Holding

An arbitral award that violates clear contractual liquidated‑damages provisions and statutory provisions (Sections 28, 31) is patently illegal and may be set aside under Section 34, with "public policy of India" given a wide meaning to encompass such awards.

Summary

ONGC entered into a contract with Saw Pipes Ltd for supply of casing pipes, making timely delivery essential and providing for liquidated damages of 1% per week (up to 10%) for delay. Saw Pipes failed to deliver on time due to a strike, sought an extension, and ONGC granted it on the condition that liquidated damages would still be recoverable. ONGC deducted the stipulated damages from payment; Saw Pipes disputed the deduction and the matter went to arbitration. The arbitral tribunal held that ONGC must prove actual loss before recovering the liquidated damages and ordered a refund with interest. The High Court dismissed ONGC's challenge. The Supreme Court held that the tribunal erred by ignoring the clear contractual liquidated‑damages clause, that the award violated Sections 28 and 31 of the Arbitration Act and was patently illegal, and that under Section 34 the award could be set aside. The Court gave a wide meaning to "public policy of India" to include such illegal awards. The appeal was allowed and the arbitral award set aside.

Issues considered

The arbitral tribunal's requirement that the purchaser prove actual loss despite a clear liquidated‑damages clause.
Whether an award that contravenes the contract terms and statutory provisions is patently illegal and can be set aside under Section 34 of the Arbitration Act.
The proper interpretation and scope of the phrase "public policy of India" in Section 34.
Whether the deduction of liquidated damages constitutes a disputed claim requiring arbitration.
The validity of the interest awarded by the tribunal in violation of the contract.

Legislation cited

Indian Contract Act, 1872s. 73, s. 74

Subjects

ArbitrationLiquidated damagesBreach of contractSection 34Public policy of IndiaArbitral award set asideIndian Contract ActDisputed claimPatently illegal awardContract interpretation

Judgment

OIL & NATURAL GAS CORPORATION LTD. A
v.
SAW PIPES LTD.

APRIL I 7, 2003
B
[M.B. SHAH AND ARUN KUMAR, JJ.]

Arbitration and Conciliation Act, 1966; Sections 23, 24, 25, 28, 31 and
34: Contract for supply of goods-Time is the essence of the contract-Delay
in supply of goods-Contractor's liability to purchaser-Award-Denial of C
compensation-Held: when liability to pay compensation in lieu of damages
for breach of any term of the contract by the other party is stipulated clearly
and unambiguously, and in the absence of evidence proving the compensation
claimed as unreasonable, arbitral tribunal could not ignore clear terms of the
agreement to determine liability of the defaulting party-It is not necessary
for the claimant to produce evidence proving damages/loss suffered by him- D
Burden is on the contending party to prove that claim is unreasonable-Since
contending party agrPed to pay damages, he cannot deny the same-Loss
actually suffered by the purchaser need not be proved-Indian Contract Act,-
Sections 73 and 74.

Claim-Deduction of compensation/claim by the purchaser from the bill
E
of the contractor in lieu of damages for breach of agreeme/1/-Nature of-
Held: such claim would be treated as disputed claim-Arbitrator to decide
it-Under the facts and circumstances of the case, Arbitrator holding the
claim as undisputed on the ground that goods were received and bill was no/
disputed-Such finding of the Arbitrator unjust and unreasonable. · F
Award by the arbitral tribzmal-lnterference with-Jurisdiction of the
Court-Ambit and scope of-Held: arbitral tribunal is empowered lo decide
the dispute referred to ii in accordance with the provisions of the Ac/-
Procedural law provides relief against the right-Award passed in
contravention of the provisions ofsubstantive law/Act would be patently illegal G
and contrary to the basic concept ofjustice-Hence could be interfered with
by the Court.

Award in conflict with Public Policy of India-Power of the Court lo
inteifere with-Held: since the phrase 'Public Policy of India' is not defined H
591
I
J"-

692 SUPREME COURT REPORTS (2003] 3 S.C.R.

A · under the Act, 1he Court requires to give contextual meaning in the light of
the principles underlying the Arbitralion Act/Contract Act/Constitutional
provisions-It could either be construed in a narrower or broader sense-
When award attains finality, jurisdiction of the Court to interfere with is
limited on the ground of public policy-It could be given wider meaning by
B !he Court in exercise of its appellatelrevisiona/jurisdiction-Award, in violation
of statutory provisions, can not be termed to be in public interest-Hence
against Public Policy of India and void-Interpretation of Statutes.

Domestic award and foreign award-Dist incl ion between-Discussed.

Words & Phrases:
c
'Arbitral Procedure', 'Substantive Law', 'Public Policy of India', 'Force
Majeure ', 'liquidated damages', 'wrtent illegality' and 'disputed claim'-
Meaning of in the context of Arbitration and Conciliation Act, 1996.

Respondent-foreign company, a contractor, had entered into an
D agreement with the appellant-company, a purchaser for supply of certain
goods on agreed terms. Timely delivery of the goods was the essence of
the agreement. As per terms of the agreement, any delay in supply of the
goods would entail liability on the contractor to liquidate damages for delay
in supply of goods. The respondent could not supply the goods in time due
E to strike of workers in that country and sought for extension of time. While
conveying extension, the appellant specifically mentioned that the liquidated
damages would be recovered from them. Accordingly it recovered the same
by making deductions from the payment due to the respondent. Since the
respondent considered the deduction as wrongful, it referred the dispute
F to the arbitral tribunal. The tribunal held the deduction made by the
appellant wrongful since it could not establish the actual monetary loss
suffered by it due to delay in supply of goods under the contract and the
tribunal passed an award accordingly. Appeal against the award was
dismissed by the High Court. Hence the present appeal.

G It was contended for the appellant that since the Award passed by
the arbitral tribunal was in violation of Sections 28 to 31 of the Arbitration
and Conciliation Act, it could be set aside by the Court as per provisions
under Section 34 of the Act; that since the impugned award was challenged
before a Forum prescribed under the Act and did not attain finality, wider
meaning could be assigned to the term 'Public Policy of India'; that the r
H provisions of law for setting aside domestic award and foreign award are
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 693

different and the domestic award could be set aside under Section 34 of A
the Act; that since no time limit for passing the award has been prescribed
under the Act, impliedly legislature did not intend to give limited
jurisdiction to the Court, and the award passed by the tribunal could not
be said to have attained finality; that since the award was contrary to the
provisions of sub-section (3) of Section 28, it was vitiated and the appellant
was entitled to recover liquidated damages from the respondent; that the
B
award was illegal since appellant was required to prove the loss suffered
by it due to. delay in supply of goods in contradiction to the terms of the
agreement; and that the interest as granted in the award was unreasonable/
unjustified since it was against the specific terms of the agreement.
c
On behalf of the respondent, it was submitted that the phrase 'Public
Policy of India' could not be so interpreted to mean that the Court possesses
jurisdiction to set aside the award in violation of some provisions of law;
that Parliament did not intend to give wider jurisdiction to the Court to
challenge the arbitral award; otherwise it would have adopted similar
provisions of English Law on the subject; that limited jurisdiction is given D
to the Court under the provisions of the Act with the object of resolving
disputes at the earliest by giving finality to the award passed by the arbitral
tribunal; and that compensation/damages would be awarded for the breach
of contract only if loss was suffered and proved.
E
Allowing the appeal, the Court

HELD: I.I. The arbitral tribunal is empowered and is required to
decide the dispute in accordance with the provisions of the Arbitration and
Conciliation Act. Since the jurisdiction or the power of the arbitral tribunal
is prescribed under the Act, the award de hors the provisions, would be, F
on the face of it, illegal. The decision of the tribunal must be within the
bounds of its jurisdiction conferred under. the Act or the contract. In
exercising jurisdiction, the arbitral tribunal can not act in breach of some
provision of substantive law or the provisions of the Act. 1706-B, F, GJ

Harish Chandra Bajpai v. Triloki Singh, (19571SCR370, relied on.
G

1.2. In view of Section 34 and other provisions of the Act that the
legislative intent could not be that if the award is in contravention of the
provisions of the Act, still however, it couldn't be interfered and set aside
by the Court. If it is held that such award could not be interfered, it would H
694 SUPREME COURT REPORTS (2003] 3 S.C.R.

A be contrary to basic concept of justice. If the arbitral tribunal has not
followed the mandatory procedure prescribed under the Act, it would mean
that it has acted beyond its jurisdiction and thereby the award would be
patently illegal which could be set aside under Section 34. Such
interpretation of clause (v) would be in conformity with the settled principle
B of law - there cannot be any wrong without a remedy - that procedural
law cannot fail to provide relief when substantive law gives the right.
(707-D-EJ

M V. Elisabeth and Ors v. Harwan Investment & Trading Pvt. Ltd, (1993)
Supp. 2 SCC 433 and Dhanna Lal v. Kalawatibai and Ors., (2002) 6 SCC
C 16, relied on.

