GS Patel, J
1. The Appeal under Section 37 of the Arbitration and Conciliation Act 1996 (“the Arbitration Actâ€) is directed against an order of 13th March
2015 by which the learned Single Judge (AA Sayed J, as he then was) disposed of three arbitration petitions under Section 34 of the Arbitration Act
filed by the present Respondent. There were three arbitration petitions because there was an award dated 12th March 2009, a supplementary final
award dated 24th February 2010 and a further award dated 21st September 2011.
2. The results of the impugned order are compactly set out in paragraph 47 at pages 125 & 126, thus:
“47. The upshot of the above discussion is as follows:
(1) The findings of the Arbitral Tribunal on Limitation are not disturbed;
(2) The findings of the Arbitral Tribunal on Repairs are set aside;
(3) Since the claim for Accident Repairs is given up by the Respondent, the challenge to the same does not survive for consideration;
(4) The findings of the Arbitral Tribunal on ‘Monthly Stipend’ are not interfered;
(5) Interest at the rate of 9% p.a. as granted by the Award dated 12 March 2009 on the amount payable by the Petitioner to the Respondent from the
date of the Award til payment shall continue to operate and the direction to pay interest as the law permits (which effectively means 18% p.a.) as
granted by further Award dated 21 September 2011, is set aside. Interest shall run from the date of the Award (Award dated 12 March 2009) till
payment.â€
3. In this Appeal, we are only concerned with item (2) and item (5). The impugned order is an elaborate and detailed discussion, but, for our purposes,
and since the Appeal is limited, a shorter summary must suffice.
4. Oil and Natural Gas Corporation Ltd (“ONGCâ€) invited bids for or regarding its Offshore Supply Vessel named Samudrika-2 known throughout
as “Sam-2â€. Interocean Shipping (India) Pvt Ltd (“Interoceanâ€), the present Appellant, was the successful bidder. ONGC and Interocean
entered into a Contract dated 22nd March 1995. Interocean’s contractual obligations included inter alia the manning, operating, victualling, repair,
maintenance, and provisioning of Sam-2 to provide 24x7 logistics support services to ONGC’s offshore operations. The term of the contract was
for 30 months from 15th March 1994 to 14th September 1996. It was extended to 11th November 1996. It provided for payment of a lump sum daily
amount to Interocean. There were also provisions for deductions to be made for various purposes. It is undisputed that the contract had an arbitration
clause.
5. The first area of dispute is as regards Interocean’s claim for repairs. Broadly stated, the submission by Mr Sen, learned Advocate for the
Interocean in Appeal before us, is that the contract specifically provided for those repairs that were to be paid for and were to the account of
Interocean. Other repairs were undoubtedly necessary to keep Sam-2 seaworthy and to enable Interocean to perform its contractual obligations. But,
for these ‘other’ repairs, Interocean only had responsibility. It did not have liability. This means, according to Mr Sen, that while Interocean
would have to effect these ‘other’ repairs, including routine ones required to address ‘normal wear and tear’, it was ONGC that would
have to pay for these.
6. We are not addressing certain aspects that seem to us tangential to this question. For this was not Interocean’s first contract with ONGC for
Sam-2. It had provided offshore service with this vessel for previous terms as well. It had made no such claim then. Even in the present case, it
appears that the claim was made at a late stage. We do not think that any of these questions are dispositive or even material to the narrow issue that
falls for our consideration.
7. In the impugned order, Sayed J set out several of the relevant clauses. These were set out in sequence; we prefer to set them out in order of
priority as applicable to the arguments and submissions before us. Clauses 7.2(iv), 7.2(v) and 7.2(vii) read thus:
“7.2 OPERATIONS:
(iv) The Operator shall at its cost, expense and risk, dry-dock, clean and paint the vessel’s hull and other areas and carry out overhaul and
necessary repairs at reasonable intervals whereas the vessel will be dry-docked as per mutually agreed programme between the Owner and the
Operator. It is hereby understood and agreed that any cleaning, painting, operation and gas freezing operation of the enclosed spaces of the vessel on
each occasion referred to above shall be on Operator’s account. Similarly, all expenses on towing, pilotage, fuel, water and other expenses
connected therewith, incurred or to be incurred from the time and date the vessel is released for dry docking and during the operation, to be designated
by the Owner, shall be entirely borne by the Operator. It is also hereby understood and agreed that before the vessel is intended to proceed for dry-
docking, fuel oil, tube oil and fresh/drill water remaining on-board the vessel shall be measured by the Surveyor appointed by the Owner at
Operator’s cost at the last point of operation and such fuel, tube oil and fresh/drill water shall be re-measured in the manner prescribed above
when the vessel reports at the first point of operation after dry-docking. Any difference between these shall be paid for by the Operator to the Owner
at the established rate. It is hereby agreed that the fee as referred in clause 2.1 for the period from the time when the vessel was released at the last
point of operation before dry-docking till the time the vessel reaches the first point of operation as designated by the Owner after the dry-docking, is
not payable to the Operator.
