Facts of the case:

SEAMEC Ltd was awarded a work order pursuant to a tender floated by OIL for the purpose of well drilling and other auxiliary operations in Assam. The contract was extended for 2 successive periods of one year each and the contract expired on 04.10.2000.

During the subsistence of the contract, the prices of High Speed Diesel (HSD) increased. SEAMEC Ltd raised a claim that increase in the price of HSD triggered the “change in law” clause  23.3 under the contract and claimed reimbursement. When OIL rejected the claim, SEAMEC Ltd invoked the arbitration clause referring the dispute to an Arbitral Tribunal comprising of three arbitrators.

Award of Arbitral Tribunal

Tribunal applied the rule of construction while interpreting the clause 23.3 of the agreement which it termed as “Habendum clause”. It held that the increase in the operational cost due to enhanced price of the diesel through a “circular” though not a “law” in literal sense but has a “force of law” and thus falls within the ambit of clause of the agreement and allowed the claim to SEAMEC Ltd. Aggrieved, OIL challenged the order under section 34 of Arbitration Act before a District Judge.

The District Judge upheld the award. The order was challenged before the High Court.

Order of the High Court

The High Court interpreted that 23.3 was not inserted for revising a fixed rate of contract. It held that clause 23 of the contract is akin to the “force majeure clause” and is pari materia to the ‘doctrine of frustration and supervening impossibility’. It thus set aside the award observing that it was passed overlooking the terms and conditions of the contract. Aggrieved, SEAMEC Ltd filed appeal before the Supreme Court.

Issue before Supreme Court:

1.    Whether the interpretation provided to the contract in the award of the Tribunal was so unreasonable and unfair that it required interference under section 34 of the Arbitration Act?

2.    Whether SEAMEC Ltd. was entitled to claim reimbursement of the increased cost of input on consideration of the contractual clauses?

Key Principles:

1. Habendum clause is a part of the agreement which defines the extent of interest being granted and any conditions affecting this grant.

2.   A written contract must be read as a whole.

3. Award cannot be passed de hors the contract between the parties.

 Verdict of the Supreme Court

The Supreme Court did not subscribe to the reasons provided either by the Tribunal or the High Court. However, it rejected the claim of reimbursement by SEAMEC and made the following observations:

(i)   On a conjoint reading of various clauses of contract it was clear that it is based on a fixed rate. The parties mitigated the risk of increase in price before entering into the contract. Thus a price fluctuation cannot be brought under clause 23 of contract unless the language of the contract points to the inclusion.

(ii)  The contract has recognized force majeure events and the parties had agreed for payment of force majeure rate to tide over any force majeure event.

(iii) Thus any price fluctuations in essential element required for completion of contractual obligation or full and proper sustenance cannot be considered as change due to ‘subsequent change in law’ clause, even if such a change arose by a government order.

(iv)If a clause stipulates a pre-determined rate on occurrence of force majeure event to support a temporary event, it cannot be considered as a case to be viewed as a Force Majeure event unless it is specifically articulated in the contract to that effect.

(v)  The award having been passed dehors the contract entered between the parties, the provisions of section 34 of the Arbitration Act was righly invoked. It was not a review or appeal against the award but the award was seriously incorrect that it required interference of the court.

Acelegal Analysis:

(i)   The consequences of a force majeure event has been codified in section 56 of the Indian Contract Act. The parties have to contract as to what they consider as a force majeure event. Section 32 of the Indian Contract Act lay down when the obligation of a party can be excused. However, both these provisions in statute cannot be applied in isolation without first determining from the complete reading of contract as to what are the events that the parties have decided to treat as Force Majeure and its consequences.

(ii)  The Courts in India, while interpreting the force majeure clause are applying strict rules of interpretation and hence not ready to hold that an agreement is void or frustrated on the basis of indirect application of a situation. The courts are not inclined to invoke section 56 of the Contract Act, in a light hearted manner and nor is there any need to do so. The questions of increase in cost for a provider is his business risk and it cannot be used to either to wriggle out of the contractual obligations or to claim additional consideration over and above the contract price decided and determined after due negotiation between the parties unless specifically covered. There are no assumptions made as to the inclusion of any event unless specifically mentioned under the contract.