Widening interpretation of “perversity” of Awards makes the exercise under s 34 subjective.
In South East Asia Marine Engineering and Constructions Ltd. v. Oil India Ltd. (SEAMEC) decided on May 11, 2020, a three judge bench of the Supreme Court ruled in favour of setting aside the arbitral award on the rationale that the award was perverse. This determination of “perversity” was made on the basis that the interpretation of the arbitration agreement by the arbitral tribunal was not a reasonably possible one. The way this decision was arrived at is problematic and makes the enforcement of arbitral awards in India dicey.
The case arose as an appeal from the Guwahati High Court. The fact situation that gave rise to the case was the following: When the work order for commission of well drilling and other auxiliary operations in Assam was still subsisting with SEAMEC Ltd. (the Appellant), the prices of High Speed Diesel (HSD) were raised by the Government. The Appellant claimed that this was covered in the “change in law” clause (Clause 23) of the contract. On reference to the Arbitral Tribunal, the contention of the Appellant was upheld on the ground that change in HSD prices through a circular, though not being a law per se, had the force of law and would fall within the ambit of Clause 23 of the contract.
Oil India Ltd. (the Respondent) challenged the same under Section 34 as being contrary to public policy, however, the Arbitral Award was upheld by the District Court. On appeal to the High Court, the Guwahati Bench set aside the award. This setting aside order was approved by the Supreme Court, albeit on differing grounds. The author contends that the setting aside of the award by the higher judiciary was a flawed understanding of the principles that an arbitration agreement represents and frustrates the commercial wisdom behind opting for arbitration.
- Acceptance of force majeure clause argument by the High Court:
The Guwahati High Court equated the Clause 23 dealing specifically with the repercussions of “change in law” on the Contract to a force majeure clause. Such a force majeure clause had already been incorporated in the agreement by the parties separately. There is a clear difference between an uncertain future event that merely affects the performance of the contract and an uncertain future event that makes the performance of the contract impossible. For instance, even under the Indian Contract Act, 1872, while Section 56 (popularly known as the force majeure/ doctrine of frustration provision) provides for making a contract whose performance is made impossible by an event, void; Section 32 allows the parties to determine the consequences of an uncertain future event.
Clause 23 of the contract could not have been equated to a doctrine of frustration clause when it provided for mitigation of risk on account of change in prices. The Supreme Court recognised as much in its judgment as well, holding the rationale of the High Court to set aside the award incorrect. The author would like to point out that the invocation of a force majeure clause at the High Court level and its acceptance by that bench certainly poses a threat to the sanctity of arbitral awards. It merits a relook at the way interpretation of arbitration agreements is done by the higher judiciary.
- Interpretation of ‘perversity’ of awards:
It is a settled rule of arbitration that reasoning taken by the Arbitral Tribunal should not be interfered with even if it differs from the view the Bench would have taken unless the reasoning portrays perversity which is unpardonable under Section 34 of the Arbitration and Conciliation Act, 1996 (the 1996 Act). The Court cannot sit in an appeal on the Arbitral Award and its only scope of enquiry is to check that the interpretation of the Tribunal is not absurd or perverse.
It may be noted that “perversity” as a ground for interference with awards was present even in the cases under the Arbitration Act, 1940. “Public policy” in the 1996 Act was given an expansive interpretation to include patently illegal cases in ONGC v. Saw Pipes. In ONGC Ltd. v. Western Geco International Ltd., this ground of perversity was enumerated as a valid ground under violation of “public policy” to set aside awards. By including “patent illegality” separately in sub-section (2A) to Section 34 on the recommendations of the 246th Report of the Law Commission, the Arbitration and Conciliation (Amendment) Act, 2015 (the Amendment Act) sought to limit “perversity” as a ground of setting aside domestic awards only by taking it away from the ambit of “public policy”. Thus, as clarified in Ssangyong Engineering & Construction Co. Ltd. v. NHAI, a perverse finding on an arbitral award is a ground covered by “patent illegality” and not “public policy”. This implies that foreign awards given after October 23, 2015 (i.e. the date on which the Amendment Act comes into force) shall be free from exploitative use of “perversity” as a ground (under public policy) to set them aside. This ground is only available in the context of domestic awards.
