[Shebani and Jai are students at Maharashtra National Law University, Mumbai.]
In its recent decision, the Supreme Court of India (SC) put an end to a long legal battle between SEAMEC Ltd. (SEAMEC) and Oil India Ltd. (OIL), and in doing so set aside the Arbitral tribunal’s (Tribunal) award. Upholding the decision of the Gauhati High Court (HC), the SC held that the contractual interpretation adopted by the arbitral tribunal could not be a possible interpretation since it was entirely inconsistent with the wording and purpose of the contract.
The dispute between SEAMEC and OIL arose out of a contract for drilling oil wells in the State of Assam, and specifically, the ‘change in law’ clause contained therein. This clause which was reflected as Clause 23 in the contract provided that OIL would be required to reimburse any additional financial costs that SEAMEC would have to incur owing to a change in law.
During the lifetime of the contract, the price of High-Speed Diesel (HSD) was increased. Given that HSD was an essential component in carrying out drilling operations, SEAMEC claimed that this change triggered Clause 23 of the contract. Accordingly, it invoked the arbitration clause and claimed that OIL was liable to repay them. The Tribunal agreed with their argument and issued an award in SEAMEC’s favor. In doing so, it observed that while the increase in HSD’s price through a circular issued by the State or the Union is not ‘law’ in the literal sense, it does still have the ‘force of law’ and would thus fall under the ambit of Clause 23.
This was followed by two successive appeals made by OIL to set aside the award. First to the District Judge under Section 34 of the Arbitration and Conciliation Act 1996 (ACA), and when this was unsuccessful, to the HC under Section 37 of the ACA. OIL had better luck at the HC and the Tribunal’s award was set aside, with the HC holding that the Tribunal’s interpretation was erroneous and against the public policy of India. Aggrieved by this judgment, SEAMEC approached the SC by way of a special leave petition under Article 136 of the Constitution of India 1950.
Decision of the Supreme Court
Essentially, what had to be determined was whether the Tribunal’s interpretation was a possible one. Before delving into this issue, the SC acknowledged the permissible scope of interference in an arbitral tribunals award as laid down in the Dyna Technologies Pvt Ltd. v. Crompton Greaves Ltd. In doing so, they recognized that where there are two possible views, the court 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 ACA (thereby appreciating that the mandate of Section 34 of the ACA is to respect the finality of the arbitral award and the commercial wisdom behind opting for arbitration).
However, on a perusal of the contract in the instant case, the SC determined that the Tribunal’s interpretation of Clause 23 was not reasonably possible. It observed that Clause 23 could not have been interpreted so broadly as to bring within its scope a price increase – one that was effected by a means other than a change in law. It also noted that there was no evidence to suggest that the parties intended for the clause to have a broad meaning. Accordingly, the SC dismissed SEAMEC’s appeal and stated that they were not inclined to interfere with HC’s judgment.
An Overview of the Scope of Interference in an Arbitral Tribunal’s Decision
It is no secret that every time an arbitral tribunal’s award is set aside, the decision draws criticism with many claiming that courts in India are diluting the sanctity of arbitral proceedings. Of course, this concern is rooted in truths that are reflected in history, and cases like ONGC v. Saw Pipes Ltd. come to mind when contemplating the extent of court interference in arbitral awards. In fairness though, it is a ghost of the past that India is trying to escape, and decisions like Dyna Technologies and recent amendments to the ACA are a testament to this very fact. However, the recent ruling in SEAMEC v. Oil India makes one question the extent of the SC’s broadmindedness when it comes to ascertaining whether a view taken by an arbitral tribunal is reasonably possible.
Needless to say, the criticism of this judgment hinges largely on a subjective element, i.e. whether or not the Tribunal’s decision was entirely perverse and not possible. Now this piece does not attempt to breakdown and dispute the SC’s findings based on the merits of the case. However, it is important to reemphasize the mandate of Section 34 of the ACA, and while doing so, to revisit a few important cases that help explain when a finding of an arbitral tribunal would be perverse.
It is well-settled law that where two views are possible, the court cannot interfere in the plausible view taken by the arbitral tribunal. It would thus follow that only a perverse view that may not be considered a reasonably possible view. So really the question is, “what would constitute a perverse view?” or rather “how high is this threshold of perversity?”
Two judgments of the SC help to answer these questions. First, as held in H.B. Gandhi v. Gopi Nath & Sons, a finding would only be perverse if it were arrived at by ignoring relevant material or if the finding were so outrageously illogical that it suffered from the vice of irrationality. Second is the case of Kuldeep Singh v. Commr. of Police, wherein the court observed that a broad distinction has to be maintained between decisions that are perverse and those which are not. The court went on to hold that a decision would not be perverse, and the findings should not be interfered with if they are arrived at based on some evidence that is reliable, regardless of how compendious it may be.
As is evident, there is a rather high threshold for perversity. Further, it is indeed permissible for two reasonable views to be different in terms of how ‘good they are in law’. Even if a view far better or preferable than the other, it surely does not have the effect of rendering the other perverse. There is, in fact, a broad difference between a perverse view and one that is not the most preferable, and that difference between must not be overlooked.
Whether the Tribunal’s Award was Perverse
Coming back to the instant case, two important facets of the Tribunal’s award need to be highlighted. First, the Tribunal utilized the liberal interpretation rule while interpreting Clause 23. Second, in doing so, it placed reliance on the testimony of OIL’s witness when he stated that change in HSD prices were never done by way of statutory enactment by either the Parliament or the State Legislatures. Accounting for this and interpreting Clause 23 liberally, the Tribunal held that the price change in question would fall under the ambit of the clause. The SC disagreed with the interpretation of the Tribunal and stated that the rule of thumb would be to read a contract as a whole and mutually explanatory. Further, and perhaps overlooking the testimony of OIL’s witness, it stated that no evidence was adduced to show that the intention of the parties was for Clause 23 to have a broad meaning.
To sum up the discussion, we may refer to the SC’s decision in Associate Builders v. Delhi Development Authority. The SC noted that even an award based on evidence that would not measure up in quality to a trained legal mind would not be held to be invalid. Simply put, once it was found that the arbitrators approach is not arbitrary or capricious, then he is the last word on the matter. Based on the above, it seems fairly apparent that the Tribunal’s award was not marred by arbitrariness and its only fault was that it relied on a different rule of interpretation that the SC would have in the instant case. In our opinion, to determine that utilizing the liberal interpretation rule was entirely illogical would be a bit of stretch in this factual circumstance.
In conclusion, there certainly appears to have been enough reason for the SC to uphold the validity of the award and reverse the decision of the HC. While it is unfortunate that this award was set aside, what remains to be seen is if subsequent benches of the SC will follow suit. Faith in arbitration in India is on the rise, and the last thing we would need is for courts to begin substituting the interpretations of tribunals with their own. One hopes that this incident was a one-off that occurred because of the peculiar circumstances of the case and that subsequent courts continue to defer to the wisdom of arbitral tribunals.