'Usually Court Not Required To Examine Merits Of Interpretation Provided In Award By Arbitrator, If Such Interpretation Was Reasonably Possible': SC [Read Judgment]

In setting aside an arbitral award, the Supreme Court recently suggested that courts may not examine the merits of the interpretation provided in the award by the arbitrator, unless they were of the view that such an interpretation was reasonably not possible. 

The Court was faced with the question 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. 

Delving into the ambit and scope of the court's jurisdiction under Section 34 of the Arbitration Act (Application for setting aside arbitral award), the bench headed by Justice N. V. Ramana acknowledged 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 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", stated the bench.

However, in the present case, Oil India Ltd. had 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 had 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", clarified the bench

Facts of the case

The Appellant was awarded the work order pursuant to a tender floated by the Respondent-government enterprise in 1994. The contract agreement was for the purpose of 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 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. The said Clause 23 is entitled 'Subsequently Enacted Laws', and reads, "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 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.

While the District Court, in a challenge under section 34, upheld the award, the Gauhati High Court, on appeal under section 37 of the Arbitration Act, set aside the award.

"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", ruled the High Court.

Conclusions of the Apex Court

In as much as the High Court suggested that Clause 23 is akin to a force majeure clause, the bench proceeded to discuss "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. 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"

The Apex Court continued to observe that the Contract Act had already recognised 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, which imposes the Obligation of restitution on the person who has received advantage under the void agreement or the contract that becomes void.

The Court also noted that, in the present case, the contract has explicitly recognised force majeure events to include "systems and acts and regulations of the Government of India and other clauses". "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", reads the judgment.

"Having regards to the law discussed herein, we do not subscribe to either the reasons provided by the Arbitral Tribunal or the High Court. 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", held the bench.

As regards the Arbitral Tribunal, the three-judge bench remarked, "The majority award utilises '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". The top court reflected 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 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.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", inferred the bench.

"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", it ruled.

The Supreme Court reached the conclusion that 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, taking note of the other contractual terms which also suggest that such interpretation of the clause is 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 contractor, 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", decided the Court.

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