(v) The Operator shall be responsible for all operations including but not limited to, full maintenance and upkeep of the vessel and its equipment
(including onboard spares and stores) and for carrying out repairs, dry-docking, survey of hull, machinery, electrical/electronic equipment and facilities
on the vessel, regular cleaning of ship’s linen and furnishings as required by the Owner/classification surveyors and to maintain the vessel in good
shape, cleaned and painted and in efficient running condition during the currency of this Agreement.
(vii) In the performance of its obligations under this Agreement the Operator shall be deemed to be an independent Contractor and neither of their
employees nor the Master nor crew of the vessel shall be deemed to be servants, agents or employees of the Owner, under any circumstances.â€
(Emphasis added)
8. Then there is clause 8 which says:
“8.0 MAINTENANCE OF THE VESSEL:
The upkeep of the vessel shall be the prime and exclusive responsibility of the Operator. The Operator shall ensure that the vessel is always safe,
seaworthy and in shipshape condition to the entire satisfaction of the Owner, the classification society and the statutory surveyors.â€
(Emphasis added)
9. These must be read with Clause 3 (“Delivery/Re-Delivery of the Vesselâ€), which says:
3.0 DELIVERY/RE-DELIVERY OF VESSEL:
The vessel shall be delivered to the Operator at any port in India as may be designated by the Owner. At the time of delivery, the vessel shall be in
good, shipshape condition along with spares, tools and tackles and other equipment supplied by the shipyard, and in every respect seaworthy with all
standard (MMD and class) certificate valid and uptodate and in good running order and condition. The Operator shall take charge of the vessel as
custodian in trust on behalf of the Owner. However, at the time of delivery if any repair and survey are considered necessary to be carried out to
bring the vessel fully operational and shipshape condition, these shall be carried out by new Operator at the cost of outgoing Operator as decided by
Owner. List of such pending repair work and survey shall be prepared jointly by the outgoing and new Operator and to be submitted to Owner. In
case of any dispute between the two Operators decision of Owner shall be binding on both. Such repair work and Survey shall be carried out by the
new Operator under supervision of (DGM), Nhava or his authorised representative and if the vessel becomes in-operative for some period for
carrying out these jobs, such period of inoperation shall not be counted as downtime within the scope of clause 12(a) and (b) nor will cost, for such
period be recovered from the incoming Operator. An Inventory of the vessel’s entire equipment, outfit, appliances, spares and stores shall be
prepared by an independent surveyor jointly appointed by the Operator and Owner at the time of delivery and by the parties at the time of re-delivery.
The cost of such survey at delivery will be borne by the Operator and on re-delivery by the Owner. The Operator shall re-deliver the vessel with all
equipment, tools, tackles, spares store and other accessories to the Owner on termination of this Agreement in the same good order and shipshape
condition in which it was delivered to him, normal wear and tear excepted. The Operator shall pay for the cost of replacement/repair of all such
equipments, tools, tackles, spares/stores and other accessories which are lost/damaged as against the inventory handed over on delivery to the
Operator. The Operator shall pay any/all charges of repair and survey which are required to be carried out to bring the vessel fully operational and in
same shipshape condition as at the time of delivery, normal wear and tear excepted.â€
(Emphasis added)
10. This is as far as Interocean’s obligations as the defined ‘Operator’. What of the ‘Owner’, ONGC? For this we turn to some parts
of Clause 10:
“10.0 LIABILITY OF OWNER:
The Owner shall:
…
ii) assist the Operator at his costs without any commitment, in obtaining clearances from Govt agencies to import spares and such other assistance
permissible under law of the land.
…
(v) pay all charges connected with pilotage, berth hire charges, port and light dues at Bombay, Madras. At other ports, charges will be paid by the
Owner or reimbursed to the Operator at actuals plus 5% service charges on submission of relevant invoices/bills. However, charges connected with
pilotage, berth hire charges port and light dues during downtime (other than compensable downtime) and drydocking will be borne by the Operator.
(vi) supply fuel tube oil and fresh water onboard. The cost of fuel oil and fresh water consumed during non-compensable downtime will be to the
Operator’s account.â€
11. There is a clear bifurcation. Mr Sen’s argument that there is ‘responsibility without liability’ does not impress us. Consider, for instance,
the very heading of Clause 10 “Liability of the Ownerâ€. Even if the headings are not to be taken into account for interpretation, that word will
provide the subject context. Clause 10 encapsulates the universe of all financial liabilities of ONGC, the owner. If what Mr Sen says is correct, then
surely in Clause 10 one would have expected to find some mention of ONGC’s liability for the financial costs that Mr Sen so enthusiastically
disclaims.
