SC: Tribunal’s liberal reading of “change in law” clause unsustainable—fixed-rate drilling contract cannot include diesel price hike

Case Name: South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Ltd.) v. Oil India Limited
Citation: Civil Appeal No. 673 of 2012, decided with Civil Appeal No. 900 of 2012
Date of Judgment: 11 May 2020
Bench: Justice N.V. Ramana, Justice Mohan M. Shantanagoudar, and Justice Ajay Rastogi

Held: The Supreme Court upheld the Gauhati High Court’s decision setting aside the arbitral award, holding that the Arbitral Tribunal’s liberal interpretation of “change in law” under Clause 23 of the drilling contract was not a possible or reasonable construction. The clause could not be extended to include increases in High-Speed Diesel (HSD) prices caused by government notifications. Since the contract was on a fixed-rate basis, such price fluctuations were commercial risks that the contractor had assumed while bidding. The Tribunal’s reading effectively rewrote the contract, making the award perverse and unsustainable under Section 34 of the Arbitration and Conciliation Act, 1996.

Summary: Oil India Ltd. had entered into a 1995 contract with SEAMEC Ltd. for onshore drilling operations in Assam. During execution, diesel prices rose due to government circulars. SEAMEC claimed reimbursement under Clause 23 (“change in law”), arguing that the government circulars had the force of law. The Arbitral Tribunal (majority) accepted this view and awarded ₹98.89 lakh with 10% interest, later revised to ₹1.32 crore. The District Judge upheld the award, but the Gauhati High Court, on Oil India’s Section 37 appeal, reversed it, holding that the Tribunal had ignored the contract’s fixed-rate nature and overstepped its jurisdiction.

Before the Supreme Court, SEAMEC contended that interpretation of contract terms lay within the Tribunal’s domain and that courts could not substitute their view when two interpretations were possible. The Court disagreed, noting that the Tribunal’s construction was not even a possible view. It emphasized that Clause 23 was intended for genuine changes in or enactment of law and not for routine price fluctuations. The Bench clarified that where a contract specifically provides for a force majeure mechanism (Clause 44.3) and fixed-rate pricing (Clauses 14.7 and 14.11), escalation claims could not be brought under “change in law.”

Relying on Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. (2019), the Court reiterated that interference is warranted when the award’s interpretation is so irrational that it goes to the root of the matter. Here, by ignoring that the contractor bore the risk of fuel-price volatility, the Tribunal’s view was patently perverse.

Decision: Appeals dismissed; High Court judgment affirmed. The arbitral award dated 19.12.2003 was correctly set aside. No order as to costs.