G H SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. (SEAMEC LTD.) versus OIL INDIA LIMITED on 11 May 2020

1. The present appeal arises out of impugned judgment and orderFdated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed by theGauhati High Court, wherein the High Court allowed the appeal preferredby the Respondent under Section 37 of the Arbitration and ConciliationAct, 1996 (hereinafter the “Arbitration Act”), and set aside the arbitralaward dated 19.12.2003.

G2. Brief facts necessary for the disposal of this case are as follows:appellant was awarded the work order dated 20.07.1995 pursuant to atender floated by the Respondent in 1994. The contract agreement wasfor the purpose of well drilling and other auxiliary operations in Assam,and the same was effectuated from 05.06.1996.Although, the contractwas initially only for a period of two years, the same was extended forH

two successive periods of one year each by mutual agreement, andfinally 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 outthe drilling operations, increased. Appellant raised a claim that increasein the price of HSD, an essential component for carrying out the contracttriggered the “change in law” clause under the contract (i.e., Clause 23)and the Respondent became liable to reimburse them for the same. Whenthe Respondent kept on rejecting the claim, the Appellant eventuallyinvoked the arbitration clause vide letter dated 01.03.1999. Thedisputewas referred to an Arbitral Tribunal comprising of three arbitrators.

4. On 19.12.2003,the Arbitral Tribunal issued the award in A.PNo. 8 of 1999. The majority opinion allowed the claim of the Appellantand awarded a sum of Rs. 98,89,564.33with interest @10% per annumfrom the date of the award till the recovery of award money. The amountwas subsequently revised to Rs. 1,32,32,126.36 on 11.03.2005. TheArbitral Tribunal held that while an increase in HSD price through acircular issued under the authority of State or Union is not a “law” in theliteral sense, but has the “force of law” and thus falls within the ambit ofClause 23.On the other hand, the minority held that the executive ordersdo not come within the ambit of Clause 23 of the Contract.

5. Aggrieved by the award, the Respondent challenged the sameunder Section 34 of the Arbitration Act before the District Judge. On04.07.2006, the learned District Judge, upheld the award and held thatthe findings of the tribunal were not without basis or against the publicpolicy of India or patently illegal and did not warrant judicial interference.

6. The Respondent challenged the order of the District Judge byfiling an appeal under Section 37 of the Arbitration Act, before the HighCourt. By the impugned judgment,the High Court, allowed the appealand set aside the award passed by the Arbitral Tribunal.

7. The High Court held that the interpretation of the terms of thecontract by the Arbitral Tribunal is erroneous and is against the publicpolicy of India. On the scope of judicial review under Section 37 of theArbitration Act, the High Court held that the Court had the power to setaside the award as it was passed overlooking the terms and conditions A

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Aof the contract. Aggrieved by the same, the appellant has filed this presentappeal by the way of special leave petition against the impugned judgment.8. Learned Counsel for the Appellant assailing the impugnedordercontends that a.The High Court has imparted its own personal view as to theBintent for inclusion of Clause 23 and has sat in appeal over theaward of the Arbitral Tribunal. The construction of Clause 23,he submitted, is a matter of interpretation and has been correctlyinterpreted by the Arbitral Tribunal based on the authoritiescited before it.Cb.

b.If two views are possible on a question of law, the High Courtcannot substitute one view and deference should be given tothe plausible view of the Arbitral Tribunal. Learned counselhas relied upon a judgment of this Court in McDermottInternational Inc. v. Burn Standard Co. Ltd. [(2006) 11DSCC 181] to support his contention.

c.The question of law decided by the Arbitral Tribunalis beyondjudicial review and thus theHigh Court could not have interferedwith a reasoned award which was neither against public policyof India nor patently illegal.

E9. In response, the learned counsel for the Respondent, supportingthe findings of the High Court, submits that a.the award passed by the Arbitral Tribunal is contrary to theterms of the contract and essentially re-writes the contract.The Arbitral Tribunal has to adjudicate the dispute within theFfour corners of the contract and thus awarding additionalreimbursement not contemplated under Clause 23 is perverseand patently illegal.

b.Overlooking the terms and conditions of a contract is violativeof Section 28 of the Arbitration Act and thus the tribunal hasGexceeded its jurisdiction.

c.This is not a case where the Arbitral Tribunal accepted oneinterpretation of the terms of the contract where twointerpretations were possible. Findings of the Tribunal areperverse and unreasonable as the Tribunal did not considerHthe contract as a whole and failed to follow the cardinalprinciple of interpretation of contract.

d. The Arbitral Tribunal has re-written the contract in the guiseof interpretation and such interpretation being in conflict withthe terms of the contract, is in conflict with the public policyof India.