12. But to return to Clause 7.2 and its sub-clauses (iv) and (v): While we do not suggest that the headings have any interpretive value, they certainly
tell us what is that that particular clause relates to. Clause 7.2 deals with operations. Clause 7.2(iv) uses the word ‘at its costs, expense and
risk’. It does not say ‘responsibility’. Sub-clause (v), however, says ‘responsible’ but does not use the words ‘cost, expense and
risk’. Sub-clause (iv) deals with one part of operation. Sub-clause (v) is a residuary or universal clause that deals with all operations including
those mentioned in sub-clause (iv). Sub-clause (v) also says that it is Interocean that is responsible for â€" and the list is inclusive not exhaustive â€
full maintenance and upkeep of the vessel and for carrying out repairs. Then comes clause 8, set out above, regarding maintenance of the vessel. This
says that the upkeep of the vessel is the ‘prime and exclusive responsibility of the Operator, who is to ensure that the vessel is always safe,
seaworthy and in shipshape condition. Notably Clause 8 also uses the word ‘upkeep’ and then says that this upkeep of Sam-2 is the prime and
exclusive responsibility of Interocean.
13. The arbitrators were confronted with this argument. We have considered the award with care, and so too the impugned order. We believe Sayed J
was correct in taking the view that arbitral tribunal went completely astray. It would have been one thing had the arbitrators merely addressed a
question of interpretation of the contract. Paragraphs B.13 and B.14 of the award prima facie indicate a wholesale rejection of Interocean’s
submissions. The arbitral tribunal indeed itself said that it could not redraft any part of the contract. Paragraphs B.13 to B.15 at pages 580 to 582 read
thus:
B.13 Clause 7.2(iv) requires that “the Operator shall, at its cost, expense and risk, dry-dock, clean and paint the vessel’s hull and other areas
and carry out overhaul and necessary repairs at reasonable intervals, whereas the vessel will be dry-docked as per mutually agreed programme
between the Owner and the Operator. It is recorded in Clause 7.2(iv) that it is understood and agreed that any cleaning, painting operation and gas
freeing operation of the enclosed spaces of the vessel on each occasion referred to above shall be on Operator’s account. Similarly, all expenses
on towing, pilotage, fuel, water and other connected expenses incurred or to be incurred from the time and date the vessel is released for dry docking
and during the operation, to be designated by the Owner, shall be entirely borne by the Operatorâ€. The Claimant has raised several contentions as to
the proper interpretation of this clause of the contract. It has submitted firstly that the location of the said sub clause in the contract is ‘strange’.
The heading of clause 7 indicates that the said clause relates to ‘Operator’s Duties and Obligations’, and not to Liabilities. The Claimant
submits that since clause 7 does not deal with financial liabilities save in a limited manner, this clause would be strange place to find a revolutionary
provision transmitting the Respondent’s entire risk in the vessel to the Operator. The Claimant further submits that the term ‘at its cost, expense
and risk’ appearing in clause 7.2(iv) is mere jargon and was actually intended to convey the same meaning which is conveyed by the alternate
expression ‘at no further cost or liability to the Owner’. In the alternative, the Claimant submits that this phrase used in the clause qualifies only
the words “drydock, clean and paint the vessel’s hull and other areas†and it does not qualify the words ‘and carry out overall and
necessary repairs’, since these words are instead qualified by the term ‘a reasonable intervals’, and are used in contradistinction to the
phrase whereas the vessel will be drydocked as per mutually agreed programme…’. It further states that the very same clause makes it clear
that any cleaning, painting operation and gas freeing operation of the enclosed spaces of the vessel shall on each occasion, be on the Operator’s
account but obviously only other operations would not be on the Operator’s account. The Claimant also submits that to read clause 7.2(iv) in any
other manner would give rise to conflicts inter se between the different terms of the contract.
B.14 These arguments are innovative, but largely unconvincing. The argument regarding the location of the sub-clause in the contract is predicated
upon the use of the heading of the clause in the interpretation of the contract. However such reference to the heading is expressly prohibited in clause
1.5 of the contract. Moreover, we must give effect to the words of the contract and cannot reject any words merely because of their allegedly
inappropriate location in the contract. We are also not inclined to rewrite the contract by replacing the words ‘as its cost, expense and risk’ with
the words ‘at no further cost or liability to the Owner’. We do not believe that such redrafting of the contract is permissible in law. Clause
7.2(iv) in addition to the liability already placed upon the Operator in the opening words of the said sub-clause, clearly provides that cleaning, painting
operations and gas freeing operations of even enclosed spaces of the vessel shall be on the Operator’s account.