2.1. The phrase 'Public Policy of India' is not defined under the Act.
Hence, the said term is re:;_;, ed to be given meaning in context and also
considering the purpose of the Section and scheme of the Act. It has been
D repeatedly stated by various authorities that the expression 'public policy'
does not admit of precise definition and may vary from generation to
generation and from time to time. Hence, the concept 'public policy' is
considered to be vague, susceptible to narrow or wider meaning depending
upon the context in which it is used. Lacking precedent the Court has to
give its meaning in the light of principles underlying the Arbitration Act,
E Contract Act and Constitutional provisions. (708-A, Bl

2.2. The term 'Public Policy of India' is required to be interpreted in
the context of the jurisdiction of the Court where the validity of award is
challenged before it becomes final and executable. The concept of
enforcement of the award after it becomes final is different and the
F jurisdiction of the Court at that stage could be limited. Similar is the
position with regard to the execution of a decree. It is settled law as well
as it is provided under Code of Civil Procedure that once the decree has
attained finality, in an execution proceeding, it may be challenged only on
limited grounds such as the decree being without jurisdiction or nullity.
G But in a case where the judgment and decree is challenged before the
Appellate Court or the Court exercising revisional jurisdiction, the
jurisdiction of such Court would be wider. Therefore, in a case where the
validity of award is challenged there is no necessity of giving a narrower
meaning to the term 'public policy of India'. On the contrary, a wider
meaning is required to be given so that the 'patently illegal award' passed
H by the arbitral tribunal could be set aside. It is for the Parliament to provide
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 695
for limited or wider jurisdiction to the Court in case where award is A
challenged. But in s.uch cases, there is no reason to give narrower meaning
to the term 'Public Policy of India'. Instead, wider meaning is required to
be given so as to prevent frustration of legislation and justice. The phrase
'Public Policy of India' used in Section 34 is required to be given a wider
meaning. It can be stated that the concept of public policy connotes some B
matter which concerns public good and the public interest. What is for
public good or in public interest or what would be injurious or harmful to
the public good or public interest has varied from time to time. The award
which is, on the face of it, patently in violation of statutory provisions
cannot be said to be in public interest. Such award/judgment/decision is
likely to adversely affect the administration of justice. C
(713-C-E; 718-A-D; 716-GJ

Central Inland Water Transport Corporation Limited and Anr. v. Brojo
Nath Ganguly and Anr., (1986] 3 SCC 156; Murlidhar Agarwal and Anr. v.
State of U.P. and Ors., (1974) 2 SCC 472 and Rattan Chand Hira Chand v.
Askar Nawaz Jung (Dead) By Lrs. and Ors., (1991] 3 SCC 67 , referred to. D
•
Renusagar Power Co. ltd. v. General Electric Co., [1994) Supp. 1 SCC
644, distinguished.

'law of Arbitration and Conciliation' by Justice Dr. B.P. Saraf and E
Justice SM Jhunjhunwala, referred to.

2.3. If the award is patently against the statutory provisions of
substantive law which is in force in India or is passed without giving an
opportunity of hearing to the parties or without giving any reason in a case
where parties have not agreed that no reasons are to be recorded, it would F
be against the statutory provisions. In such cases, the award is required to
be set aside on the ground of 'patent illegality'. (714-A, B]

2.4. It is true that under the Act, there is no provision which
specifically provides that the arbitrator shall pass award within reasonable G
time as fixed by the Court; that on occasions, arbitration proceedings are
delayed for one or the other reason, but it is for the parties to take
appropriate action in that regard. However, non-providing of time limit
for deciding the dispute by the arbitrators could have no bearing on
interpretation of Section 34•. _Further, for achieving the object of speedier
disposal of dispute, justice in accordance with law can not be sacrificed. H
696 SUPREME COURT REPORTS [2003] 3 S.C.R.

A Thus, giving limited jurisdiction to the Court for havi.ng finality to the
award by the arbitrator and resolving the dispute by speedier method
would be much more frustrated by permitting patently illegal award to
operate. Patently illegal award is required to be set at naught, otherwise it
would promote injustice. [717-E-H; 718-Al

B 2.5. An award could be set aside if it is contrary to:-

(a) fundamental policy of Indian law; or
(b) th:; interest of India; or
(c) justice or morality, or
C (d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of
trivial nature it cannot be held that award is against the public policy.
Award could also be set aside if it is so unfair and unreasonable that it
shocks the conscience of the Court. Such award is opposed to public policy
D and is required to be adjudged void. [739-H; 740-A, Bl

3.1. lt is settled law that the intention of the parties is to be gathered
.
from the words used in the agreement. If words are unambiguous and are
used after full understanding of their meaning by experts, it would not be
E appropriate to gather their intention different from the language used in
the agreement. If upon a reading of the documents as a whole, it can fairly
be deduced from the words actually used therein that the parties had agreed
on a particular term, there ·is nothing in law which prevents them from
setting up that term. When parties have expressly agreed that recovery
from the contractor for breach of the contract is pre-estimated genuine
F liquidated damages and is not by way of penalty duly agreed by the parties,
there was no justifiable reason for the arbitral tribunal to arrive at a
conclusion that still the purchaser should prove loss suffered by it because
of delay in supply of goods. [723-B, C, El

Modi & Co. v. Union ofIndia, [196812 SCR 565 and Provash Chandra
G Dalui andAnr. v. Biswanath Banerjee and Anr., [1989[ Supp 1SCC487, relied
on.

3.2. The arbitral tribunal is required to decide the dispute in
accordance with the terms of the contract. In the instant case, the agreement
H between the parties specifically provides that without prejudice to any other
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 697

right or remedy if the contractor fails to deliver the stores within the A
stipulated time, appellant will be entitled to recover from the contractor
liquidated damages on agreed terms.Further, when respondent sought
extension of time for supply of goods, time was extended with a specific
demand that the clause for liquidated damages would be invoked and
appellant would recover the same for such delay. Despite such specific B
indication by the appellant, respondent had supplied the goods which would
indicate that even at that stage, respondent was agreeable to pay liquidated
damages. 1723-F, G; 724-8, Cl

3.3. From the provisions of law under Sections 73 and 74 of Indian
Contract Act, it can be held that when a contract has been broken, the C
party who suffers by such breach is entitled to receive compensation for
any loss which naturally arise in the usual course of things from such
breach. And if parties knew when they made the contract that a particular
loss is likely to result from such breach, they can agree for payment of such
compensation. In such a case, there may not be any necessity of leading
evidence for proving damages, unless the Court arrives at the conclusion D
that no loss is likely to occur because of such breach. Further, in case where
Court arrLves at the conclusion that the term contemplating damages is
by way of penalty, the Court may grant reasonable compensation not
exceeding the amount so named iii the contract on proof of damages.
However, when the terms of the contract are clear and unambiguous then E
its meaning is to be gathered only from the words used therein. In a case
where agreement is executed by experts in the field, it would be difficult
to hold that the intention of the parties was different from the language
used therein, and it is for the party who contends that stipulated amount
is not reasonable compensation, to prove the same. 1725-C-EI
F
Mazda Bux v. Union of India, 119691 2 SCC 554; H.M. Kamaluddin
Ansari & Co. v. Union of India and Ors., 119831 4 SCC 417 and Union of
India v. Rampur Distillery & Chemical Co. Ltd., 119731 I SCC 649, relied
on.
G
Fateh Chand v. Ba/kishan Das, 119641 I SCR 515, distinguished.

Union of India v. Raman Iron Foundry, 119741 2 SCC 231, held
inapplicable.

3.4. It is true that if the arbitral tribunal has committed mere error H
I
;A

698 SUPREME COURT REPORTS (2003) 3 S.C.R.

A of fact or law in reaching its conclusion on the disputed question submitted
to it for adjudication then the Court would have no jurisdiction to interfere
with the award. But, this would depend upon reference made to the
arbitrator; (a) If there is a general reference for deciding the contractual
dispute between the parties and if the award is based on erroneous legal
B proposition, the Court could interfere; (b) It is also settled law that in a
case of reasoned award, the Court can set aside the same if it is, on the
face of it, erroneous on the proposition of law or its application; (c) If a
specific question of law is submitted to the arbitrator, erroneous decision
in point of law does. not make the award bad, so as to permit of its being
set aside, unless the Court is satisfied that the arbitrator had proceeded
C illegally. (729-D, El

3.5. In the facts of the instant case, if contractual term, as it is, is to
be taken into consideration, the award is, on the face of it, erroneous and
in violation of the terms of the contract and thereby it violatPs Section 28(3)
·-
D of the Act. The reference to the arbitral tribunal was · Jt with regard to
interpretation of question of law. It was only a general reference with
regard to claim of respondent. Hence, if the award is erroneous on the basis
of record with regard to proposition of law or its application, the Court
will have jurisdiction to interfere with the same. 1729-F, GI

E Mis. Alopi Parshad & Sons Ltd. v. Union of India, 11960] 2 SCR 793;
Maharashtra State Electricity Board v. Sterilite Industries (India) and Anr.,
120011 8 SCC 482; Union of India v. A.L. Ra/lia Ram, [1964] 3 SCR 164;
Seth Thawardas Pherumal v. Union ofIndia, [1955] 2 SCR 48; Rajasthan State

F
Mines & Minerals Ltd v. Eastern Engineering Enterprises and Anr., [199919
sec 283; Sikkim Subba Associates v. State of Sikkim, [200115sec629 and
G.M Northern Railway and Anr. v. Sarvesh Chopra, [200214 SCC 45, referred
to.
--
F.R. Absalom Ltd. v. Great Western (London) Garden Village Society
Ltd., (1993) AC 592, referred to.
G
4:1. The arbitral tribunal failed to consider Sections 73 and 74 of the
Indian Contract Act and the ratio laid down in *Fateh Chandv. Balkishan
Das wherein.it is specifically held that jurisdiction of the Court to award
compensation in case of breach of contract is unqualified except as to the
maximum stipulated; and compensation has to be reasonable. The emphasis
H is on reasonable compensation. If the compensation named in the contract
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 699
is by way of penalty, consideration would be different and the party is only A
entitled to reasonable compensation for the loss suffered. But if the
compensation named in the contract for such breach is genuine pre-estimate
of loss which the parties knew when they made the contract to be likely to
result from the breach of it, there is no question of proving such loss or such
party is not required to lead evidence to prove actual loss suffered by him.
Burden is on the other party to lead evidence for proving that no loss is likely B
to occur bv such breach. (734-C-GI

*Fateh Chand v. Balkishan Das, (196411 SCR 515, followed.

Mau/a Bux v. Union of India, (196912 SCC 554, relied on. c
4.2. In the instant case, no evidence is led by the claimant to establish
that stipulated condition was by way of penalty or the compensation contemplated
was, in any way, unreasonable. There was no reason for the tribunal not to
rely upon the clear and unambiguous terms of agreement stipulating pre-
estimate damages because of delay in supply of goods. [736-EI D
4.3. When the agreed amount is deducted and thereafter contractor
claims it back on the ground that the appellant was not entitled to deduct the
same as it has failed to prove loss suffered by it, such claim undoubtedly would
be a 'disputed claim'. The arbitrators were-required to decide the undisputed E
claim by considering the facts and the law applicable. The reason recorded by
the arbitrators that as the goods were received and bills are not disputed,
therefore, the claim for recovering the amount of bills cannot be held to be
'disputed claim' is, on the face of it, unjust, unreasonable, unsustainable and
patently illegal as well as against the expressed terms of the contract. It is the
primary duty of the arbitrators to enforce a promise which the ,parties have F
made and to uphold the sanctity of the contract which forms the basis of the
civilized society and also the jurisdiction of the arbitrators. Hence, that part
of the award passed by the arbitral tribunal granting interest on the amount
deducted by the appellant from the bills payable to the respondent is against
the terms of the contract and is, therefore, violative of Section 28(3) of the G
Act. (738-A-C-F(

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7419 of2001.

