Supreme Court rules on perverse interpretation of clauses by arbitral tribunal

Brief Facts

South East Asia Marine Engineering and Construction Ltd. (“Appellant”), who was awarded a work order for well drilling by Oil India Ltd. (“Respondent”), claimed reimbursement from the Respondent since the prices of High Speed Diesel (“HSD”), one of the essential materials for carrying out the drilling operations, had increased. The Appellant contended that the price increase triggered the “change in law” clause in the contract, i.e., Clause 23, (“Clause 23”) justifying reimbursement from Respondent. The  three member arbitral tribunal (“Tribunal”) issued the majority award (“Award”) in favour of the Appellant and held that while an increase in HSD prices through a circular issued under the authority of the State or Union is not a “law”, it has the “force of law” and thus, falls within the ambit of Clause 23. The minority award held that the executive orders do not come within the ambit of Clause 23.

The Respondent’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) failed as the District Judge held that the findings of the Tribunal were not against the public policy of India or patently illegal. The Respondent’s challenge under Section 37 of the Act succeeded, with the Hon’ble Gauhati High Court (“High Court”) setting aside the Award. The High Court held that the interpretation of the contract by the Tribunal was erroneous, was against the public policy of India and overlooked certain terms of the contract.

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