Case: SOUTH EAST ASIA MARINE ENGINEERING AND CONSTRUCTIONS LTD. (SEAMEC LTD.) Vs. OIL INDIA LIMITED

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 04.10.20003. 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. 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 arbitrators4. 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 Contract5. 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 interference6. 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 Tribunal7. 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.

Court's reasoning:
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 Courts13. 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 reasoning15. 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 possible25. 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 Contract26. 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 contract27. 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 question28. 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 clause29. 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 drilled30. 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 inclusion31. 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 same32. 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.