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Supreme Court of India
South East Asia Marine … vs Oil India Limited on 11 May, 2020Author: N.V. Ramana
Bench: N.V. Ramana, R. Subhash Reddy, B.R. Gavai
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 673 OF 2012
SOUTH EAST ASIA MARINE …APPELLANT
ENGINEERING AND CONSTRUCTIONS
LTD. (SEAMEC LTD.)
VERSUS
OIL INDIA LIMITED …RESPONDENT
With
CIVIL APPEAL NO. 900 OF 2012
OIL INDIA LIMITED …APPELLANT
VERSUS
SOUTH EAST ASIA MARINE …RESPONDENT
ENGINEERING AND CONSTRUCTIONS
LTD. (SEAMEC LTD.)
JUDGMENT
N. V. RAMANA, J.
Civil Appeal No. 673 of 2012
Signature Not Verified
1. The present appeal arises out of impugned judgment and order
Digitally signed by
GEETA AHUJA
Date: 2020.05.11
15:37:43 IST
Reason:
dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed
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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.
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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
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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
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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.
Learned counsel has relied upon a judgment of this Court
in McDermott International Inc. v. Burn Standard Co.
Ltd. [(2006) 11 SCC 181] to support his contention.
c. 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.
9. In response, the learned counsel for the Respondent,
supporting the findings of the High Court, submits that
a. the award passed by the Arbitral Tribunal is contrary to
the terms of the contract and essentially rewrites the
contract. The Arbitral Tribunal has to adjudicate the
dispute within the four corners of the contract and thus
awarding additional reimbursement not contemplated
under Clause 23 is perverse and patently illegal.
b. Overlooking the terms and conditions of a contract is
violative of Section 28 of the Arbitration Act and thus the
tribunal has exceeded its jurisdiction.
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c. This is not a case where the Arbitral Tribunal accepted
one interpretation of the terms of the contract where two
interpretations were possible. Findings of the Tribunal
are perverse and unreasonable as the Tribunal did not
consider the contract as a whole and failed to follow the
cardinal principle of interpretation of contract.
d. The Arbitral Tribunal has rewritten the contract in the
guise of interpretation and such interpretation being in
conflict with the terms of the contract, is in conflict with
the public policy of India.
10. We have heard the learned counsels for the parties and
perused the materials on record.
11. In order to answer the questions raised in this appeal we first
need to delve into the ambit and scope of the court’s
jurisdiction under Section 34 of the Arbitration Act. Section 34
of the Arbitration Act provides as under –
34. Application for setting aside arbitral award. — (1)
Recourse to a Court against an arbitral award may be made
only by an application for setting aside such award in
accordance with subsection (2) and subsection (3).
(2) An arbitral award may be set aside by the Court only if—
(a) the party making the application furnishes proof that—
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under
the law to which the parties have subjected it or,
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failing any indication thereon, under the law for
the time being in force; or
(iii) the party making the application was not
given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of
the submission to arbitration, or it contains
decisions on matters beyond the scope of the
submission to arbitration:
Provided that, if the decisions on matters
submitted to arbitration can be separated from
those not so submitted, only that part of the
arbitral award which contains decisions on
matters not submitted to arbitration may be set
aside; or
(v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement
was in conflict with a provision of this Part from
which the parties cannot derogate, or, failing
such agreement, was not in accordance with this
Part; or
(b) the Court finds that—
(i) the subjectmatter of the dispute is not capable
of settlement by arbitration under the law for the
time being in force, or
(ii) the arbitral award is in conflict with the public
policy of India.
Explanation. —Without prejudice to the generality of
subclause (ii) it is hereby declared, for the avoidance
of any doubt, that an award is in conflict with the
public policy of India if the making of the award was
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induced or affected by fraud or corruption or was in
violation of section 75 or section 81.
(3) An application for setting aside may not be made after
three months have elapsed from the date on which the party
making that application had received the arbitral award or,
if a request had been made under section 33, from the date
on which that request had been disposed of by the arbitral
tribunal: Provided that if the Court is satisfied that the
applicant was prevented by sufficient cause from making
the application within the said period of three months it
may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application under subsection (1), the
Court may, where it is appropriate and it is so requested by
a party, adjourn the proceedings for a period of time
determined by it in order to give the arbitral tribunal an
opportunity to resume the arbitral proceedings or to take
such other action as in the opinion of arbitral tribunal will
eliminate the grounds for setting aside the arbitral award.
