Why 'No Oral Modification Clauses' Matter More Than Ever? Lessons From The Supreme Court's Ruling In SEPCO-GMR Case

Introduction

The Supreme Court in the case SEPCO Electric Power Construction Corporation vs GMR Kamalanga Energy Limited¹, addressed the scope and limits of judicial interference under the Arbitration and Conciliation Act, 1996. The Court reaffirmed the foundational principle of commercial arbitration that arbitral awards must strictly remain within the parameters of the agreement between parties.

The judgment is a significant contribution to the evolving jurisprudence under the Arbitration and Conciliation Act, 1996 particularly concerning the scope and limits of judicial interference. The Court undertook a rigorous examination of whether an arbitral award could be set aside on grounds such as waiver of contractual notices, invocation of estoppel, jurisdictional overreach, and breach of natural justice. In doing so, it reinforced the delicate balance between finality in arbitration and judicial oversight to ensure procedural fairness and contractual fidelity.

The Backdrop: A Billion-Rupee Dispute

SEPCO (Appellant), a Chinese Engineering, Procurement and Construction (EPC) contractor, entered into several EPC contracts with GMR Kamalanga Energy Limited (GMRKEL) (Respondent), to build coal-fired thermal power plants in Odisha. The EPC agreements featured detailed milestone provisions, notice requirements for claims, and specific termination clauses. However, following project delays and site issues over payments, SEPCO initiated arbitration seeking costs and damages. The EPC agreement contained a clear “No Oral Modification” (NOM) clause, mandating that any waiver or variation must be agreed in writing and signed by both parties. The arbitral award largely factored SEPCO, granting payments exceeding INR 995 Crore. GMRKEL challenged the award, alleging the tribunal improperly waived contractual notice requirements, made jurisdictional errors, reinterpreted contract terms contrary to the parties' intent, and violated natural justice.

The Orissa High Court Division Bench found that the arbitral tribunal had overstepped its authority by relying on an email to infer waiver, effectively rewriting the contract. SEPCO appealed to the Supreme Court, on the ground that the High Court had exceeded its limited scope under Section 37 of the Arbitration and Conciliation Act, 1996.

The Legal Crossroads

The Supreme Court examined the following key issues:

• Whether the arbitral tribunal correctly applied contractual notice waivers despite express “No Oral Modification” and ‘No Waiver” clauses?
• Whether estoppel could override these explicit contractual provisions?
• Whether the tribunal's factual findings and contractual reinterpretations were justified or constituted jurisdictional overreach?
• Whether the tribunal's treatment of parties violated principles of equality and natural justice under Section 18 of the Arbitration and Conciliation Act, 1996?
• The limitations on the court's power to interfere with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996?

Supreme Court Ruling: A Reassertion of Contractual Sanctity

In this case, the Supreme Court stated that an arbitral tribunal has no authority to rewrite or alter clear and express contractual provisions, particularly where the parties have agreed to clauses such as ‘No Oral modification' and ‘No Waiver'. These clauses are binding and reflect the mutual intent of the parties to restrict any informal changes to the contract. The Court also emphasised that equitable estoppel cannot override such explicit terms unless there is mutual consent. Furthermore, judicial intervention under Sections 34 and 37 of the Arbitration and Conciliation Act 1996 is strictly limited to instances of patent illegality, breach of natural justice or awards that conflict with the Public Policy of India. However, the court is not empowered to modify arbitral awards on merits but may correct clerical errors or invalid parts. The tribunal's actions in altering contractual terms violated these principles and the norms of natural justice, thereby justifying the setting aside of the award to uphold contractual sanctity, fairness and the finality of the arbitration.

Judgment Analysis: Five Key Principles

The Court conducted a detailed analysis of the arbitral award and reaffirmed the following key principles:

1. Scope of judicial interference: The Court has repeatedly stated that judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996, is narrowly defined and should only occur in cases of patent illegality, fundamental breaches of natural justice, or violation of public policy. It stressed the importance of party autonomy and the finality of arbitration.
2. Waiver and estoppel cannot override express terms: The Court clarified that waiver and estoppel cannot override express contractual clauses unless there is a clear, mutual, and deliberate intention to relinquish rights.
3. Natural Justice is foundational: The Tribunal's discriminatory treatment of the Respondent's Claim and denial of a fair opportunity to present its case constituted a breach of natural justice under Section 18 of the Arbitration and Conciliation Act, 1996.
4. Merits cannot be revaluated: The Court emphasised that while it cannot re-evaluate the merits of an award, but it can only correct clerical errors.
5. Awards must align with public policy and morality: The Court underscored that awards conflicting with the fundamental policy of Indian law or basic notions of morality and justice can be set aside, ensuring that arbitration does not become a tool for injustice.

Key Takeaway

Parties involved in international arbitration under Indian law must exercise rigorous contractual discipline to ensure that arbitral awards are both enforceable and fair. This includes a strict observance of the terms laid out in the contract, particularly clauses that exclude oral modifications and informal waivers. While judicial review of arbitral awards in India is limited, courts will intervene in cases of jurisdictional overreach, patent illegality, or violations of public policy. Therefore, parties must ensure that their arbitration process is legally sound, procedurally robust, and aligned with Indian legal standards to preserve the integrity and finality of the arbitral outcome.

Footnotes

1. Civil Appeal SLP (C) NO. 2706 OF 2024

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