1. INTRODUCTION AND BACKGROUND
1.1. In the recent judgment delivered by the Hon’ble Supreme Court of India on May 11, 2020 in the case of SEAMEC v. Oil India Ltd, the Court set aside a domestic arbitral award due to the reason that the Arbitral Tribunal had interpreted contract wrongly and such interpretation caused the award to become against the public policy of India.
1.2. This judgment has become a topic of discussion in legal circle. This is because arbitral awards can be interfered by Courts and set aside on very limited grounds which are mentioned under section 34 of the Arbitration and Conciliation Act, 1996, and determining that an award is against the public policy of India because it was given due to erroneous interpretation of contract is unprecedented.
1.3. Section 34 states that an arbitral award could be set aside on any of the following grounds:
i. When a party was under some incapacity;
ii. the arbitration agreement is not valid under the law to which the parties have subjected it;
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;
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 matter beyond the scope of the submission to arbitration;
v. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
vi. the subject-matter of the dispute is not capable of settlement by arbitration;
vii. the award is in contravention with the fundamental policy of Indian law [prior to Arbitration and Conciliation (Amendment) Act, 2015 which came into effect on 23rd October, 2015 it was to be read as ‘against public policy of India’];
viii. it is in conflict with the most basic notions of morality or justice
1.4. Keeping in mind the aforesaid section 34, in the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd, the Supreme Court has held that domestic awards should not be interfered with in a casual and cavalier manner under Section 34, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter. It also held that 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. In past precedents too, the Supreme Court has held that, – domestic awards could be set aside only if they were patently illegal or have been given by ignoring vital evidence.
1.5. In the aforesaid background, judgment of the Supreme Court in the SEAMAC Case (supra) seems to be contradicting its own precedent.
2. FACTS (IN BRIEF)
2.1. Oil India Limited floated the tender for the purpose of well drilling and other auxiliary operations in Assam. The tender was awarded to the SEAMEC Limited.
2.2. Clause 23 of the Agreement that, –
“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.”
2.3. 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. The said increase occurred due to a circular issued by the Ministry of Petroleum & Natural Gas, Government of India. SEAMAC claimed that the said increase in the price of HSD, triggered the “change in law” clause under the contract and accordingly, Oil India became liable to reimburse SEAMAC for the additional cost.
2.4. Oil India rejected this claim of SEAMAC. SEAMAC invoked Arbitration. The Arbitral Tribunal (by a majority decision) gave the award in favour of SEAMAC and held that, – even 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 it had the “force of law” and on a liberal and harmonious construction of the Contract, it fell within the ambit of Clause 23.
2.5. Aggrieved by the award, Oil India challenged the same under Section 34 of the Arbitration Act before the District Judge. The District Judge, upheld the award and held that the findings of the Arbitral Tribunal were not without basis or against the public policy of India or patently illegal and did not warrant judicial interference.
2.6. Oil India further challenged the order of the District Judge by filing an appeal before the High Court of Guwahati. The High Court allowed the appeal and set aside the Arbitral Award on the ground that the Arbitral Tribunal had interpreted Clause 23 erroneously and the award based on such interpretation was against the public policy of India.
2.7. Aggrieved by the order of the High Court, SEAMAC filed an appeal against it in the Supreme Court of India by the way of a Special Leave Petition.
3. JUDGMENT OF THE HON’BLE SUPREME COURT OF INDIA (KEY PARTS UNQUOTED)
3.1. At the outset the Supreme Court observed that question which was required to be answered was that, – Whether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passed the muster under Section 34 of the Arbitration Act?
3.2. Before deciding the aforesaid question the Court delved into the ambit and scope of the court’s jurisdiction under Section 34 of the Arbitration Act. The Court while 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. where it was observed that,- arbitral 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.
3.3. The Court looked into the merits of the case and held 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 was 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 could not be brought under Clause 23 unless specific language pointed to the inclusion.
3.4. The Court also held that 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 case at hand, this basic rule was ignored by the Arbitral Tribunal while interpreting the clause.
4. OUR ANALYSIS (ARTICULATED IN BRIEF)
4.1. While on one hand the Supreme Court is conscious that it has very limited scope to review an arbitral award, but on the other hand, in the SEAMAC Case (Supra) it has itself intervened and set aside an award on the ground that the arbitral tribunal has wrongly interpreted the contract leading the award to become against the policy of India.
4.2. With due respect to the judgment of the Supreme Court, in our opinion, we don’t think that the Arbitral Tribunal had interpreted the Clause 23 of the contract incorrectly. What perhaps could have gone against SEAMAC was that the term ‘law’ would not have been expressly or widely defined under the contract to include circular issued by Government departments or by authorities having control over oil prices. It is not unknown that enactment and enforcement of changes in law is not necessarily made through changes made in the legal enactments at Parliament or State Legislature. Such changes in law can also be introduced through the regulatory authorities who have been delegated powers to introduce the changes under certain circumstances and subject to certain conditions. Secondly, assuming that the Tribunal is deemed to have interpreted the same erroneously, the award could still not have been treated as contravening “the public policy of India”.
4.3. It is important to note that, – the criteria to set as aside an order is not simply misinterpretation of contract, but to see whether such misinterpretation has resulted the award to be against the fundamental policy of Indian law. If it does not then, Courts should ideally not examine the merits of the case and set aside the award. Section 34 also specifically states that, – in determining whether or not an arbitral award contravenes the fundamental policy of Indian law, the Courts cannot do a review on the merits of the dispute.
4.4. The judgment in SEAMAC Case has now blurred the line of difference between a case as to when can a mis-interpretation of contract be considered to have contravened with the fundamental policy of Indian law and when it does not.
4.5. The aforesaid decision in SEAMAC Case, opens a big window for award debtor to challenge the arbitral award on the ground that the Arbitral Tribunal has given the award on the basis of misinterpretation of contract. The award debtor would however have to show that such misinterpretation goes into the root of matter and makes the award against contravening the fundamental policy of Indian law.