Author : Siddhant Bajaj
Introduction
Over the years, a robust corpus of judicial precedent and legislation has transformed the landscape of Indian arbitration. The last decade has seen an interplay between judicial pronouncements and legislative amendments which have not only worked as a shot in the arm for international arbitration in India, but also for domestic arbitration. While India wishes to emerge as a hub of international arbitration; on the domestic front, it wishes to make arbitration a truly independent dispute resolution mechanism, with little judicial interference. However, the Judgement delivered by the Supreme Court in (“SC”) in South East Asia Marine Engineering And Construction Ltd. (“SEAMEC”) v. Oil India Ltd[1].(“SEAMEC Ltd.”) has caused a set back to the development of domestic arbitration law in the country.
I will first, summarize the Judgement in SEAMEC Ltd. (the “Judgement”) and then briefly explain how it runs contrary to India’s growing pro-arbitration jurisprudence.
SEAMEC Ltd.: Breaking the flow
Following is a brief rundown of the Judgement.
SEAMEC contracted with Oil India Ltd. for well drilling and other auxiliary operations in Assam. During the subsistence of the contract, the prices of High Speed Diesel (“HSD”), one of the essential requisites for carrying on the drilling operations increased. The contract between the parties contained a “change in law” clause (Clause 23) which read as follows –
“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.”
According to SEAMEC, the increase in the prices of HSD triggered the above-quoted clause which entitled it to be compensated by Oil India Ltd. for the same. Oil India Ltd. disagreed and thus arbitration proceedings were initiated between the parties. The Tribunal consisted of three arbitrators.
It was SEAMEC’s case that any change in the law that resulted in an increase in the costs incurred by it would trigger the change in law clause and entitle SEAMEC to compensation. Oil India Ltd. contended that the increase in the price of HSD was not the result of a law made by the Parliament or any state legislature and hence the increased price of HSD was not the result of a change in the law.
The Tribunal held that while a circular issued under the authority of a state or the central government is not technically ‘law’, it does, however, have the ‘force of law’. The Tribunal also noted the fact that at the time of entering into the contract, Oil India Ltd. was aware that changes in prices of diesel were never affected by way of statutory enactment but only by way of government orders, resolutions, instructions, etc. Because of this, the Tribunal held that Clause 23 of the contract between the parties must be liberally interpreted and must be read to include a change in the price of HSD.
Aggrieved by the Award, Oil India Ltd. challenged it before the District Judge under Section (“u/s”) 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The District Judge refused to set aside the award stating that the Tribunal’s findings were not without basis. It was held that neither was the award against the public policy of India nor was it patently illegal.
The District Judge’s order was challenged before the High Court of Gauhati by Oil India Ltd. u/s Section 37 of the Arbitration Act. The Gauhati High Court set aside the award holding the Tribunal’s interpretation of the contract to be erroneous. Against this decision of the High Court, SEAMEC approached the SC by way of a Special Leave Petition.
The SC found fault with the Tribunal’s interpretation of the contract. The SC noted that the contract between the parties was on a fixed price basis, and as per the terms of the contract, such a fixed price was to last until obligations under the contract were discharged. The Court also stated that SEAMEC would have entered into the contract after hedging the risk of a price increase. Basis this the SC held that increase in the price of HSD could not be brought within the ambit of Clause 23. On this understanding of the contract, the SC upheld the decision of the Gauhati High Court (while disagreeing with its interpretation of the contract) to set aside the award.
Analysis
This section deals with how the Judgement has forgone settled legal precepts limiting judicial intervention so far as setting aside an award is concerned.
It was argued before the Court that “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”[2], in so arguing, SEAMEC relied on the Judgement delivered in McDermott International Inc. v. Burn Standard Co. Ltd.[3]. The SC accepted this settled principle when it relied on the Judgement in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.[4] The acceptance of this view is made clear by the following words of the Court –
“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 perversity unpardonable under Section 34 of the Arbitration Act.” (emphasis supplied)”[5]
Interestingly, the Judgment fleetingly mentions that the interpretation of the Tribunal is perverse[6], however, it has not elaborated on how the award is vitiated by ‘perversity unpardonable under Section 34 of the Arbitration Act’. What the Judgement asserts, with greater vigour, is the fact that the Tribunal’s interpretation of the contract as an impossible view. This is clear from the following words –
“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 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.”
