South East Asia Marine Engineering and Constructions Ltd v. Oil India Limited [Supreme Court, 11 May 2020 in Civil Appeal No. 673 of 2012]

SOUTH EAST ASIA MARINE ENGINEERING V. OIL INDIA LTD.

Whether the arbitral tribunal’s interpretation of Clause 23 as involving a price increase in high-speed diesel (HSD) due to an Executive Order was a reasonable construction of the contract provisions, given that the contract appeared to envisage a fixed rate for the contractor?
Whether the arbitral tribunal’s interpretation, while based on the principle of harmonious interpretation, was so implausible and contrary to the overall terms of the contract that it could be considered against Indian public policy, justifying the High Court’s overturning of the arbitral award?

While courts and tribunals should normally use a harmonic interpretation of contract words to determine the parties’ intent, such interpretation must nevertheless be consistent with the contract’s overall terms and conditions. An interpretation that is not plausible in the context of the contract may be rejected, particularly if it contradicts the contract’s plain stipulations and is contrary to Indian public policy.

OIL awarded SEAMEC a contract for drilling and related operations that includes a “change in law clause” (Clause 23).
The contract authorised SEAMEC to seek payment for additional expenditures incurred as a result of legal changes.
An Executive Order caused a rise in the price of HSD, which is necessary for SEAMEC’s operations.
SEAMEC contended that the price rise constituted a “change in law” under Clause 23, but OIL disagreed.
The arbitral tribunal found in favour of SEAMEC, applying a broad interpretation of the Article.
The District Judge upheld the award after it was challenged under Section 34 of the Arbitration and Conciliation Act 1996.
The High Court overturned the award, ruling that the interpretation was incorrect and against public policy.
SEAMEC filed an appeal with the Supreme Court.

Both the arbitral tribunal and the High Court were overruled by the Supreme Court.
While a harmonic reading of a contract is normally prefered, it should not contradict the overall terms and circumstances of the deal.
The contract envisioned a set fee for SEAMEC, according to the Court, and there was no specific language in the contract linking price changes with a “change in law.”
SEAMEC’s broad interpretation of Clause 23 was ruled improbable by the tribunal because it was not supported by adequate evidence.
When two credible opinions exist, the Supreme Court clarified that the Court should not interfere with the arbitrator’s decision. In this case, however, the tribunal’s interpretation was not even an option.
Finally, the Supreme Court declined to intervene in the High Court’s decision to vacate the arbitral verdict.