B.15 Hence, to our mind, the critical issue to be decided in respect of this clause is the appropriate interpretation of the opening words of Clause 7.2
(iv) which reads “the Operator shall, at its cost, expense and risk, dry-dock, clean and paint the vessel’s hull and other areas and carry out
overhaul and necessary repairs at reasonable intervals, whereas the vessel will be dry-docked as er mutually agreed programme between the Owner
and the Operatorâ€.
14. It is immediately after this that the arbitral tribunal let itself, as it were, flounder. For it then engaged in itself in a discussion applying the contra
proferentem rule of interpretation of contracts and then came by this roundabout manner to an acceptance of the very submissions of Interocean that
the tribunal had rejected merely two paragraphs earlier. This is hardly tenable. The contra proferentem rule of interpretation of contracts is often
known as “interpretation against the draftsmanâ€. Where a contractual term is ambiguous, the meaning to be preferred is the one that works
against the interests of the party who provided the wording. This is done frequently in ‘contracts of adhesion’ or ‘boilerplate contracts’,
where one party tells the other, “this is the contract; take it or leave it.†There are three core components to attract the rule. First, there has to be
a clearly defined ambiguity. Second, the parties have to be shown by evidence to be in an unequal bargaining position at the time of the contract.
Third, it has to be shown that the dominant party deliberately insisted or forced upon the other a contractual term that is ambiguous, intending that this
ambiguity would work in favour of the dominant party. This is not a doctrine of interpretation that can be assumed or plucked out of the air. In
essence, it gives the benefit of doubt in case of an ambiguity to the party that did not draw up the contract.
15. It is self-evident that before an arbitral tribunal can resort to this interpretative tool, there has to be an invocation before it of the principle. That
means there must be a pleading, and an argument advanced. It has to be shown that the weaker party had no choice; the ambiguous term was forced
on it by the dominant one. Before Sayed J, precisely such an argument was advanced by Interocean. Sayed J dealt with this in paragraphs 27 to 35
(pages 101â€"114) of the impugned order. The learned single Judge analysed the contractual provisions to hold that repairs were the liability of
Interocean. He then found (page 105) that there was no plea invoking the contra proferentem rule of interpretation. He also noted that ONGC had
invited tenders. Interocean knew the tender conditions. It submitted a bid, and it did so, as Sayed J said ‘with open eyes’. There was no element
of compulsion â€" and this is all the more evident because Interocean had secured identical contracts in the past. Sayed J noted the assertions in the
Statement of Claim (that Interocean had similar contracts for the last 25 years, etc, and for Sam-2 since 1991â€"1994). In all those previous periods,
the Operators paid for these repairs.
16. Indeed, Mr Sen accepts this, but says that at that time, during the previous contracts, the ‘normal wear and tear’ costs were low as the
vessel was new. But it had grown old and weary and worn and torn in the hands of Interocean â€" which knew its condition even before the present
contract was signed â€" and we quite fail to understand how this could have possibly affected interpretation. In other words, for the previous
contracts for the same vessel and in identical terms, Interocean saw no such ambiguity. Even those were standard form contracts. Yet Interocean
never said that those contracts had an ambiguity or justified invocation of the contra proferentem rule. Indeed, even in this contract it did not, for it did
not even invoke the contra proferentem rule even in this claim. The arbitrators simply conjured this up on their own.
17. In paragraph 30, Sayed J concluded:
“The Arbitral Tribunal has completely glossed over the assertions/admissions in the aforementioned pleadings, which in my view, go to the root of
the matter, as it clearly brings out that despite the allegedly onerous terms of the Contract, the Respondent [Interocean] had clearly accepted the
terms of the Contract on previous occasions also and both the parties proceeded on the basis and were well aware of what the terms of the Contract
would provide and which Contract was eventually entered into between the parties belatedly and without the Respondent [Interocean] raising any
objection.
