TMI Blog2020 (5) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... occurrence of an event which renders the performance impossible, the contract becomes void thereafter - When the parties have not provided for what would take place when an event which renders the performance of the contract impossible, then Section 56 of the Contract Act applies. When the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the contract becomes void - However, there is no doubt that the parties may instead choose the consequences that would flow on the happening of an uncertain future event, under Section 32 of the Contract Act. Although, the Arbitral Tribunal correctly held that a contract needs to be interpreted taking into consideration all the clauses of the contract, it failed to apply the same standard while interpreting Clause 23 of the Contract - We also do not completely subscribe to the reasoning of the High Court holding that Clause 23 was inserted in furtherance of the doctrine of frustration. Rather, under Indian contract law, the effect of the doctrine of frustration is that it discharges all the parties from future obligations. In order to mitigate the harsh consequences of frustratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and order dated 13.12.2007 in Arbitration Appeal No. 11 of 2006 passed by the Gauhati High Court, wherein the High Court allowed the appeal preferred by the Respondent under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter the Arbitration Act ), and set aside the arbitral award dated 19.12.2003. 2. Brief facts necessary for the disposal of this case are as follows: appellant was awarded the work order dated 20.07.1995 pursuant to a tender floated by the Respondent in 1994. The contract agreement was for the purpose of well drilling and other auxiliary operations in Assam, and the same was effectuated from 05.06.1996. Although, the contract was initially only for a period of two years, the same was extended for two successive periods of one year each by mutual agreement, and finally the contract expired on 04.10.2000. 3. During the subsistence of the contract, the prices of HighSpeed Diesel ( HSD ), one of the essential materials for carrying out the drilling operations, increased. Appellant raised a claim that increase in the price of HSD, an essential component for carrying out the contract triggered the change in law clause under the contract (i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Clause 23, he submitted, is a matter of interpretation and has been correctly interpreted by the Arbitral Tribunal based on the authorities cited before it. b. If two views are possible on a question of law, the High Court cannot substitute one view and deference should be given to the plausible view of the Arbitral Tribunal. Learned counsel has relied upon a judgment of this Court in McDermott International Inc. v. Burn Standard Co. Ltd. [(2006) 11 SCC 181] to support his contention. c. The question of law decided by the Arbitral Tribunal is beyond judicial review and thus the High Court could not have interfered with a reasoned award which was neither against public policy of India nor patently illegal. 9. In response, the learned counsel for the Respondent, supporting the findings of the High Court, submits that a. the award passed by the Arbitral Tribunal is contrary to the terms of the contract and essentially rewrites the contract. The Arbitral Tribunal has to adjudicate the dispute within the four corners of the contract and thus awarding additional reimbursement not contemplated under Clause 23 is perverse and patently illegal. b. Overlooking the terms and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that- (i) the subjectmatter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation. -Without prejudice to the generality of subclause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81. (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasoning provided in the award is implied unless such award portrays perversity unpardonable under Section 34 of the Arbitration Act. (emphasis supplied) 14. However, the question in the present case is whether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passes the muster under Section 34 of the Arbitration Act? 15. In the present case, respondent has argued that the view taken by the Arbitral Tribunal was not even a possible interpretation, therefore the award being unreasonable and unfair suffers from perversity. Hence, the respondent has pleaded that the award ought to be set aside. In this context, we may state that usually the Court is not required to examine the merits of the interpretation provided in the award by the arbitrator, if it comes to a conclusion that such an interpretation was reasonably possible. 16. We begin by looking at the clause, i.e Clause 23 which is extracted below: SUBSEQUENTLY ENACTED LAWS: Subsequent to the date of price of Bid Opening if there is a change in or enactment of any law or interpretation of existing law, which results in additional cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any order, instruction and resolution issued by the Central Government in its Ministry of Petroleum and Natural Gas. The majority award utilizes liberal interpretation rule to construe the contract, so that the price escalation of HSD could be brought under the Clause 23 of the contract. Further the Arbitral Tribunal identifies the aforesaid clause to be a Habendum Clause , wherein the rights granted to the appellant are required to be construed broadly. 18. On the other hand, the High Court in the impugned order, interpreted the same clause as follows: 27 I am of the firm view that clause 23 was inserted in the agreement to meet such uncertain and unforeseen eventualities and certainly not for revising a fixed rate of contract. I also find that both parties had agreed to keep force majeure clause in the agreement. Under this doctrine of commercial law, a contract agreement can be rescinded for acts of God, etc. Under clause 44.3 of the agreement, force majeure has been clearly defined, which includes acts and regulations of the Government to rescind a contract. In this way, clause 23 is very close and akin to the force majeure clause . Besides this, I may a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties may instead choose the consequences that would flow on the happening of an uncertain future event, under Section 32 of the Contract Act. 21. On the other hand, the common law at one point interpreted the consequence of such frustration to fall on the party who sustained loss before the frustrating event. The best example of such an interpretation can be seen in the line of cases which came to be known as coronation cases . In Chandler v. Webster, [1904] 1 KB 493, Mr. Chandler rented space from Mr. Webster for viewing the coronation procession of King Edward VII to be held on 26th June 1902. Mr. Chandler had paid part consideration for the same. However, due to the King falling ill, the coronation was postponed. As Mr. Webster insisted on payment of his consideration, the case was brought to the Court. The Court of Appeals rejected the claims of both Mr. Chandler as well as Mr. Webster. The essence of the ruling was that once frustration of contract happens, there cannot be any enforcement and the loss falls on the person who sustained it before the force majeure took place. 22. This formulation was overruled by the House of Lords in the historic decision of Fibrosa S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract, it failed to apply the same standard while interpreting Clause 23 of the Contract. 26. We also do not completely subscribe to the reasoning of the High Court holding that Clause 23 was inserted in furtherance of the doctrine of frustration. Rather, under Indian contract law, the effect of the doctrine of frustration is that it discharges all the parties from future obligations. In order to mitigate the harsh consequences of frustration and to uphold the sanctity of the contract, the parties with their commercial wisdom, chose to mitigate the risk under Clause 23 of the contract. 27. Our attention was drawn to Sumitomo Heavy Industries Limited v. Oil and Natural Gas Corporation Limited, (2010) 11 SCC 296, where this Court interpreted an indemnity clause and found that an additional tax burden could be recovered under such clause. Based on an appreciation of the evidence, the Court ruled that additional tax burden could be recovered under the clause as such an interpretation was a plausible view that a reasonable person could take and accordingly sustained the award. However, we are of the opinion that the aforesaid case and ratio may not be applicable herein as the evid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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