Without getting into the minutiae of how the Gauhati HC interpreted the contract between the parties and how the SC differed in its interpretation, I believe that the Tribunal’s interpretation of the contract could not have been dismissed as an impossible view. It is clear that the Tribunal based its view on the knowledge of the parties at the time of entering the contract. The Tribunal gauged the intention of the parties from what they knew at the time of entering into the contract, basis which it interpreted Clause 23 liberally. Consider the following reasoning adopted by the Tribunal –
“…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. …”[7]
There are various other logical reasons for which the Tribunal’s interpretation would appear to be a possible view[8], if not the correct one (possible if not plausible[9]). I would not explain those reasons in detail here, however, these reasons become apparent on a reading of the Judgement.
Also, the threshold for establishing perversity is rather high. This is evident from the following decisions. In H.B. Gandhi, Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons[10], it was held:
"7. ...It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law."
In Kuldeep Singh v. Commissioner of Police[11], the following test for establishing perversity was laid down
"10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with."
In my humble view, the Judgement does not provide a satisfactory explanation of how the Tribunal’s interpretation was impossible or perverse, and so, it is hard to see how the Judgement has not upheld the Gauhati HC’s decision to set aside of the impugned award exclusively on differences in interpretation of the contract. Without admitting so, the Judgement has favoured one possible interpretation of the contract over another. In my humble opinion, both interpretations were possible.
The Judgement has held the Tribunal’s interpretation to be perverse and its view to be impossible. This means that the Judgement has upheld the setting aside of the award on the grounds contained in Section 34(2)(b)(ii) and/or Section 34(2A) of the Arbitration Act (since perversity and/or impossibility of a view taken by the Tribunal, being issues on merits, can only be covered under these provisions[12]) In light of this, it is prudent to revise the contents of Section 34 of the Arbitration Act.
Explanation 2 to Section 34 (2)(b)(ii) states the following – “For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute” Similarly, the proviso to Section 34(3) which deals with setting aside of awards basis patent “illegality appearing on the face of the award” states the following – “Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence”
The bare provisions of Section 34 of Arbitration Act disallow a review on merits while adjudging whether an award is against the fundamental policy of Indian law (of which patent illegality is part[13]). Section 34 also does not consider an award to be patently illegal even in the face of “an erroneous application of the law”. Though courts can delve into the merits of an award while scrutinising it u/s 34 of the Arbitration Act, this can be done only in exceptional circumstances. However, it is clear that the threshold for setting aside an award under Section 34 of the Arbitration Act is high. Let us now examine judicial precedent on the limits of a court’s power to interfere with an award on merits.
In MSK Projects (I)(JV) Ltd. v. State of Rajasthan[14], the SC distinguished between an error in the construction of a contract and a jurisdictional error in the following manner –
"17. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence.
Further, in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran[15], the SC held the following –
"43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.
The above finding of the SC in Rashtriya Ispat Nigam Ltd. is among the many precedents that hold that it is impermissible for a court to reinterpret the provisions of a contract while deciding an application to set aside the award. It also makes clear that it not necessary for the view taken by an arbitral tribunal to be plausible, it is only required that the view be possible.
In SAIL v. Gupta Brothers Steel Tubes Ltd.[16] the SC summarised the position on the power of courts to set aside an arbitral award in the following words –
“18. It is not necessary to multiply the references. Suffice it to say that the legal position that emerges from the decisions of this Court can be summarised thus:
(i)In a case where an arbitrator travels beyond the contract, the award would be without jurisdiction and would amount to legal misconduct and because of which the award would become amenable for being set aside by a Court.
(ii) An error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by Courts as such error is not an error on the face of the award.
(iii) If a specific question of law is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law does not make the award bad on its face.
(iv) An award contrary to substantive provision of law or against the terms of contract would be patently illegal. …
(vi) If the conclusion of the arbitrator is based on a possible view of the matter, the court should not interfere with the award.
(vii) It is not permissible to a court to examine the correctness of the findings of the arbitrator, as if it were sitting in appeal over his findings.
From the reasoning employed by the Tribunal in liberally interpreting Clause 23 of the contract as recorded in the Judgement it becomes clear that the Tribunal did not commit any jurisdictional error, neither did it decide contrary to the terms of the contract, it can also be said that the decision of the Tribunal was a possible view.
In Sumitomo Heavy Industries Ltd. v. ONGC Ltd.[17], the SC laid down the following -
"43. ... The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Mfg. Corpn. v. Central Warehousing Corpn. [(2009) 5 SCC 142 : (2009) 2 SCC (Civ) 406] the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding."
Having examined the Tribunal’s reasoning as recorded in the Judgement it is hard to find any perversity in it, it is also difficult to accept that the view was an impossible one. One could, at best argue that the view taken by the Tribunal was an implausible one, but that would not make the award liable to be set aside. A conspectus of the precedent cited above would reveal that the Judgement, without conclusively establishing impossibility and perversity of the Tribunal’s view, could not have allowed the award to be set aside.