10. We have heard the learned counsels for the parties and perusedthe materials on record.

11. In order to answer the questions raised in this appeal we firstneed to delve into the ambit and scope of the court’s jurisdiction underSection 34 of the Arbitration Act. Section 34 of the Arbitration Actprovides as under –

34. Application for setting aside arbitral award. — (1)Recourse to a Court against an arbitral award may be made onlyby an application for setting aside such award in accordance withsub-section (2) and sub-section (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 towhich the parties have subjected it or, failing any indicationthereon, under the law for the time being in force; or

(iii) the party making the application was not given propernotice of the appointment of an arbitrator or of the arbitralproceedings or was otherwise unable to present his case;or

(iv) the arbitral award deals with a dispute not contemplatedby or not falling within the terms of the submission toarbitration, or it contains decisions on matters beyond thescope of the submission to arbitration:

Provided that, if the decisions on matters submitted toarbitration can be separated from those not so submitted,only that part of the arbitral award which contains decisionson matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitralprocedure was not in accordance with the agreement ofthe parties, unless such agreement was in conflict with a A

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provision of this Part from which the parties cannotderogate, or, failing such agreement, was not in accordancewith this Part; or (b) the Court finds that—

(i) the subject-matter of the dispute is not capable ofsettlement by arbitration under the law for the time being inforce, or

(ii) the arbitral award is in conflict with the public policy ofIndia.

Explanation. —Without prejudice to the generality of sub-clause(ii) it is hereby declared, for the avoidance of any doubt, thatan award is in conflict with the public policy of India if themaking of the award was induced or affected by fraud orcorruption or was in violation of section 75 or section 81.

(3) An application for setting aside may not be made after threemonths have elapsed from the date on which the party makingthat application had received the arbitral award or, if a requesthad been made under section 33, from the date on which thatrequest had been disposed of by the arbitral tribunal: Providedthat if the Court is satisfied that the applicant was prevented bysufficient cause from making the application within the said periodof three months it may entertain the application within a furtherperiod of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Courtmay, where it is appropriate and it is so requested by a party,adjourn the proceedings for a period of time determined by it inorder to give the arbitral tribunal an opportunity to resume thearbitral proceedings or to take such other action as in the opinionof arbitral tribunal will eliminate the grounds for setting aside thearbitral award.

12. It is a settled position that a Court can set aside the awardonly on the grounds as provided in the Arbitration Act as interpreted bythe 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. ThisCourt observed as follows

“26. There is no dispute that Section 34 of the Arbitration Actlimits a challenge to an award only on the grounds provided thereinor as interpreted by various Courts. We need to be cognizantof the fact that arbitral awards should not be interfered within a casual and cavalier manner, unless the Court comes toa conclusion that the perversity of the award goes to theroot of the matter without there being a possibility ofalternative interpretation which may sustain the arbitralaward. Section 34 is different in its approach and cannot beequated with a normal appellate jurisdiction. The mandate underSection 34 is to respect the finality of the arbitral award and theparty autonomy to get their dispute adjudicated by an alternativeforum as provided under the law. If the Courts were to interferewith the arbitral award in the usual course on factual aspects,then the commercial wisdom behind opting for alternate disputeresolution would stand frustrated.”

13. It is also settled law that where two views are possible, theCourt cannot interfere in the plausible view taken by the arbitratorsupported by reasoning. This Court in Dyna Technologies (supra)observed as under- “27. Moreover, umpteen number of judgments of this Court havecategorically held that the Courts should not interfere with anaward merely because an alternative view on facts andinterpretation of contract exists.The Courts need to be cautiousand should defer to the view taken by the Arbitral Tribunaleven if the reasoning provided in the award is implied unlesssuch award portrays perversity unpardonable under Section34 of the Arbitration Act.”

