Pre- 2015 Arbitration Amendment Act dispute in a post 2015 era

In South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Ltd.) v. Oil India Limited[1] [‘SEAMEC judgment’], the Supreme Court recently adjudicated on a question of perversity of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996[2] [‘the Arbitration Act’], pertaining to a dispute that had arisen in 1999 i.e. in a pre-2015 Arbitration Amendment Act era, and the petition for setting aside of the arbitral award had also been filed in a pre-2015 Arbitration Amendment Act era.

The Supreme Court in the instant case dismissed the appeal from an impugned order[3] passed by the Gauhati High Court setting aside an award passed by an Arbitral Tribunal on the ground of it being against the public policy of India.

Facts

The appellant was awarded a work order dated 20th July, 1995 pursuant to a tender floated by the respondent. The contract agreement between the appellant and the respondent was for the purpose of well drilling and other auxiliary operations in Assam.

During the subsistence of the contract, the parties witnessed a price rise in an essential commodity [High Speed Diesel ‘HSD’] for carrying out the drilling operations. Consequently, the appellant raised a claim under Clause 23 of the contract agreement (set out herein below) on the ground that an increase in the price of an essential material for carrying out the contract agreement had triggered the “change in law” clause under the contract and the respondent became liable to reimburse the appellant for the same. As the respondent kept rejecting the claim, the appellant eventually invoked the arbitration clause.

Clause 23 of the contract agreement between the appellant and the respondent stated:

Subsequent 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.”

The Award passed by the Arbitral Tribunal

Upon having adjudicated the disputes between the appellant and the respondent, the majority of the Arbitral Tribunal held that “while an increase in the price of an essential material 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 of the contract agreement[4]. Whereas the minority of the Arbitral Tribunal held that the change in price of the said essential material being an executive order, does not come within the ambit of Clause 23 of the contract agreement.

Decision of the District Judge and the Gauhati High Court

Aggrieved by the award passed by the Arbitral Tribunal, the respondent challenged the award under Section 34 of the Arbitration Act before the District Judge. The District Judge upheld the award and decided that “the findings of the tribunal were not without bias or against the public policy of India or patently illegal and did not warrant judicial interference.[5]

The order of the District Judge was challenged by the respondent before the High Court under Section 37 of the Arbitration Act. 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[6] and thereby allowed the appeal and set aside the award passed by the Arbitral Tribunal.

Decision of the Supreme Court

Aggrieved by the setting aside of the award passed by the Arbitral Tribunal, the appellant filed an appeal in the Supreme Court. The Supreme Court noted that the Arbitral Tribunal had held that the subsequent enactment clause must be construed in a liberal manner and any circular of the Government of India would amount to a change in law. Further, the Supreme Court noted that the High Court in its reasoning suggested that the subsequent enactment clause is akin to a force majeure clause and therefore, under the said clause, the rights and obligations of both the parties would be saved on account of any change in the existing law or enactment of a new law or on the ground of new interpretation of the existing law.

The question addressed by the Supreme Court in SEAMEC judgment is: whether the interpretation provided to the contract in the award passed by the Arbitral Tribunal was reasonable and fair, so that the same passes the muster under Section 34 of the Arbitration Act? The Supreme Court concluded that the interpretation of the clause, as suggested by the Arbitral Tribunal, is perverse, resulting in the appeal being allowed and the award being set aside.

Opinion

It is important to understand the manner and the reasons for which the Supreme Court in the SEAMEC judgment concluded that the award passed by the Arbitral Tribunal was perverse and therefore had to be set aside.

In  ONGC Ltd. v. Saw Pipes Ltd.[7] the Supreme Court held that an award could be set aside on the ground of violating the “public policy of India” if it is contrary to: (i) fundamental policy of Indian Law; or (ii) the interest of India; or (iii) justice and morality; or (iv) in addition, if it is patently illegal[8]. Thereafter, in ONGC v. Western Geco International Ltd.[9] (which is no longer considered as good law) the Supreme Court was of the opinion that what constitutes “fundamental policy of Indian law” has not been elaborated, and therefore took on the task of determining the same. In doing so, the Supreme Court defined three principles that would constitute “fundamental policy of Indian law”. One of the said three principles was ‘the duty to adopt a judicial approach[10] which meant   “…that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration.” [11]

When we look at the manner in which the question addressed by the Supreme Court has been framed in SEAMEC judgment, one sees a clear resemblance in the Court having adopted the judicial approach and language of ONGC v. Western Geco International Ltd.[12]

In Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd.[13]  as well as the 246th Law Commission Report[14], it has been stated that the Amendment Act, 2015 would apply to Section 34 petitions that are made after 23.10.2015 (i.e. the day on which the Amendment Act came into force). In Ssangyong Engg. & Construction Co. Ltd. v. NHAI[15], the Supreme Court held that “a decision which is perverse, as understood in paras 31 and 32 of Associate Builders[16], while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award.[17] The test for a decision being ‘perverse’ as laid down under the Associate Builders[18] case remains a valid test. The difference between the applicability of the test pre-2015 and post 2015 Arbitration Amendment Act era is that in case of the former, the case for a decision being perverse will still have to be made out on the ground of “public policy” whereas in the latter, the case for a decision being perverse will have to be made out on the ground of “patent illegality” as the same was introduced as a ground for setting aside an award under Section 34 of the Arbitration Act, vide the 2015 Arbitration Amendment Act.

