The words interpretation or application of the contract are frequently used in arbitration agreements, and they generally cover disputes between the parties in regard to the construction of the relevant terms of the contract as well as their effect. After the advent of the Arbitration and Conciliation Act, 1996, (as amended), (“the Act”), Courts are adopting a considerate approach of interpretation of the arbitration agreement that would promote and not destroy essence of arbitration. Unless a clear intention is borne out of the arbitration agreement to keep disputes without the purview of the arbitration, an arbitration agreement should be interpreted according to the true intent and purpose.
The question of interpretation is jurisdiction-specific one, and it is not uncommon for the parties to choose the governing laws of their arbitration clause based on how generous the jurisdiction’s approach to interpretation is. However, even under so-called “arbitration friendly” laws, interpretation cannot amount to rewriting of the clause and care must still be taken at the drafting stage. This is especially important regarding non-exclusive arbitration agreements, which submit all disputes to arbitration, but include a carved-out provision that reserve the parties' right to go to court in respect of certain types of claims or relief.
The most fundamental and widely accepted principle of interpretation applicable to arbitration agreements, is the principle of interpretation in good faith. Interpretation in good faith is nothing but looking for the intention of the parties, rather than simply restricting oneself to examining the literal meaning of the terms used. Most of the Courts throughout the world especially from countries, who are parties to UNCITRAL, have rejected the principle of strict interpretation.
In the present case under reference Re; South East Asia Marine Engineering & Constructions Ltd (SEAMEC Ltd) v/s Oil India Limited Civil Appeal No. 673 of 2012, the Supreme Court of India has by its Order dated 11th May 2020, clarified the general rules of interpretation which are crucial to ascertain the scope and reach of arbitration agreements.
Facts of the Case in brief
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. 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 04.10.2000. 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 (clause 23) of the contract 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 arbitrators. On 19.12.2003, the majority of Arbitral Tribunal awarded the claim of the Appellant along with interest @10% per annum from the date of the award till the recovery of award money. The amount awarded was subsequently revised by the Tribunal on 11.03.2005, on the basis 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 Arbitration clause 23 under the contract. On the other hand, the minority held that the executive orders do not come within the ambit of clause 23 of the Contract.
The Respondent challenged the award under Section 34 of the 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 interference.
The Respondent challenged the order of the District Judge in an appeal under Section 37 of the Arbitration Act, before the High Court. Taking the scope of judicial review under section 37 of the Act, the High Court, allowed the appeal and set aside the award passed by the Arbitral Tribunal and held that the interpretation of the terms of the contract by the Arbitral Tribunal is erroneous and is against the public policy of India and therefore the Court was empowered to set aside the award as it was passed overlooking the terms and conditions of the contract. Against the Order of the High Court, the Appellant preferred Special Leave Petition before the Supreme Court of India.
Arguments Advanced by the Appellant
The construction of Clause 23 is a matter of interpretation and has been correctly interpreted by the Arbitral Tribunal. If two views are possible on a question of law, the High Court cannot substitute one view and deference should be given to the plausible view of the Arbitral Tribunal. The question of law decided by the Arbitral Tribunal is beyond judicial review and thus the High Court could not have interfered with a reasoned award which was neither against public policy of India nor patently illegal.
Contentions of the Respondent
The award passed by the Arbitral Tribunal is contrary to the terms of the contract and essentially rewrites the contract. The Arbitral Tribunal has to adjudicate the dispute within the four corners of the contract and thus awarding additional reimbursement not contemplated under Clause 23 is perverse and patently illegal. The Arbitral Tribunal has overlooked the terms and conditions of a contract and has exceeded its jurisdiction. Findings of the Tribunal are perverse and unreasonable as the Tribunal did not consider the contract as a whole and failed to follow the cardinal principle of interpretation of contract. The Arbitral Tribunal has rewritten the contract in the guise of interpretation and such interpretation being in conflict with the terms of the contract, is in conflict with the public policy of India.
The disputed Clause 23 of the Contract:
“SUBSEQUENTLY ENACTED LAWS:
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 Contractor/Company additional/reduced incurred. reimburse/pay for such cost actually”.
Observations of the Supreme Court
While deciding the case under reference the question which arose before the Hon’ble Supreme Court is 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 Act?
Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or as interpreted by various Courts. It is settled law that where two views are possible, the Court cannot interfere in the plausible view taken by the arbitrator supported by reasoning. This was observed in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [2019 SCC Online SC 1656] and held that the Courts should not interfere with an award merely because an alternative view on facts and interpretation of contract exists. The Courts need to be cautious and 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 Arbitration Act.
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, Sumitomo Heavy Industries Limited v/s Oil and Natural Gas Corporation Limited, (2010) 11 SCC 296, it was held that an interpretation is a plausible view that a reasonable person could take and accordingly sustain the award. To provide a wide interpretation cannot be accepted.
Decision
The Court held 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.
The Court gave following reasoning, “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 inclusion.”
Comments
According to Rule of Construction of any document harmonious approach should be made reading or taking the document as a whole and exclusion should not be readily inferred unless it is clearly stated in the particular clause of the document. This is according to Rule of Interpretation. A consistent interpretation should be given with a view to smooth working of the system, which the document purports to regulate. The word, which makes it inconsistent or unworkable, should be avoided.
The arbitrator is a Judge of choice of parties and the Courts cannot set aside its award unless it suffers from error apparent on the face of the record. It cannot be set aside even if the Court can come to a different conclusion on the same facts.
The fact that arbitral 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. If the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.
This Article is written by Ms. Khushnuma Khan, is the Owner of M/s. K K Associates (Advocates & Solicitors), New Marine Lines Mumbai, the views are personal and should not be construed advisory to any person entity in specific. She can be reached at khushnuma@kkassociates.