Moreover, the Respondent [Interocean] having operated the very vessel viz.-SAM-2 under an earlier Contract was aware of the condition of the
vessel and had bid for the same with open eyes. It is well settled that in reading and construing a Contract the attending circumstances and intention of
the parties are also required to be considered, assuming there was any ambiguity in the Contract. The fact that the Contract was entered into after
about a year of the allotment of the Contract would only suggest that the parties were in no rush to enter into the Contract and that they were aware
that the proposed Contract would be on the same lines and on identical terms as the previous Contract, which was a mere formality. Even otherwise,
there was no objection raised by the Respondent [Interocean] to the terms of the present Contract before execution thereof. Moreover, it does
appear, as pointed out by the learned Counsel for the Petitioner [ONGC] that the other Operators who were operating about 24 vessels of the
Petitioner [ONGC] on similar contracts were also carrying out repairs of the vessels at their own cost. Significantly, as averred in paragraph 10 of the
Statement of Claim, the Respondent [Interocean] has entered into a fresh Contract with the Petitioner [ONGC] for a further period of two and half
years commencing from 12 November 1996.â€
(Emphasis added)
18. Not one single threshold requirement for invoking the contra proferentem rule existed. And yet the Arbitral Tribunal invoked and applied it. As
Sayed J said, even if some term was onerous, Interocean knew what it was getting into; it was no stranger to the vessel. The mere fact that a term is
onerous is insufficient to justify the invocation of the rule. An ambiguity must be established, and it must be shown that despite its protests, the
contract-drawing party foisted it or forced it on the other. This was only argued, and in the written submissions before the Arbitral Tribunal said to be
‘unconscionable’; but that is not the same thing.
19. However unfair the terms of the contract maybe, if the clauses are unambiguous, legal, clear and not against the public policy they are binding on
both parties. When this fundamental principle is sought to be dislodged by invoking in an appropriate manner (with pleadings and some level of proof )
the contra proferentem rule, what is really being canvassed is an interpretation in equity. Though said to be a matter of interpretation of contract, the
contra proferentem rule is rooted in equity and in equitable principles regarding the relative bargaining positions of the parties. In our view, without
demonstration of an ambiguity, without a supporting pleading, and without an explanation to past contracts and the circumstances surrounding the
execution of the disputed contract, there is no scope for an arbitral tribunal to blindly apply the contra proferentem rule to effect some sort of
adjustment in equity. Such an approach is forbidden by Sections 28(2) and 28(3) of our Arbitration Act:
“28. Rules applicable to substance of dispute:â€
(1) …
(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do
so.
(3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade
usages applicable to the transaction.â€
(Emphasis added)
20. This is rule of interpretation that is always open, traditionally to a Court of Chancery, that is to say, a Court of equity. It is certainly permissible in a
Civil Court and undoubtedly in a Writ Court. It is completely outside the purview of an arbitral tribunal unless the parties specifically consent as
required by Section 28(2). Nothing short of an express consent will do and it was never open to the arbitral tribunal to invoke this in the guise of
“interpretation of contract†to do precisely that which the arbitral tribunal said it could not do, i.e. to rewrite a portion of the contract and to fasten
liability, not contractually provided, on ONGC, and to allow Interocean to contend that it had entitlement to this strange creature called ‘responsibility
without liability’. But that is not all. The award does not actually identify any contractual provision that could be read to fasten liability on ONGC
at all. It only says this that if on this contra proferentem interpretation the liability could not be that of Interocean, then it must default to a liability of
ONGC. That is unstatable from any perspective, especially when Interocean did not itself contend that there was an unjustly freighted ambiguity in the
contract. The principle of contra proferentem does not apply to a commercial contract executed by parties with full knowledge of the bargain being
struck. Rashtriya Ispat Nigam Ltd v Dewan Cham Ram Saran, (2012) 5 SCC 306 During the execution of the work or the contract, Interocean never
alleged any such ambiguity. It also did not seek any clarification about any so-called ambiguous provision at the time of the time, nor did it seek an
addendum to the contract.
21. In Export Credit Guarantee Corporation of India Ltd v Garg Sons International, (2014) 1 SCC 686, paragraphs 11 and 13. the Supreme Court
rejected the submission that the contra proferentem rule should be applied to an insurance contract. The court held:
“11. The insured cannot claim anything more than what is covered by the insurance policy. “The terms of the contract have to be construed
strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely.†The clauses of an insurance policy
have to be read as they are. Consequently, the terms of the insurance policy, that fix the responsibility of the insurance company must also be read
strictly. The contract must be read as a whole and every attempt should be made to harmonise the terms thereof, keeping in mind that the rule of
contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually
been agreed upon. (Vide Oriental Insurance Co Ltd v Sony Cheriyan [(1999) 6 SCC 451], Polymat India (P) Ltd v National Insurance Co Ltd [(2005)
9 SCC 174], Sumitomo Heavy Industries Ltd v ONGC Ltd [(2010) 11 SCC 296] and Rashtriya Ispat Nigam Ltd v Dewan Chand Ram Saran [(2012)
