[This guest post is authored by Malak Bhatt (Advocate on Record, Supreme Court of India) and Atreyo Banerjee (Advocate). They are part of the Chambers of Malak Bhatt.
SEAMEC v. OIL (II): Has the Supreme Court Overstepped its Mandate under Section 34?
The Supreme Court of India has recently set aside an arbitral award in the case of South East Asia Marine Engineering and Constructions Ltd vs. Oil India Limited (SEAMEC). Among other things, it was observed that that contractual terms must be perused carefully and read as a whole to ascertain whether the arbitral tribunal’s decision and contractual interpretation were plausible.
Having done so, the Court held that the tribunal had transgressed its powers in granting a revised and increased price claim in a ‘fixed rate’ contract. Such an increased revision of rates was found to be de hors the contractual terms. The award was thus set aside under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”).
This decision has been previously discussed here on this blog. In this post, we offer a different perspective.
We argue that the Court transgressed the well-settled principle of deferring to the tribunal’s view of the contract where more than one interpretation is possible. Instead, in SEAMEC, the Court supplanted its own view of in place of the Tribunal’s by implying that the view taken by the Tribunal is not a possible view at all.
Therefore, we argue that there were cogent grounds in the facts of this case for the Tribunal to adopt its view and accordingly, the rationale of the Court in setting the award aside is erroneous.
SEAMEC was awarded a work order in 1995 from OIL for well-drilling operations within the State of Assam (“Contract”). Among other things, High Speed Diesel (“HSD”) was an essential material for the Appellant’s performance of the Contract. During the subsistence of the Contract, the price of HSD was increased by the Government of India (“GOI”) by way of a circular.
Clause 23 of the Contract dealt with effects of a “Change in Law” (“Clause 23”). The relevant portion is extracted below:
“…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 Appellant argued that the increase in the price of HSD would amount to a “change in law”. The Tribunal accepted this interpretation. In doing so, the Tribunal adopted a liberal construction of Clause 23, and held that the GOI’s Circular may not be a statutory enactment and accordingly might not be “law” in the literal sense. However, the GOI’s Circular has the “force of law” and would fall within the ambit of Clause 23. The award was challenged by OIL under Section 34.
The District Court upheld the award and held that the findings were not against the public policy of India. Thereafter, on appeal, the High Court at Gauhati set aside the award for being erroneous and against the public policy of India.
Supreme Court’s decision
In appeal, the Apex Court upheld the High Court’s decision to set aside the award – albeit for different reasons.
The Court undertook an interpretation of the Contract and its commercial purport. It was observed that the Contract was for a ‘fixed rate’, which would entail that all rates set out in the Contract were to be in force until completion.
The Court also noted that the underlying tendering process was meant to limit price variations. The appendix to the Contract also provided that HSD would be supplied by the Appellant at his expense.
In light of these findings, the Court was of the view that a “prudent contractor” would have taken price fluctuations into account while bidding. Therefore, such price fluctuations would not be under the ambit of Clause 23. Observing that that the tribunal’s view of Clause 23 was not even a possible interpretation, the Supreme Court held that award suffered from a perversity. It was therefore set aside under Section 34 for being violative of India’s public policy.
The Court’s mandate in a section 34 application is meant to narrower than an appeal. It was further streamlined in the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”).
In this regard, Explanation 1 to Section 34 of the Act categorically provides that an award is in conflict with the public policy of India, only if:
“(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.”
Explanation 2 goes even further to clarify that the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. Therefore, it would be incumbent upon an appellate court to defer to these limited grounds in order to set aside an award.
It is also trite law that deference should be given to the view taken by the arbitral tribunal if the view is a possible one in the given factual matrix. In this regard, the Supreme Court has previously made the following observations in Associate Builders vs Delhi Development Authority –
“…the expression “justice” when it comes to setting aside an award under the public policy ground can only mean that an award shocks the conscience of the court. It cannot possibly include what the court thinks is unjust on the facts of a case for which it then seeks to substitute its view for the Arbitrator’s view and does what it considers to be “justice”…”
Therefore, a Section 34 court should not substitute its idea of “justice” with a possible view taken by a tribunal.
Risk allocation and Clause 23
Risk Allocation Clauses (“RACs”) are often found in infrastructure contracts and may take multiple formats. They are fundamentally premised on avoiding the inequitable outcome of a contract. A ‘Change in Law Clause’ is nothing but an RAC which aims to ameliorate certain hardships which befall a party in the event of a change in the legal or regulatory landscape.
Commercial wisdom would dictate the opting for RACs since without them a contract runs the risk of being “frustrated” under the Indian Contract Act. RACs pre-empt a supervening circumstance and stipulate a mechanism to deal with such a situation.
Clause 23 could be plausibly described as an RAC; aimed at offsetting the increased price of the HSD by allowing the Appellant certain reimbursements in the event of additional costs. Such restitutionary clauses are a practical tool in a jurisdiction where a significant chunk of law-making by way of rules and regulations has been delegated upon the executive branch of the GOI.
Possible interpretation vs unpardonable perversity
The tribunal concluded that the GOI Circular by way of which the prices of HSD was increased had the force of law. However, the Court has indicated that the tribunal’s finding to be of an unpardonable perversity. In doing so, the Apex Court has effectively re-written the terms of the Contract and undermined the parties’ autonomy.
The tribunal’s finding was limited to determining if an increase in the price of HSD, amounted to a change in law. Keeping in mind the regulatory landscape of India, the Arbitral Tribunal answered in the affirmative.
However, the Court did not limit its judgement in simply interpreting the Contract. The Court traversed into the parties’ intention behind entering into the Contract, i.e. inter alia limiting price fluctuations at the outset itself. In doing so, the Court has failed to give effect to the terms of the Contract.
It is respectfully submitted, therefore, that the Tribunal’s view can hardly be termed as impossible.
The Court’s judgement in SEAMEC comes as a striking aberration in the otherwise pro-arbitration stance of Indian courts. Most notably, SEAMEC overlooks the use of “risk-allocation” clauses and goes on to interpret the purport of the clause, thereby rejecting what would have been considered a ‘possible’ view of the tribunal.
The Court should have perhaps limited itself in answering whether Clause 23 is open to more than one interpretation. However, by offering its own interpretation of Clause 23, the Court has widened the scope of its narrow and limited mandate under Section 34.
SEAMEC also makes an odd reference to the due-diligence required to be done by a ‘prudent contractor’ before entering into a contract. In effect, the Supreme Court in SEAMEC has created an extra and onerous presumption against contractors in such agreements and in doing so, dealt a blow to party autonomy. Such interpretation may also cause undue confusion and pave way for courts to undertake an interpretation of work orders and fixed rate contracts in all Section 34 applications.
In the circumstances, it is respectfully submitted, that the underlying rationale in SEAMEC should be reexamined by the Apex Court.