From the Judgment an(l Order dated 21.6.2000 of the Mumbai High
Court in A. No. 256 of 2000.
H
700 SUPREME COURT REPORTS [2003] 3 S.C.R.

A Ashok H. Desai, Dushyant A. Dave, Sunil Gupta, Ashwani Kumar, Ms.
Anuradha Bindra, Kashi Vishweshwaran, Ms. Padmalakshmi Nigam, Vikram
Mehta, K.R. Sasiprabhu, A.M. Khattawala, Mahesh Agarwal, Rishi Agarwal,
E.C. Agarwala, Prabhjit Jauhar and S.S. Jauhar for the Appearing parties.

The Judgment of the Court was delivered by
B
SHAH, J. Court's Jurisdiction Under Section 34 of the Arbitration and
Conciliation Act. 1966

Before dealing with the issues involved in this appeal, we would first
decide the main point in controversy, namely-the ambit and scope of Court's
C jurisdiction in case where award passed by the Arbitral Tribunal is challenged
under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as "the Act") as the decision in this appeal would depend upon
the said finding. In other words-whether the Court would have jurisdiction
under Section 34 of the Act to set aside an award passed by the Arbitral
D Tribunal which is patently illegal or in contravention of the provisions of the
Act or any other substantive law governing the parties or is against the terms
of the contract?

Learned senior counsel Mr. Ashok Desai appearing for the appellant
submitted that in case where there is clear violation of Section 28 to 31 of the
E Act or the terms of the Contract between the parties, the said award can be
and is required to be set aside by the Court while exercising jurisdiction
under Section 34 of the Act.

Mr. Dushyant Dave, learned senior counsel appearing on behalf of
respondent-company submitted to the contrary and contended that the Court's
F jurisdiction under Section 34 is limited and the award could be set aside
mainly on the ground that the same is in conflict with the 'Public Policy of
India'. According to his submission, the phrase 'Public Policy of India'
cannot be interpreted to mean that in case of violation of some provisions
of law, the Court can set aside the award.
G For deciding this controversy, we would refer to the relevant part of
Section 34 which reads as under:-

"34. Application for setting aside arbitra/ award-{!) 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
H
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 701
sub-section (3). A
(2) An arbitral award may be set aside by the court only if-
(a) the party making the application furnishes proof that-

(i) a party was under some incapacity, or
B
(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 C
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;
D
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 arbitra/ tribunal or the arbitral E
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 that-
F

(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) arbitral award is in conflict with the public policy of India.
G
Explanation-Without prejudice to the generality of sub-clause
(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 ji·aud or corruption or was in
violation of Section 75 or Section 81."
H
702 SUPREME COURT REPORTS [2003] 3 S.C.R.

A For our purpose, it is not necessary to refer to the scope of self
explanatory Clauses (i) to (iv) of sub-section (2)(a) of Section 34 of the Act
and it does not require elaborate discussion. However, clause (v) of sub-
section 2(a) and clause (ii) of sub-section 2(b) require consideration. For
proper adjudication of the question of jurisdiction, we shall first consider
B what meaning could be assigned to the tenn 'Arbitral Procedure.'

'Arbitral Procedure.'

The ingredients of clause (v) are as under:-

(I) The Court may set aside the award:-
c (i) (a) ifthe composition of the arbitral Tribunal was not in accordance
with the agreement of the parties.
(b) failing such agreement, the composition of the arbitral tribunal
was not in accordance with Part-I of the Act.
D (ii) if the arbitral procedure was not in accordance with:-
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in
accordance with Part-I of the Act.

E However, exception for setting aside the award on the ground of
composition of arbitral tribunal or illegality of arbitral procedure is that the
agreement should not be in conflict with the provisions of Part-I of the Act
from which parties cannot derogate.

In the aforesaid sub-clause (v), the emphasis is on the agreement and
F the provisions of Part-I of the Act from which parties cannot derogate. It
means that the composition of arbitral tribunal should be in accordance with
the agreement. Similarly, the procedure which is required to be followed by
the arbitrators should also be in accordance with the agreement of the parties.
If there is no such agreement then it should be in accordance with the
G procedure prescribed in the Part-I of the Act i.e. Section 2 to 43. At the same
time, agreement for composition of arbitral tribunal or arbitral procedure should
not be in conflict with the provisions of the Act from which parties cannot
derogate. Chapter V of Part-I of the Act provides for conduct of arbitral
proceedings. Section 18 mandates that parties to the arbitral proceedings shall
be treated with equality and each party shall be given full opportunity to
H present his case, Section 19 specifically provides that arbitral tribunal is not
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 703

bound by the Code of Civil Procedure, 1903 or the Indian Evidence Act, 1872 A
and parties are free to agree on the procedure to be followed by the arbitral
tribunal in conducting its proceedings. Failing any agreement between the
parties subject to other provisions of Part-I, the arbitral tribunal is to conduct
the proceedings in the manner it considers appropriate. This power includes
the power to determine the admissibility, relevance the materially and weight B
of any evidence. Sections 20, 21 and 22 deal with place of arbitration,
commencement of arbitral proceedings and language respectively. Thereafter,
Section, 23 24 and 25 deal with statements of claim and defence, hearings and
written proceedings and procedure to be followed in case of default of a party.

At this stage, we would refer to Section 24 which is as under:- C
"24. Hearings and written proceedings-( I) Unless otherwise agreed
by the parties, the arbitral tribunal shall decide whether to hold
oral hearings for the presentation of evidence or for oral argument,
or whether the proceedings shall be conducted on the basis of
documents and other materials: D
Provided that the arbitral tribunal shall hold oral hearings, at
an appropriate stage of the proceedings, on a request by a party,
unless the parties have agreed that no oral hearing shall be held.

(2) The parties shall be given sufficient advance notice of any hearing E
and of any meeting of the arbitral tribunal for the purposes of
inspection of documents, goods or other property.

(3) All statements, documents or other information supplied to, or
applications made to the arbitral tribunal by one party shall be
communicated to the other party, and any expert report or evidentiary F
document on which the arbitral tribunal may rely in making its decision
shall be communicated to the parties."

Thereafter, Chapter VI deals with making of arbitral award and termination
of proceedings. Relevant Sections which require consideration are Sections
28 and 31. Section 28 and 31 read as under:- G
"28. Rules applicable to substance of dispute-

(1) Where the place of arbitration is situate in India-

(a) in an arbitration other than an international commercial
arbitration, the arbitral tribunal shall decide the dispute H
,,

704 SUPREME COURT REPORTS (2003] 3 S.C.R.

A submitted to arbitration in accordance with the substantive
law of the time being in force in India.

(b) in international commercial arbitration,-

(i) the arbitral tribunal shall decide the dispute in accordance
with the rules of law designated by the partie~ as applicable
B to the substance of the dispute;

(iO any designation by the parties of the law or legal system of
a given country shall be construed, unless otherwise
expressed, as directly referring to the substantive law of that
country and not to its conflict of law rules;
c
(iiO failing any designation of the law under clause (a) by the
parties, the arbitral tribunal shall apply the rules of law it
considers to be appropriate given all the circumstances
surrounding the dispute.

D (2) The arbitral tribunal shall decide ex aequo et bona or as.
amiable compositeur only if the parties have expressly authorised it
to do so.

(3) In all cases, the arbitral tribunal shall decide in accordance
with the terms of the contract and shall take into account the usages
E of the trade applicable to the transaction.

31. Form and contents of arbitral award-(!) An arbitral award shall
be made in writing and shall be signed by the members of the arbitral
tribunal.

F (2) For the purposes of sub-section (I), in arbitral proceedings
with more than one arbitrator, the signatures of the majority of all the
members of the arbitral tribunal shall be sufficient so long as the
reason for any omitted signature is stated.

(3) The arbitral award shall state the reasons upon which it is
G based, unless-

(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed tern1s under section 30.

(4) The arbitral award shall state is date and the place ofarbitratinn
H as determined in accordance with section 20 and the award shall be
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 705
deemed to have been made at that plare. A
(5) After the arbitral award is made, a signed copy shall be delivered
to each party.

(6) The arbitral tribunal may, at any time during the arbitral
proceedings, make an interim arbitral award on any matter with respect B
to which it may make a final arbitral award.

(7)(a) Unless otherwise agreed by the parties, where and in so far
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, C
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 eighteen per
centum per annum from the date of the award to the date of payment. D
(8) Unless otherwise agreed by the parties,

(a) the costs of an arbitration shall be fixed by the arbitral
tribunal:

(b) the arbitral tribunal shall specify,- E
(i) the party entitled to costs.

(ii) the party who shall pay the costs,

(iii) the amount of costs or method of determining that F
amount, and

(iv) the manner in which the costs shall be paid.

Explanation: For the purpose of clause (a), "costs" means reasonable
costs relating to,-
G
(0 the fees and expenses of the arbitrators and witnesses.

(ii)· legal fees and expenses,

(iii) any administration fees of the institution supervising the
arbitration, and
H
706 SUPREME COURT REPORTS (2003) 3 S.C.R.

A (iv) any other expenses incurred in connection with the arbitral
proceedings and the arbitral award."