5 SCC 306].)
13. Thus, it is not permissible for the court to substitute the terms of the contract itself, under the garb of construing terms incorporated in the
agreement of insurance. No exceptions can be made on the ground of equity. The liberal attitude adopted by the court, by way of which it interferes in
the terms of an insurance agreement, is not permitted. The same must certainly not be extended to the extent of substituting words that were never
intended to form a part of the agreement.â€
(Emphasis added)
22. A very recent decision of 25th April 2022 of the Supreme Court In Haris Marine Products v Export Credit Guarantee Corporation (ECGC) Ltd,
2022 SCC OnLine SC 509 discusses the contra proferentem rule, albeit in the context of an insurance claim (typically of the ‘contracts of
adhesion’ or ‘boilerplate contracts’ class). Garg Sons (supra) was cited. Then the Haris Marine court set out the law regarding the rule of
contra proferentem:
26. It is entrenched in our jurisprudence that an ambiguous term in an insurance contract is to be construed harmoniously by reading the contract in its
entirety. If after that, no clarity emerges, then the term must be interpreted in favour of the insured, i.e., against the drafter of the policy. In deciding
the applicability of a cover note on houses swept away by floods, a Constitution Bench of this Court in General Assurance Society Ltd v Chandumull
Jain (1966) 3 SCR 500, paragraph 11 held as follows:
“In other respects there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a
requirement of uberrima fides i.e., good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the
company in case of ambiguity or doubt… (I)n interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words
in which the contract is expressed by the parties, because it is not for the court to make a new contract, however reasonable, if the parties have not
made it themselvesâ€.
(emphasis supplied)
27. While the court ultimately denied insurer’s liability, it laid down the manner in which ambiguities were to be interpreted. Since then, a catena of
judgments has upheld this approach.
(Emphasis added)
23. The award recognized that Interocean had incurred expenses of about Rs 80 lakhs in its repairs. The amount is irrelevant. The question is whether
the contract provided for liability. As we have seen, there is a contractual provision for re-delivery of the vessel in Clause (3). The arbitral tribunal
referred to Clause (3) to hold that since normal wear and tear was excepted, this meant that ONGC had to pay for all normal wear and tear repairs.
But Clause (3) exempts only the wear and tear at the time of re-delivery, i.e., that wear and tear repair work that remained to be done. It can hardly
be dated back to the beginning of the contract. The argument that these wear and tear repairs added to the asset value or, as Mr Sen put it, virtually
created a new vessel except to raise a faux philosophical dilemma â€" a sort of Ship of Theseus paradox. We do not see how the arbitral tribunal
could have imagined or conjured up a liability clause for ONGC when none existed. If this was not rewriting of the contract, then nothing was. At the
same time, by some interpretative legerdemain, what was clearly Interocean’s operational responsibility was suddenly excluded from its financial
responsibility. For this is actually what Mr Sen argues before us: that Interocean had responsibility, but not financial responsibility. This is a distinction
without a difference and not an argument that can be accepted.
24. Now the law regarding interference with arbitral awards is exceedingly well settled. Amended Section 34 of the Arbitration and Conciliation Act
reads thus:
34. Application for setting aside arbitral award.â€
(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2)
and sub-section (3).
(2) An Arbitral award may be set aside by the Court only ifâ€
(a) the party marking the application establishes on the basis of the record of the arbitral tribunal that
â€
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the
time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise
unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions
on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award
which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless 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 thatâ€
(i) the subject-matter 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 1.â€" For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,â€
(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.â€" For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail
a review on the merits of the dispute.
(2-A) An arbitral award arising out of arbitrations other than international commercial arbitrators, may also be set aside by the Court, if the Court finds
that the award is vitiated by patent illegality appearing on the face of the award;
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.
(3) An application for setting aside my 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 three
months it may entertain the application within a further period of thirty days, but not thereafter.
(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings
for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action
as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.
(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be
accompanied by an affidavit by the applicant endorsing compliance with the said requirement.
(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice
referred to in sub-section
(5) is served upon other party.â€
(Emphasis added)
25. As the Section itself shows, the scope for challenge is exceedingly narrow. The amended provision has been authoritatively appreciated by the
Supreme Court in Sangyong Engineering & Construction Co Ltd v National Highways Authority of India. (2019) 15 SCC 131 The previous law
including Associate Builders v Delhi Development Authority, (2015) 3 SCC 49. ONGC Ltd v Western Geco International Ltd, (2004) 9 SCC 263.
Renusagar Power Co Ltd v General Electric Co 1994 Supp (1) SCC 644 and other decisions were analysed, as was the effect of the statutory
amendments. Sangyong Engineering effectively says:
(a) “Public policy of Indiaâ€, whether in Section 34 or Section 48 means the ‘fundamental policy of Indian law’ as explained in paragraphs
18 and 27 of Associate Builders. This is a return to the Renusagar position: violation of (i) the fundamental policy of Indian law;
(ii) the interest of India; and (iii) justice or morality. Ssangyong Engineering, supra, paragraphs 34 and 36
(b) The Western Geco expansion, i.e. the requirements of a judicial approach (as interpreted in Western Geco) and placing ‘unreasonableness’
in the ‘public policy’ head, is now a thing of the past. And therefore paragraphs 28 and 29 of Associate Builders would no longer obtain To do
so would be to enter impermissibly into a merit-based review of an arbitral award.
