Seamec : South East Asia Marine Engineering And Constructions Ltd. V. Oil India Ltd.

Background facts

• The Appellant, South East Asia Marine Engineering and Constructions Ltd. (SEAMEC), and the Respondent, Oil India Ltd (OIL), entered into a contract for drilling of oil wells and other ancillary activities. The contract was initially signed for a period of two years and was later extended for two additional years. During contract period price of high-speed diesel, which is one of the key materials used in the drilling operations, increased. SEAMEC made a claim to OIL stating that increase in price of high-speed diesel would attract Clause 23 of contract pertaining to 'Change in Law' and that OIL was liable to make good the difference in price to SEAMEC.
• OIL rejected this claim and SEAMEC invoked arbitration against OIL. The arbitral tribunal issued an award on December 19, 2003 in favour of SEAMEC allowing its claim along with payment of interest, stating that a circular issued by government on increase of price of high speed diesel has force of law and, therefore, falls within ambit of 'Change in Law' clause of the contract.
• OIL challenged this award before District Judge who affirmed the award passed by the arbitral tribunal. Aggrieved by this decision, OIL filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (Act) before the Guwahati High Court (HC), which ruled that arbitral tribunal had wrongfully interpreted the contract and that award was against the public policy of India. Guwahati High Court also held that by powers under Section 37 of the Act, it was entitled to set aside the award since award was passed by arbitral tribunal overlooking terms of the contract.
• SEAMEC challenged this order by way of a special leave petition before Supreme Court of India (SC).

Our view

It is interesting to note that the Court dismissed the issue surrounding the interpretation of the 'Change in Law' clause in the contract. It relied on other provisions of the contract to conclude that the contract was a fixed rate contract. The Court ought to have delved into the connotations of the wordings of the 'Change in Law' clause and examined whether price variation of an essential item of the contract could be included within the meaning of 'Change in Law'. The Court's reliance on the item list of the contract which states that SEAMEC agreed to supply fuel at its own expense may not be entirely correct. Although SEAMEC agreed to supply the fuel at its expense at the rate existing at the time of entering into the contract, the subsequent price variation ought to have been dealt with separately.

Issue at hand

• Whether the interpretation of the 'Change in Law' clause by the arbitral tribunal was correct?

Findings of the Court

• SC noted that the contract was based on a fixed rate and contained certain clauses that stated that the rates, terms and conditions were to be in force throughout the term of the contract. By this arrangement, Court interpreted the parties to have mitigated risk of increase in prices at the time of entering into the contract. Court relied on the item list of the contract which stated that SEAMEC would supply fuel at its own expense and, therefore, held that it was erroneous of arbitral tribunal to have given Clause 23 a wide interpretation and to have included a government circular on change in price of high-speed diesel within meaning of 'Change in Law'.
• On the above basis, Court set aside award of arbitral tribunal and restored order of HC.

Footnotes

1 1994 Supp (1) SCC 644

2 (2003)5 SCC 705

3 (2015) 3 SCC 49

4 (2010) 11 SCC 557

Originally published 02 July, 2020

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Faranaaz Karbhari
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