2010 (7) TMI 1087 - SC - Indian Laws

Arbitration petition - decree in terms of the award - umpire exceeded jurisdiction - The present case relates to an international commercial contract and as noted earlier the appellant and MII had agreed to subject themselves to the domestic laws of India as well as the International law and conventions. On this background the appellant wanted to safeguard itself in the event of change of law in India to which the respondent had agreed. It was submitted that any narrow interpretation of Clause 17.3 to exclude the reimbursement of the income tax liability of the sub-contractor will defeat the purpose in providing this safeguard under clause 17.3 and will make it otiose. HELD THAT - As we have noted above the umpire has looked into the evidence before him including that of the respondent s officer as to how MII had participated in the bid clarification meetings. He considered the submission of the appellant as to how the sub-contract was also tax protected which was their main plea. It is true that if there is an error apparent on the face of the award or where the umpire had exceeded his jurisdiction or travelled beyond the reference the court can interfere. However in view of what is noted above it is not possible to say that the award suffers from any of the above defects so as to call for interefence. The intention of the parties in providing a clause like clause 17.3 could not be ignored. It had to be given a due weightage. This is what the umpire has done and has given the direction to the respondent to compensate the appellant for the amount of the necessary and reasonable extra cost caused by change in law. We have no hesitation in holding that the award of the umpire is a well reasoned award and one within his jurisdiction and which gives a meaningful interpretation to all the clauses of the contract including clause 17.3. In the circumstances in our view the High Court has clearly erred in interfering with the award rendered by the umpire. However we are not required to go into that issue since we are otherwise holding that the award was not only a plausible one but a well-reasoned award. In the circumstance the interference by the High Court was not called for. In that view of the matter we allow this appeal and set aside the judgment of the learned single Judge as well as that of the Division Bench. The award made by the Umpire is upheld and there shall be a decree in terms of the award. The arbitration petition filed by the respondent for setting aside the award shall stand dismissed with cost.

Issues Involved:
1. Whether the umpire failed to apply his mind to the material on record and the clauses of the contract, rendering a perverse award.
2. Whether the High Court erred in interfering with the umpire's decision.
3. Whether the tax liability of the sub-contractor, reimbursed by the appellant, constituted a necessary and reasonable extra cost arising out of a change of law under Clause 17.3 of the General Conditions of Contract.
4. Whether the interpretation of Clause 17.3 by the umpire was plausible and within his jurisdiction.
5. Whether the High Court's interference with the umpire's award was justified.

Detailed Analysis:

1. Umpire's Application of Mind and Alleged Perversity of the Award:
The primary issue was whether the umpire failed to apply his mind to the material on record and the clauses of the contract, thereby rendering a perverse award. The appellant contended that the reimbursement of the tax liability of the sub-contractor (MII) was due to a change in law, which constituted necessary and reasonable extra costs under Clause 17.3 of the General Conditions of Contract. The umpire, Sir Michael Kerr, accepted this claim, directing the respondent to pay the appellant the sum of Japanese Yen 129,764,463 with interest and indemnify the appellant against any further tax payments to MII. The High Court, however, found that the umpire's construction of Clause 17.3 was "clearly an impossible one," and thus, set aside the award.

2. High Court's Interference with the Umpire's Decision:
The High Court's interference was based on its interpretation that the umpire exceeded his jurisdiction by allowing the appellant's claim under Clause 17.3. The High Court held that the only possible view of all the clauses of the contract was that the respondent could not be held liable for the sub-contractor's tax liability. However, the Supreme Court noted that the umpire had given a meaningful interpretation to Clause 17.3 after considering all the material on record and the context, and thus, his award was within his jurisdiction.

3. Tax Liability as Necessary and Reasonable Extra Cost:
The appellant argued that the tax liability of MII arose due to a change in law after the date of bid closing, which affected the appellant economically. The umpire agreed, stating that the payments made by the appellant to MII were an "extra cost" caused by the change in law and were necessary and reasonable. The Supreme Court supported this view, emphasizing that the liability arose from the retrospective change in the Income Tax Law, which was a valid ground under Clause 17.3 for seeking reimbursement from the respondent.

4. Interpretation of Clause 17.3 by the Umpire:
The Supreme Court examined whether the umpire's interpretation of Clause 17.3 was plausible. The umpire construed Clause 17.3, which provided for compensation in the event of a change in law, as covering the tax liability of the sub-contractor reimbursed by the appellant. The Supreme Court found that the umpire's interpretation was commercially understandable and sensible, given the wide terms of Clause 17.3 designed to cover unforeseeable changes in Indian law. The Court held that the umpire's interpretation was a possible and reasonable one, and thus, the High Court should not have interfered.

5. Justification of High Court's Interference:
The Supreme Court concluded that the High Court erred in interfering with the umpire's award. The umpire's award was well-reasoned, based on a plausible interpretation of the contract clauses, and within his jurisdiction. The Court emphasized that unless there is an error apparent on the face of the award or the umpire exceeded his jurisdiction, the High Court should not interfere with the arbitrator's findings. The Supreme Court found that the umpire's award did not suffer from any such defects and thus, reinstated the umpire's award, setting aside the judgments of the learned single Judge and the Division Bench.

Conclusion:
The Supreme Court allowed the appeal, set aside the judgments of the learned single Judge and the Division Bench, and upheld the award made by the umpire. The arbitration petition filed by the respondent for setting aside the award was dismissed with costs.

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