Sumitomo Industries’ journey through the Indian Court system to have an Arbitration Award in its favour upheld, is the classic example of enforcement of international arbitral awards by Indian Courts.
Having bid for and awarded the contract for a major Bombay High offshore site project by ONGC, the Supreme Court judgement was delivered after fifteen years.
To put the facts briefly, at the time of the execution of the contract, the income arising from the project work was not subjected to Indian tax. After the successful closure of the project in 1984, by a notification and subsequently by an amendment to the Income Tax Act, its applicability was extended to all Maritime Zones including the Continental Shelf. Part of the work had been subcontracted to a third party, McDermott International Inc. (MII). MII”s assessment was reopened and the amount recovered from Sumitomo who invoked arbitration against ONGC claiming reimbursement.
The determination involved the interpretation of a few clauses of the General Conditions of the Contract (GCC). Clause B.27 required the Contractor to observe and comply, and to ensure the same of their subcontractors, with all laws, rules with respect to any of the sea areas at site. Clause 17 provides for the applicable law to be that of India Clause 17.3 being the “Change in Law” provision, provides that in the event of any change affecting economically the contractor’s position, ONGC would compensate Sumitomo for all necessary and reasonable extra cost, while Clause 23.0 provides for payment of “all Indian income taxes levied, or imposed”. The issue narrows down to the interpretation of the two clauses read with Clause 13.27 which provided that ONGC would not be obliged to make any payment pertaining to Sumitomo’s sub contractors as to whether ONGC was liable to reimburse for the income tax liability to Sumitomo in view of under Clause 23.
The arbitration proceedings under the 1940 Arbitration Act (Act), was initially heard by a two member tribunal, who disagreed, and the matter stood referred to the Umpire. In 1995, the Umpire passed an award directing the Appellant to refund the amount along with costs, in view of the provision in Clause 17.3 of the GCC “as reasonable extra costs” occasioned by the change of Law.
During the proceedings, Sumitomo had approached the UK Courts for certain interim directions against ONGC who also submitted to the UK Courts and neither party challenged the ensuing order. When the award was passed, ONGC approached the Bombay High Court for setting it aside under Section 14 of the Act. Sumitomo challenged the jurisdiction of the Indian Courts as both parties had submitted to jurisdiction of the Commercial Court, UK which would be the Court having jurisdiction.
The matter was determined by the Supreme Court against Sumitomo. The lasting contribution of this decision is a landmark ruling on what constitutes the three potentially relevant aspects of an arbitration agreement ie. the curial law i.e., the law governing the proceedings of the contract, the proper law, or the law governing substantive rights, and the proper law of the arbitration agreement, governing its performance, scope, validity.
Based on these fine distinctions, the Supreme Court held that the law applicable to the filing and of the award would not be the curial law, ie. of the UK, but the proper law of arbitration, ie of the Indian Courts. Accordingly the Single Judge of the Bombay High Court set aside the award upholding ONGC’s objections, that the reimbursement by Sumitomo was a voluntary act, and the Umpire’s interpretation “an impossible one’.
In appeal, the Division bench observed that the Umpire had exceeded his jurisdiction, in not placing a narrow and strict interpretation of Clause 17. as it has to be construed as a contract of indemnity. In doing so, the Division Bench overlooked that indemnification was provided for under Clause10.5.5 of GCC for losses arising from breach and negligence and that Clause 17.3 which dealt with extra cost on account of change of law, had to be interpreted in the context of a commercial project otherwise, the of the provision is rendered nugatory.
Even under the Act, which envisaged a far wider scope of judicial intervention than the present law the Supreme Court had laid down, in the absence of an award being perverse, in matters of interpretation, the court could not replace the arbitrator’s award by its decision. It is unfortunate that even after the new law came into effect, this approach has to be reiterated by the Supreme Court. While the ruling restores faith in the Indian Court systems, the time frame remains a concern.
Kumkum Sen is a Partner in Rajinder Narain & Co. and can be reached at Kumkumsen@rnclegal.com
