2020 (5) TMI 242 - SC - Indian Laws

Arbitral Award - interpretation of the terms of the contract by the Arbitral Tribunal - the Respondent challenged the same under Section 34 of the Arbitration Act before the District Judge. On 04.07.2006, the learned District Judge, upheld the award and held that the findings of the tribunal were not without basis or against the public policy of India or patently illegal and did not warrant judicial interference. 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? HELD THAT - The High Court, in its reasoning, suggests that Clause 23 is akin to a force majeure clause. We need to understand the utility and implications of a force majeure clause. Under Indian contract law, the consequences of a force majeure event are provided for under Section 56 of the Contract Act, which states that on the occurrence of an event which renders the performance impossible, the contract becomes void thereafter - When the parties have not provided for what would take place when an event which renders the performance of the contract impossible, then Section 56 of the Contract Act applies. When the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the contract becomes void - However, there is no doubt that the parties may instead choose the consequences that would flow on the happening of an uncertain future event, under Section 32 of the Contract Act. 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 - We also do not completely subscribe to the reasoning of the High Court holding that Clause 23 was inserted in furtherance of the doctrine of frustration. Rather, under Indian contract law, the effect of the doctrine of frustration is that it discharges all the parties from future obligations. In order to mitigate the harsh consequences of frustration and to uphold the sanctity of the contract, the parties with their commercial wisdom, chose to mitigate the risk under Clause 23 of the contract. Based on an appreciation of the evidence, the Court ruled that additional tax burden could be recovered under the clause as such an interpretation was a plausible view that a reasonable person could take and accordingly sustained the award. However, we are of the opinion that the aforesaid case and ratio may not be applicable herein as the evidence on record does not suggest that the parties had agreed to a broad interpretation to the clause in question - the interpretation of Clause 23 of the Contract by the Arbitral Tribunal, to provide a wide interpretation cannot be accepted, as the thumb rule of interpretation is that the document forming a written contract should be read as a whole and so far as possible as mutually explanatory. In the case at hand, this basic rule was ignored by the Tribunal while interpreting the clause. The contract was based on a fixed rate. The party, before entering the tender process, entered the contract after mitigating the risk of such an increase. 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. There is no gainsaying that there will be price fluctuations which a prudent contractor would have taken into margin, while bidding in the tender. Such price fluctuations cannot be brought under Clause 23 unless specific language points to the inclusion - 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. Appeal dismissed.

Issues Involved:
1. Interpretation of Clause 23 of the contract.
2. Scope of judicial review under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996.
3. The applicability of the "force majeure" clause and the doctrine of frustration.
4. Whether the arbitral award was against the public policy of India.

Detailed Analysis:

1. Interpretation of Clause 23 of the contract:

The core issue revolves around the interpretation of Clause 23, which deals with subsequent changes in law affecting the contract. The Arbitral Tribunal interpreted Clause 23 to include changes in the price of High-Speed Diesel (HSD) as a "change in law," arguing that even government circulars have the "force of law." The Tribunal applied a "liberal interpretation rule" to include price changes under Clause 23, terming it a "Habendum Clause," which should be construed broadly to include government orders and instructions.

Conversely, the High Court held that Clause 23 was akin to a "force majeure" clause, meant to address unforeseen events that make contract performance impossible. The High Court argued that Clause 23 was not intended for revising fixed contract rates but to address changes in law that would make the contract impossible to perform.

2. Scope of judicial review under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996:

The High Court set aside the arbitral award under Section 37, stating that the Arbitral Tribunal's interpretation was erroneous and against the public policy of India. The Supreme Court examined the scope of judicial review under Section 34, emphasizing that an arbitral award should not be interfered with unless it is patently illegal or against public policy. The Court cited Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., emphasizing that arbitral awards should not be interfered with casually and that the courts should respect the finality of the arbitral process.

3. The applicability of the "force majeure" clause and the doctrine of frustration:

The High Court equated Clause 23 with a "force majeure" clause, which under Indian law, discharges parties from future obligations if an unforeseen event makes performance impossible. The Supreme Court discussed the doctrine of frustration under Section 56 of the Indian Contract Act, 1872, which voids contracts that become impossible to perform due to unforeseen events. The Court clarified that Clause 23 was not intended to address price fluctuations but to mitigate risks associated with changes in law that would make the contract impossible to perform.

4. Whether the arbitral award was against the public policy of India:

The Supreme Court concluded that the Arbitral Tribunal's interpretation of Clause 23 to include changes in HSD prices was not a possible interpretation of the contract. The Court emphasized that the contract was based on a fixed rate, and price fluctuations were foreseeable risks that the contractor should have accounted for. The Tribunal's interpretation was deemed perverse as it ignored the explicit terms of the contract, which required the contractor to bear the cost of fuel.

Conclusion:

The Supreme Court upheld the High Court's decision to set aside the arbitral award, finding that the Arbitral Tribunal's interpretation of Clause 23 was unreasonable and not supported by the contract's terms. The appeal was dismissed, and the judgment emphasized the importance of adhering to the explicit terms of the contract and the limited scope of judicial review in arbitral matters.

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