The aforesaid provisions prescribe the procedure to be followed by the
arbitral tribunal coupled with its powers. Power and procedure are synonymous
in the present case. By prescribing the procedure, the arbitral tribunal is
B empowered and is required to decide the dispute in accordance with the
provisions of the Act, that is to say, the jurisdiction of the tribunal to decide
the dispute is prescribed. In these sections there is no distinction between
the jurisdiction/power and the procedure. In Harish Chandra Bajpai v. Triloki
Singh, (1957] SCR 370, while dealing with Sections 90 and 92 of the
C Representation of the !'eople Act, 1951 (as it stood), this Court observed
thus:-

"It is then argued that S.92 confers powers on the Tribunal in
respect of certain matters, While S. 90(2) applies the CPC in resoect
of matters relating to procedure that there is a distinction between
power and procedure, and that the granting of amendment being a
D
power and not a matter of procedure, it can be claimed only under
section 92 and not under S. 90(2). We do not see any antithesis
between 'procedure' in S. 90(2) and 'powers' under S.92. When the
respondent applied to the Tribunal for amendment, he took a procedural
step, and that he was clearly entitled to do under S. 90(2). The
E question of power arises only with reference to the order to be passed
on the petition by the Tribunal. Is it to be held that the presentation
of a petition is competent, but the passing of any order thereon is
not? We are of opinion that there is no substance in the contention
either."

F Hence, the jurisdiction or the power of the arbitral tribunal is prescribed
under the Act and if the award is do hors the said provisions, it would be,
on the face of it, illegal. The decision of the Tribunal must be within the
bounds of its jurisdiction conferred under the Act or the contract. In exercising
jurisdiction, the arbitral tribunal can not act in breach of some provision of
G substantive law or the provision of the Act.

The question, therefore, which requires consideration is-whether the
award could be set aside, ifthe arbitral tribunal has not followed the mandatory
procedure prescribed uhder Section 24, 28 or 31(3), which affects the rights
of the parties? Under sub-section (I )(a) of Section 28 there is a mandate to
H the arbitral tribunal to decide the dispute in accordance with the substanuve
OIL & NATURAL GAS CORPORATION LTD. '"SAW PIPES LTD. [SHAH, J ] 707
law of the time being in force in India. Admittedly, substantive law would A
include the Indian Contract Act, the Transfer of Property Act and other such
laws in force. Suppose, if the award is passed in violation of the provisions
of the Transfer of Property Act or in violation of the Indian Contract Act, the
question would be-whether such award could be set aside? Similarly, under
sub-section (3), arbitral tribunal is directed to decide the dispute in accordance B
with the terms of the contract and also after taking into account the usage
of the trade applicable to the transaction. If arbitral ignores the terms of the
contract or usage of the trade applicable to the transaction, whether the said
award could be interfered? Similarly, if the award is non-speaking one and is
in violation of Section 31(3), can such award be set aside? In our view, reading
Section 34 conjointly with other provisions of the Act, it appears that the C
legislative intent could not be that if the award is in contravention of the
provisions of the Act, still however, it couldn't be set aside by the Court. If
it is held that such award could not be interfered, it would be contrary to basic
concept of justice. If the arbitral tribunal has not followed the mandatory
procedure prescribed under the Act, it would mean that it has acted beyond
its jurisdiction and thereby the award would be patently illegal which could D
be set aside ~nder Section 34.
,..
The aforesaid interpreta<ion of the clause (v) would be in conformity
with the settled principle of law that the procedural law cannot fail to provide
relief when substantive law gives the right. Principle is there cannot be any E
wrong without a remedy. In M V. Elisabeth and Ors. v. Harwan Investment
& Trading Pvt. ltd, (1993] Supp. 2 SCC 433 this Court observed that where
substantive law demands justice for the party aggrieved and the statute has
not provided the remedy, it is the duty of the Court to devise procedure by
drawing analogy from other systems of law and practice. Similarly, in Dhanna
Lal v. Kalawatibai and Ors., [2002] 6 SCC 16 this Comi observed that wrong F
must not be left unredeemed and right not left unenforced.

Result is if the award is contrary to the substantive provisions of law
or the provisions of the Act or against the terms of the contract, it would be
patently illegal, which could be interfered under Section 34. However, such
failure of procedure should be patent affecting the rights of the parties. G
What Meaning Could be assigned to 1he phrase 'Public Policy of
India'?

The next clause which requires interpretation is clause (ii) of sub-
section 2(b) of Section 34 which inter alia provides that the Court may set H
I
.A

708 SUPREME COURT REPORTS [2003] 3 S.C.R'.
-(
A aside arbitral if it is in conflict with the 'Public Policy oflndia'. The phrase
'Public Policy of India' is not defined under the Act. Hence, the said term is
required to be given meaning in context and also considering the purpose of
the section and scheme of the Act. It has been repeatedly stated by various
authorities that the expression 'public policy' does not admit of precise
B definition and may vary from generation to generation and from time to time.
Hence, the concept 'public policy' is considered to be vague, susceptible to
narrow or wider meaning depending upon the context in which it is used.
Lacking precedent the Court has to give its meaning in the light and principle
underlying the Arbitration Act. Contract Act and Constitutional provisions.
--
c learnedForcounsel
this purpose, we would refer to few decisions referred to by the
for the parties. While dealing with the concept of 'public
----.
policy, this Court in Central Inland Water Transport Corporation Limited
and Anr. v. Brojo Nath Ganguly and Anr., [1986] 3 SCC 156 has observed
thus:-

D "92. The Indian Contract Act does not define the expression
"public policy" or "opposed to public policy". From the very nature
of things, the expressions "public policy", "opposed to public policy'',
or "contrary to public policy" are incapable of precise definition.
Public policy, however, is not the pqlicy of a particular government.
It connotes some matter which concerns the public good and the·
E public interest. The ·concept of what is for the public good or in the
public interest or what would be injurious or harmful to the public
good or the public interest has varied from time to time. As new
concepts take the place of old, transactions which were once considered
against public policy are now being upheld by the courts and similarly
F where there has been a well recognized head of public policy, the
courts have not shirked from extending it to the new transactions and
changed circumstances and have at time not even flinched from
inventing a new head of public policy. There are two schools of
thought-"the narrow view" school and "the broad view" school.
According to the former, courts cannot create new heads of public
G policy whereas the latter countenances judicial law-making in this
area. The adherents of "the narrow view" school would not invalidate
a contract on the ground of public policy unless that particular ground
had been well-established by authorities. Hardly ever has the voice
of the timorous spoken more clearly and loudly than in these words
H of Lord Davey in Janson v. Driefontein Consolidated Gold Mines
•.
OIL& NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. (SHAH,J.] 709
Ltd., [1902] AC 484, 500 "Public Policy is always an unsafe and A
treacherous ground for legal decision". That was in the year 1902.
Seventy-eight years earlier. Burrough, J., Richardson v. Mellish, [1824]
2 Bing 229, 252 described public policy as "a very unruly horse, and
when once you get astride it you never know where it will carry
you. " The Master of the Rolls, Lord Denning, however, was not a
man to shy away from unmanageable horses and in words which B
conjure up before our eyes the picture of the young Alexander the
Great laming Bucephalus, he said in Enderby Town Football Club
Ltd v. Football Assn. Ltd, (1971) Ch. 591 606; "With a good man in
the saddle, the unruly horse can be kept in control. It can jump over
obstacles": Had the timorous always held the field, not only the C
doctrine of public policy but even the Common Law or the principles
of Equity would never have evolved, Sir William Holdsworth in his
"History of English Law" Volume III, page 55, has said;

In fact, a body of law like the common law, which has grown up
gradually with the growth of the nation, necessarily acquire some D
fixed principle, and if it is to maintain these principles it must be able,
on the ground of public policy or some other like ground, to suppress
practices which, under ever new disguises, seek to weaken or negative
them.

It is thus clear that the principles governing public policy must E
be and are capable, on proper occasion, of expansion or modification.
Practices which were considered perfectly normal at one time have
today become obnoxious and oppressive to public conscience. If
there is no head of public policy which covers a case, then the court
must in consonance with public conscience and in keeping with F
public good and public interest declare such practice to be opposed
to public policy. Above all, in deciding any case which may not be
covered by authority our courts have before them the beacon light of
the Preamble to the Constitution. Lacking precedent, the court can
always be guided by that light and the principles underlying the
Fundamental Rights and the Directive Principles enshrined in our G
Constitution.

93. The normal rule of Common Law has been that a party who
seeks to enforce an agreement which is opposed to public policy will
be non-suited. The case of A. Schroeder Music Public Co. Ltd. v.
Macaulay, [1974] I WLR 1308 however establishes that where a H
)

710 SUPREME COURT REPORTS [2003] 3 S.C.R.

A contract is vitiated· as being contrary to public policy, the party
adversely affected by it can sue to have to declared void. The case
may be different where the purpose of the contract is illegal or immoral.
In Kedar Nath Motani v. Prahlad Rai, [ 1960] I SCR 861, rev<;rsing
the High Court and restoring the decree passed by the trial court
declaring the appellants' title to the lands in suit and directing the
B respondents who were the appellants' benamidars to restore
possession, this Court, after discussing the English and Indian law on
the subject said at page 873:

The correct position in law, in our opinion, is that what one
has to see is whether the illegality goes so much to the root of
c the matter that the plaintiff cannot bring his action without
relying upon the illegal transaction into which he had entered.
If the illegality be trivial or venial, as stated by Williston and the
plaintiff is not required to rest his case upon that illegality, then
public policy demands that the defendant should not be allowed
D to take advantage of the position. A strict view, of course, must
be taken of the plaintiffs conduct, and he should not be allowed
to circumvent the illegality by resorting to some subterfuge or
by misstating the facts. If, however, the matter is clear and the
illegality is not required to be pleaded or proved as part of the
cause of action and the plaintiff recanted before the illegal
E purpose was achieved, then, unless it be of such a gross nature
as to outrage the conscience of the court, the plea of the
defendant should not prevail.

The types of contracts to which the principle formulated by us above
applies are not contracts which are tainted with illegality but are
F contracts which contain terms which are so unfair and unreasonable
that they shock the conscience of the court. They are opposed to
public policy and require to be adjudged void."