14. However, the question in the present case is whether theinterpretation provided to the contract in the award of the Tribunal wasreasonable and fair, so that the same passes the muster under Section34 of the Arbitration Act?

15. In the present case, respondent has argued that the view takenby the Arbitral Tribunal was not even a possible interpretation, therefore A

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Athe award being unreasonable and unfair suffers from perversity. Hence,the respondent has pleaded that the award ought to be set aside. In thiscontext, we may state that usually the Court is not required to examinethe merits of the interpretation provided in the award by the arbitrator, ifit comes to a conclusion that such an interpretation was reasonablypossible.B16. We begin by looking at the clause, i.e Clause 23 which isextracted below:

-SUBSEQUENTLY ENACTED LAWS:

Subsequent to the date of price of Bid Opening if there is a changeCin or enactment of any law or interpretation of existing law,which results in additional cost/reduction in cost to Contractor onaccount of the operation under the Contract, the Company/Contractor shall reimburse/pay Contractor/Company for suchadditional/reduced cost actually incurred.

D17. The Arbitral Tribunal held that this clause must be liberallyconstrued and any circular of the Government of India would amount toa change in law. The Arbitral Tribunal observed:

“According to Rule of Construction of any document harmoniousapproach should be made reading or taking the document as aEwhole and exclusion should not be readily inferred unless it isclearly stated in the particular clause of the document. This isaccording to Rule of Interpretation. A consistent interpretationshould be given with a view to smooth working of the system,which the document purports to regulate. The word, which makesit inconsistent or unworkable, should be avoided. This is known asFbeneficial construction and a construction should be made whichsuppress the mischief and advance the remedies. So, the increasein the operational cost due to enhanced price of the diesel is oneof the subject matters of the contract as enshrined in Cl. 23. Itmay be said that Cl. 23 may be termed as ‘‘Habendum Clause”.GIn the deed of the contract containing various granting clausesand the habendum signifying the intention of, the grantor.

That Cl. 23 requires liberal interpretation for interpreting theexpression ‘law’ or change in law etc. will also be evident fromthe facts that the respondents Oil India Ltd. through its witness H

Mr. Pasrija has clearly stated that the change in diesel price orany other oil price was never done and by way of any statutoryenactment either by Parliament or by State Legislature So, it isclear that at the time when the Cl. 23 was incorporated in theagreement the Oil India Ltd. was very much aware that changein oil price was never made by any Statutory Legislation but onlyby virtue of Government Order, Resolution, Instruction, as thecase may be, on accepting that a condition of the appropriatecommittee namely O.P.C. it is also clear to apply when there ischange in oil price, here HSD, by the Government and its statutoryauthority as enacted in the above without resorting any statutoryenactment. Therefore that the interpretation of expression ‘law’or change in law etc. requires this extended meaning to includethe statutory law, or any order, instruction and resolution issuedby the Central Government in its Ministry of Petroleum and NaturalGas.”

The majority award utilizes ‘liberal interpretation rule’ to construethe contract, so that the price escalation of HSD could be brought underthe Clause 23 of the contract. Further the Arbitral Tribunal identifies theaforesaid clause to be a ‘Habendum Clause’, wherein the rights grantedto 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 theagreement to meet such uncertain and unforeseen eventualitiesand certainly not for revising a fixed rate of contract. I also findthat both parties had agreed to keep “force majeure” clause inthe agreement. Under this doctrine of commercial law, a contractagreement can be rescinded for acts of God, etc. Under clause44.3 of the agreement, ‘force majeure” has been clearly defined,which includes acts and regulations of the Government to rescinda contract.In this way, clause 23 is very close and akin to the“force majeure clause”. Besides this, I may also declare that clause23 is parimateria to the “doctrine of frustration and superveningimpossibility”. In other words, under clause 23 rights and obligationsof both the parties have been saved due to any change in theexisting law or enactment of a new law or on the ground of newinterpretation of the existing law. In my opinion, clause 23 must A

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264SUPREME COURT REPORTS

Ahave been made a part of the agreement keeping in mind section56 of the Indian Contract Act, 1872 sans any other intention.”

