Arbitral Tribunal cannot give interpretation that completely defeat the explicit wordings and purpos
- shrey singh
- May 12, 2020
- 3 min read
South East Asia Marine Engineering And Constructions Ltd. (Seamec Ltd.) v Oil India Limited https://main.sci.gov.in/supremecourt/2008/7009/7009_2008_33_1501_22029_Judgement_11-May-2020.pdf
CIVIL APPEAL NO. 673 OF 2012 decided 17.03.2020
Bench: N.V. Ramana, Mohan M. Shantanagoudar and Ajay Rastogi, JJ.
Facts
Appellant was awarded a work order by the Respondent. The contract agreement was for the purpose of well drilling and other auxiliary operations. 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.
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 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.
When the Respondent kept on rejecting the claim, the Appellant eventually invoked the arbitration clause. The dispute was referred to an Arbitral Tribunal comprising of three arbitrators.
The majority opinion allowed the claim and said 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.
Question of Law
Whether Arbitral Tribunal was justified in interpreting the circular, increasing HSD price, as “force of law”?
Arguments
Appellant
Respondent
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 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.
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.
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.
Held
The Court held that 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.
The Court gave following reasoning, “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 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.”
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