[This guest post is authored by Saurish Shetye. Saurish is an advocate practicing at the Bombay High Court. He can be reached at saurish.shetye@gmail.com]

SEAMEC v. OIL: Supreme Court on Power to Examine the Plausibility of Arbitral Tribunal’s Interpretation of Contract

In its recent decision, dated 11 May 2020, the Supreme Court in South East Asia Marine Engineering and Constructions Ltd. (SEAMEC) vs. Oil India Limited (OIL) [1] has set aside an arbitral award on grounds that the tribunal’s interpretation of the underlying contract was implausible and, therefore, is against the public policy of India.

Factual background

SEAMEC was awarded a work order by OIL for the purpose of carrying out drilling and other ancillary operations in Assam (Contract). The Contract contained a ‘change in law clause’ (“Clause 23”) which read as follows:

“23. 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.” (emphasis supplied)

During the subsistence of the Contract, there was an increase in the price of high-speed diesel (HSD) – a material essential for the SEAMEC’s drilling operations. The price change was caused by a circular issued by a governmental authority (Executive Order).

SEAMEC claimed that an increase in price of the HSD was caused by a ‘change in the existing law’ within the meaning of Clause 23 and, as such, called upon OIL to reimburse the increased amount. OIL refused; claiming that the effect of an Executive Order cannot be termed as a change or enactment of ‘law’.

Aggrieved, SEAMEC invoked arbitration against OIL in terms of the Contract.

The Award

The arbitral tribunal allowed SEAMEC’s claim. It was held that even though an increase in price of the HSD by way of a circular is not ‘law’ but it has the ‘force of law’. It was held that the Executive Order could therefore trigger the provisions of Clause 23. While arriving at its decision, the arbitral tribunal applied the principles of harmonious interpretation.

In order to interpret to the scope of Clause 23, it was observed that the entire Contract must be looked at; and exclusion must not be readily inferred unless it is clearly stated. On a liberal construction of the Contract, the arbitral tribunal held that the expressions ‘law’ or ‘change in law’ in Clause 23 meant to include escalation of price of HSD caused by the Executive Order. Clause 23 was therefore identified as a ‘Habendum Clause’.

Challenge to the award

When the award was challenged under Section 34 of the Arbitration and Conciliation Act 1996 (Arbitration Act), the District Judge found that the tribunal’s findings were not against the public policy of India. The award did not suffer from a patent illegality and, as such, did not warrant judicial interference. The award was thus upheld. However, OIL challenged the District Court’s decision before the High Court under Section 37 of the Arbitration Act.

In appeal, the High Court observed that the arbitral tribunal had overlooked the terms of the contract and incorrectly interpreted its terms. It was further observed that Clause 23 was akin to a ‘force majeure’ clause and must have been included in the contract keeping in mind Section 56 of the Indian Contract Act, 1872 (Contract Act). Interestingly, the High Court made this observation despite the fact that ‘force majeure events’ were explicitly recognised under a separate clause of the Contract.

It was found that the interpretation of the terms of the Contract by the Arbitral Tribunal is erroneous and is against the public policy of India. Accordingly, the High Court reversed the District Court’s decision and set aside the arbitral award. SEAMEC challenged the High Court’s decision before the Supreme Court.

Supreme Court’s decision

OIL argued that the arbitral award does not consider the contract as a whole; and thus failing to follow the cardinal principle of interpretation of contract. It was also submitted that the tribunal’s interpretation of Clause 23  was in conflict with the terms of the contract; thereby making the arbitral award contrary to the public policy of India.

The Supreme Court disagreed with not only the view taken by the Arbitral Tribunal, but also that of the High Court.

While the Supreme Court agreed with the tribunal’s decision to undertake a harmonious interpretation of the Contract, it was observed that the Tribunal failed in its endeavour to apply the same standard while interpreting Clause 23. As per the Contract, the contract price was payable to the ‘contractor’ (ie SEAMEC) for full and proper performance of its contractual obligations. The rates, terms and conditions of the said contract were to be in force until the completion or abandonment of the last drilling operation.

On this basis, the Supreme Court inferred that the contract contemplated a fixed rate for SEAMEC. The Supreme Court also noted that other terms of the Contract require that all fuel would be supplied by the ‘contractor’ at its own cost. There was no specific language in the Contract to indicate that change in price amounted to change in law. Further, SEAMEC failed to lead adequate evidence to prove that Clause 23 was meant to have an expansive meaning to bring within its ambit change in rate of HSD. Accordingly, the Supreme Court held that price fluctuations were beyond the scope of Clause 23. SEAMEC would not be entitled to any reimbursement for the price increase in HSD.

The Supreme Court also rejected the High Court’s view that Clause 23 was similar to a force majeure clause or that it attracted Section 56 of the Contract Act. Rather, it was observed that under the Indian contract law, doctrine of frustration discharges parties from all future obligations. This could not have been the parties’ intent for including Clause 23. Rather, Clause 23 was meant to mitigate the risk of harsh consequences of frustration and to uphold the sanctity of the contract.

In a recent decision, the Supreme Court had observed in Dyna Technologies Pvt. Ltd. v Crompton Greaves Ltd.[2] (Dyna) that courts should not interfere with arbitral awards merely because an alternative view exists; unless the award portrays a perversity defer to the view taken by the arbitral tribunal even if the reasoning provided in the award is implied unless such award portrays a perversity that is ‘unpardonable’ under Section 34 of the Act.

The Supreme Court relied on Dyna to further clarify that where two views are possible, the Court cannot interfere in the plausible view taken by the arbitrator supported by reasoning. Such reasoning may be implied. That said, on a conspectus of the award in SEAMEC, the Supreme Court found that the arbitral tribunal’s interpretation of Clause 23 was not even a possible one.

Particularly, the tribunal’s decision to accord a wide interpretation of Clause 23 was not accepted since, in the court’s view, the thumb rule of interpretation is that the contract must be read as a whole and mutually explanatory to the extent possible. It was found that the tribunal had ignored this basic rule in interpreting Clause 23. Having assessed the other terms of the Contract, the Supreme Court opined the Contract was in fact based on a fixed price. It was therefore held that the tribunal’s expansion of Clause 23 to include a price change in HSD could not have been a possible interpretation since SEAMEC did not adduce any evidence to prove this.

Ultimately, whilst disagreeing with its reasoning, the Supreme Court refused to interfere with the High Court’s decision to set aside the arbitral award.

Comment

In my opinion, the arbitral tribunal’s view was erroneous as it defeated the purpose and intent of the rule of harmonious interpretation. A court or tribunal must strive to harmoniously interpret the terms of a contract to advance the intention of the parties. It is settled law that intention of the parties can be gathered from the terms of the contract. However, in the present case, the arbitral tribunal ignored those terms of the said contract which clearly indicated that change in price of the fuel would not accrue any additional entitlement to the affected party. Hence, the arbitral tribunal’s interpretation of Clause 23 rendered otiose several other provisions of the Contract.

While the High Court rightly set aside the arbitral award, the Court reasoned wrongly in equating Clause 23 with a ‘force majeure’ clause. This is mainly because there the Contract already contained a clause which explicitly recognized the impact of force majeure events.

That said, all in all, the Supreme Court arrived at the appropriate conclusion by setting aside the arbitral award.

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[1] Civil Appeal No. 673 of 2012 and Civil Appeal No. 900 of 2012

[2] (2019) SCC Online SC 1656