 23 of the contract is reproduced hereinbelow 

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.

The dispute was referred to an Arbitral Tribunal comprising of three arbitrators.

Arbitral Award

The majority opinion of the arbitral tribunal allowed the claim of the Appellant and awarded a sum of Rs. 98,89,564.33 with interest @10%. 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. 

Aggrieved by the award, the Respondent challenged the same under Section 34 of the Act before the District Judge. On 04.07.2006, the learned District Judge, upheld the award and 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. 

High Court 

Respondent challenged the Order of District Judge before Hon’ble Guwahati High Court and it was 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 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.

Issue

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 Arbitration Act? 

Arguments Advanced

Appellant argued that the High Court has imparted its own personal view as to the intent for inclusion of Clause 23 and has sat in appeal over the award of the Arbitral Tribunal. The question of law decided by the Arbitral Tribunal is beyond judicial review and thus the High Court could not have interfered with a reasoned award which was neither against public policy of India nor patently illegal. Respondent, on the other side, argued that the award passed by the Arbitral Tribunal is contrary to the terms of the contract and essentially re-writes the contract. 

Supreme Court Ruling

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. Further, the Court observed that 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. Therefore, Court is of the view that if the purpose of the tender was to limit the risks of price variations, then the interpretation done by the Arbitral Tribunal cannot be said to be possible one, as it would completely defeat the explicit wordings and purpose of the contract. Thus, the Court upheld the order of High Court while setting aside the arbitral award.

Analysis

Hon’ble Supreme Court in the case of Associate Builders Vs. Delhi Development Authority [2] held that it must clearly be understood that when a court is applying the “public policy” test to an arbitration award, it does not act as a court of appeal. Court further held that a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score.

It is pertinent to note that in the instant case, the Court held that there is no evidence to suggest that the parties intended for the broad interpretation of clause 23 of the Contract despite of the undisputed factual position that Respondent was well aware that the oil prices are usually changed by the Government Order and not by any statutory obligation and therefore would fall within clause 23 of the contract. Thus, the said reasoning and reliance on the purported non-availability of the evidence is contrary to the ratio of the judgment of Associate Builders (supra). 

It is settled law that a particular arbitral award can be set aside on the ground of ‘public policy’ would depend on factors such as a) disregarding orders of superior courts; b) lack of judicial approach, or an arbitrary approach; c) lack of application of principles of natural justice; d) a decision is so perverse or so irrational that no reasonable person would have arrived at the same conclusion. Thus, Court failed to test the award on the aforesaid judicially developed contours.

In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran,[3] the Hon’ble Supreme Court held that, if a clause was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of the contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.

In the instant case, the Court held that broad interpretation of the clause 23 of the Contract is not the possible interpretation as it would defeat the purpose of the contract.  It is apposite to note that said reasoning does not specify whether narrow or broad interpretation would invite the Courts intervention to set aside the arbitral award. Moreover, interpretation of contract, irrespective of narrow or broad, would not itself entail the triggering of violation of public policy or perversity of award.

It is also imperative to note that Court did not categorically specified under which ground of Section 34 of the Act, the impugned award is set aside as Court merely set aside an arbitral award on the pretext that broad interpretation of the clause 23 is not possible one, thus judgment suffers from the legal infirmity.

Conclusion

Court through the said judgment uprooted the settled position of law that interpretation of the contract is the task of the arbitrator and cannot interfere unless suffers from grave perversity which goes to the root of the matter. The consequence of the said judgment would be that Section 34 would now be susceptible to misuse by the parties, as the issue involved in the instant case regarding interpretation of the contract, is a common issue in most of the contractual matters of arbitration and therefore would broaden the ambit of Section 34 of the Act which is not intended by the Legislature. This will further prolong the dispute under Section 34 of the Act and the parties will unnecessarily drag the arbitral award to the appellate court on the sole ground of interpretation of the contract, thereby diluting the sanctity of the arbitral tribunal.

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Abhinav Mathur is a Senior Associate (Litigation team) at Chir Amrit Legal LLP, Jaipur. Abhinav’s key areas of interest are Commercial Litigation and Arbitration.

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  1. Civil Appeal No. 673 of 2012 decided on 11.5.2020
  2. AIR 2015 SC 620
  3. 2012 5 SCC 306
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