Conclusion
One of the primary reasons for the enactment of the Arbitration Act and the repeal of the Arbitration Act, 1940 was the need to do away with excessive supervision, or interference by Courts. In Guru Nanak Foundations Vs. Rattan Singh[18], the SC, expressed the following view regarding the Arbitration Act, 1940 - "the way in which the proceedings under the Act are conducted and without an exception challenged in courts, has made lawyers laugh and legal philosophers weep" in view of the "unending prolixity, at every stage providing a legal trap to the unwary.". The insertion of Section 5[19] into the Arbitration Act, stands testament to the fact that judicial intervention in the arbitral process and decisions was intended to be limited. Limiting the supervisory role of courts in the arbitral process was one of the main objects of the Arbitration Act[20]
A steady stream of judicial pronouncements has established India to be a jurisdiction where courts do not sit in appeal over decisions of arbitral tribunals; where awards are not set aside on differences over interpretation of contract; and, where findings of an arbitrator on facts and decisions on merits, so long as they are not perverse, capricious, arbitrary, shocking to the conscience of the court, etc. are considered final and binding.
While courts may indeed set aside awards for being perverse and for containing impossible interpretations/views, in my humble opinion, the Judgement while holding the Tribunal’s views to be perverse and impossible, has effectively delved into the merits of the matter and set aside the award on interpretational differences.
The Judgement seems to have whittled down the high threshold for establishing perversity. This may open the floodgates for disgruntled parties to challenge awards over issues relating to merits while masquerading their contentions as ones based on perversity and impossibility. There is also a possibility that the Judgement[21] may be used to counter, if not negate the law laid down by various division benches of the Supreme Court, as mentioned above.
In my opinion, the Court in SEAMEC Ltd. has derailed to some extent India’s efforts towards achieving and maintaining minimal levels of judicial interference. It would take some corrective action from the SC to curb the impact of this judgement. One can only hope that such action is taken soon.
References : [1] SEAMEC Ltd. v. Oil India Ltd, 2020 SCC OnLine SC 451 [2] Ibid, ¶ 9 [3] McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181] [4] Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [5] Supra N. 2, ¶ 14 [6] Ibid, ¶ 38 [7] Ibid, ¶ 18 [8] Such as the fact that Clause 23 of the contract was not a force majeure provision (as held by the High Court of Gauhati) and did not intend to discharge the parties of their contractual obligations. The Clause only provided for SEAMEC to be compensated if there it was to incur an increased cost by any change in the law. The fact that the contract was a fixed price contract does not, in my opinion, negate the possibility of the price of diesel being covered by Clause 23. Contrary to the Court’s opinion, one can always argue that SEAMEC, would have planned its operations under the contract bearing in mind the fixed cost which had to continue till the discharge of the contract, and because all ways in which cost may increase for SEAMEC could not be reasonably foreseen, Clause 23 was inserted to cover contingencies. This argument, coupled with the fact that the Tribunal relied on Oil India Ltd.’s knowledge of how a rise in HSD prices is given effect, leads to the conclusion that the Tribunal’s view was possible if not plausible. [9] Infra Note, 15 [10] H.B. Gandhi, Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312 ¶ 7 [11] Kuldeep Singh v. Commissioner of Police (1999) 2 SCC 10, ¶ 10 [12] See, Associate Builders v. Delhi Development Authority, 2014 SCC OnLine SC 937¶ 17 “It will be seen that none of the grounds contained in sub- clause 2 (a) deal with the merits of the decision rendered by an arbitral award. It is only when we come to the award being in conflict with the public policy of India that the merits of an arbitral award are to be looked into under certain specified circumstances.” [13] See, Associate Builders v. Delhi Development Authority, 2014 SCC OnLine SC 937¶ 19 [14] MSK Projects (I)(JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573 ¶ 17 [15] Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran (2012) 5 SCC 306, ¶ 43 [16] SAIL v. Gupta Brothers Steel Tubes Ltd. (2009)10 SCC 63 ¶ 18 [17] Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (2010) 11 SCC 296 ¶ 43 [18] Guru Nanak Foundations Vs. Rattan Singh, AIR 1981 SC 2075 [19] Section 5 reads as follows – 5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part [20] See, Bharat Sewa Sansthan v. Uttar Pradesh Electronics Corporation Ltd., AIR 2007 SC 2961 – “Main objective of the Act is to make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration and to minimize the supervisory role of courts in the arbitral process…” [21] Having been delivered by a full bench of the SC.