Annulment due to Perverse Interpretation of Underlying Contract: Another Blow to Arbitration Regime?

By: Divyansha Agrawal & Kanwar Abhay Singh (Advani and Co.)


While the dust settles on the much discussed judgment of NAFED v. Alimenta S.A, where the Supreme Court decided not to enforce a foreign award on the grounds that it violates the public policy of India, we face yet another decision of the Supreme Court in South East Asia Marine Engineering and Constructions Ltd v. Oil India Limited (“SEAMEC”), this time on a domestic award where the enforcement was refused on account of perverse interpretation of the contract by the arbitral tribunal.

BRIEF FACTS

SEAMEC Ltd. entered into a contract with Oil India, based on a tender document which Oil India had floated for for the purpose of well drilling and other auxiliary operations in Assam. While the time limit originally prescribed in the contract was for two years, it was subsequently extended twice for a period of one year each on the mutual agreement of the parties. Meanwhile, since the time of the signing of the contract the price of High Speed Diesel (“HSD”), an essential raw material for drilling, increased substantially. SEAMEC claimed the said price from Oil India and triggered the ‘change in law’ clause, i.e. clause 23, of the contract. Oil India rejected the said claim leading to invocation of the arbitration clause by SEAMEC Ltd. 

Accordingly, arbitration was conducted and the arbitral tribunal allowed the claim. While examining the arguments, the majority of the Ld Tribunal decided 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 Clause 23”. On the other hand, minority decision was that the executive orders do not come within the ambit of Clause 23 of the Contract.

Oil India challenged the award under Section 34 of Arbitration and Conciliation Act, 1996 (“the Act”). While the District Court upheld the award, the same was found violative of public policy of India by the High Court when approached under Section 37 of the Act. Hence, the appeal before the Supreme Court.

SUPREME COURT’S VIEW

 While propounding upon the question of whether or not the award should be enforced, the Court laid reliance on the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., 2019 SCC Online SC 1656 whereby the Court laid down the restricted scope of examination under Section 34 of the Act. The Court emphasised on the fact that: 

“Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. …… 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 Court found it to be a settled position in law that in situations where alternate views are possible, the Court cannot/must not interfere with the plausible view taken by the arbitrator if the same is supported by reasoning. 

The questioned framed in this case was “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 Arbitration Act?”. While looking at the contentions of the parties and the question thus framed, the Court opined that it is not required to examine the merits of the interpretation provided in the award passed by the arbitrator, if it concludes that such an interpretation was reasonably possible.

The Court sets itself to examine whether or not the interpretation of the contract adopted by the arbitral tribunal was reasonably possible. Interestingly, while mapping put a narrow scope of examination the court inadvertently seems to subject the arbitral award to a wider test of ‘reasonability’. 

In order to do the same, the Supreme Court contrasted the observations of the arbitral tribunal to the one taken by the High Court. The former relied on a liberal construction of clause 23 of the contract and took a view that the ‘change in prices will come under the scope of ‘change in law’. The High Court on the other hand identified ‘Change in Law’ clause as a force majeure and examined it in light of the Section 56 of the Contract Act, 1872

The Supreme Court expressed its disagreement with both the above approaches. It further noted that “although, the Arbitral Tribunal correctly held that a contract needs to be interpreted taking into consideration all the clauses of the contract, it failed to apply the same standard while interpreting Clause 23 of the Contract.”

The Supreme court finally decided that the interpretation adopted by the arbitral tribunal was not reasonably possible and hence perverse. The Court opines that the evidence on record does not suggest that the parties had agreed to a broad interpretation to the clause in question.

ANALYSIS OF COURT’S APPROACH

The Court emphasises on the interpretation of contract being perverse, which begs the question of what is the meaning of the term ‘perverse’ and when exactly can an award be set aside on the grounds of ‘perversity’. The term ‘perverse’ has been examined in the case of Aruvelu v. State, (2009) 10 SCC 206, the Court held that “perversity or perverse finding is a finding which is not only against the weight of evidence but is altogether against it and is so unreliable that no reasonable person would act on it”. 

In Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49, the Supreme Court made an important observation that fundamental policy of Indian law carry within itself three important principles first that the arbitrator must have a judicial approach and second that he/she must not act perversely. It further decided that for a decision to be perverse (i) if the finding is based on no evidence, or (ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or (iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse. Later, in Ssangyong Engg. & Construction Co. Ltd. v. NHAI 2019 SCC OnLine SC 677, the Supreme Court observed that a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. In above stated Supreme Court judgment, the term perverse was defined with regards to findings/decisions based on lack of evidence.

However, while deciding the present case, the Court has applied a wider test of reasonableness and has gone to re-interpret the contract in question in order to find that the award so passed by the tribunal was based on a perverse reading of the contract. It has further relied on the evidence to ascertain the intent of the parties while entering into the contract in order to appropriately interpret clause 23. Interestingly, the Court does not make an inference that the award is perverse because the interpretation of the contract is perverse in so many words. Perverse interpretation of contract in itself is considered as a ground for refusal.

Perhaps a similar question arose recently in MMTC Limited v. Anglo American Metallurgical, CM.APPL 20560/2015 (“MMTC”) where the Delhi High Court set aside the arbitral award while observing that

if the majority of the arbitral tribunal ignores what is plainly stated in commercial correspondence and reads into e-mails words that do not exist, or ignores words that are contained in e-mails, this can only pave the way for complete injustice”.

The said case was contended on the wrong interpretation of the e-mails/documents by the arbitral tribunal. 

In the opinion of the authors as also one might infer from the decision in MMTC, interpretation of the contract may not require consideration of evidence of any kind to infer about the intention of the parties. While there can be arguments to the effect that the decision thus rendered by the Supreme Court is correct, one is not sure if such a detailed examination of the contract in order to reach the conclusion, that an interpretation is perverse, exceeds the narrow scope of Section 34 of the Act. 

In light of the above, one could say that the test of ‘reasonability’ is an enigmatic test under the much debated terms of patent illegality, which requires further clarity from the courts on its scope. While most of the cases concerning patent illegality seem to have been examined on its own merits, it is imminent that an objective criteria be provided to define the peripheries of reasonability. Currently, Section 34 and the heads thereunder, looks akin to Russian doll – one doll inside another. Hopefully, clarity will be provided by superior courts in future.


(The authors are practicing lawyers at the Delhi High Court and are associated with Advani and Co.)

2 thoughts on “Annulment due to Perverse Interpretation of Underlying Contract: Another Blow to Arbitration Regime?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s