12. It is a settled position that a Court can set aside the award
only on the grounds as provided in the Arbitration Act as
interpreted by the Courts. Recently, this Court in Dyna
Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [2019 SCC
Online SC 1656] laid down the scope of such interference. This
Court observed as follows
“26. There is no dispute that Section 34 of
the Arbitration Act limits a challenge to an
award only on the grounds provided therein
or as interpreted by various Courts. We need
to be cognizant of the fact that arbitral
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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.
Section 34 is different in its approach and
cannot be equated with a normal appellate
jurisdiction. The mandate under Section 34
is to respect the finality of the arbitral award
and the party autonomy to get their dispute
adjudicated by an alternative forum as
provided under the law. If the Courts were to
interfere with the arbitral award in the usual
course on factual aspects, then the
commercial wisdom behind opting for
alternate dispute resolution would stand
frustrated.”
(emphasis supplied)
13. It is also settled law that where two views are possible, the
Court cannot interfere in the plausible view taken by the
arbitrator supported by reasoning. This Court in Dyna
Technologies (supra) observed as under
“27. Moreover, umpteen number of judgments
of this Court have categorically held that the
Courts should not interfere with an award
merely because an alternative view on facts
and interpretation of contract exists. The
Courts need to be cautious and should defer
to the view taken by the Arbitral Tribunal
even if the reasoning provided in the award
is implied unless such award portrays
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perversity unpardonable under Section 34
of the Arbitration Act.”
(emphasis supplied)
14. However, the question in the present case is whether 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?
15. In the present case, respondent has argued that the view
taken by the Arbitral Tribunal was not even a possible
interpretation, therefore the award being unreasonable and
unfair suffers from perversity. Hence, the respondent has
pleaded that the award ought to be set aside. In this context,
we may state that usually the Court is not required to 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.
16. We begin by looking at the clause, i.e Clause 23 which is
extracted below:
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
10
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.
17. The Arbitral Tribunal held that this clause must be liberally
construed and any circular of the Government of India would
amount to a change in law. The Arbitral Tribunal observed:
“According to Rule of Construction of any
document harmonious approach should
be made reading or taking the document
as a whole and exclusion should not be
readily inferred unless it is clearly stated
in the particular clause of the document.
This is according to Rule of Interpretation.
A consistent interpretation should be
given with a view to smooth working of the
system, which the document purports to
regulate. The word, which makes it
inconsistent or unworkable, should be
avoided. This is known as beneficial
construction and a construction should be
made which suppress the mischief and
advance the remedies. So, the increase in
the operational cost due to enhanced price
of the diesel is one of the subject matters
of the contract as enshrined in Cl. 23. It
may be said that Cl. 23 may be termed as
‘‘Habendum Clause”. In the deed of the
contract containing various granting
clauses and the habendum signifying the
intention of, the grantor.
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That Cl. 23 requires liberal interpretation
for interpreting the expression ‘law’ or
change in law etc. will also be evident
from the facts that the respondents Oil
India Ltd. through its witness Mr. Pasrija
has clearly stated that the change in
diesel price or any other oil price was
never done and by way of any statutory
enactment either by Parliament or by
State Legislature So, it is clear that at the
time when the Cl. 23 was incorporated in
the agreement the Oil India Ltd. was very
much aware that change in oil price was
never made by any Statutory Legislation
but only by virtue of Government Order,
Resolution, Instruction, as the case may
be, on accepting that a condition of the
appropriate committee namely O.P.C. it is
also clear to apply when there is change in
oil price, here HSD, by the Government
and its statutory authority as enacted in
the above without resorting any statutory
enactment. Therefore that the
interpretation of expression ‘law’ or
change in law etc. requires this extended
meaning to include the statutory law, or
any order, instruction and resolution
issued by the Central Government in its
Ministry of Petroleum and Natural Gas.”
The majority award utilizes ‘liberal interpretation rule’ to
construe the contract, so that the price escalation of HSD
could be brought under the Clause 23 of the contract. Further
the Arbitral Tribunal identifies the aforesaid clause to be a
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‘Habendum Clause’, wherein the rights granted to the
appellant are required to be construed broadly.