(c) Violations of principles of natural justice continue to be a ground for interference. Arguably, though, this would not be on ‘merits’ strictly
speaking, so much as a question of procedure and a violation of the equal-treatment standard
(d) “The interest of India†does not survive as a ground for challenge. Ssangyong Engineering, supra, paragraphs 35 and 36.
(e) The ‘justice or morality’ standard is now to be viewed as a test of whether the award violates ‘the most basic notions of morality or
justice’, in accord with paragraphs 36 to 39 of Associate Builders â€" the award must shock the judicial conscience to admit of interference on
this ground. Ssangyong Engineering, supra, paragraph 35
(f ) Domestic awards must now survive an additional test: that set out in Section 34(2A), the ‘patent illegality’ standard. This must be a facially
patent illegality. It cannot be an erroneous application of the law. A backdoor entry is not permitted: a ground not within ‘the fundamental policy of
Indian law’ â€" the contravention of a statute unlinked to public policy or public interest â€" cannot slither in under the ground of ‘patent
illegality’. Ssangyong Engineering, supra, paragraph 37
(g) There is distinction between ‘an erroneous application of the law’ and an ‘incorrect invocation of the law’. For instance, ignoring a
binding decision of a superior court is not an erroneous application of the law. It is a ground of patent illegality, because it does not state the law
correctly. But an award that correctly states the law is not vulnerable because its application of that correctly stated law to the contractual dispute is
said (or even shown) to be erroneous.
(h) Patent illegality does not extend to a re-appreciation of evidence. Only an appellate court can do that. A Section 34 court cannot. It is not an
appellate court. Ssangyong Engineering, supra, paragraph 38
(i) A mere contravention of substantive Indian law is no longer a ground to set aside an arbitral award. Ssangyong Engineering, supra, paragraph 39.
Therefore, paragraph 42.1 of Associate Builders no longer obtains
(j) But an award with no reasons is a violation of Section 31(3) of the Arbitration Act and constitutes a patent illegality. Paragraph 42.2 of Associate
Builders stands. Ssangyong Engineering, supra, paragraph 39.
(k) The interpretation and construction of a contract is primarily for the arbitrator to decide. If the tribunal does so in a way no fair-minded or
reasonable person would â€" that is, the arbitrator’s view is not even minimally a possible one â€" or if he wanders outside the contract and deals
with mattes not assigned to him (for instance, in a dispute about a leave and license agreement considering whether a particular communication is
defamatory and awarding damages or an injunction), then the award is vulnerable as a jurisdictional error within Section 34(2A). Ssangyong
Engineering, supra, paragraph 40
(l) ‘Perversity’, as understood in paragraphs 31 and 32 of Associate Builders, is no longer under the ‘public policy of India’ head. Yet it
continues to exist. It is now re-positioned to fall under the ‘patent illegality appearing on the face of the award’ head. This would include: a
finding based on no evidence at all; an award which ignores vital evidence in arriving at its decision; or, say, a finding based on documents taken
behind the back of the parties. Ssangyong Engineering, supra, paragraph 41
(m) The patent illegality standard is unavailable for international commercial arbitrations. Ssangyong Engineering, supra, paragraph 42
(n) Section 34(2)(a) does not permit a challenge to an arbitral award on merits. Ssangyong Engineering, supra, paragraphs 43â€"48
26. In Union of India v Recon,22 the decision of the Supreme Court in Sangyong Engineering has been further analysed to cull out the emergent
principles. Paragraph 17.4 reads thus.
17.4 This yields the following result:
(i) A lack of a ‘judicial approach’, being the Western Geco expansion, is not available per se as a ground of challenge.
(ii) A violation of the principles of natural justice is a ground for challenge as one under Section 18 read with Section 34(2)(a)(iii) â€" that is to say, not
under the ‘fundamental policy’ head nor the ‘patent illegality’ head, but distinctly under this sub-section.23
(iii) A lack of reasons is a patent illegality under Section 34(2-A).
(iv) In interpreting the contract, the arbitral view must be fair-minded and reasonable. If the view is one that is not even possible, or if the arbitrator
wanders beyond the contract, that would amount to a ‘patent illegality’.
