SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. (SEAMEC LIMITED) vs. OIL INDIA LIMITED

Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 673 OF 2012 SOUTH EAST ASIA MARINE                              ...APPELLANT ENGINEERING AND CONSTRUCTIONS  LTD. (SEAMEC LTD.)  VERSUS OIL INDIA LIMITED                                       …RESPONDENT With CIVIL APPEAL NO. 900 OF 2012 OIL INDIA LIMITED                                        ...APPELLANT VERSUS SOUTH EAST ASIA MARINE      …RESPONDENT ENGINEERING AND CONSTRUCTIONS  LTD. (SEAMEC LTD.)                                                         J U D G M E N T   N. V. R AMANA , J.   Civil Appeal No. 673 of 2012 Signature Not Verified The present appeal arises out of impugned judgment and order 1. Digitally signed by GEETA AHUJA Date: 2020.05.11 15:37:43 IST Reason: dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed 1 by the Gauhati High Court, wherein the High Court allowed the appeal preferred by the Respondent under Section 37 of the   Arbitration   and   Conciliation   Act,   1996   (hereinafter   the ”),   and   set   aside   the   arbitral   award   dated “Arbitration   Act 19.12.2003. 2. Brief   facts   necessary   for   the   disposal   of   this   case   are   as follows:   appellant   was   awarded   the   work   order   dated 20.07.1995 pursuant to a tender floated by the Respondent in 1994.   The   contract   agreement   was   for   the   purpose   of   well drilling and other auxiliary operations in Assam, and the same was effectuated from 05.06.1996. Although, the contract was initially only for a period of two years, the same was extended for   two   successive   periods   of   one   year   each   by   mutual agreement, and finally 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   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. 2 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.  4. On 19.12.2003, the Arbitral Tribunal issued the award in A.P No. 8 of 1999. The majority opinion allowed the claim of the Appellant   and   awarded   a   sum   of   Rs.   98,89,564.33   with interest @10% per annum from the date of the award till the recovery   of   award   money.   The   amount   was   subsequently revised   to   Rs.   1,32,32,126.36   on   11.03.2005.  The  Arbitral Tribunal  held 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. On the other hand, the minority held that the executive orders do not come within the ambit of Clause 23 of the Contract. 5. Aggrieved by the award, the Respondent challenged the same under   Section   34   of   the   Arbitration   Act   before   the   District Judge. On 04.07.2006, the learned District Judge, upheld the award   and   held   that   the   findings   of   the   tribunal   were   not 3 without basis or against the public policy of India or patently illegal and did not warrant judicial interference.  6. The Respondent challenged the order of the District Judge by filing an appeal under Section 37 of the Arbitration Act, before the High Court.  By the impugned judgment, the High Court, allowed the appeal and set aside the award passed by the Arbitral Tribunal. 7. The High Court held that the interpretation of the terms of the contract by the Arbitral Tribunal is erroneous and is against the public policy of India. On the scope of judicial review under Section 37 of the Arbitration Act, the High Court held that the Court had the power to set aside the award as it was passed overlooking the terms and conditions of the contract. Aggrieved by the same, the appellant has filed this present appeal by the way of special leave petition against the impugned judgment. 8. Learned   Counsel   for   the   Appellant   assailing   the   impugned order contends that 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 4 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.  [ (2006) 11 SCC 181 ] to support his contention. Ltd. 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.  9. In   response,   the   learned   counsel   for   the   Respondent, supporting the findings of the High Court, submits that  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.  5 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.  10. We   have   heard   the   learned   counsels   for   the   parties   and perused the materials on record. 11. In order to answer the questions raised in this appeal we first need   to   delve   into   the   ambit   and   scope   of   the   court’s jurisdiction under Section 34 of the Arbitration Act. Section 34 of the Arbitration Act provides as under – 34.  Application  for  setting  aside  arbitral  award.  —  (1) Recourse to a Court against an arbitral award may be made only   by   an   application   for   setting   aside   such   award   in accordance with sub­section (2) and sub­section (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 to which the parties have subjected it or, 6

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It is a settled position that a Court can set aside the award 12. only  on   the   grounds   as   provided   in  the   Arbitration   Act  as interpreted   by   the   Courts.   Recently,   this   Court   in   Dyna Technologies Pvt. Ltd. v.   Crompton Greaves Ltd . [ 2019 SCC ] laid down the scope of such interference. This Online SC 1656   Court observed as follows ­

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It is also settled law that where two views are possible, the 13. Court   cannot   interfere   in   the   plausible   view   taken   by   the arbitrator   supported   by   reasoning.   This   Court   in   Dyna  (supra) observed as under­ Technologies

