Change in Law Clauses in Fixed-Price Contracts Explained: Supreme Court Holds Fuel Price Increase Not Recoverable Unless Contract Clearly Provides

Case Name: South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Ltd.) v. Oil India Limited

Citation: 2020 INSC 392

Date of Judgment/Order: 11 May 2020

Bench: N.V. Ramana, Mohan M. Shantanagoudar, Ajay Rastogi

Held: The Supreme Court held that escalation in the price of High-Speed Diesel during the subsistence of a fixed-price contract does not qualify as a “change in law” under the contract, and arbitral tribunals cannot grant reimbursement for such increase unless the contractual terms clearly and expressly permit it.

Summary: The dispute arose from a fixed-price contract awarded by Oil India Limited to SEAMEC Ltd. for drilling operations. During the execution of the contract, the price of High-Speed Diesel increased pursuant to government notifications. SEAMEC invoked the “change in law” clause and claimed reimbursement of the increased fuel costs.

The arbitral tribunal, by a majority award, accepted the claim and held that government circulars increasing diesel prices had the force of law and therefore fell within the change in law clause. The award was upheld under Section 34 but was set aside by the Gauhati High Court in an appeal under Section 37.

The Supreme Court affirmed the High Court’s decision. It held that the contract was unequivocally a fixed-price contract, with clear provisions indicating that fuel costs were to be borne by the contractor. The Court rejected the tribunal’s expansive interpretation of the change in law clause, observing that contractual provisions must be read as a whole and that such clauses cannot be interpreted in a manner that defeats the core commercial structure of the contract.

The Court further clarified that a change in law clause is distinct from force majeure or frustration and is intended to mitigate specific legal risks expressly contemplated by the parties, not normal commercial price fluctuations which contractors are expected to factor into their bids.

Decision: Both appeals were dismissed. The Supreme Court upheld the High Court’s judgment setting aside the arbitral award and reaffirmed that courts may interfere with arbitral awards where the interpretation adopted is not a plausible one and effectively rewrites the contract.