A three-judge bench of the Supreme Court in its recent judgment in South East Asia Marine Engineering and Constructions Limited v. Oil India Limited2 (the "Judgment") upheld an order passed by the Gauhati High Court under Section 37 of the Arbitration and Conciliation Act, 1996 (the "Arbitration Act") setting aside an arbitral award. The High Court reversed the decision under Section 34 of the Arbitration Act (whereby the challenge to the award was rejected) on the ground that the interpretation of the terms of the contract by the arbitral tribunal is erroneous and is against the public policy of India. The Judgment (upholding the High Court's decision) is an interesting development as it marks an important checkpoint on the principle that an error of interpretation of contract is considered to be an error within the arbitral tribunal's domain and thus not a ground to set aside an award. Before analyzing the Judgment, it is necessary to advert to a brief factual background, as set out hereunder.


Pursuant to a tender floated by the Respondent, the parties entered into a contract whereby the Appellant was engaged to carry out well drilling and other ancillary operations in the state of Assam. During the term of the contract, the price of high speed diesel ("HSD"), one of the essential materials for carrying out the operations contemplated in the contract, was increased by the Government though a circular. On account of rise in price of HSD, the Appellant sought certain reimbursements from the Respondent by relying on Clause 23 of the contract ("Clause 23") which provided for reimbursement of cost in the event of change in prices of essential materials due to enactment of a new law or modification in an existing law. As the Respondent denied the reimbursements sought, the Appellant invoked arbitration claiming reimbursements on account of rise in price of HSD.

The arbitral tribunal passed an award dated December 19, 2003 (the "Award") in favour of the Appellant. It took a view that Clause 23 ought to be interpreted liberally, in as much as it held that "while an increase in HSD price through a circular issued under the authority of State or Union is not a "law" in the literal sense, but has the "force of law" and thus falls within the ambit of Clause 23."3 The tribunal held that this clause must be construed as 'Habendum Clause', thereby bringing price escalation of HSD within its purview.

The Respondent's application under Section 34 of the Arbitration Act for setting aside the award was dismissed by the district judge who took the view that the award was neither without basis nor against the public policy of India nor patently illegal and did not warrant interference. The decision of the district judge was further challenged before the Gauhati High Court in an appeal under Section 37 of the Arbitration Act which set aside the award on the ground that it was passed overlooking the terms of the contract between the parties. In its reasoning, the High Court took a view that Clause 23 is akin to a force majeure clause. Aggrieved by the decision of the High Court, the Appellant filed an appeal before the Supreme Court.

The main grounds of challenge before the Supreme Court were (a) that interpretation of contractual terms falls within the domain of the arbitral tribunal to decide and the High Court is conferred with only a supervisory role which cannot impart its own view with regard to interpretation of contractual terms between parties; and (b) as there exists no patent illegality in the Award, the questions of law decided by the arbitral tribunal were beyond the judicial review of the High Court under Section 34 of the Arbitration Act.

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* First published on Bar and Bench at https://www.barandbench.com/columns/supreme-court-upholds-court-interventionto-rectify-erroneous-contractual-interpretation-in-an-arbitral-award.

2 Civil Appeal No. 673 of 2012.

3 Finding as noted in Para 4 of the Judgment.

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