Further, in Renusagar Power Co. Ltd. v. General Electric Co., [1994]
G Supp. I SCC 644, this Court considered Section 7( 1) of the Arbitration (Protocol
and Convention) Act, 1937 which inter a/ia provided that a foreign award
may not be enforced under the said Act, if the Court dealing with the case
is satisfied that the enforcement of the award will be contrary to the Public
Policy. After elaborate discussion, the Court arrived at the conclusion that
Public Policy comprehended in Section 7( 1)(b )(ii) of the Foreign Awards
H (Recognition and Enforcement) Act, 1961 is the 'Public Policy' of India' and •
OIL& NATURAL GAS CORPORATION LTD. "·SAW PIPES LTD. [SHAH, l.) 711

does not cover the public policy of any other country. For giving meaning A
to the term 'Public Policy', the Court observed thus:-

"66. Article V(2)(b) of the New York Convention of 1958 and Section
7(1 )(b )(ii) of the Foreign Awards Act do not postulate refusal of
recognition and enforcement of a foreign award on the ground that
it is contrary to the law of the country of enforcement and the. ground B
of challenge is confined to the recognition and enforcement being
contrary to the public policy of the country in which the award is set
to be enforced. There is nothing to indicate that the expression "public
policy" in Article V(2)(b) of the New York Convention and Section
7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense C
in which it was used in Article l(c) of the Geneva Convention of 1927
and Section 7(1) of the Protocol and Convention Act of 1937. This
would mean that "public policy" in Section 7(i)(b)(ii) has been used
in a narrower sense and in order to attract to bar of public policy
the enforcement of the award must invoke something more than the
violation of the law of India. Since the Foreign Awards Act is D
concerned with recognition and enforcement of foreign awards which
are governed by the principles of private international law, the
expression "public policy" in Section 7(1)(b)(ii) of the Foreign Awards
Act must necessarily be construed in the sense the doctrine of public
policy is applied in the field of private international law. Applying the E
said criteria it must be held that the enforcement of a foreign award
would be refused on the ground that it is contrary to public policy
if such enforcement would be contrary to (i) fundamental policy of
Indian law; or (ii) the interests of India; or (iii) justice or morality. "

The Court finally held that;-
F
"76. Keeping in view the aforesaid objects underlying FERA and the
principle governing enforcement of exchange control laws followed in
other countries, we are of the view that the provisions contained in
FERA have been enacted to safeguard the economic interests of India
and any violation of the said provisions would be contrary to the G
public policy oflndia as envisaged in Section 7(l)(b)(ii) of the Act."

This Court in Murlidhar Agarwal and Anr. v. State of UP. and Ors.,
[1974) 2 sec 472 while dealing with the concept of"public policy" observed
thus:-
H
l
712 SUPREME COURT REPORTS (2003] 3 S.C.R.

A "31. Public policy does not remain static in any given community.
It may vary from generation to generation and even in the same
generation. Public policy would be almost useless if it were to remain
in fixed moulds for all time.

32 ......... The difficulty of discovering what public policy is at any
B given moment certainly does not absolve the Judges from the duty
of doing so. In conducting an enquiry, as already stated, Judge are
not hide-bound by precedent. The Judges must look beyond the
narrow fields of past precedents, through this still leaves open the
question in which direction they must cast their gaze. The Judge are
to base their decision on the opinions of men of the world, as
c distinguished from opinions based on legal learning. In other words,
the Judges will have to look beyond the jurisprudence and that in so
doing, they must consult not their own personal standards or
predilections but those of the dominant opinion at a given moment,
or what has been termed customary morality. The Judges must consider
D the social consequences of the rule propounded, especially in the
light of the factual evidence available as to its propable results. The
point is rather that this power must be lodged somewhere and under
our Constitution and laws, it has been lodged in the Judges and if
they have to fulfil their function as Judges, it could hardly be lodged
elsewhere."
E
Mr. Desai submitted that the narrow meaning given to the term "public
policy" in Renusagar 's case is in context of the fact that the question involved
in the said matter was with regard to the execution of the award which had
attained finality. It was not a case where validity of the Award is challenged
F before a forum prescribed under the Act. He submitted that the scheme of
Section 34 which deals with setting aside the domestic arbitral award and
Section 48 which deals with enforcement of foreign award are not identical.
A foreign award by tlefinition is subject to double exequatur. This is recognized
. inter a/ia by Section 48(1) and there is no parallel provision to this clause
I
in Section 34. For this, he referred to Lord Must ill & Stewart C. Boyd QC 's
G ''.Commercial Arbitration" 2001 wherein at page 90 it is stated as under:-
"Mutual recognition of awards is the glue which holds the
international arbitrating community together, and this will only be
strong if the enforcing court is willing to trust, as the convention
assumes that they will trust, the supervising authorities of the chosen •
H venue. It follows that if, and to the extent that the award has been
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 713
struck down in the local court it shou Id be a matter of theory and A
practice be treated when enforcement is sought as if to the extent it
did not exist."

He further submitted that in foreign arbitration, the award would be
subject to being set aside or suspended by the competent authority under

- the relevant law of that country whereas in the domestic arbitration the only
recourse is to Section 34.

The aforesaid submission of the learned senior counsel requires to be
B

accepted. From the judgments discussed above, it can be held that the term
'public policy of India' is required to be interpreted in the context of the
jurisdiction of the Court where the validity of award is challenged before it C
becomes final and executable. The concept of enforcement of the award after
it becomes final is different and the jurisdiction of the Court at that stage
could be limited. Similar is the position with regard to the execution of a
decree. It is settled law as well as it is provided under Code of Civil Procedure
that once the decree has attained finality, in an execution proceeding, it may D
be challenged only on limited grounds such as the decree being without
jurisdiction or nullity. But in a case where the judgment and decree is challenged
before the Appellate Court or the Court exercising revisional jurisdiction, the
jurisdiction of such Court would be wider. Therefore, in a case where the
validity of award is challenged there is no necessity of giving a narrower
meaning to the tenn 'public policy of India'. On the contrary, wider meaning E
is required to be given so that the 'patently illegal award' passed by the
arbitral tribunal could be set aside. If narrow meaning as contended by the
learned senior counsel Mr. Dave is given, some of the provisions of the
Arbitration Act would become nugatory, Take for illustration a case wherein
there is a specific provision in the contract that for delayed payment of the p
amount due and payable, no interest would be payable, still however, if the
Arbitrator has passed an award granting interest, it would be against the
terms of the contract and thereby against the provision of Section 28(3) of
the Act which specifically provides that "arbitral shall decide in accordance
with the terms of the contract". Further, where there is a specific usage of the
trade that if the payment is made beyond a period of one month, then the G
party would be required to pay the said amount with interest at the rate of
15 per cent. Despite the evidence being produced on record for such usage,
if the arbitrator refuses to grant such interest on the ground of equity, such
award would also be in violation of sub-sections (2) and (3) of Section 28,
Se.ction 28(2) specifically provides that arbitrator shall decide ex aequo et H
.
:'
I

714 SUPREME COURT REPORTS [2003] 3 S.C.R.

A bona [according to what is just and good] only if the parties have expressly
authorised him to do so. Similarly, ifthe award is patently against the statutory
provisions of substantive law which is in force in India or is passed without
giving an opportunity of hearing to the parties as provided under Section 24
or without giving any reason in a case where parties have not agreed that
B no reasons are to be recorded it would be against the statutory provisions.
In all such cases, the award is required to be set aside on the ground of
'patent illegality.'

The learned senior counsel Mr. Dave submitted that the Parliament has
not made much change while adopting Article 34 of Uncitral Model Law by
C not providing error of law as a ground of challenge to the arbitral award under
Section 34 of the Act. For this purpose, he referred to Sections 68, 69 and
70 of the Arbitration Act, 1996 applicable· in England and submitted that if the
legislature wanted to give a wider jurisdiction to the Court, it would have
done so by adopting similar provisions.

D Section 68 of the law applicable in England provides that the award can
be challenged on the ground of serious irregularities mentioned therein.
Section 68 reads thus:-

'"68. Challenging the award: serious irregularity-

E (I) A party to arbitral proceedings may (upon notice to the other
parties and to the tribunal) apply to the court challenging an award
in the proceedings on the ground of serious irregularity affecting the
tribunal, the proceedings or the award.

A party may lose the right to object (see Section 73) and the right to
p apply is subject to the restrictions in section 70(2) and (3).

(2) Serious irregularity means an irregularity of one or more of the
following kinds which the court considers has caused or will cause
substantial injustice to the applicant-
(a) failure by the tribunal to comply with section 33 (general duty
G of tribunal);
(b) the tribunal exceeding its power (otherwise than by exceeding its
substantive jurisdiction; see section 67);
(c) failure by the tribunal to conduct the proceedings in accordance
H with the procedure agreed by the parties;
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, l.l 715
(d) failure by the tribunal to deal with all the issues that were put A
to it;

(e) any arbitral or other institution or person vested by the parties
with powers in relation to the proceedings or the award exceeding
its powers;

(f) uncertainty or ambiguity as to the effect of the award; B
(g) the award being obtained by fraud or the award or the way in
which it was procured being contrary to public policy;

(h) failure to comply with the requirement as to the form of the
award; or
c
(i) any irregularity in the conduct of the proceedings or in the
award which is admitted by the tribunal or by any arbitral or
other institution or person vested by the parties with powers in
reaction to the proceedings or the award.

(3) If there is shown to be serious irregularity affecting the tribunal, D
the proceedings or the award, the court may-

(a) remit the award to the tribunal, in whole or m part, for
reconsideration;

(b) set the award aside in whole or in part, or
E
(c) declare the award to be of no effect, in whole or in part.

The Court shall not exercise its power to set aside or to declare an
award to be of no effect, in whole or in part, unless it is satisfied that
it would be inappropriate to remit the matters in question to the
tribunal for reconsideration. F
(4) The leave of the Court is required or any appeal from a decision
of the court under this section."

Similarly, Section 69 provides that appeal on point of law would be
maintainable and the procedure thereof is also provided. Section 70 provides G
supplementary provisions.

It is true that Legislature has not incorporated exhaustive grounds for
challenging the award passed by the arbitral tribunal or the ground on which
appeal against the order of the Court would be maintainable.
H
716 SUPREME COURT REPORTS [2003] 3 S.C.R.

