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Presentation Write-Up Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd.

AIR 2003 SC 262

!a"tual #a"$%round Oil and Natural Gas Corporation (hereinafter referred to as ONGC) is a public sector undertaking while SA !ipes "td. is engaged in the business of suppl#ing e$uip%ent for !ipe through its letter dated '(.)'.)**+ in Offshore Oil e&ploration and %aintenance. SA

response to a tender on agreed ter%s and conditions, offered to suppl# to the appellants '- dia%eter and ./ dia%eter casing pipes. ONGC b# its letter of intent dated /../-.)**followed b# a detailed order accepted the offer of SA !ipes "td. As per ter%s and conditions, the goods were re$uired to be supplied on or before )0.)).)**-. SA !ipes contended that as per Clause ()1) of the agree%ent, the raw %aterials were

re$uired to be procured fro% the reputed and pro2en %anufacturers3suppliers appro2ed b# the respondent as listed therein. 4# letter dated /1./1.)**-, respondent placed an order for suppl# of steel plates, that is, the raw %aterial re$uired for %anufacturing the pipes with "i2e "a%inati, !iani S.!.A., 5talian suppliers stipulating that %aterial %ust be shipped latest b# the end of Septe%ber )**- as ti%el# deli2er# was of the essence of the order. Since, there was a general strike of steel %ill workers all o2er 6urope including 5tal# during Septe%ber3October )**-, respondent b# its letter dated '1.)/.)**- con2e#ed to ONGC deli2er# of the %aterial as per agreed schedule could not be %ade for the afore%entioned reasons and re$uested for an e&tension of 0+ da#s ti%e. 4# letter dated 0.)'.)**-, the ti%e for deli2er# of the pies was e&tended with a specific state%ent inter alia that the a%ount e$ui2alent to li$uidated da%ages for dela# in suppl# of pipes would be reco2ered fro% the respondent. As such ONGC %ade pa#%ent of the goods supplied after wrongfull# deducting an a%ount of 7S 8 .,/0,*(/.'/ and 9s. )+,(+,++*3: as li$uidated da%ages. ;hat deduction was disputed b# the respondent and, therefore, dispute was referred to the arbitral tribunal. ;he arbitral tribunal arri2ed at the conclusion that strikes affecting the suppl# of raw %aterial to the clai%ant are not within the definition of <=orce >a?eure@ in the contract between the parties, and hence, on that ground, it cannot be said that the a%ount of )

Presentation Write-Up li$uidated da%ages was wrongfull# withheld b# the appellant. that it would not ?ustif# the dela# in the suppl# of goods. ;hereafter, the arbitral tribunal considered 2arious decisions of this court regarding reco2er# of li$uidated da%ages and arri2ed at the conclusion that it was for the appellant to establish that the# had suffered an# loss because of the breach co%%itted b# the respondent in not suppl#ing the goods within the prescribed ti%e li%it. ;he arbitral tribunal thereafter appreciated the e2idence and arri2ed at the conclusion that the shortage of casing pipes was onl# one of the other reasons which led to the change in the deplo#%ent plan and that it has failed to establish its case that it has suffered an# loss in ter%s of %one# because of dela# in suppl# of goods under the contract. Aence, the arbitral tribunal held that appellant has wrongfull# withheld the agreed a%ount of 7S 8 .,/0,*(/.'/ and 9s. )+,(+,++*3: on account of custo%s dut#, sales ta&, freight charges deducted b# wa# of li$uidated da%ages. ;he arbitral tribunal further held that the respondent was entitled to reco2er the said a%ount with interest at the rate of )' per cent p.a. fro% )st April )**( till the date of the filling of state%ent of clai% and thereafter ha2ing regard to the co%%ercial nature of the transaction at the rate of )1 per cent per annu% pendente lite till pa#%ent is %ade. ONGC challenged the arbitral award dated './+.)*** b# filing Arbitration !etition No. *)(3)*** before the Aigh Court of 4o%ba#. "earned Single Budge dis%issed the sa%e. Appeal No. '+-3'/// preferred before the Ci2ision 4ench of the Aigh Court was also dis%issed. Subse$uentl#, it presented an appeal before the Supre%e Court. ith regard to other

contention on the basis of custo%s dut# also, the arbitral tribunal arri2ed at the conclusion

