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Supreme Court�s SEAMAC Decision: Expansive Interpretation of Section 34, Arbitration Act

The recent judgement delivered by the Hon'ble Supreme Court of India in the case of South East Asia Marine Engineering and Constructions Ltd. vs. Oil India Limited [i] assumes relevance on account of its wide implications when it comes to setting aside arbitral awards under section 34 of the Arbitration & Conciliation Act, 1996 (Arbitration Act). Vide this judgment, the Supreme Court has indicated its deviation from the earlier standard of minimal judicial interference. Safe to say this, the judgment widens the scope of judicial interference whilst entertaining applications for setting aside arbitral awards under section 34 of the Arbitration Act.

Factual Matrix

The appellant, South East Asia Marine Engineering and Constructions Ltd (SEAMAC) had secured a contract for the purposes of well drilling and other auxiliary operations in Assam. The contract contained a change in law clause whereby any post facto change in law causing an increase or reduction in cost to be incurred by SEAMAC would have to be considered and reimbursed by the parties.

During the subsistence of the contract, there was an increase in the price of high speed diesel, a material essential for the operations being conducted by SEAMAC under the contract. SEAMAC claimed that the increase in price of the High Speed Diesel was on account of a change in law and thus the Respondent, Oil India Limited (OIL) was required to reimburse the increase. OIL refused to reimburse the demand and this led the dispute to arbitration.

Tribunals Award

The Tribunal decided in favour of SEAMAC and allowed its claim granting it compensation along with interest. Applying the principle of liberal interpretation of contract, the tribunal observed that though the change in price of the diesel by way of the circular would not be a change in law per se, it surely had the force of law. The Tribunal held that the expression change in law would include within itself the increase in price of High Speed Diesel.

Challenge to the Award

OIL preferred a challenge to the award under section 34 of the Arbitration Act before the District Court, who did not find the award to be against public policy of India. The judge also did not find the award to suffer from a patent illegality and thus refused to interfere. OIL thus preferred an appeal before the High Court under section 37 of the Arbitration Act. The High court found fault with the award and held that the Tribunal had incorrectly interpreted the terms of the contract. The High Court thus set aside the district Courts order and set aside the award. SEAMAC challenged the high court's order before the Supreme Court.

Supreme Court's Decision

OIL contended before the Supreme Court that the tribunal did not take the contract into consideration as a whole and thus failed to apply the cardinal principle of interpretation. The Supreme Court found fault with the decision of not only the tribunal but the High Court's as well. The supreme court placed reliance upon its earlier judgment in the case of Dyna Technology Pvt Ltd vs Crompton Greaves Ltd[ii] to observe that an arbitral award can be set aside if the perversity of the award goes to the root of the matter without a possibility of any interpretation to sustain the award or that the award is not permissible under section 34 of the Arbitration Act.

The court refused the wide and liberal interpretation of the contract applied by the tribunal. Thus holding that the interpretation that was sought to be applied tribunal was impossible, the Supreme Court refused to interfere with the High Court's order setting aside the Tribunals award.

The Supreme Court has thus indicated its shift from the earlier standard of minimal judicial interference. The Supreme Court has since quite some time now been firm in its stand that that an arbitral award may be set aside only on grounds set out under section 24 of the Arbitration Act. The judgement thus provides an expansive interpretation of scope of judicial interference under section 34 of the Arbitration Act. The straight effect of this judgement being that incorrect interpretation of contractual provisions now form a ground for setting aside arbitral awards under section 34 of the Arbitration Act.

  1. Civil Appeal No. 673/2012 and Civil Appeal No. 900/2012
  2. 2019 SCC Online SC 1656

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