A On this aspect, eminent Jurist & Senior Advocate Late Mr. Nani Palkhivala
while giving his opinion to 'Law of Arbitration and Conciliation by Justice
Dr. B.P. Saraf and Justice SM. Jhunjhunuwala, noted thus:-

"I am extremely impressed by your analytical approach in dealing
with the complex subject of arbitration which is emerging rapidly as
B an alternate mechanism for resolution of commercial disputes. The
new arbitration law has been brought in parity with statutes in other
countries though I wish that the Indian law had a provision similar to
section 68 of the English Arbitration Act, 1996 which gives power to
the Court to correct errors of law in the award.

C I· welcome your view on the need for giving the doctrine of
"public policy" its full amplitude. I particularly endorse your comment
that Courts of law may intervene to permit challenge to an arbitral
award which is based on an irregularity of a kind which has caused
substantial injustice.
D If the arbitral tribunal does not dispense justice, it cannot truly be
reflective of an alternate dispute resolution mechanism. Hence, if the
award has resulted in an injustice, a Court would be well within its
right in upholding the challenge to the award on the ground that
it is in conflict with public policy of India. "
E From this discussion it would be clear that the phrase 'public policy of
India' is not required to be given a narrower meaning. As stated earlier, the
said term is susceptible of narrower or wider meaning depending upon the
object and purpose of the legislation. Hence, the award which is passed in
contravention of Section 24, 28 or 31 could be set aside. In addition to Section
F 34, Section 13(5) of the Act also provides that constitution of the arbitral
tribunal could also be challenged by a party. Similarly Section 16 provides that
a party aggrieved by the decision of the arbitral tribunal with regard to its
jurisdiction could challenge such arbitral award under Section 34. In any case,
it is for the Parliament to provide for limited or wider jurisdiction to the Court
in case where award is challenged. But in such cases, there is no reason to
G give narrower meaning to the term 'public policy of India' as contended by
learned senior counsel Mr. Dave. In our· view, wider meaning is required to
be given so as to prevent frustration of legislation and justice. This Court in
Rattan Chand Hira Chand v. Askar Nawaz (Dead) By LRs and Ors., [1991]
3 SCC 67, this Court observed thus;-
H
OIL& NATURAL GAS CORPORATION LTD. ,.. SAW PIPES LTD. [SHAH, J.] 717
"17 ...... It cannot be disputed that a contract which has a tendency A
to injure public interests or public welfare is one against public policy.
What constitutes an injury to public interests or welfare would depend
upon the times and climes. The legislature often fails to keep pace
with the changing needs and values nor as it realistic to expect that
it will have provided for all contingencies and eventualities. It is,
therefore, not only necessary but obligatory on the courts to step in B
to fill the lacuna. When courts perfonn this function undoubtedly
they legislate judicially. But that is a kind of legislation which stands
implicity delegated to them to further the object of the legislation and
to promote the goals of the society. Or to put it negatively, to prevent
the frustration of the legislation or perversion of the goals and C
values of the society.

Learned senior counsel Mr. Dave submitted that the purpose of giving
limited jurisdiction to the Court is obvious and is to see that the disputes are
resolved at the earliest by giving finality to the award passed by the forum
chosen by the parties. As against this, learned senior counsel Mr. Desai D
submitted that in the present system even the arbitral proceedings are delayed
on one or the other ground including the ground that the arbitrator is not free
and the matters are not disposed of for months together. He submitted that
the legislature has not provided any time limit for passing of the award and
this indicates that the contention raised by the learned counsel for the E
respondent has no bearing in interpreting Section 34.

It is true that under the Act, there is no provision similar to Sections
23 and 28 of the Arbitration Act, I 940, which specifically provided that the
arbitrator shall pass award within reasonable time as fixed by the Court. It is
also true that on occasions, arbitration proceedings are delayed for one or p
other reason, but it is for the parties to take appropriate action of selecting
proper arbitrator(s) who could dispose of the matter within reasonable time
fixed by them. It is for them to indicate the time limit for disposal of the arbitral
proceedings. It is for them to decide whether they should continue with the
arbitrator(s) who cannot dispose of the matter within reasonable time. However,
non-providing of time for deciding the dispute by the arbitrators could have G
no bearing on interpretation of Section 34. Further, for achieving the object
of speedier disposal of dispute, justice in accordance with law cannot be
sacrificed. In our view, giving limited jurisdiction to the Court for having
finality to the award and resolving the dispute by speedier method would be
much more frustrated by permitting patently illegal award to operate. Patently H
718 SUPREME COURT REPORTS (2003] 3 S.C.R.

A illegal award is required to be set at naught, otherwise it would promote
injustice.

Therefore, in our view, the phrase 'Public Policy of India' used in
Section 34 in context is required to be given a wider meaning. It can be stated
that the concept of public policy connotes some matter which concerns
B public good and the public interest. What is for public good or in public
interest or what would be injurious or harmful to the public good or public
interest has varied from time to time. However, the award which is, on the face
of it, patently in violation of statutory provisions cannot be said to be in
public interest. Such award/judgment/decision is likely to adversely affect the
C administration of justice. Hence, in our view in addition to narrower meaning
given to the term 'public policy' in Renusagar's case supra it is required to
be held that the award could be set aside if it is patently illegal. Result would
be-award could be set aside if it is contrary to:-

(a) fundamental policy of Indian law; or
D (b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and ifthe illegality is of trivial
E nature it cannot be held that award is against the public policy. Award could
also be set aside if it is so unfair and unreasonable that it shocks the
conscience of the Court. Such award is opposed to public policy and is
required to be adjudged void.

Now on Facts:-
F
The brief facts of the case are as under:-

Appellant-ONGC which is a Public Sector llndertaking, has challenged
the arbitral award dated 2nd May, 1999 by filing Arbitration Petition No. 917/
1999 before the High Court of Bombay. Learned Single Judge dismissed the
G same. Appeal No. 256/2000 preferred before the Division Bench of the High
Court was also dismissed. Hence, the present appeal.

It is stated that in response to a tender, respondent-Company which is
engaged in the business of supplying equipment for Offshore Oil exploration
FI and maintenance by its letter dated 27th December, 1995 on agreed terms and
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH,J.] 719
conditions, offered to supply to the appellants 26" diameter and 30" diameter A
casing pipes. The appellant by letter of intent dated 3rd June, 1996 followed
by a detailed order accepted the offer of the respondent-Company. As per
terms and conditions, the goods were required to be supplied on or before
14th November, 1996.

It was the contention of the respondent that as per clause ( 18) of the B
agreement, the raw materials were required to be procured from the reputed
and proven manufactures/suppliers approved by the respondent as listed
therein. By letter dated 8th August, 1996, respondent placed an order for
supply of steel plates, that is, the raw material required for manufacturing the
pipes with Liva Laminati, Piani S.P.A. Italian suppliers stipulating that material C
must be shipped latest by the end of September 1996 as timely delivery was
of the essence of the order. It is their case that all over Europe including Italy
there was a general strike of the steel mill workers during September/October
I 996. Therefore, respondent by its letter dated 28th October, 1996 conveyed
to the appellant that Italian suppliers had faced labour problems and was
unable to deliver the material as per agreed schedule. Respondent, therefore, D,
requested for an extension of 45 days time for execution of the order in view
of the reasons beyond its control. By letter dated 4th December, 1996, the time
for delivery of the pipes was extended with a specific statement inter alia that
the amount equivalent to liquidated damages for delay in supply of pipes
would be recovered from the respondent. It is the contention of the respondent E
that the appellant made payment of the goods supplied after wrongfully
deducting an amount of US $ 3,04,970.20 and Rs. 15,75,559. as liquidated
damages. That deduction was disputed by the respondent and therefore,
dispute was referred to the arbitral tribunal. The arbitral tribunal arrived at the
conclusion that strikes affecting the supply of raw material to the claimant are
not within the definition of 'Force Majeure' in the contract between the F
parties, and hence, on that ground, it cannot be said that the amount of
liquidated damages was wrongfully withheld by the appellant. With regard to
other contention on the basis of customs duty also, the arbitral tribunal
arrived at the conclusion that it would not justify the delay in the supply of
goods. Thereafter, the arbitral tribunal considered various decisions of this G
Court regarding recovery of liquidated damages and arrived at the conclusion
that it was for the appellant to establish that they had suffered any loss
because of the breach committed by the respondent in not supplying the
goods within the prescribed time limit. The arbitral tribunal thereafter
appreciated the evidence and arrived at the conclusion that in view of the
statement volunteered by Mr. Arumoy Das, it was clear that shortage of H
720 SUPREME COURT REPORTS [2003] 3 S.C.R.

A casing pipes was only one of the other reasons which led to the change in
the deployment plan and that it has failed to establish its case that it has
suffered any loss in terms of money because of delay in supply of goods
under the contract. Hence, the arbitral tribunal held that appellant has
wrongfully withheld the agreed amount of US$ 3,04,970.20 and Rs. 15,75,559
on account of customs duty, sales tax, freight charges deducted by way of
B liquidated damages. The arbitral tribunal further held that the respondent was
entitled to recover the said amount with interest at the rate of 12 per cent p.a.
from I st April 1997 till the date of the filing of statement of claim and
thereafter having regard to the commercial nature of the transaction at the rate
of 18 per cent annum pendente lite till payment is made.
c For challenging the said award, learned senior counsel Mr. Desai
submitted that:-

(I) the award is vitiated on the ground that there was delay on the
part of respondent in supplying agreed goods/pipes and for the delay,
D appellant was entitled to recover agreed liquidated damages i.e, a sum
equivalent to 1% of the contract price for whole unit per week of such
delay or part thereof. Thereby, the award was contrary to Section
28(3) which provides that the arbitral tribunal shall decide the dispute
in accordance with the terms of the contract.

