1. Contract for drilling operations — Dispute over reimbursement for increased fuel prices under a change in law clause — Challenge to arbitral award under Arbitration Act. (Para 1 , 2 , 3 , 4 )
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2020 Supreme(SC) 370
SUPREME COURT OF INDIA
N.V. RAMANA, MOHAN M. SHANTANAGOUDAR, AJAY RASTOGI, JJ.
SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. (SEAMEC LTD.) – APPELLANT
VERSUS
OIL INDIA LIMITED – RESPONDENT
CIVIL APPEAL NO. 673 OF 2012
With
OIL INDIA LIMITED – APPELLANT
VERSUS
SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. (SEAMEC LTD.) – RESPONDENT
CIVIL APPEAL NO. 900 OF 2012
Decided on : 11-05-2020
Advocates Appeared:
For the Appellant :Manish Singhvi, Abhinav Raghuvanshi, D.K. Devesh Advocates
For the Respondent:K. R. Sasiprabhu, Advocate
For the Appellant :Manish Singhvi, Abhinav Raghuvanshi, D.K. Devesh Advocates
For the Respondent:K. R. Sasiprabhu, Advocate
IMPORTANT POINTS
(1) Court can set aside award only on grounds as provided in Arbitration Act as interpreted by Courts.
(2) When act contracted for becomes impossible, then parties are exempted from further performance and contract becomes void.
Headnote:
(A) Arbitration and Conciliation Act, 1996 – Sections 34 and 37 – Appeal against arbitral award – Reversal of award passed by Arbitral Tribunal – Court can set aside award only on grounds as provided in Arbitration Act as interpreted by Courts – Where two views are possible, Court cannot interfere in plausible view taken by Arbitrator supported by reasoning – In present case, contract was based on a fixed rate – Party, before entering tender process, entered contract after mitigating risk of such an increase – If purpose of tender was to limit risks of price variations, then interpretation placed by Arbitral Tribunal cannot be said to be possible one, as it would completely defeat explicit wordings and purpose of contract – There will be price fluctuations which a prudent contractor would have taken into margin, while bidding in tender – Such price fluctuations cannot be brought under Clause 23 unless specific language points to inclusion-Interpretation of Arbitral Tribunal to expand meaning of Clause 23 to include change in rate of HSD is not a possible interpretation of this contract, as appellant did not introduce any evidence which proves the same – Court not inclined to interfere with impugned judgment and order of High Court setting aside award – Appeal dismissed. (Paras 12, 13, 30, 31 and 33)
(B) Contract Act, 1872 – Section 56 – Utility and implications of a force majeure clause – When parties have not provided for what would take place when an event which renders performance of contract impossible, then Section 56 of Contract Act applies – When act contracted for becomes impossible, then under Section 56, parties are exempted from further performance and contract becomes void – Parties may instead choose consequences that would flow on happening of an uncertain future event, under Section 32 of Contract Act. (Paras 19 and 20)
Facts of the Case:
Present appeal arises out of impugned judgment and order dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed by the Gauhati High Court, wherein the High Court allowed the appeal preferred by the Respondent under Section 37 of Arbitration and Conciliation Act, 1996 and set aside the arbitral award dated 19.12.2003
Findings of the Court:
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.
Result : Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether the arbitral award was a plausible interpretation of the contract or a perverse rewriting of terms contrary to public policy and the Arbitration Act. (Para 8 , 9 )
3. The court analyzed the scope of judicial review under Section 34 and determined that interpreting a fixed-rate contract to include price fluctuations is not a plausible view. (Para 11 , 12 , 13 , 14 , 15 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 32 )
4. In fixed-rate contracts, a change in law clause cannot be expanded to cover price fluctuations of consumables without specific language, as it defeats the contract's purpose. (Para 30 , 31 , 32 )
5. Appeal dismissed — Impugned judgment and order of the High Court setting aside the arbitral award upheld. (Para 33 , 34 )
6. What is the scope of judicial interference with an arbitral award under Section 34 of the Arbitration Act?
Courts should not interfere in a casual manner unless the award is perverse to the root of the matter. If two plausible views are possible on facts or contract interpretation, the court must defer to the Arbitral Tribunal's reasoned view. (Para 12 , 13 )
7. Can a change in law clause be interpreted to include price fluctuations of essential materials in a fixed-rate contract?
No, unless specific language points to such inclusion. In a fixed-rate contract where the contractor bears the expense of consumables, expanding a change in law clause to cover price fluctuations would defeat the contract's purpose and the risk-mitigation intent of the tender process. (Para 28 , 29 , 30 , 31 , 32 )
8. Is a change in law clause equivalent to a force majeure clause or the doctrine of frustration under Section 56 of the Contract Act?
No. While force majeure or frustration under Section 56 typically discharges parties from future obligations when performance becomes impossible, a change in law clause is a commercial tool used by parties to mitigate specific risks without terminating the contract. (Para 18 , 19 , 20 , 26 )
JUDGMENT
N. V. Ramana, J.
Civil Appeal No. 673 of 2012
1. The present appeal arises out of impugned judgment and order dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed by the Gauhati High Court, wherein the High Court allowed the appeal preferred by the Respondent under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter the "Arbitration Act"), and set aside the arbitral award dated 19.12.2003.
2. Brief facts necessary for the disposal of this case are as follows: appellant was awarded the work order dated 20.07.1995 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, and the same was effectuated from 05.06.1996. 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 04.10.2000.
3. 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 dated 01.03.1999. The dispute was referred to an Arbitral Tribunal comprising of three arbitrators.
4. On 19.12.2003, the Arbitral Tribunal issued the award in A.P No. 8 of 1999. The majority opinion allowed the claim of the Appellant and awarded a sum of Rs. 98,89,564.33 with interest @10% per annum from the date of the award till the recovery of award money. The amount was subsequently revised to Rs. 1,32,32,126.36 on 11.03.2005. 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.
5. Aggrieved by the award, the Respondent challenged the same under Section 34 of the Arbitration 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.
6. 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.
7. 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 by the way of special leave petition against the impugned judgment.
8. Learned Counsel for the Appellant assailing the impugned order contends that
a. 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 construction of Clause 23, he submitted, is a matter of interpretation and has been correctly interpreted by the Arbitral Tribunal based on the authorities cited before it.
b. If two views are possible on a question of law, the High Court cannot substitute one view and deference should be given to the plausible view of the Arbitral Tribunal. Lea
