Recently, a three-judge bench of Supreme Court (‘SC’) in SEAMEC v. OIL ruled in favor of setting aside an arbitral award on the ground that the award passed by the Arbitral Tribunal was perverse in nature. The author in the present article highlights the question put through this judgment–whether a court can set aside the arbitral tribunals' interpretation of a contract and substitute it for their own. The mandate of section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’) is to respect the finality of an award. Courts cannot interfere with an award in the usual course, and particularly when an arbitral tribunal has taken a particular plausible view. Any reasons stated by the Tribunal while passing the award needs to be proper, intelligible, and adequate as per Section 31(3) of the Act. Failing which, the award can be challenged on the ground of perversity under Section 34 of the Act, and if proved, the award can be set aside.
After the respondent company, OIL issued a tender in 1994, the parties entered into a contract whereby the appellant company, SEAMEC was engaged for the purpose of drilling and other auxiliary operations in Assam. The contract was initially signed for a period of two years which was later extended for two additional years. While the contract was in force, the prices of High-Speed Diesel (‘HSD’), an essential material to carry out the operations increased. SEAMEC claimed that the change in the price triggered Clause 23 of the contract and that OIL was liable to reimburse them for the same.
As per Clause 23 of the contract “, if there was any ‘change in law or interpretation of existing law’ subsequent to the date of the price of Bid Opening, any additional charge incurred by the Company carrying out the operation will be reimbursed”.
With OIL repeatedly denying the claim, SEAMEC invoked the arbitration clause and the dispute was referred to an Arbitral Tribunal comprising three arbitrators. The majority opinion held that an increase in the price of HSD through a circular issued by the government is not “law” in the literal sense, but has the “force of law” and is thus within the ambit of Clause 23. Aggrieved by the award, OIL challenged the same under Section 34 of the Act. The District Judge upheld the award and did not find any reason to interfere with the same. Subsequently, OIL filed an appeal under Section 37 of the Act before the Guwahati High Court (‘HC’) which allowed the appeal and set aside the award. The HC found that interpretation of terms of the contract by the Arbitral Tribunal was erroneous and hence against the public policy of India.
This led SEAMEC to file a Special Leave Petition in the SC.
Supreme Court Ruling:
The SC had to essentially decide whether the interpretation of the Arbitral Tribunal as to “force of law” was a reasonable and adequate one so as to fall within the scope of Section 34 of the Act. The SC paid heed to its recent decision in Dyna Technologies Pvt. Ltd v. Crompton Greaves Ltd. which laid down the scope of interference,
“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.”
However, on examining the terms of the contract, the SC held that the wide interpretation of Clause 23 of the contract cannot be accepted, and is not a possible one, as the thumb rule of interpretation is that a contract should be read as a whole and mutually explanatory. The SC also observed that the parties before entering the contract mitigated such risk of price hike and additionally that SEAMEC led no evidence to support the broad interpretation of Clause 23. Hence, the SC set aside the appeal and stated that they were not inclined to interfere with the HCs judgment of setting aside the award.
Scope of Interference with Arbitral Awards
It is settled law that courts cannot interfere with an award unless it is perverse. What is a perverse finding has been expounded by the SC in Municipal Committee, Hoshiarpur v. Punjab State Electricity Board wherein it held that
“If a finding arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then the finding is rendered infirm in the eye of the law.”
A similar view was taken by the SC in the case of H.B. Gandhi v. Gopi Nath & Sons.
Further, courts cannot delve into the merits of the case if the interpretation given by the arbitral tribunal is a plausible one. The SC in Steel Authority of India v. Gupta Brothers Steel tubes limited, held that an error relatable to the interpretations of the contract by an arbitrator is an error within his jurisdiction and such an error is not open to correction by courts as it is not a prima facie error. In Sudarshan Trading Co. v. Govt of Kerala, Sabyasachi Mukherji J. ruled that “by purporting to construe the contract the court could not take upon itself the burden of saying that this was contrary to the contract and, as such, beyond jurisdiction”. Further, in Numaligarh Refinery Ltd. v. Daelim Industrial Co. Ltd, the SC held that courts shall not ordinarily substitute their interpretation for that of the arbitrator. If the parties with their eyes wide open have consented to refer the matter to the arbitration, then normally the finding of the arbitrator should be accepted without demur. It is also relevant to refer to the SC’s decision in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran wherein the SC laid down that if two views are possible, then the court cannot interfere with the possible view taken by the arbitrator, even though it may not be the plausible view.
Coming back to the case at hand, it is fair to say that the award rendered by the Arbitral Tribunal was perverse in the sense that it was arbitrary, irrational, or. illogical. The Tribunal merely interpreted the clause in question in a different manner as compared to the SC. Therefore does the broad interpretation of a contract called for interference by courts? This judgment of the SC provides an expansive interpretation to the scope of interference under section 34 of the Act and is in divergence from earlier judicial precedents which lean towards minimal judicial interference. Judges presiding over arbitration matters should be conscious of the harms that entail arbitrary interference with awards. As the interpretation of contracts remains in question in most arbitrations, broadening the ambit of Section 34 of the Act will prolong the dispute, and the principle of minimal intervention by courts will be defeated. A wider scope of interpretation may open Section 34 to misuse by the parties thereby diluting the sanctity of the award of the arbitral tribunal.
[i] Niyati is currently pursuing her 4th year BA.LLB course from ILS Law College Pune. Her interests lies in dispute resolution, IPR, and Criminal law jurisprudence.
Preferred Citation: Niyati Bhogayta, SEAMEC V Oil India: A case of excessive interference?, Arbitration & Corporate Law Review, Published on 11th July 2020.