SUPREME COURT FORCE MAJURE AND THE INDIAN CONTRACT ACT SOUTH EAST ASIA MARINE ENGINEERING AND OIL INDIA LIMITED 11MAY 2020

IMPORTANT POINTS:

The interpretation of the Arbitral Tribunal to expand the meaning of a clause in the contract 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

Section 34 - Recourse to a Court against an arbitral award was dwelved at depth to test the course of decision by the High Court.

The appellant was awarded a work order basis tender floated by the Respondent and the the contract was for the purpose of well drilling and other auxiliary operations in Assam. 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

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. RAMANA, J .

Civil Appeal No. 673 of 2012

1. The present appeal arises out of impugned judgment and order dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed 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 “Arbitration Act”), and set aside the arbitral award dated 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 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.

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

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

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.

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.

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,

failing any indication thereon, under the law for

the time being in force; or

(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; or

(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 matters beyond the scope of the

submission to arbitration:

Provided that, if the decisions on matters

submitted to arbitration can be separated from

those not so submitted, only that part of the

arbitral award which contains decisions on

matters not submitted to arbitration may be set

aside; or

(v) the composition of the arbitral tribunal or the

arbitral procedure was not in accordance with the

agreement of the parties, unless such agreement

was in conflict with a provision of this Part from

which the parties cannot derogate, or, failing

such agreement, was not in accordance with this

Part; or

(b) the Court finds that—

(i) the subjectmatter

of the dispute is not capable

of settlement by arbitration under the law for the

time being in force, or

(ii) the arbitral award is in conflict with the public

policy of India.

Explanation. —Without prejudice to the generality of

subclause

(ii) it is hereby declared, for the avoidance

of any doubt, that an award is in conflict with the

public policy of India if the making of the award was

induced or affected by fraud or corruption or was in

violation of section 75 or section 81.

(3) An application for setting aside may not be made after

three months have elapsed from the date on which the party

making that application had received the arbitral award or,

if a request had been made under section 33, from the date

on which that request had been disposed of by the arbitral

tribunal: Provided that if the Court is satisfied that the

applicant was prevented by sufficient cause from making

the application within the said period of three months it

may entertain the application within a further period of

thirty days, but not thereafter.

(4) On receipt of an application under subsection

(1), the

Court may, where it is appropriate and it is so requested by

a party, adjourn the proceedings for a period of time

determined by it in order to give the arbitral tribunal an

opportunity to resume the arbitral proceedings or to take

such other action as in the opinion of arbitral tribunal will

eliminate the grounds for setting aside the arbitral award.

12. It is a settled position that a Court can set aside the award

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

Online SC 1656] laid down the scope of such interference. This

Court observed as follows“

26. There is no dispute that Section 34 of

the Arbitration Act limits a challenge to an

award only on the grounds provided therein

or as interpreted by various Courts. We need

to be cognizant of the fact 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.

Section 34 is different in its approach and

cannot be equated with a normal appellate

jurisdiction. The mandate under Section 34

is to respect the finality of the arbitral award

and the party autonomy to get their dispute

adjudicated by an alternative forum as

provided under the law. 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.”

(emphasis supplied)

13. 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)

14. However, the question in the present case is 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?

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

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.

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

‘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.”

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:

56. Agreement to do impossible act.—An

agreement to do an act impossible in itself is

void.

Contract to do act afterwards becoming

impossible or unlawful—A contract to do an

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

contract becomes void. As held by this Court in Satyabrata

Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44:

“15. These differences in the way of

formulating legal theories really do not concern

us so long as we have a statutory provision in

the Indian Contract Act. In deciding cases in

India the only doctrine that we have to go by is

that of supervening impossibility or illegality as

laid down in Section 56 of the Contract Act,

taking the word “impossible” in its practical

and not literal sense. It must be borne in

mind, however, that Section 56 lays down a

rule of positive law and does not leave the

matter to be determined according to the

intention of the parties.”

(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

Mr. Webster for viewing the coronation procession of King

Edward VII to be held on 26th 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

Lawson Combe Barbour Ltd., [1942] UKHL 4, wherein the

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

Engineering Co. Ltd., [1924] AC 226, had observed that

English law of leaving the loss to where it fell unless the

contract provided otherwise was, he said, appropriate only

‘among tricksters, gamblers and thieves’. The UK Parliament

took notice of the aforesaid judgment and legislated Law

Reform (Frustrated Contracts) Act, 1943.

23. In India, the Contract Act had already recognized the harsh

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:

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

other clauses (but not due to employment

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

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.

27. Our attention was drawn to 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

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

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.

31. 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, as the appellant did

not introduce any evidence which proves the same.

32. The other contractual terms also suggest that the

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

aside the award. The appeal is accordingly dismissed. There

shall be no order as to costs.

CIVIL APPEAL NO. 900 OF 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.

(N.V. RAMANA)

(MOHAN M. SHANTANAGOUDAR)

(AJAY RASTOGI)

NEW DELHI;

MAY 11, 2020.

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