The full bench of the Hon’ble Supreme Court comprising Justice N.V. Ramana, Justice Mohan M. Shantanagoudar and Justice Ajay Rastogi has, vide its judgment dated 11th May 2020 in the matter of South East Asia Marine Engineering and Constructions Ltd (SEAMEC Ltd) v Oil India Limited (OIL) has held that a domestic award can be set aside on the basis that the contractual interpretation by the arbitral tribunal is perverse and implausible and, therefore, is against the public policy of India.
OIL and SEAMEC entered into a contract for drilling oil wells. During the subsistence of the contract, the price of High Speed Diesel (HSD) increased, thus SEAMEC asked OIL to reimburse the excess cost. The price change was caused by a circular issued by a governmental authority (Executive Order). As per clause 23 of the contract, SEAMEC is entitled to claim any increase in price of the HSD which is caused by a ‘change in the existing law’ within the meaning of clause 23 and such extra amount will be paid by OIL. OIL refused to pay the extra cost by saying the effect of an Executive Order cannot be termed as a change or enactment of law. Thus, SEAMEC invoked arbitration against OIL.
The majority of the arbitral tribunal held that as per clause 23 the increase in HSD price by virtue of the Executive Order will amount to a change in law thus OIL will be liable to reimburse the additional costs incurred to SEAMEC. The award was challenged before District Court where the Court without interfering with the award upheld the award passed by the arbitration tribunal.
An appeal was made before Guwahati High Court under section 37 of the Arbitration and Conciliation Act, 1996. Guwahati High Court vide its judgment, allowed the appeal by setting aside the award passed by the arbitral tribunal. The Guwahati High Court held that it was a fit case for exercise of its power of judicial review under section 37 since the award was erroneous because it overlooked the terms and conditions of the contract and was therefore against the public policy of India.
Decision of the Guwahati High Court was challenged before the Hon’ble Supreme Court. Hon’ble Supreme Court observed that the contract contemplated a fixed rate for SEAMEC. The Supreme Court also noted that other terms of the contract require that all fuel would be supplied by SEAMEC at its own cost. There was no specific language in the contract to indicate that change in law will amount to change in price. Further, SEAMEC failed to lead adequate evidence to prove that clause 23 was meant to have an expansive meaning to bring within its ambit change in rate of HSD. Accordingly, the Supreme Court held that price fluctuations were beyond the scope of clause 23 thus SEAMEC would not be entitled to any reimbursement for the price increase in HSD. Ultimately, whilst disagreeing with its reasoning, the Supreme Court refused to interfere with the High Court’s decision to set aside the arbitral award.
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