Supreme Court: Principle of Interpretation to apply in certain case when interpreting an Arbitration clause

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In this case, the dispute between the parties arose over an increase in the price of High-Speed Diesel (“HSD”).

Brief Facts of the case 

The “HSD It is an essential material for carrying out the drilling operation based on a contract agreement. The contract provided for a ‘Change in Law’ clause (“Clause 23”). Accordingly, the other party will reimburse if a Contractor incurs additional cost.

The Appellant raised a claim under Clause 23, upon the Respondent’s rejection of the claim, instituted arbitration. The Arbitral Tribunal allowed the claim of the Appellant. The Respondent challenged the same under Sec. 34 of the Arbitration and Conciliation Act, 1996 (“Act”).

The District Judge held that the award was neither against the public policy of India nor patently illegal. It did not warrant judicial interference. Subsequently, High Court was favouring an appeal under Sec. 37 of the Act. This was being appealed before the Supreme Court.

Contentions of the Appellant 

The Appellant submitted that the Tribunal had interpreted the clause in a certain way. Hence, the increase in price by circular does not warrant “law” in the literal sense. But it sanctions the “force of law”. 

The High Court cannot substitute one view when two views are possible of the construction of the clause. The award was neither against the public policy nor patently illegal. It did not warrant interference by the High Court on a question of law decided by the Arbitral Tribunal.

Contentions of the Respondent 

Contrary to the submission of the Appellant, the respondents said that the award passed by the Tribunal is contrary to the terms of the contract. It has to adjudicate the dispute within the four corners of the contract. The Tribunal has exceeded its jurisdiction by overlooking the terms and conditions of the contract. The Tribunal has rewritten the contract in the guise of interpretation that conflicts with the public policy of India.

Court’s View 

The Act contemplates under Sec. 34 the necessary guidelines for setting aside an arbitral award.

It is evident by the Supreme Court in its recent decision, Dyna Technologies Ptv. Ltd. v. Crompton Greaves Ltd., [2019 SCC OnLine SC 1656] that the “arbitral awards should not interfere with the casual and cavalier manner unless the Court concludes that the perversity of the award goes to the root of the matter (emphasis supplied)”.

Moreover, when there are two interpretations the Court shouldn’t interfere. The Court should defer to the view taken by the Tribunal unless it does not stand the test of perversity emphasized under Sec. 34 of the Act.

Court’s Analysis

Based on the settled law, the Court answered the following question. Whether the interpretation provided to Clause 23 by the Tribunal was reasonable and fair to pass the test of Sec. 34 of the Act?

The Arbitral Tribunal had given a broad and liberal interpretation to Clause 23. However, The High Court, concluded that Clause 23 was identical to Sec. 56 of the Contract Act, 1872. The effect was that is the contract performance was impossible, then under Sec. 56 of the Contract Act, the parties, were exempted from further performance. In the instant case, the Contract had provided for force majeure events under Clause 44.3.

The Tribunal ascribed to the rule of reading the contract as a whole. But it failed to apply the same to the impugned clause. The High Court held that Clause 23 was inserted after the doctrine of frustration. However, the Supreme Court stated that the parties chose to mitigate the risk under Clause 23 while maintaining the sanctity of the contract.

The Court found that the contract entered by the parties provided for mitigating the risk of an increase in price. But the interpretation applied by the Tribunal would defeat the worded contract. Moreover, the Appellant had not produced any evidence. Hence, the increase in the price of HSD cannot be included in Clause 23. Although the Arbitral Award emphasized the principle of interpretation, it failed to apply to Clause 23.

Court’s Decision

The Supreme Court dismissed the appeal and set aside the award on the ground that Clause 23 did not warrant liberal and broader interpretation to include price variation within its ambit.


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