Considering that SEAMEC judgment pertains to a dispute and its adjudication in a pre- 2015 Arbitration Amendment Act era, the Supreme Court whilst reaching its conclusion that the award passed by the Arbitral Tribunal was ‘perverse’, would have had to apply the test for perversity which was laid down under para 31 of Associate Builders[19]: (SCC para 31)

31.The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:

(i) a finding is based on no evidence, or

(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or

(iii) ignores vital evidence in arriving at its decision,

such decision would necessarily be perverse.”[20]

The SEAMEC judgment does not seem to have applied the test of a decision being ‘perverse’ as has been elaborated hereinabove. However, it does come to the conclusion that the decision of the Arbitral Tribunal was perverse. This is one of the fundamental flaws in  SEAMEC judgment.

Having considered the view of the Arbitral Tribunal and the High Court, the Supreme Court concluded that it does not subscribe to either of the two views. The Supreme Court disagreed with the view of the Arbitral Tribunal as it failed to interpret Clause 23 by taking into consideration all the clauses of the contract agreement. Further, the Supreme Court did not find the High Court’s reasoning that Clause 23 was inserted in furtherance of the doctrine of frustration was not completely valid, as sustainable. Moreover, the Supreme Court stated that “the evidence on record does not suggest that the parties had agreed to a broad interpretation to the clause in question”[21] and that the wide interpretation of Clause 23 provided by the Arbitral Tribunal 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, which was ignored by the Arbitral Tribunal in the instant case. However, in doing so, the Supreme Court completely overlooks the findings of the Arbitral Tribunal that it has itself quoted at para 17 of the SEAMEC judgment and the evidence provided by a witness of the  respondent.

The Supreme Court has adopted its own view on the interpretation of the contract agreement and stated that it was based on a fixed rate. The parties, before entering the tender process, entered the contract after mitigating the risk of such an increase. Further, the Supreme Court stated 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 workings and purpose of the contract”[22]. It is pertinent to note that in adopting this interpretation the Supreme Court has completely undermined the protection warranted to a contractor under Clause 23 of the contract agreement.

Clause 23 not only protects the contractor from additional cost, in case of a change or an enactment of the law, but also from ‘interpretation of existing law’. The wording of the said clause itself has a wide connotation which was not considered by the Supreme Court. Considering that Clause 23 of the contract agreement itself has been worded in a wide manner in order to include not only a change or enactment of any law but also an interpretation of an existing law in order to reimburse additional cost to the contractor, the reasoning given by the Supreme Court to conclude that the interpretation of the clause, as suggested by the Arbitral Tribunal is perverse may not necessarily be acceptable. 

In a recent judgment delivered by the Supreme Court in  Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.[23], it was held that “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”[24]. In  SEAMEC judgment, the Supreme Court despite having referred to this particular ratio of Dyna Technologies[25], has failed to apply it as it had failed to show that the perversity of the arbitral award in  SEAMEC dispute goes to the root of the matter and that the interpretation adopted by the Arbitral Tribunal is not a sustainable interpretation.

The Court in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd[26]., has also stated that “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.”[27] However, despite having referred to this jurisprudence, the Court has failed to apply the same to  SEAMEC judgment.

In Navodaya Mass Entertainment Ltd. v. J.M. Combines[28], the Supreme Court had held that “Once the arbitrator has applied his mind to the matter before him, the court cannot reappraise the matter as if it were an appeal and even if two views are possible, the view taken by the arbitrator would prevail.”[29] Despite the jurisprudence laid down in Navodaya Mass Entertainment Ltd. v. J.M. Combines[30], in  SEAMEC judgment, both the High Court and the Supreme Court failed to appreciate the interpretation of Clause 23 that was adopted by the Arbitral Tribunal and instead provided its own interpretation of the said clause to conclude that the award passed by the Arbitral Tribunal was perverse, erroneous and against the public policy of India.

While the Supreme Court in most cases now has adopted a progressive stance in maintaining a minimum interference in adjudication of arbitration matters,  SEAMEC judgment is the one-off instance where the Supreme Court crossed the self-drawn boundaries of interference in arbitration matters.


*Practising Lawyer at Bombay High Court.

*Law Researcher at Punjab and Haryana High Court.

[1] 2020 SCC OnLine SC 451  

[2] Arbitration and Conciliation Act, 1996

[3] Arbitration Appeal No. 11 of 2006, judgment dated 24.07.2007

[4] 2020 SCC OnLine SC 451 para 4 

[5] Ibid, para 5;

[6] Ibid, para 7

[7] (2003) 5 SCC 705 

[8] Ibid, para 31

[9] (2014) 9 SCC 263, paras 34 &35; 

[10] Ibid. paras  34 & 35

[11] Ibid. paras 34 & 35

[12] Ibid. paras 34 & 35

[13] Ibid. para 78

[14] 246th Law Commission Report on Amendments to the Arbitration and Conciliation Act, 1996

[15] (2019) 15 SCC 131

[16] Associate Builders v. DDA, (2015) 3 SCC 49  

[17] Ssangyong Engg. & Construction Co. Ltd. v. NHAI,(2019) 15 SCC 131, paras 41 

[18] Associate Builders v. DDA, (2015) 3 SCC 49  

[19] Ibid.

[20] Ibid. para 31 

[21] 2020 SCC OnLine SC 451, para 27

[22] Ibid. para 30

[23] 2019 SCC OnLine SC 1656  

[24] Ibid. para 26

[25] 2019 SCC OnLine SC 1656

[26] Ibid.

[27] Ibid. para 26

[28] (2015) 5 SCC 698 

[29] Ibid. para 8

[30](2015) 5 SCC 698 

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