In what one hopes is not a bull run, one more arbitral award has been set aside by the Supreme Court. In SEAMEC v. Oil India Ltd., a domestic award was set aside on the basis that the contractual interpretation by the Arbitral Tribunal was perverse and completely defeated the explicit wordings and purpose of the contract.
In our last blog ‘Enforcement of Foreign Awards in India – Have the brakes been applied?’, we had discussed the Supreme Court judgment in NAFED v. Alimenta S.A.[1] In that case, the Supreme Court refused to enforce a foreign award on the basis that the transaction contemplated (export of HPS groundnuts) would have violated Indian law and was therefore contrary to the public policy of India. We had noted that in the face of a plethora of judicial decisions, the Apex Court had waded into an examination of the merits of the case and the terms of the relevant contract, something which Indian courts have repeatedly held are purely within the purview of the arbitrator’s power.
South East Asia Marine Engineering & Construction (SEAMEC) Ltd. v. Oil India Ltd. (“OIL”)[2] is one more 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 could sustain the award.”[3]
In SEAMEC, the Supreme Court agreed with the Gauhati 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 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 upheld the Award and noted that it did not warrant judicial interference.
In 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.
In a challenge to the decision of the High Court setting aside the Award, the Supreme Court framed a rather fluid question, i.e. ‘[w]hether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passes the muster under Section 34 of the Arbitration Act?’.[4]
In considering the scope of judicial review and interference with an arbitral award, the Supreme Court relied on its earlier decision in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.[5] where it observed that “awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation, which may sustain the arbitral award.”. [6]
The Apex Court examined the terms of the Contract and concluding that it was based on a fixed rate, noted that it was expected that price risk would have been considered by SEAMEC before entering into the Contract. Consequently, such price fluctuations could not be brought under Clause 23 as SEAMEC had sought to do, unless specific language pointed to the inclusion – which it did not. The Court did not however subscribe to the wider interpretation and reasoning ascribed by the Arbitral Tribunal, which expanded the purview of Clause 23 to include change in prices of HSD. On this basis it held that the tribunal’s interpretation of the Contract could not be said to be a possible one, as it would completely defeat its explicit wordings and purpose.
The further reasoning of the High Court (in the Section 34 application), to the extent that it held Clause 23 of the Contract to be pari materia to a force majeure clause and corresponding frustration of the Contract on happening of such an event, was also rejected. The Supreme Court noted that a separate provision in the Contract provided for consequences of force majeure and also payment of force majeure rate to tide over any such event which was temporary in nature. As such, the scope of Clause 23 could not be extended to treat it as a further amelioration of a purported force majeure event. Insofar as the doctrine of frustration was concerned, the Court noted that where it applies, the contract is treated as void and the parties are discharged from future obligations. In the present case, in order to mitigate the harsh consequences of frustration and to uphold the sanctity of the Contract, the parties with their commercial wisdom, chose to mitigate some risks under Clause 23, which as aforesaid, did not cover price fluctuation, and accordingly, SEAMEC was not entitled to reimbursement.
For these reasons, and after noting that the Court is not required to (indeed, should not), examine the merits of the interpretation provided in the award by the arbitrator, if it comes to a conclusion that such an interpretation was reasonably possible, the Supreme Court held that the Award in the present case, was perverse and set it aside.
The COVID situation today has given rise to several claims of force majeure and frustration and we would be remiss in not highlighting the decision of the Apex court in Energy Watchdog v. CERC,[7] on the interpretation and purview of force majeure clauses and the doctrine of frustration. This decision is instructive, particularly with respect to the consequences of price escalation. Justice Rohinton F. Nariman in a detailed judgment clarified that while parties may be faced with a wholly abnormal rise or fall in prices, that in itself would not amount to force majeure (unless otherwise agreed), or frustration as would make the contract non-performable. Indeed, merely because it may become onerous to one of the parties, financial duress or even the collapse of the economy is unlikely to constitute an event of force majeure or frustration. (Indeed, Donald Trump’s claim that the global financial crisis constituted an event of force majeure would on this basis, likely have failed if finally argued). It is only when a consideration of the terms of the contract, in the light of circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation, which had unexpectedly emerged, that the contract ceases to bind.
India is currently in its eighth week of lockdown and as it is slowly lifted, disputes are brewing. We can expect in the following months and years, a considerable amount of jurisprudence on these principles, including whether the COVID pandemic and its fall out, including measures put in place by various Governments, will amount to force majeure, frustration, material adverse change events, or the like.
One cannot fault the reasoning of the Supreme Court. However, the fact remains that while it appears to have been conscious of the limited scope of interference on merits of an award and interpretation taken by an arbitral tribunal, it has nevertheless dived into the merits. In the present case, India’s final court of appeal appears to have determined that the perversity of the Award in the present case goes to the root of the matter, without there being a possibility of alternative interpretation, which could have sustained the Award. One more award in the span of a few short weeks, also bites the dust.
[1]Civil Appeal No. 667 of 2012, delivered on April 22, 2020.
[2] Civil Appeal No. 673 of 2012, delivered on May 11, 2020. Bench comprising of N.V. Ramana J., Mohan M. Shantanagoudar J. and Ajay Rastogi J.
[3] Ibid. Paragraph 26 and 27.
[4] Ibid. Paragraph 14
[5] 2019 SCC Online SC 1656
[6] Ibid. Paragraph 26
[7] (2017) 14 SCC 80
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