18. On the other hand, the High Court in the impugned order,
interpreted the same clause as follows:
“27…I am of the firm view that clause 23
was inserted in the agreement to meet
such uncertain and unforeseen
eventualities and certainly not for revising
a fixed rate of contract. I also find that
both parties had agreed to keep “force
majeure” clause in the agreement. Under
this doctrine of commercial law, a
contract agreement can be rescinded for
acts of God, etc. Under clause 44.3 of the
agreement, ‘force majeure” has been
clearly defined, which includes acts and
regulations of the Government to rescind
a contract. In this way, clause 23 is very
close and akin to the “force majeure
clause”. Besides this, I may also declare
that clause 23 is pari materia to the
“doctrine of frustration and supervening
impossibility”. In other words, under
clause 23 rights and obligations of both
the parties have been saved due to any
change in the existing law or enactment
of a new law or on the ground of new
interpretation of the existing law. In my
opinion, clause 23 must have been made
a part of the agreement keeping in mind
section 56 of the Indian Contract Act,
1872 sans any other intention.”
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19. The High Court, in its reasoning, suggests that Clause 23 is
akin to a force majeure clause. We need to understand the
utility and implications of a force majeure clause. Under Indian
contract law, the consequences of a force majeure event are
provided for under Section 56 of the Contract Act, which states
that on the occurrence of an event which renders the
performance impossible, the contract becomes void thereafter.
Section 56 of the Contract Act stands as follows:
56. Agreement to do impossible act.—An
agreement to do an act impossible in itself is
void.
Contract to do act afterwards becoming
impossible or unlawful—A contract to do an
act which, after the contract is made, becomes
impossible, or, by reason of some event which
the promisor could not prevent, unlawful,
becomes void when the act becomes
impossible or unlawful.
20. When the parties have not provided for what would take place
when an event which renders the performance of the contract
impossible, then Section 56 of the Contract Act applies. When
the act contracted for becomes impossible, then under Section
56, the parties are exempted from further performance and the
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contract becomes void. As held by this Court in Satyabrata
Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44:
“15. These differences in the way of
formulating legal theories really do not concern
us so long as we have a statutory provision in
the Indian Contract Act. In deciding cases in
India the only doctrine that we have to go by is
that of supervening impossibility or illegality as
laid down in Section 56 of the Contract Act,
taking the word “impossible” in its practical
and not literal sense. It must be borne in
mind, however, that Section 56 lays down a
rule of positive law and does not leave the
matter to be determined according to the
intention of the parties.”
(emphasis supplied)
However, there is no doubt that the parties may instead
choose the consequences that would flow on the happening of
an uncertain future event, under Section 32 of the Contract
Act.
21. On the other hand, the common law at one point interpreted
the consequence of such frustration to fall on the party who
sustained loss before the frustrating event. The best example
of such an interpretation can be seen in the line of cases
which came to be known as ‘coronation cases’. In Chandler v.
Webster, [1904] 1 KB 493, Mr. Chandler rented space from
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Mr. Webster for viewing the coronation procession of King
Edward VII to be held on 26 th June 1902. Mr. Chandler had
paid part consideration for the same. However, due to the King
falling ill, the coronation was postponed. As Mr. Webster
insisted on payment of his consideration, the case was brought
to the Court. The Court of Appeals rejected the claims of both
Mr. Chandler as well as Mr. Webster. The essence of the ruling
was that once frustration of contract happens, there cannot be
any enforcement and the loss falls on the person who
sustained it before the force majeure took place.
22. This formulation was overruled by the House of Lords in the
historic decision of Fibrosa Spolka Akcyjna v. Fairbairn
Lawson Combe Barbour Ltd., [1942] UKHL 4, wherein the
harsh consequences of frustration as per the old doctrine was
moderated by the introduction of the law of restitution.
Interestingly, Lord Shaw in Cantiare San Rocco SA
(Shipbuilding Company) v. Clyde Shipbuilding and
Engineering Co. Ltd., [1924] AC 226, had observed that
English law of leaving the loss to where it fell unless the
contract provided otherwise was, he said, appropriate only
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‘among tricksters, gamblers and thieves’. The UK Parliament
took notice of the aforesaid judgment and legislated Law
Reform (Frustrated Contracts) Act, 1943.
23. In India, the Contract Act had already recognized the harsh
consequences of such frustration to some extent and had
provided for a limited mechanism to ameliorate the same
under Section 65 of the Contract Act. Section 65 provides as
under:
65. Obligation of person who has received
advantage under void agreement, or
contract that becomes void
When an agreement is discovered to be void, or
when a contract becomes void, any person who
has received any advantage under such
agreement or contract is bound to restore it, or
to make compensation for it to the person from
whom he received it.