Clai&s o' t(e Appellant ). ;he award is 2itiated on the ground that there was dela# on the part of respondent in suppl#ing agreed goods3 pipes and for the dela#, appellant was entitled to reco2er agreed li$uidated da%ages i.e. a su% e$ui2alent to )D of the contract price for whole unit per week of such dela# or part thereof. ;hereb#, the award was contrar# to

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Presentation Write-Up Section '1(.) which pro2ides that the arbitral tribunal shall decide the dispute in accordance with the ter%s of the contractE '. ;he award passed b# the arbitrator is on the face of it illegal and erroneous at it arri2ed at the conclusion that the appellant was re$uired to pro2e the loss suffered b# it before reco2ering the li$uidated da%ages. Ae sub%itted that the arbitral tribunal %isinterpreted the law on the sub?ectE .. 5n an# set of circu%stances, the award passed b# the arbitrator granting interest on the li$uidated da%ages deducted b# the appellant is, on the face of it, un?ustified, unreasonable and against the specific ter%s of the contract, na%el# Clause .0.0 of the agree%ent, which pro2ides that on <disputed clai%@, no interest would be pa#able. Contentions o' t(e Respondent 5t is settled law that for the breach of contract pro2isions of Section (0 of the Contract Act would be applicable and co%pensation3da%ages could be awarded onl# if the loss is suffered because of the breach of contract. As per precedents, the plaintiff clai%ing li$uidated da%ages has to pro2e the loss suffered b# hi%. 62en if there is an# error in arri2ing at the said conclusion, the award cannot be interfered with under Section .0 of the Act. Issues 'or Consideration ). hat is the Court@s Burisdiction under Section .0 of the Arbitration and Conciliation Act, )**-F '. .. hat %eaning could be assigned to the phrase <!ublic !olic# of 5ndia@F hether the legal proposition which is the basis of the award for arri2ing at the conclusion that ONGC was not entitled to reco2er the stipulated li$uidated da%ages as it has failed to establish that it has suffered an# loss is erroneous on the face of itF 0. hether the clai% of refund of the a%ount deducted b# the appellant fro% the bills is disputed or undisputed clai%F W(at is t(e Court)s *urisdi"tion under Se"tion 3+ o' t(e Ar,itration and Con"iliation A"t- . 6/

Presentation Write-Up 9ele2ant !ro2isionG Section .0(')(a)(2) :the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agree%ent of the parties, unless such agree%ent was in conflict with a pro2ision of this !art fro% which the parties cannot derogate or, failing such agree%ent, was not in accordance with this Part =or proper ad?udication of the $uestion of ?urisdiction ,first %eaning assigned to the ter% Arbitral !rocedure was considered. ;he procedure which is re$uired to be followed b# the arbitrator should also be in accordance with the agree%ent of the parties. 5f there is no such agree%ent then it should be in accordance with the procedure prescribed in the !art:5 of the Act i.e. Sections ' to 0.. At the sa%e ti%e, agree%ent for co%position of arbitral tribunal or arbitral procedure should not be in conflict with the pro2isions of the Act fro% which parties cannot derogate. !ower and procedure are s#non#%ous in the present case. 4# prescribing the procedure, the arbitral tribunal is e%powered and is re$uired to decide the dispute in accordance with the pro2isions of the Act, that is to sa#, the ?urisdiction of the tribunal to decide the dispute is prescribed. 5n these sections there is no distinction between the ?urisdiction power and the procedure. ;hus, the secondar# $uestion which arises is that, whether the award could be set aside, if the arbitral tribunal has not followed the %andator# procedure prescribed under Sections '0, '1 or .)(.), which affects the rights of the partiesF 9eading Section .0 con?ointl# with other pro2isions of the Act, it appeals that the legislati2e intent could not be that if the award is in contra2ention of the pro2isions of the Act, still howe2er, it couldn@t be set aside b# the Court. 5f it is held that such award could not be interfered, it would be contrar# to basic concept of ?ustice. 5f the arbitral tribunal has not followed the %andator# procedure prescribed under the Act, it would %ean that it has acted be#ond its ?urisdiction and thereb# the award would be patentl# illegal which could be set aside under Section .0. ;hus, rel#ing on the principle of law that the procedural law cannot fail to pro2ide relief when substanti2e law gi2es the right, it was held that if the award is contrar# to the substanti2e pro2isions of law or the pro2isions of the Act or against the ter%s of the contract, it would be patentl# illegal, which could be interfered under Section .0. Aowe2er, such failure of procedure should be patent affecting the rights of the parties. W(at &eanin% "ould ,e assi%ned to t(e p(rase 0Pu,li" Poli"1 o' India)/

