[Ms. Shreya Choudhary, ILS Law College, Pune, Batch of 2020][Edited by Adv. Chirag Bhatia, Associate at Advani & Co.|Senior Editor]
While allowing the challenge to the arbitral award, the Supreme Court recently in National Agricultural Cooperative Marketing Federation of India v Alimenta S.A digressed from the precedent set out in cases like Vijay Karia v Prysmian Cavi E Sistemi SRL. The Supreme Court delved into the terms of the contract between the parties and based its decision regarding the liabilities upon examining the merits of the case.
Following its recent approach against enforcement, the three-judge bench of the Supreme Court on May 11, 2020 in South East Asia Marine Engineering and Constructions Ltd. v Oil India Limited interfered with yet another domestic award rendering it unenforceable. The article seeks to critically analyse the Judgment, the principles relied upon by the bench and its relevance during Covid-19.
FACTS OF THE CASE
Pursuant to awarding of the tender for a Work Order, the Respondent entered into a contract with the Appellant for two years regarding well-drilling and other auxiliary operations in Assam. The parties mutually agreed to extend the period twice by one year each. During the subsistence of this contract, the price of High-Speed Diesel (“HSD”), a commodity essential to the performance of the contract increased. The Appellant claimed this price fluctuation as “change in law” within Clause 23 of the contract, and accordingly made the Respondent liable to reimburse them. Upon repeated rejections of the claim, the Appellant invoked the arbitration clause.
ARBITRAL AWARD AND JUDICIAL ACTION
The majority of the Arbitral Tribunal allowed the claim of the Appellants and gave the award in their favour. The majority reasoned the award to liberally include executive circulars having “force of law” within the ambit of the “change in law” clause in the contract. Aggrieved by the award, the Respondent challenged it under section 34 of the Arbitration and Conciliation Act of 1996 (“the 1996 Act”). The District Judge upheld the award and found that the award is not perverse to public policy. The Respondent further appealed before the Guwahati High Court under section 37 of the Act. The High Court while allowing the appeal held the Tribunal’s view to be erroneous and against the intent of the parties and the terms of the contract between them. The Appellant then filed the instant Special Leave Petition before the Supreme Court.
JUDGEMENT OF THE SUPREME COURT
The Supreme Court relied on Dyna Technologies Pvt Ltd v Crompton Greaves Ltd (“Dyna”)to understand the scope of section 34 prior to the Arbitration and Conciliation (Amendment) Act, 2015 (“the 2015 Amendment Act”). The extent of judicial interference was observed to be limited to cases where “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”. In light of this interpretation in Dyna, the Supreme Court posed a question to understand the challenge under section 34- whether the perversity in the award is so much so that the challenge under section 34 must be allowed?
Answering in the affirmative, the three-judge bench held the liberal interpretation of the Arbitral Tribunal to include increasing price of HSD within clause 23 to be flawed. It observed that the Tribunal ought to have interpreted the contract as a whole and then rendered the award. Moreover, it held the High Court’s decision to be incorrect to the extent that it equates clause 23 of the contract to force majeure and applies the doctrine of frustration. In effect, the Supreme Court dismissed the appeal and set aside the award.
JUDGEMENT NOT A TRENDSETTER
It is important to note that section 34 application in the instant Special Leave Petition was filed prior to the 2015 Amendment Act. Therefore, the Judgment must be read in accordance with section 28 and section 34 the 1996 Act. This view is consistent with Supreme Court’s approach in Ssangyong Engineering & Construction Co. v. National Highways Authority of India and BCCI v Kochi Cricket wherein it observed that the erstwhile 1996 Act shall be applicable to section 34 applications filed before the 2015 Amendment Act.
Section 28 of the 1996 Act made it mandatory for the arbitrator to strictly decide according to the terms of the contract between the parties, otherwise the award rendered would qualify for a challenge within public policy under section 34, as observed in ONGC v Saw Pipes (“Saw Pipes”). However, the 2015 Amendment Act did away with the position in Saw Pipes, amending section 28 and section 34 to give the arbitrator the power to decide beyond the contours of contract which reflected unequal bargain of power between parties. The present position is such that the arbitrator may liberally interpret the contract to base his award but interpretations not possible from the contract or procedural irregularities if any, may in limited circumstances make a case for patent illegality under section 34.
