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Wide interpretation of a Clause of Agreement by the Arbitral Tribunal, Award rightly set aside: SC

The SC on May 11, 2020 {SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. v. OIL INDIA LIMITED} held that it is a settled position that a Court can set aside the award only on the grounds as provided in the Arbitration Act. It was held that 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.

The SC Bench, comprising of Justice N.V. Ramana, Justice Mohan M. Shantanagoudar & Justice Ajay Rastogi held that 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.

In the present case, the question falling for consideration before the SC was 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?

The factual delineation of the case before the SC was as follows: during the subsistence of the contract, the prices of HighSpeed   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. 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. The claim was allowed by Arbitral Tribunal; upheld under Sec 34 petition by District Judge; but set aside by HC in Sec 37 petition. That judgment of the HC, setting aside the award, was subject matter before the SC in this case.

The SC held that 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. It was held that when the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the contract becomes void.

It was held that having   regards   to   the settled  law,  the SC   does  not subscribe   to   either   the   reasons   provided   by   the   Arbitral Tribunal or the High Court. It was held that 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.

The SC held that 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. It was held that in the case at hand, this basic rule was ignored by the Tribunal while interpreting the clause.

The SC concluded that it can be said that the contract was   based   on   a   fixed   rate. It was held that the   party,   before   entering   the tender process, entered the contract after mitigating the risk of such an increase. Further held that 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. It was held that there   is   no   gainsaying   that   there   will   be   price fluctuations which a prudent contractor would have taken into margin, while bidding in the tender. It was held that such price fluctuations cannot be brought under Clause 23 unless specific language points to the inclusion.

For the aforesaid reasons, the SC did not interfere with the impugned judgment and order of the High Court setting aside the award, however, assigned different reasons than by the HC for sustaining the impugned judgment. The appeal was accordingly dismissed by the SC. 

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