Presentation Write-Up 9ele2ant !ro2isionG Section .0(')(b)(ii): ;he court finds that the arbitral award is in conflict with the public policy of India. ;he e&pressions public polic#, opposed to public polic#, or contrar# to public polic# are incapable of precise definition. !ublic polic#, howe2er, is not the polic# of a particular go2ern%ent. 5t connotes so%e %atter which concerns the public good and the public interest. ;he concept of what is for the public good or in the public interest or what would be in?urious or har%ful to the public good or the public interest has 2aried fro% ti%e to ti%e. ;he narrow 2iew on !ublic !olic# H As per this school of thought, courts cannot create new heads of public polic#. ;he adherents of this school would not in2alidate a contract on the ground of public polic# unless that particular ground had been well: established b# authorities. An e&a%ple wherein the narrow school of thought was followed is the case of Renusagar Power Co. Ltd. 2. General Electric Co.)5n this case Section (()) of the Arbitration (!rotocol and Con2ention) Act, )*.( which pro2ided that a foreign award %a# not be enforced under the said Act, if the Court dealing with the case is satisfied that the enforce%ent of the award will be contrar# to the !ublic !olic# was considered. Appl#ing the narrower sense, the court obser2ed that in order to attract to bar of public polic# the enforce%ent of the award %ust in2oke so%ething %ore than the 2iolation of the law of 5ndia. ;hus it was held that the enforce%ent of a foreign award would be refused on the ground that it is contrar# to public polic# if such enforce%ent would be contrar# to (i) funda%ental polic# of 5ndian lawE or (ii) the interests of 5ndiaE or (iii) ?ustice or %oralit#. ;he 4roader Iiew on !ublic !olic# H ;his school of thought appro2es of ?udicial law: %aking in the area of !ublic !olic# and e%phasises on the do%inant opinion at a gi2en %o%ent, or what has been ter%ed custo%ar# %oralit#. ;he Budges %ust consider the social conse$uences of the rule propounded, especiall# in the light of the factual e2idence a2ailable as to its probable results. it can be held that the ter% <public polic# of 5ndia@ is re$uired to be interpreted in the conte&t of the ?urisdiction of the Court where the 2alidit# of award is challenged before it beco%es final and e&ecutable. 5n a case where the 2alidit# of award is challenged there is no necessit# of gi2ing a narrower %eaning to the ter% <public polic# of 5ndia@. On the contrar#, wider %eaning is re$uired to be gi2en so that the <patentl# illegal award@ passed b# the arbitral tribunal could be set aside.
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A59 )**0 SC 1-/

