Analysis On Supreme Court’s Observation On Not To Look At Merits Of Interpretation By Arbitrator

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South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Limited) v. Oil India Limited was decided on 11th May 2020. A three-judge bench of the Supreme Court decided this case. The Court, in the judgment, dealt with some aspects of arbitration and contract law. The important part of the judgment was 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 possible.” There are some unique parts of the judgment that we will examine in this article. The appeal of this case arose from the judgment of an arbitration appeal from the Gauhati High Court.

Facts Of The Case

Oil India limited awarded a tender in 1995 to SEAMEC limited. The motivation behind the contract was well drilled. They wanted to do extra helping activities in Assam. The contract came into activity from 5th June 1996 and ended on 4th April 2000. The essential material for this task was high-speed diesel (HSD). While the contract was subsisting, the cost HSD increased. SEAMEC then raised a claim that this circumstance forces a commitment to Oil India to repay. They relied on clause 23 of the Indian contract Act, 1872 as an increase in cost has set off the “change in the law.”

Judgment Of the Tribunal And District Court

On dismissal of the case by Oil India, the discretion clause was summoned. The question then alluded to an arbitration tribunal. The Tribunal, preferring SEAMEC held that an increase in HSD cost through a circular is not a “law”. Although, it has the “force of law” and along these lines falls under the ambit of clause 23. The issue at that point went in an appeal under the watchful eye of the District Court. It upheld the arbitral award.

Judgement Of the High Court

The High Court permitted the appeal and set aside the award. This was on the grounds that interpreting the Tribunal to the terms and conditions of the contract is erroneous and against the Indian public policy. The High Court expressed that clause 23 is like the “force majeure clause”. It held that the clause was embedded to help the doctrine of frustration. They should consider Section 56 of the Indian Contract Act, 1872. It explains about the repercussions of frustration in Indian contract law. It implies that an event can turn the performance of the contract impossible.

Then the contract formed becomes void. It absolves the parties involved from further performance of the contract. This article examines the varied reasoning of the Tribunal and the High Court. It will also find out the use of section 56. It also creates an analogy between section 65 and clause 23 of the Indian contract Act, 1872.

Analysis

Black’s Law Dictionary defines ‘force majeure’. It refers ‘to an event which is neither anticipated nor can be controlled’. There are cases where the contract specifies the force majeure provision.

In these cases, there is a frustration of the contract. Section 32 of the Indian Contract Act, 1872 provides for this. In cases where there is no such condition, Section 56 applies. Under this section, the contract gets void under one condition. The Act must become impossible because of an event outside the control of the parties.

When the contract frustrates, the parties face consequences of its inconceivability. While trying to improve these consequences, section 65 accommodates compensation to the parties. It expresses that, where an agreement gets void, either party who has gotten any helpful position under such agreement will re-establish the contract, or make compensation for it, to the other parties from whom he got it. This keeps the party from accepting any undue advantage over the other due to the difficulty.

About the Current Case

In the current case, there is no use of section 56 for two reasons:

(a) there is no frustration of the contract, i.e., it has not gotten void

(b) the parties are not absolved of performance of their duties under the agreement. Thus, the Court cannot grant compensation to the parties under section 65 of the Act. This is because, for the use of this provision, sine qua non for the agreement to have gotten void. The Supreme Court made a similar perception in the current case. It is relevant to understand the idea of clause 23 of the agreement. There are conditions mentioned, due to which there is an extra or diminished expense. The organization has to
compensate the other party for this expense.

In this lies the difference between section 65 of the Act and clause23. Section 65 accommodates compensation only if the agreement is void. Clause 23 restores the contract regardless of any changes made. This is so that clause 23 is not a furtherance of the doctrine of frustration.

The High Court believes that clause 23 is like “force majeure”. It believes it is pari-materia to the “doctrine of frustration and consequent impossibility”. This is because, in any case of force majeure, the agreement gets void. Further, it clears parties of their commitments. The doctrine of frustration is characteristic of this law.

Interpretation Of Contracts

The Supreme Court agreed with the Tribunal with regard to looking at all provisions. The Court saw that the Tribunal did not consider a similar condition in clause 23 of the contract. The Court communicated that: “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”.

It stated that the Tribunal disregarded this fundamental object while deciphering clause 23.

Conclusion

The judgment illuminates a critical aspect of the force majeure clause. Though the force majeure doctrine includes clauses beyond parties control, it could not lead to frustration of contract. Thus, there is no application of the force majeure clause and its remedies like section 56 or 65 of the Act.

But, it is important to note that in this case, the Tribunal adopted a harmonious approach. The Supreme Court depended upon a literal interpretation of the contract. The point of the Tribunal was to make the report functional and advance remedies to the parties. The Supreme Court concentrated on the aim of the agreement. It expressed that it was a fixed-rate contract. Thus, it renders statement 23 to get redundant.

The impact of the language of the provision is with the end goal. Oil India has outperformed its commitment to reimburse the contractual worker any bit of leeway received because of the cost of progress by tasks under the agreement. This resulted in no favorable position by SEAMEC.


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