(v) ‘Perversity’ as understood in Associate Builders, is now dishoused from ‘fundamental policy’ (where Western Geco put it), and now
has a home under ‘patent illegality’. This includes:
(A) a finding based on no evidence at all; 22 2020 SCC OnLine Bom 2278 : (2020) 6 Mah LJ 509 : (2020) 6 AIR Bom R 613 : (2021) 1 Bom CR 167
23 34(2)(a)(iii): the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case.
(B) an award that ignores vital evidence; and
(C) a finding based on documents taken behind the back of the parties.
… …
Combining (iv) and (v) above, therefore, while the explicit recognition or adoption of the Wednesbury unreasonableness standard (introduced in
Western Geco) is probably done away with, there is even yet a requirement of reasonableness and plausibility in matters of contractual interpretation.
If the interpretation of the contract is utterly unreasonable and totally implausible â€" the view taken is not even possible â€" a challenge lies.
Therefore: an award that was impossible either in its making (by ignoring vital evidence, or being based on no evidence, etc) or in its result (returning a
finding that is not even possible), then a challenge on the ground of ‘perversity’ lies under Section 34(2-A) as a dimension of ‘patent
illegality’.
27. Paragraph 29 of the Supreme Court decision in Delhi Airport Metro Express Pvt Ltd v Delhi Metro Rail Corporation Ltd(2022) 1 SCC 131 says:
29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal
would not fall within the expression “patent illegalityâ€. Likewise, erroneous application of law cannot be categorised as patent illegality. In
addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression “patent illegalityâ€. What is
prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as
Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the
ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner
which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing
with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The
conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on
the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the
expression “patent illegalityâ€.
(Emphasis added)
28. Some of this law was reaffirmed and restated recently by the Supreme Court in Gemini Bay Transcription Pvt Ltd v Integrated Sales Service Ltd
& Anr. (2022) 1 SCC 753
29. As to the scope of Section 37 Appeal, we may profitably refer to the decision of a three-judge Bench of the Supreme Court in UHL Power
Company Limited v State of Himachal Pradesh. (2022) 4 SCC 116 In paragraphs 16 and 17, the Supreme Court said:
16. As it is, the jurisdiction conferred on courts under Section 34 of the Arbitration Act is fairly narrow, when it comes to the scope of an appeal under
Section 37 of the Arbitration Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the
more circumscribed. … …
(Emphasis added)
30. It is in the highlighted area that the present matter falls. The arbitrators wandered outside contract. They took a view that was plainly impossible.
No reasonable person could have arrived at such a conclusion. The interference by the learned Single Judge was not only justified but in our view was
entirely necessary and possibly in inescapable.
31. The second aspect is as regards the interest component. At one stage, the arbitrators awarded interest at 9% per annum from the date of the
reference. Obviously, that could not have survived a legal challenge and it did not. That aspect of the matter was remitted to the tribunal. The tribunal
then deleted the portion of the award that provided for a rate of interest or even the date from which it was to run, and simply threw up its hands by
saying that the interest would be as per the Act. In this context, we must make reference to Section 31(7) of the Act which reads thus:
“31. Form and contents of arbitral award.â€
(1) …
…
(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal
may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the
money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is
made.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent,
higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.
Explanation.â€"The expression “current rate of interest†shall have the same meaning as assigned to it under clause (b) of section 2 of the
Interest Act, 1978 (14 of 1978).
(Emphasis added)
32. Sub-clause (b) of sub-section (7) was added by the Amendment Act 3 of 2016 with effect from 23rd October 2015. The awards are all prior to
this date. The applicable regime at the date of the award would have to stop at what is now Section 31(7)(a). The learned Single Judge was
confronted with the argument that the silence of the arbitrators and post the 2015 amendment to Section 31, the result was an enforceable or
executable interest component computed in terms of sub-clause (b) and the Explanation. The learned Single Judge held the arbitral tribunal by saying
interest would be ‘as the law permits’, changed the rate of interest to 18% per annum. Whether it did so deliberately or inadvertently was
immaterial. For six distinct reasons, Sayed J held that the entire award or further award and interest could not be sustained at 18% per annum even if
this was the effective result of the further award dated 21st September 2011. Sayed J set that aside in its entirety the interest awarded and said that
the only interest that could be awarded was 9% per annum on the amount payable by ONGC to the Respondent.
33. In our view, the Appeal is without merit. We see no reason to interfere with the impugned order. The Appeal is dismissed.
34. Since this is a Commercial Appeal costs would ordinarily have to be awarded. If not, reasons must be given. The only reason not to award costs is
that the Appellant is a private contractor and ONGC is a government body, though we hasten to add that this is not a rule of universal applicability. It
is limited to the facts of this case. Parties to bear their own costs.
35. The Cross Objection by ONGC will not survive and in any case are now not pressed by Mr Sawant.
36. All pending Interim Applications are disposed of as infructuous.