Presentation Write-Up 9esult would be::award could be set aside if it is contrar# toG:: (a) funda%ental polic# of 5ndian lawE or (b) the interest of 5ndiaE or (c) ?ustice or %oralit#, or (d) in addition, if it is patentl# illegal. 5llegalit# %ust go to the root of the %atter and if the illegalit# is of tri2ial nature it cannot be held that award is against the public polic#. W(et(er t(e le%al proposition 2(i"( is t(e ,asis o' t(e a2ard 'or arrivin% at t(e "on"lusion t(at ONGC 2as not entitled to re"over t(e stipulated li3uidated da&a%es as it (as 'ailed to esta,lis( t(at it (as su''ered an1 loss is erroneous on t(e 'a"e o' it/ ;he reasoning recorded b# the arbitral tribunal was held erroneous since it failed to consider Sections (. and (0 of 5ndian Contract Act and the ratio laid down in Fateh Chands case' wherein it was specificall# held that ?urisdiction of the Court to award co%pensation in case of breach of contract is un$ualified e&cept as to the %a&i%u% stipulatedE and co%pensation has to be reasonable. ;he e%phasis is on reasonable co%pensation. 5f the co%pensation na%ed in the contract is b# wa# of penalt#, consideration would be different and the part# is onl# entitled to reasonable co%pensation for the loss suffered. 4ut if the co%pensation na%ed in the contract for such breach is genuine pre:esti%ate of loss which the parties knew when the# %ade the contract to be likel# to result fro% the breach of it, there is no $uestion of pro2ing such loss or such part# is not re$uired to lead e2idence to pro2e actual loss suffered b# hi%. ;hus, it was held as followsG i ;er%s of the contract are re$uired to be taken into consideration before arri2ing at the conclusion whether the part# clai%ing da%ages is entitled to the sa%eE ii 5f the ter%s are clear and una%biguous stipulating the li$uidated da%ages in case of the breach of the contract unless it is held that such esti%ate of da%ages3co%pensation is unreasonable or is b# wa# of penalt#, part# who has

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J)*-0K ) SC9 +)+

Presentation Write-Up co%%itted the breach is re$uired to pa# such co%pensation and that is what is pro2ided in Section (. of the Contract Act. iii Section (0 is to be read along with Section (. and, therefore, in e2er# case of breach of contract, the person aggrie2ed b# the breach is not re$uired to pro2e actual loss or da%age suffered b# hi% before he can clai% a decree. ;he Court is co%petent to award reasonable co%pensation in case of breach e2en if no actual da%age is pro2ed to ha2e been suffered in conse$uence of the breach of a contract. i2 5n so%e contracts, it would be i%possible for the Court to assess the co%pensation arising fro% breach and if the co%pensation conte%plated is not b# wa# of penalt# or unreasonable, Court can award the sa%e if it is genuine pre:esti%ate b# the parties as the %easure of reasonable co%pensation. W(et(er t(e "lai& o' re'und o' t(e a&ount dedu"ted ,1 t(e appellant 'ro& t(e ,ills is disputed or undisputed "lai&/ 5t was reiterated that it is the pri%ar# dut# of the arbitrators to enforce a pro%ise which the parties ha2e %ade and to uphold the sanctit# of the contract which for%s the basis of the ci2iliLed societ# and also the ?urisdiction of the arbitrators. Aence, this part of the award passed b# the arbitral tribunal granting interest on the a%ount deducted b# the appellant fro% the bills pa#able to the respondent is against the ter%s of the contract and is, therefore, 2iolati2e of Section '1(.) of the Act. 4e"ision o' t(e Court ;he i%pugned award re$uires to be set aside %ainl# on the groundsG:: i there is specific stipulation in the agree%ent that the ti%e and date of deli2er# of the goods was the essence of the contractE ii in case of failure to deli2er the goods within the period fi&ed for such deli2er# in the schedule, ONGC was entitled to reco2er fro% the contractor li$uidated da%ages as agreedE iii it was also e&plicitl# understood that the agreed li$uidated da%ages were genuine pre: esti%ate of da%agesE