In the instant case, the Supreme Court confirming with the pre-amendment position in Saw Pipes held the liberal view of the Arbitral Tribunal to be erroneous and foul of public policy. Therefore, this view cannot be misused to decide upon section 34 applications filed post the 2015 Amendment Act. The position in this case must be relied only in light of such applications under the 1996 Act.
JUDGEMENT LACKED REASONING ON THE GROUND OF CHALLENGE
While the Court was conscious of the position on judicial interference with the arbitral award laid out in Dyna, it delved into the merits of the case to hold that the Arbitrator’s reasoning in the award was perverse to the root of the matter. The Court pointed out that the wide interpretation of the Arbitral Tribunal would defeat the purpose of the explicitly worded contract. However, the decision seems incomplete because it failed to shed more light on what constitutes the “root of the matter” and also reason out why and how alternative interpretations favouring the award could not be sustained.
APPROACH TOWARDS FORCE MAJEURE CLAUSES AND DOCTRINE OF FRUSTRATION
The Supreme Court in the instant case held the view of the Arbitral Tribunal to include the increase in price of HSD within clause 23 erroneous. It noted that the contract was based on a fixed rate and was entered into after mitigating the risk of such increase, as evident from the letter of intent issued by the Appellant after considering the tender bids. The price fluctuations are contemplated by prudent contractors but there are no explicit words provided within the instant contract. Hence, the Court found the liberal interpretation of clause 23 to be flawed.
Further, the Supreme Court held that the High Court erred in interpreting clause 23 as a force majeure clause and in furthering the doctrine of frustration. The provision for frustration under section 56 of the Indian Contract Act, 1872 (“the Contract Act”) renders the contract void discharging the parties from future obligations. The instant contract already provided for a separate force majeure provision and a rate to tide over any such force majeure event. On this point, the Court observed that the parties already chose to mitigate the risks within clause 23 of the contract, thereby not attracting section 56.
Owing to the interpretations of the Supreme Court regarding force majeure and frustration, it seems that the Court has principally applied the judgment in Energy Watchdog v CERC “Energy Watchdog”. From the judgment, “It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.” The Supreme Court also seems to follow the principle in M/s Alopi Parshad & Sons Ltd. v. Union of India wherein the Court observed that a claim of consideration arising out of rates different from those stipulated cannot be based on “a vague plea of equity”. Therefore, it is clear that the doctrine of frustration would only apply to circumstances fundamentally different from what has been contemplated or agreed upon by the parties.
CONCLUSION:RELEVANCE OF THE JUDGEMENT DURING COVID-19
In the present times, there are ongoing debates on Covid-19 being a force majeure event. The Government’s response to Covid-19 resulted in a nationwide lockdown majorly disrupting the supply chain and making it difficult to meet the contractual obligations. In such instances, the parties wish to bring Covid-19 under force majeure and exempt themselves from liability under the contract. There are primarily two scenarios. Firstly, in a contract which explicitly includes “pandemic”, “natural calamity” or words alike within the force majeure clause, the parties may rely on the Office Memorandum dated February 19, 2020 and WHO declaration dated March 11, 2020 to treat Covid-19 as a force majeure event. Secondly, in the absence of a force majeure clause, doctrine of frustration under section 56 of the Contract Act may be invoked. In Satyabrata Ghose v. Mugneeram Bangur & Co., it is observed that the doctrine may be invoked only if
“…performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties…”.
The instant case is relevant in understanding the Court’s strict interpretation of force majeure clause and the requirements to attract the doctrine of frustration. It will be interesting to see whether the courts in future follow this Judgment to strictly interpret the force majeure clauses to exclude Covid-19 and adheres to the requirements for frustration laid out by Courts or whether they carve out exceptions to its present rule.
[Disclaimer- The views expressed in the article are personal views of the author]
Ms. Shreya Choudhary, ILS Law College, Pune, 2020
[The author may be reached at firstname.lastname@example.org]