E (2) the award passed by the arbitrator is on the face of it illegal and
erroneous as it arrived at the conclusion that the appellant was required
to prove the loss suffered by it before recovering the liquidated
damages. He submitted that the arbitral tribunal misinterpreted the law
on the subject.
F (3) in any set of circumstances, the award passed by the arbitrator
granting interest on the liquidated damages deducted by the appellant
is, on the face of it, unjustified, unreasonable and against the specific
terms of the contract, namely clause 34.4 of the agreement, which
provides that on 'disputed claim', no interest would be payable.
G
As against this, learned senior counsel Mr. Dave submitted that it is
settled law that for the breach of contract provisions of Section 74 of the
Contract Act would be applicable and compensation/damages could be
awarded only if the loss is suffered because of the breach of contract. He
submitted that this principle is laid down by the Privy Council as early as in
H 1929 in Bhai Panna Singh and Ors. v. Bhai Arjun Singh and Ors., AIR (1929)
OIL & NATURAL GAS CORPORATION LTD. "· SAW PIPES LTD. [SHAH, J.] 72 J
PC 179, wherein the Privy Council observed thus:- A
"The effect of S. 74, Contract Act of 1872, is to disentitle the
plaintiffs to recover simplicitor the sum of Rs. I0,000 whether penalty
or liquidated damages. The plaintiffs must prove the damages they
have suffered."
B
He submitted that this Court has also held that the plaintiff claiming
liquidated damages has to prove the loss suffered by him. In support of this
contention, he referred to and relied upon various decisions. In any case, it
is his contention that even if there is any error in arriving at the said
conclusion the award cannot be interfered with under Section 34 of the Act. C

At this stage, we would refer to the relevant terms of the contract upon
which learned counsel for the appellant has based his submission, which are
as under:-

"I I. Failure and Termination Clause/Liquidated Damages: D
Time and date of delivery shall be essence of the contract. If the
contractor fails to deliver the stores, or any installment thereof within
the period fixed for such delivery in the schedule or at any time
repudiates the contract before the expiry of such period, the purchaser·
may, without prejudice to any other right or remedy, available to him E
to recover damages for breach of the contract:-

(a) Recovery from the contractor as agreed liquidated damages
are not by way ofpenalty, a sum equivalent to 1% (one percent)
of the contract price of the whole unit per week for such delay p
or part thereof (this is an agreed, genuine pre-estimate of damages
duly agreed by the parties) which the contractor has failed to
deliver within the period fixed for delivery in the schedule, where
delivery thereof is accepted after expiry of the aforesaid period.
It may be noted that such recovery of liquidated damages may
be upto I 0% of the contract price of whole unit of stores which G
the contractor has failed to deliver within the period fixed for
delivery, or

(c) It may further be noted that clause (a) provides for recovery of
liquidated damages on the cost ·of contract price of delayed H
722 SUPREME COURT REPORTS (2003] 3 S C.R.

A supplies (whole unit) at the rate of I% of the contract price of
the whole unit per week for such delay or part thereof upto a
ceiling of I0% of the contract price of delayed supplies (whole
unit). liquidated damages for delay in supplies thus accrued
will be recovered by the paying authorities of the purchaser
specified in the supply order, from the bill for payment of the
B
cost of material submitted by the contractor or his foreign
principals in accordance with the terms of supply order or
otherwise.

(t) Notwithstanding anything stated above, equipment and materials
C will be c!eemed to have been delivered only when all its
components, parts are also delivered. If certain components are
not delivered in time the equipment and material will be
considered as delayed until such time all the missing parts are
also delivered.

D 12. Levy of liquidated damages (LD) due to delay in supplies.

LD will be imposed on the total value of the order unless 75% of
the value ordered is supplied within the stipulated delivery period.
Where 75% of the value ordered has been supplied within stipulated
delivery period, LD will be imposed on the order value of delayed
E supply(ies). However, where in judgment of ONGC, the supply of
partial quantity does not fulfill the operating nej:d, LD will be imposed
on full value of the supply order.

34.4. Delay in Release of Payment:
F
In case where payment is to be made on satisfactory receipt of
materials at destination or where payment is to be made after
satisfactory commissioning of the equipment as per terms of the
supply order, ONGC shall make payment within 60 days of receipt of
invoice/claim complete in all respects. Any delay in payment on
G undisputed claim/amount beyond 60 days of the receipt of invoice/
claim will attract interest @ I% per month. No interest will be paid
on disputed claims. For interest on delayed payments to small scale
and Ancillary Industrial Unde11akings, the provisions of the "Interest
of· delayed payments to small scale and Ancillary Industrial
H Undertakings Act, 1983 will govern."
OIL&NATURALGASCORPORATIONLTD. v.SAWPIPESLTD. [SHAH,J.] 723
Mr. Desai referred to the decision rendered by this Court in Delta A
International Ltd v. Shyam Sundar Ganeriwala and Anr., (1999] 4 SCC 54.5
and submitted that for the purpose of construction of contracts, the intention
of the parties is to be gathered from the words they have used and there is
no intention independent of that· meaning.

It cannot be disputed that for construction of the contract, it is settled B
law that the intention of the parties is to be gathered from the words used
in the agreement. If words are unambiguous and are used after full
understanding of their meaning by experts, it would be difficult together their
intention different from the language used the agreement. If UJlOn a reading
of the document as a whole it can fairly be deduced from the words actually C
used therein that the parties had agreed on a particular term, there is nothing
in law which prevents them from setting up that term. Re Modi & Co. v.
Union of India, [I 968) 2 SCR 565. Further; in construing a contract, the Court
must look at the words used in the contract unless they are such that one
may suspect that they do not convey the intention correctly. If the words are
clear, there is very little the court can do about it. Re Provash Chandra Dalui D
and Anr. v. Biswanath Banerjee and Anr., [1989) Sup. I SCC 4871.

Therefore, when parties have expressly agreed that recovery from the
contractor for breach of the contract is pre-estimated genuine liquidated
damages and is not by way of penalty duly agreed by the parties, there was E
no justifiable reason for the arbitral tribunal to arrive at a conclusion that still
the purchaser should prove loss suffered by it because of delay in supply
of goods.

Further, in arbitration proceedings, the arbitral tribunal is required to
decide the dispute in accordance with the terms of the contract. The agreement F
between the parties specifically provides that without prejudice to any other
right or remedy ifthe contractor fails to deliver the stores within the stipulated
time, appellant will be entitled to recover from the contractor, as agreed,
liquidated damages equivalent to 1% of the contract price of the whole unit
per week for such delay. Such recovery of liquidated damage could be. at the . G
most up to I0% of the contract price of whole unit of stores. Not only this,
it was also agreed that:

(a) liquidated damages for delay in supplies will be. recovered by
paying authority from the bill for payment of cost of material
submitted by the contractor. H
724 SUPREME COURT REPORTS [2003) 3 S.C.R.

A (b) liquidated damages were not by way of penalty and it was
agreed to be genuine, pre-estimate of damages duly agreed by
the parties.

(c) This pre-estimate of liquidated damages is not assailed by the
respondent as unreasonable of damages by the parties.
B
Further, at the time when respondent sought extension of time for
supply of goods, time was extended by letter dated 4.12.1996 with a specific
demand that the clause for liquidated damages would be invoked and appellant
would recover the same for such delay. Despite this specific letter written by
C the appellant, respondent had supplied the goods which would indicate that
even at that stage, respondent was agreeable to pay liquidated damages.

On this issue, learned counsel for the parties referred to the interpretation
given to Sections 73 and 74 of the Indian Contract Act in Sir Chunilal V.
Meta & Sons Ltd. v. The Century Spinning and Manufacturing Co. Ltd.,
D [1962) Supp. 3 SCR 549; Fateh Chandv. Balkishan Das, [1964) l SCR 515
at 526, Mau/a Bux v. Union of India, [1969) 2 SCC 554, Union of India v.
Rampur Distillery and Chemical Co Ltd., [1973] I SCC 649 and Union of
India v. Raman Iron Foundry, [1974] 2 SCC 231.

Relevant part of Sections 73 and 74 of Contract Act are as under -
E
"73. Compensation for loss or damage caused by breach of
contract:-When a contract has been broken the party who suffers
by such breach is entitled to receive, from the party who has broken
the contract compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such
F
breach or which the parties knew, when they made the contract, lo
be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect
loss or damage sustained by reason of the breach.
G
"74. Compensation for breach of contract where penalty stipulated
for.-When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the
contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage
H
OIL & NATURAL GAS CORPORATION LTD. 1' SAW PIPES LTD. [SHAH, J.l 725
or loss is proved to have been caused thereby, to receive from the A
party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty
stipulated for.

Explanation.-A stipulation for increased interest from the date
of default may be a stipulation by way of penalty." B

From the aforesaid Sections, it can be held that when a contract has
been broken, the party who suffers by such breach is entitled to receive
compensation for any loss which naturally arise in the usual course of things
from such breach. These sections further contemplate that if parties knew C
when they made the contract that a particular loss is likely to result from such
breach they can agree for payment of such compensation. In such a case,
th·ere may not be any necessity of leading evidence for proving damages,
unless the Court arrives at the conclusion that no loss a likely to occur
because of such breach. Further, in case where Court arrives at the conclusion
that the term contemplating damages is by way of penalty, the Court may D
. grant reasonable compensation not exceeding the amount so named in the
contract on proof of damages. However, when the terms of the contract are
clear and unambiguous then its meaning is. to be gathered only from the
words used therein. In a case where agreement is executed by experts in the
field, it would be difficult to hold that the intention of the parties was different E
from the language used therein. In such a case, it is for the party who
contends that stipulated amount is not reasonable compensation, to prove
the same.

Now, we would refer to various decisions on the subject. In Fateh
Chand's case (supra), the plaintiff made a claim to forfeit a sum of Rs. 25000 F
received by him from the defendant. The sum of Rs. 25000 consisted of two
items Rs. l 000 received as earnest money and Rs. 24000 agreed to be paid
by the defendant as out of sale price against the delivery of possession of
property. With regard to earnest money, the Court held that the plaintiff was
entitled to forfeit the same. With regard to claim of remaining sum of
Rs. 24000, the Court referred to Section 74 oflndian Contract Act and observed G
that Section 74 deals with the measure of damages in two classes of cases
(i) where the contract names a sum to be paid in case of breach, and (ii) where
the contract contains any other stipulation by way of penalty. The Court
observed thus:-
H
726 SUPREME COURT REPORTS [2003] 3 S.C.R.