In Triveni Rubber & Plastics v. CCE, the Supreme Court held that a ‘perverse’ finding is one that is not only against the weight of the evidence but is based on no evidence. The standard of a ‘perverse’ finding is thus, very strict. In practice, however, this exercise of enquiring whether the interpretation is reasonable and fair is itself, an interpretative endeavour. In SEAMEC, the Supreme Court stated that the Arbitral Tribunal had not been very circumspect of the contract terms and conditions. “If the purpose of the tender was to limit the risks of price variations, then the interpretation placed by the Arbitral Tribunal cannot be said to be possible one, as it would completely defeat the explicit wordings and purpose of the contract.” Relying upon this interpretation of the terms of the contract, the Court reassessed and re-appreciated the evidence on record, effectively sitting in an appeal over the award.
In Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran, even when the Court was of the opinion that the interpretation in arriving at the Arbitral Award was not a plausible one, since it was a ‘possible’ interpretation, the Division Bench refrained from sitting in judicial review over the Award. An error in construction of the contract cannot be said to be a jurisdictional error. These precedents in favour of upholding arbitral awards have not been followed in SEAMEC.
- Presumption of the Court and Onus of Proof:
The Supreme Court in setting aside the award stated, “The interpretation of the Arbitral Tribunal to expand the meaning of Clause 23 to include change in rate of HSD is not a possible interpretation of this contract, as the appellant did not introduce any evidence which proves the same.” The Court thus presumed that the contract was a fixed rate one. This was done without elucidating upon the concept of a “fixed rate” contract. Merely on the basis that the contract was entered into after a tender bid, the character of a “fixed rate” contract was given to it. Then it went on to hold that the change in rate of HSD being a change in law was not a possible interpretation and placed the onus of proof to state otherwise upon the Appellant – who was the beneficiary under the Arbitral Award.
This approach is against the principles espoused by the Indian Evidence Act, 1872, as per which the onus to prove a fact generally lies on the person asserting it. Moreover, the presumption in cases of arbitration is always in favour of the award being valid. As the above statement shows, however, the Supreme Court expected the Appellant to discharge the burden of proving the basis for the Arbitral Award correct and by drawing a presumption against the Award, rather than the Respondent, who was the Award Debtor.
Conclusion and The Way Forward
This judgment shows that the act of setting aside the award under Section 34 has become very subjective and a toss of the coin situation. A similar problem was faced in the December judgment of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. as well wherein albeit recognising in principle that arbitral awards should not be interfered with unless the perversity goes to the root of the matter, the Supreme Court interfered with the Arbitral Award on the grounds that more than 20 years had passed since the passing of the award and a quick resolution was warranted. These precedents are problematic also because of the higher strength of the judiciary arriving at the findings.
The decision in State of A.P. v. A.P. Jaiswal may be aptly quoted here, “Consistency is the cornerstone of the administration of justice. It is consistency which creates confidence in the system and this consistency can never be achieved without respect to the rule of finality.” Judges presiding over arbitration matters should be conscious of the harms that entail arbitrary interference with awards. The judgment in SEAMEC will open a floodgate of challenges under Section 34, which the Courts will now have to deal with, once more, shifting the focus of arbitration away from Tribunals and bringing settlements into the domain of courts.
A thin line separates the boundaries between whether an interpretation is reasonably possible or not at all possible. Courts must exercise caution when treading the line, so as to not make shift balance in a way that vitiates the objectives of resolving disputes using the mechanism of arbitration.
Ms. Ragini Agarwal is a 5th Year B.A. LL.B. (Business Law Hons.) student at National Law University Jodhpur.
 C.A. No. 673/2012, Supreme Court of India, decided on May 11, 2020.
 Steel Authority of India Limited v. Gupta Brother Steel Tubes Limited, (2009) 10 SCC 63 ¶ 18, 27; Sumitomo Heavy Industries Limited v. Oil and Natural Gas Corporation Limited, (2010) 11 SCC 296 ¶ 41, 42.
 Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449.
 (2003) 5 SCC 705.
 (2014) 9 SCC 263.
 AIR 1994 SC 1341.
 SEAMEC, supra n. 1, at ¶ 30.
 (2012) 5 SCC 306.
 Id., ¶ 29.
 MSK Projects India (JV) Limited v. State of Rajasthan, (2011) 10 SCC 573.
 SEAMEC, supra n. 1, at ¶ 31.
 2019 SCC Online SC 1656.
 State of A.P. v. A.P. Jaiswal, (2001) 1 SCC 748, ¶ 24.
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Categories: Economics & Corporate Law