19. The High Court, in its reasoning, suggests that Clause 23 isakin to a force majeure clause.We need to understand the utility andimplications of a force majeure clause. Under Indian contract law, theBconsequences of a force majeure event areprovided for under Section56 of the Contract Act, which states thaton the occurrence of an eventwhich renders the performance impossible, the contract becomes voidthereafter. Section 56 of the Contract Act stands as follows:

56. Agreement to do impossible act.—An agreement to doCan act impossible in itself is void.

Contract to do act afterwards becoming impossible orunlawful—A contract to do an act which, after the contract ismade, becomes impossible, or, by reason of some event whichthe promisor could not prevent, unlawful, becomes void when theDact becomes impossible or unlawful.

20. When the parties have not provided for what would take placewhen an event which renders the performance of the contract impossible,then Section 56 of the Contract Act applies. When the act contractedfor becomes impossible, then under Section 56, the parties are exemptedEfrom further performance and the contract becomes void. As held bythis Court in Satyabrata Ghose v. Mugneeram Bangur & Co., AIR1954 SC 44:

“15. These differences in the way of formulating legal theoriesreally do not concern us so long as we have a statutory provisionFin the Indian Contract Act. In deciding cases in India the onlydoctrine that we have to go by is that of supervening impossibilityor illegality as laid down in Section 56 of the Contract Act, takingthe word “impossible” in its practical and not literal sense. It mustbe borne in mind, however, that Section 56 lays down arule of positive law and does not leave the matter to beGdetermined according to the intention of the parties.”

However, there is no doubt that the parties may instead choosethe consequences that would flow on the happening of an uncertainfuture event, under Section 32 of the Contract Act.H

SOUTH EAST ASIA MARINE ENGINEERING ONSTRUCTIONSLTD. (SEAMEC LTD.) v. OIL INDIA LIMITED [N. V. RAMANA, J.]

21. On the other hand, the common law at one point interpretedthe consequence of such frustration to fall on the party who sustainedloss before the frustrating event.The best example of such aninterpretation can be seen in the line of cases which came to be knownas ‘coronation cases’. In Chandler v. Webster, [1904] 1 KB 493, Mr.Chandler rented space from Mr. Webster for viewing the coronationprocession of King Edward VII to be held on 26[th] June 1902. Mr. Chandlerhad paid part consideration for the same. However, due to the Kingfalling ill, the coronation was postponed. As Mr. Webster insisted onpayment of his consideration, the case was brought to the Court. TheCourt of Appeals rejected the claims of both Mr. Chandler as well asMr. Webster. The essence of the ruling was that once frustration ofcontract happens, there cannot be any enforcement and the loss falls onthe person who sustained it before the force majeure took place.

22. This formulation was over-ruled by the House of Lords in thehistoric decision of Fibrosa Spolka Akcyjna v. Fairbairn LawsonCombe Barbour Ltd., [1942] UKHL 4, wherein the harsh consequencesof frustration as per the old doctrine was moderated by the introductionof the law of restitution. Interestingly, Lord Shaw in Cantiare San RoccoSA (Shipbuilding Company) v. Clyde Shipbuilding and EngineeringCo. Ltd., [1924] AC 226, had observed that English law of leaving theloss to where it fell unless the contract provided otherwise was, he said,appropriate only ‘among tricksters, gamblers and thieves’. The UKParliament took notice of the aforesaid judgment and legislated LawReform (Frustrated Contracts) Act, 1943.

23. In India, the Contract Act had already recognized the harshconsequences of such frustration to some extent and had provided for alimited mechanism to ameliorate the same under Section 65 of theContract Act. Section 65 provides as under:

65. Obligation of person who has received advantage undervoid agreement, or contract that becomes void When an agreement is discovered to be void, or when a contractbecomes void, any person who has received any advantage undersuch agreement or contract is bound to restore it, or to makecompensation for it to the person from whom he received it.

The aforesaid clause provides the basis of restitution for ‘failureof basis’. We are cognizant that the aforesaid provision addresses limited AB

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Acircumstances wherein an agreement is void ab initio or the contractbecomes subsequently void.

24. Coming back to the case, the contract has explicitly recognizedforce majeure events in Clause 44.3 in the following manner:

For purpose of this clause “Force Majeure” means an act of God,Bwar, revolt, riots, strikes, bandh, fire, flood, sabotage, failure ordestruction of roads, systems and acts and regulations of theGovernment of India and other clauses(but not due toemployment problem of the contractor) beyond the reasonablecontrol of the parties.