The aforesaid clause provides the basis of restitution for
‘failure of basis’. We are cognizant that the aforesaid provision
addresses limited circumstances wherein an agreement is void
ab initio or the contract becomes subsequently void.
24. Coming back to the case, the contract has explicitly recognized
force majeure events in Clause 44.3 in the following manner:
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For purpose of this clause “Force Majeure”
means an act of God, war, revolt, riots, strikes,
bandh, fire, flood, sabotage, failure or
destruction of roads, systems and acts and
regulations of the Government of India and
other clauses (but not due to employment
problem of the contractor) beyond the
reasonable control of the parties.
Further, under Clause 22.23, the parties had agreed for a
payment of force majeure rate to tide over any force majeure
event, which is temporary in nature.
25. Having regards to the law discussed herein, we do not
subscribe to either the reasons provided by the Arbitral
Tribunal or the High Court. Although, the Arbitral Tribunal
correctly held that a contract needs to be interpreted taking
into consideration all the clauses of the contract, it failed to
apply the same standard while interpreting Clause 23 of the
Contract.
26. We also do not completely subscribe to the reasoning of the
High Court holding that Clause 23 was inserted in furtherance
of the doctrine of frustration. Rather, under Indian contract
law, the effect of the doctrine of frustration is that it discharges
all the parties from future obligations. In order to mitigate the
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harsh consequences of frustration and to uphold the sanctity
of the contract, the parties with their commercial wisdom,
chose to mitigate the risk under Clause 23 of the contract.
27. Our attention was drawn to Sumitomo Heavy Industries
Limited v. Oil and Natural Gas Corporation Limited,
(2010) 11 SCC 296, where this Court interpreted an indemnity
clause and found that an additional tax burden could be
recovered under such clause. Based on an appreciation of the
evidence, the Court ruled that additional tax burden could be
recovered under the clause as such an interpretation was a
plausible view that a reasonable person could take and
accordingly sustained the award. However, we are of the
opinion that the aforesaid case and ratio may not be applicable
herein as the evidence on record does not suggest that the
parties had agreed to a broad interpretation to the clause in
question.
28. In this context, 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 and so far as possible as mutually explanatory. In the
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case at hand, this basic rule was ignored by the Tribunal while
interpreting the clause.
29. The contract was entered into between the parties in
furtherance of a tender issued by the Respondent herein. After
considering the tender bids, the Appellant issued a Letter of
Intent. In furtherance of the Letter of Intent, the contract
(Contract No. CCO/FC/0040/95) was for drilling oil wells and
auxiliary operations. It is important to note that the contract
price was payable to the ‘contractor’ for full and proper
performance of its contractual obligations. Further, Clauses
14.7 and 14.11 of the Contract states that the rates, terms and
conditions were to be in force until the completion or
abandonment of the last well being drilled.
30. From the aforesaid discussion, 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. If the purpose of the tender was to limit the
risks of price variations, then the interpretation placed by the
Arbitral Tribunal cannot be said to be possible one, as it would
completely defeat the explicit wordings and purpose of the
contract. There is no gainsaying that there will be price
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fluctuations which a prudent contractor would have taken into
margin, while bidding in the tender. Such price fluctuations
cannot be brought under Clause 23 unless specific language
points to the inclusion.
31. 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.
32. The other contractual terms also suggest that the
interpretation of the clause, as suggested by the Arbitral
Tribunal, is perverse. For instance, Item 1 of List II
(Consumables) of Exhibit C (Consolidated Statement of
Equipment and Services Furnished by Contractor or Operator
for the Onshore Rig Operation), indicates that fuel would be
supplied by the contactor, at his expense. The existence of
such a clause shows that the interpretation of the contract by
the Arbitral Tribunal is not a possible interpretation of the
contract.
33. For the aforesaid reasons, we are not inclined to interfere with
the impugned judgment and order of the High Court setting
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aside the award. The appeal is accordingly dismissed. There
shall be no order as to costs.
CIVIL APPEAL NO. 900 OF 2012
34. In view of the judgment pronounced in C.A. No. 673 of 2012,
the aforesaid matter is disposed of in the aforesaid terms.
……………………………………….J.
(N.V. RAMANA)
……………………………………….J.
(MOHAN M. SHANTANAGOUDAR)
……………………………………….J.
(AJAY RASTOGI)
NEW DELHI;
MAY 11, 2020.
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