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  However, the question in the present case is whether the 14. 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?  15. In   the   present   case,   respondent   has   argued   that   the   view taken   by   the   Arbitral   Tribunal   was   not   even   a   possible interpretation,   therefore   the   award   being   unreasonable   and unfair   suffers   from   perversity.   Hence,   the   respondent   has pleaded that the award ought to be set aside. In this context, we may state that usually the Court is not required to examine the merits of the interpretation provided in the award by the arbitrator,   if   it   comes   to   a   conclusion   that   such   an interpretation was reasonably possible.  16. We  begin by looking  at  the clause, i.e 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 10 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.  17. The Arbitral Tribunal held that this clause must be liberally construed and any circular of the Government of India would amount to a change in law. The Arbitral Tribunal observed: “According to Rule of Construction of any document   harmonious   approach   should be made reading or taking the document as a whole and exclusion should not be readily inferred unless it is clearly stated in the particular clause of the document. This is according to Rule of Interpretation. A   consistent   interpretation   should   be given with a view to smooth working of the system, which the document purports to regulate.   The   word,   which   makes   it inconsistent   or   unworkable,   should   be avoided.   This   is   known   as   beneficial construction and a construction should be made   which   suppress   the   mischief   and advance the remedies. So, the increase in the operational cost due to enhanced price of the diesel is one of the subject matters of the contract as enshrined in Cl. 23. It may be said that Cl. 23 may be termed as ‘‘Habendum   Clause”.   In  the   deed   of   the contract   containing   various   granting clauses and the habendum signifying the intention of, the grantor. 11 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.” The   majority   award   utilizes   ‘liberal   interpretation   rule’   to construe   the   contract,   so   that   the   price   escalation   of   HSD could be brought under the Clause 23 of the contract. Further the Arbitral Tribunal identifies the aforesaid clause to be a 12 ‘Habendum   Clause’,   wherein   the   rights   granted   to   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   the   agreement   to   meet such   uncertain   and   unforeseen eventualities and certainly not for revising a fixed rate of contract. I also find that both   parties   had   agreed   to   keep   “force majeure” clause in the agreement. Under this   doctrine   of   commercial   law,   a contract agreement can be rescinded for acts of God, etc. Under clause 44.3 of the agreement,   ‘force   majeure”   has   been clearly defined, which includes acts and regulations of the Government to rescind a contract. In this way, clause 23 is very close   and   akin   to   the   “force   majeure clause”. Besides this, I may also declare that   clause   23   is   pari   materia   to   the “doctrine of frustration and supervening impossibility”.   In   other   words,   under clause 23 rights and obligations of both the parties have been saved due to any change in the existing law or enactment of a new law or on the ground of new interpretation of the existing law. In my opinion, clause 23 must have been made a part of the agreement keeping in mind section   56   of   the   Indian   Contract   Act, 1872 sans any other intention.” 13 19. The High Court, in its reasoning, suggests that Clause 23 is akin to a force majeure clause. We need to understand the utility and implications of a  force majeure  clause. 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. Section 56 of the Contract Act stands as follows: . —An 56.   Agreement   to   do   impossible   act agreement to do an act impossible in itself is void. Contract   to   do   act   afterwards   becoming —A contract to do an impossible or unlawful act which, after the contract is made, becomes impossible, or, by reason of some event which the   promisor   could   not   prevent,   unlawful, becomes   void   when   the   act   becomes impossible or unlawful.   20.  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. When the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the 14 contract becomes void. As held by this Court in  Satyabrata

(emphasis supplied) However,   there   is   no   doubt   that   the   parties   may   instead choose the consequences that would flow on the happening of an uncertain future event, under Section 32 of the Contract Act. 21. On the other hand, the common law at one point interpreted the consequence of such frustration to fall on the party who sustained loss before the frustrating event. The best example of such an interpretation can  be  seen  in the  line  of  cases which came to be known as ‘coronation cases’. In  Chandler v. Webster , [1904] 1 KB 493, Mr. Chandler rented space from 15 Mr.   Webster   for   viewing   the   coronation   procession   of   King th Edward VII to be held on 26   June 1902. Mr. Chandler had paid part consideration for the same. However, due to the King falling   ill,   the   coronation   was   postponed.   As   Mr.   Webster insisted on payment of his consideration, the case was brought to the Court. The Court of Appeals rejected the claims of both Mr. Chandler as well as Mr. Webster. The essence of the ruling was that once frustration of contract happens, there cannot be any   enforcement   and   the   loss   falls   on   the   person   who sustained it before the  force majeure  took place. 22. This formulation was over­ruled by the House of Lords in the historic  decision of   Fibrosa  Spolka  Akcyjna  v. Fairbairn , [1942] UKHL 4, wherein the Lawson Combe Barbour Ltd. harsh consequences of frustration as per the old doctrine was moderated   by   the   introduction   of   the   law   of   restitution. Interestingly,   Lord   Shaw   in   Cantiare   San   Rocco   SA (Shipbuilding   Company)   v.   Clyde   Shipbuilding   and ,   [1924]   AC   226,   had   observed   that Engineering   Co.   Ltd. English   law   of   leaving   the   loss   to   where   it   fell   unless   the contract   provided   otherwise   was,   he   said,   appropriate   only 16 ‘among tricksters, gamblers and thieves’. The UK Parliament took   notice   of   the   aforesaid   judgment   and   legislated  Law