CFurther, under Clause 22.23, the parties had agreed for a paymentof force majeure rate to tide over any force majeure event, which istemporary in nature.

25. Having regards to the law discussed herein, we do not subscribeto either the reasons provided by the Arbitral Tribunalor the High Court.DAlthough, the Arbitral Tribunal correctly held that a contract needs to beinterpreted taking into consideration all the clauses of the contract,it failedto apply the same standard while interpreting Clause 23 of the Contract.

26. We also do not completely subscribe to the reasoning of theHigh Court holding that Clause 23 was inserted in furtherance of theEdoctrine of frustration. Rather, under Indian contract law, the effect ofthe doctrine of frustration is that it discharges all the parties from futureobligations. In order to mitigate the harsh consequences of frustrationand to uphold the sanctity of the contract, the parties with their commercialwisdom, chose to mitigate the risk under Clause 23 of the contract.

F27. Our attention was drawn to Sumitomo Heavy IndustriesLimited v. Oil and Natural Gas Corporation Limited, (2010) 11 SCC296, where this Court interpreted an indemnity clause and found that anadditional tax burden could be recovered under such clause. Based onan appreciation of the evidence, the Court ruled that additional tax burdencould be recovered under the clause as such an interpretation was aGplausible view that a reasonable person could take and accordinglysustained the award. However, we are of the opinion that the aforesaidcase and ratio may not be applicable herein as the evidence on recorddoes not suggest that the parties had agreed to a broad interpretation tothe clause in question.H

28. In this context, the interpretation of Clause 23 of the Contractby the Arbitral Tribunal, to provide a wide interpretation cannot beaccepted, as the thumb rule of interpretation is that the document forminga written contract should be read as a whole and so far as possible asmutually explanatory. In the case at hand, this basic rule was ignored bythe Tribunal while interpreting the clause.

29. The contract was entered into between the parties infurtherance of a tender issued by the Respondent herein. After consideringthe tender bids, the Appellant issued a Letter of Intent. In furtherance ofthe Letter of Intent, the contract (Contract No. CCO/FC/0040/95) wasfor drilling oil wells and auxiliary operations. It is important to note thatthe contract price was payable to the ‘contractor’ for full and properperformance of its contractual obligations. Further, Clauses 14.7 and14.11 of the Contract states that the rates, terms and conditions were tobe in force until the completion or abandonment of the last well beingdrilled.

30. From the aforesaid discussion, it can be said that the contractwas based on a fixed rate. The party, before entering the tender process,entered the contract after mitigating the risk of such an increase. If thepurpose of the tender was to limit the risks of price variations, then theinterpretation placed by the Arbitral Tribunal cannot be said to be possibleone, as it would completely defeat the explicit wordings and purpose ofthe contract.There is no gainsaying that there will be price fluctuationswhich a prudent contractor would have taken into margin, while biddingin the tender. Such price fluctuations cannot be brought under Clause 23unless specific language points to the inclusion.

31. The interpretation of the Arbitral Tribunal to expand the meaningof Clause 23 to include change in rate of HSD is not a possibleinterpretation of this contract, as the appellant did not introduce anyevidence which proves the same.

32. The other contractual terms also suggest that the interpretationof the clause, as suggested by the Arbitral Tribunal, is perverse. Forinstance, Item 1 of List II (Consumables) of Exhibit C (ConsolidatedStatement of Equipment and Services Furnished by Contractor orOperator for the Onshore Rig Operation), indicates that fuel would besupplied by the contactor, at his expense. The existence of such a clauseshows that the interpretation of the contract by the Arbitral Tribunal isnot a possible interpretation of the contract.

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[2020] 4 S.C.R.

A33. For the aforesaid reasons, we are not inclined to interferewith the impugned judgment and order of the High Court setting asidethe award. The appeal is accordingly dismissed. There shall be no orderas to costs.

CIVILAPPEAL NO. 900 OF 2012

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34. In view of the judgment pronounced in C.A. No. 673 of 2012,the aforesaid matter is disposed of in the aforesaid terms.

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Devika Gujral

Appeals disposed of.

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