Presentation Write-Up i2 on the re$uest of the respondent to e&tend the ti%e li%it for suppl# of goods, ONGC infor%ed specificall# that ti%e was e&tended but stipulated li$uidated da%ages as agreed would be reco2eredE 2 li$uidated da%ages for dela# in suppl# of goods were to be reco2ered b# pa#ing authorities fro% the bills for pa#%ent of cost of %aterial supplied b# the contractorE 2i there is nothing on record to suggest that stipulation for reco2ering li$uidated da%ages was b# wa# of penalt# or that the said su% was in an# wa# unreasonable. 2ii in certain contracts, it is i%possible to assess the da%ages or pro2e the sa%e. Such situation is taken care b# Sections (. and (0 of the Contract Act and in the present case b# specific ter%s of the contract. I&pli"ations o' t(e 4e"ision 5t %a# also be obser2ed that Section .0 does not pro2ide <%isconduct of the arbitrator@ as one of the grounds for recourse. 5ndeed this ground is not %ade a2ailable under the 7NC5;9A" >odel Arbitration "aw. 7nder the 6nglish Arbitration Act, )**-, %isconduct of the arbitrator is a ground for challenge and section -( and -1 of the 6nglish Act do not correspond e&actl# with the 7NC5;A" >odel "aw. 7nder the 5ndian enact%ent of )*0/, section ./ included %isconduct of the arbitrator as a ground for recourse. Aowe2er, since the ONGC case, under the head of <public polic#@ the court has dee%ed itself to ha2e the power to cure an# in?ustice. ;herefore where2er the principles of natural ?ustice ha2e not been followed, the court %a# redress this b# setting aside the arbitral award. >ore specificall#, Section )'(0) read with Section ).(.) indicates that the appoint%ent of an arbitrator %a# be challenged on the grounds of doubt as to independence of the arbitrator or i%partialit# of the arbitrator in the course of the arbitral proceeding itself Section ).(0) states that if the challenge is unsuccessful, the arbitral proceedings shall continue. Section ).(+) pro2ides that an# award %ade under these circu%stances %a# be challenged b# the part# and an application for setting aside of the award %a# be %ade in consonance with the pro2isions of section .0 Section .0(')(a)(2) can be read to include a challenge on the abo2e grounds. 5n the ONGC case the Ape& Court 2alidated Section ).(+) and Section )-(-) as legiti%ate grounds of challenge under Section .0 of the Act. ;he old act which pro2ided for recourse in a situation where the arbitrator %isconducted hi%self or the award was broadl# construed. 1

Presentation Write-Up 9eading Section .0 in the light of the ONGC case it is e2ident that though this ground for setting aside an award under the )**- Act is not e&pressl# stated, the interpretation of the ?udiciar# enhances the scope of the Section. So as to possibl# include it as a ground for recourse. ;herefore. the position in law would see% to be that %isconduct of the arbitrator %a# be read into the section and would be a sufficient ground for setting aside an award. Currentl#, the Arbitration and Conciliation (A%end%ent) 4ill, '//. is pending which proposes to add e&planation. to Section .0 in order to li%it ?udicial inter2ention in Arbitral decisions. Aowe2er, the Supre%e Court has refrained fro% appl#ing the e&tensi2e %eaning of <public polic#@ if the intention of the part# is to a2oid 5ndian ?urisdiction as in the case of Venture Global Engineering 2. at!a" Co"puters.0 5n this case, the #$GC %udg"ent was relied on and it was e%phasised that the e&tended definition of public polic# can be b#: passed b# taking the award to a foreign countr# for enforce%ent. ;he court obser2ed that the effort of respondent was to a2oid enforce%ent of the Award under Section 01 of the )**Act which would ha2e gi2en the appellant herein the benefit of the 5ndian !ublic !olic# rule based on the ?udg%ent in the ONGC case and for a2oiding the ?urisdiction of the Courts in 5ndia though the award had an inti%ate and close ne&us to 5ndia in 2iew of the fact that, (a) the co%pan# was situated in 5ndiaE (b) the transfer of the ownership interests shall be %ade in 5ndia under the laws of 5ndia as set out abo2eE (c) all the steps necessar# ha2e to be taken in 5ndia before the ownership interests stood transferred. 5f, therefore, respondent No.) was not prepared to enforce the Award in spite of this inti%ate and close ne&us to 5ndia and its laws, the appellant herein would certainl# not be depri2ed of the right to challenge the award in 5ndian Courts.

6&planation '.M =or the purposes of this section, clause (b) of sub:section (') of section 01 and clause (e) of sub:section ()) of section +(, public polic# of 5ndia or Contrar# to public polic# of 5ndia %eans contrar# to (i) funda%ental polic# of 5ndia, or (ii) interests of 5ndia, or (iii) ?ustice or %oralit#.@ 0 A59 '//1 SC )/-)