In India, the Contract Act had already recognized the harsh 23. consequences   of   such   frustration   to   some   extent   and   had provided   for   a   limited   mechanism   to   ameliorate   the   same under Section 65 of the Contract Act. Section 65 provides as under: 65. Obligation of person who has received advantage   under   void   agreement,   or contract that becomes void When an agreement is discovered to be void, or when a contract becomes void, any person who has   received   any   advantage   under   such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it. The   aforesaid   clause   provides   the   basis   of   restitution   for ‘failure of basis’. We are cognizant that the aforesaid provision addresses limited circumstances wherein an agreement is  void ab initio  or the contract becomes subsequently void.  24. Coming back to the case, the contract has explicitly recognized force majeure  events in Clause 44.3 in the following manner: 17 For   purpose   of   this   clause   “Force   Majeure” means an act of God, war, revolt, riots, strikes, bandh,   fire,   flood,   sabotage,   failure   or destruction of roads,   systems and acts and regulations of the Government of India and   (but   not   due   to   employment other   clauses problem   of   the   contractor)   beyond   the reasonable control of the parties. Further,   under   Clause  22.23,   the  parties   had   agreed   for  a payment of   force majeure   rate to tide over any   force majeure event, which is temporary in nature. 25. Having   regards   to   the   law   discussed   herein,   we   do   not subscribe   to   either   the   reasons   provided   by   the   Arbitral Tribunal or the High Court. 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. 26. We also do not completely subscribe to the reasoning of the High Court holding that Clause 23 was inserted in furtherance of the doctrine of frustration. Rather, under Indian contract law, the effect of the doctrine of frustration is that it discharges all the parties from future obligations. In order to mitigate the 18 harsh consequences of frustration and to uphold the sanctity of   the   contract,   the   parties   with   their   commercial   wisdom, chose to mitigate the risk under Clause 23 of the contract.  Our   attention   was   drawn   to   27. Sumitomo   Heavy   Industries Limited   v.   Oil   and   Natural   Gas   Corporation   Limited , (2010) 11 SCC 296, where this Court interpreted an indemnity clause   and   found   that   an   additional   tax   burden   could   be recovered under such clause. Based on an appreciation of the evidence, the Court ruled that additional tax burden could be recovered under the clause as such an interpretation was a plausible   view   that   a   reasonable   person   could   take   and accordingly   sustained   the   award.   However,   we   are   of   the opinion that the aforesaid case and ratio may not be applicable herein as the evidence on record does not suggest that the parties had agreed to a broad interpretation to the clause in question.  28. In this context, 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. In the 19 case at hand, this basic rule was ignored by the Tribunal while interpreting the clause.  29. The   contract   was   entered   into   between   the   parties   in furtherance of a tender issued by the Respondent herein. After considering the tender bids, the Appellant issued a Letter of Intent.  In   furtherance   of   the   Letter   of   Intent,   the   contract (Contract No. CCO/FC/0040/95) was for drilling oil wells and auxiliary operations. It is important to note that the contract price   was   payable   to   the   ‘contractor’   for   full   and   proper performance of its contractual obligations. Further, Clauses 14.7 and 14.11 of the Contract states that the rates, terms and conditions   were   to   be   in   force   until   the   completion   or abandonment of the last well being drilled. 30. 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 20 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.  The   interpretation   of   the   Arbitral   Tribunal   to   expand   the 31. meaning of Clause 23 to include change in rate of HSD is not a possible interpretation of this contract, as the appellant did not introduce any evidence which proves the same.  The   other   contractual   terms   also   suggest   that   the 32. interpretation   of   the   clause,   as   suggested   by   the   Arbitral Tribunal,   is   perverse.   For   instance,   Item   1   of   List   II (Consumables)   of   Exhibit   C   (Consolidated   Statement   of Equipment and Services Furnished by Contractor or Operator for the Onshore Rig Operation), indicates that fuel would be supplied by the contactor, at his expense. The existence of such a clause shows that the interpretation of the contract by the Arbitral Tribunal is not a possible interpretation of the contract. 33. For the aforesaid reasons, we are not inclined to interfere with the impugned judgment and order of the High Court setting 21 aside the award. The appeal is accordingly dismissed. There shall be no order as to costs. IVIL PPEAL O OF   C  A  N . 900   2012   34.  In view of the judgment pronounced in C.A. No. 673 of 2012, the aforesaid matter is disposed of in the aforesaid terms. ..............................................J. (N.V. RAMANA)  ..............................................J.  (MOHAN M. SHANTANAGOUDAR) ..............................................J.  (AJAY RASTOGI) NEW DELHI; MAY 11, 2020. 22