A "The measure of damages in the case of breach of a stipulation by
way of penalty is by S. 74 reasonable compensation not exceeding
the penalty stipulated for. In assessing damages the Court has, subject
to the limit of the penalty stipulated, jurisdiction to award such
compensation as it deems reasonable having regard to all the
circumstances of the case. Jurisdiction of the Court to award
B compensation in case of breach of contract is unqualified except as
to the maximum stipulated; but compensation has to be reasonable,
and that imposes upon the Court duty to award compensation
according to settled principles. The section undoubtedly says that the
aggrieved party is entitled to receive compensation from the party
c who has broken the contact, whether or not actual damage or loss
is proved to have been caused by the breach. Thereby it merely
dispenses with proof of "actual loss or damages"; it does not justifj;
the award of compensation when in consequence of the breach no
legal injury at all has resulted, because compensation for breach of
contract can be awarded to make good loss or damage which
D naturally arose in the usual course of things, or which the parties
knew when they made the contract, to be likely to result from the •.
breach.

The Court further observed as under:-
E ........ Duty not to enforce the penalty clause but only to award
reasonable compensation is statutorily imposed upon courts by S.74.
In all cases, therefore, where there is a stipulation in the nature of
penalty for forfeiture of an amount deposited pursuant to the terms
of contract which expressly provides for forfeiture, the court has
F jurisdiction to award such sum only as it considers reasonable, but
not exceedings the amount specified in the contract as liable to
forfeiture."

From the aforesaid decision, it is clear that the Court was not dealing
with a case where contract named a sum to be paid in case of breach but with
G a case where the contract contained stipulation by way of penalty.

The aforesaid case and other cases were referred to by three Judge
Bench in Maztla Bux 's case (supra) wherein the Court held thus:-

" ...... It is true that in every case of breach of contract the person
H
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 727

aggrieved by the breach is not required to prove actual loss or A
damage suffered by him before he can claim a decree, and the Court
is competent to award reasonable compensation in case of breach
even if no actual damage is proved to have been suffered in
consequence of the breach of contract. But the expression "whether
or not actual damage or loss is proved to have been caused thereby"
is intended to cover different classes of contracts which come before B
the Courts. In case of breach of some contracts it may be impossible
for the Court to assess compensation arising from breach, while in
other cases compensation can be calculated in accordance with
established rules. Where the Court is unable to assess the
compensation, the sum named by the parties if it be regarded as a C
genuine pre-estimate may be taken into consideration as the measure
of reasonable compensation, but not if the sum named is in the nature
of a penalty. Where loss in terms of money can be determined, the
party claiming compensation must prove the loss suffered by him."

In Rampur Distille1y and Chemical Co. Ltd. 's (supra) also, two Judge D
• Bench of this Court refen-ed to Ma1ila Bux 's case and observed thus:-

" ..... .It was held by this Court that forefeiture of earnest money under
a contract for sale of property does not fall within Section 70 of the
Contract Act, if the amount is reasonable, because the forefeiture of E
a reasonable sum paid as earnest money does not amount to the
imposition of a penalty. But, "where under the terms of the contract
the party in breach has undertaken to pay a sum of money or to
forefeit a sum of money which he has already paid to the party
complaining of a breach of contract, the undertaking is of the nature
of a penalty." F
In Raman Iron Foundry's case (supra), this Court considered clause 18
of the Contract between the parties and arrived at the conclusion that it
applied only where the purchaser has a claim for a sum presently due and
payable by the contractor. Thereafter, the Court observed thus:-
G
"I I. Having discussed the proper interpretation of Clause 18, we may
now turn to consider what is the real nature of the claim for recovery
of which the appellant is seeking to appropriate the sums due to the
respondent under other contracts. The claim is admittedly one fot .
... damages for breach of the contract between the parties. Now, it is true .H
728 SUPREME COURT REPORTS (2003] 3 S.C.R.

A that damages which are claimed are liquidated damages unde~ Clause
14, but so far as the law in India is concerned, there is no qualitative
difference in the nature of the claim whether it be for liquidated
damages or for unliquidated damages. Section 74 of the Indian Contract
Act eliminates the somewhat elaborate refinements made under the
English common law in distinguishing between stipulations providing
B for payment of liquidated damages and stipulations in the nature of
penalty. Under the common law a genuine pre-estimate of damages by
mutual agreement is regarded as a stipulation naming liquidated
damages and binding between the parties; a stipulation in a contract
in terrorem is a penalty and the Court refuses to enforce it, awarding
c to the aggrieved party only reasonable compensation. The Indian
Legislature has sought to cut across the web of rules and presumptions
under the English common law, by enacting a uniform principle
applicable to all stipulations naming amounts to be paid in case of
breach, and stipulations by way of penalty, and according to this
principle, even if there is a stipulation by way of liquidated damages,
D a partly complaining of breach of contract can recover only
reasonable compensation for the injury sustained by him, the
stipulated amount being merely the outside limit. It, therefore, makes
no difference in the present case that the claim of the appellant is for
liquidated damages. It stands on the same footing as a claim for
E unliquidated damages. Now the law is well settled that a claim for
unliquidated damages does not give rise to a debt until the liability
is adjudicated and damages assessed by a decree or order of a Court
or other adjudicatory authority. When there is a breach of contract,
•
the party who commits the breach does not eo instanti incur any
pecuniary obligation, nor does the party complaining of the breach
F becomes entitled to a debt due from the other party. The only right
which the party aggrieved by the breach of the contract has is the
right to sue for damages."

Firstly, it is to be stated that in the aforesaid case Court has not referred
G to earlier decision rendered by the five Judge Bench in Fateh Chand's case
or the decision rendered by the three Judge Bench in Mazda Bux 's case.
Further, in Mis. H. M. Kamaluddin Ansari and Co. v. Union of India and Ors.,
[I 983] 4 SCC 4 I 7, three Judge Bench of this Court has over-ruled the decision
in Raman Iron Foundry's case (supra) and the Court while interpreting similar

H
term of the contract observed that it gives wider power to Union of India to
recover the amount claimed by appropriating any sum then due or which at
.
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 729
any time may become due to the contractors under other contracts and the A
· Court observed that clause 18 of the Standard Contract confers ample powers
on the Union of India to withhold the amount and no injunction order could
be passed restraining the Union of India from withholding the amount.

In the light of the aforesaid decisions, in our view, there is much force
in the contention raised by the learned counsel for the appellant. However, B
the learned senior counsel Mr. Dave submitted that even if the award passed
by the arbitral tribunal is erroneous, it is settled Jaw that when two views are
possible with regard to interpretation of statutory provisions and or facts, the
Court would refuse to interfere with such award.

It is true that if the arbitral tribunal has committed mere error of fact or
c
law in reaching its conclusion on the disputed question submitted to it for
.adjudication then the Court would have no jurisdiction to interfere with the
award. But, this would depend upon reference made to the arbitrator: (a) If
there is a general reference for deciding the contractual dispute between the
parties and if the award is based on erroneous legal proposition, the Court D
could interfere; (b) It is also settled law that in a case of reasoned award, the
Court can set aside the same if it is, on the face of it, erroneous on the
proposition of law or its application; (c) If a specific question of law is
submitted to the arbitrator, erroneous decision in point of law does not make
the award bad, so as to permit of its being set aside, unless the. Court is E
satisfied that the arbitrator had proceeded illegally.

In the facts of the case, it cannot be disputed that if contractual term,
as it is, is to be taken into consideration, the award is, on the face of it,
erroneous and in violation of the terms of the contract and thereby it violates
Section 28(3) of the Act. Undisputedly, reference to the arbitral tribunal was F
not with regard to interpretation of question of law. It was only a general
reference with regard to claim of respondent. Hence, if the award is erroneous
on the basis of record with regard to proposition of law or its application, the
Court will have jurisdiction to interfere with the same.

Dealing with the similar question, this Court in Mis. Alopi Parshad and G
Sons Ltd. v. The Union of India, [1960] 2 SCR 793 observed that the extent
of jurisdiction of the Court to set aside the award on the ground of an error
in making the award is well defined and held thus:-

"The award of an arbitrator may be set aside on the ground of an H
. ,;'-, ''::

730 SUPREME COURT REPORTS (200313 s.cAt

A error on tQe .face thereof only when in the award or in any document
mcorporated with it, as for instance, a note appended by the arbitrators,
stating the reasons for his decision, there is found some legal
proposition which is the basis of the award and which is erroneous-
Champsey Bharat and Company v. Jivaraj Ba/loo Spinning and
Weaving Company Limited, L.R. 50 IA 324. If however, a specific
B question is submitted to the arbitrator and he answers it, the fact that
the answer involves an erroneous decision in point of law, does not
make the award bad on its face so as to permit of its being set aside-
ln the matter of an arbitration between King and Duveen and Ors.,
LR (1913) 2 KBD 32 and Government ofKelantan v. DuffDevelopment
C Company Limited, L.R. (1923) AC 395.

Thereafter, the Court held that if there was a general reference and not
a specific reference on any question of law then the award can be set aside
if it demonstrated to be erroneous on the face of it. The Court, in that case,
considering Section 56 of the Indian Contract Act held that the Indian Contract
D Act does not enable a party to a contract to ignore the express provisions
thereof and to claim payment of consideration for performance of the contract
at rates different from the stipulated rates, on some vague plea of equity and
that the arbitrators were not justified in ignoring the expressed terms of the
contract prescribing the remuneration payable to the agents. The aforesaid
law has been followed continuously. Re. Rajasthan State Mines & Minerals
E Ltd. v. Eastern Engineering Enterprises and Anr., [1999) 9 SCC 283, Sikkim
Subba Associates v. State of Sikkim, [2000) 5 SCC 629 and G.M, Northern
Railway and Anr. v. Sarvesh Chopra, (2002] 4 SCC 45.

There is also elaborate discussion on this aspect in Union of India v.
F A.I. Rallia Ram, [1964) 3 SCR 164 wherein the Court succinctly observed as
\lnder:-

"But it is now firmly established that an award is bad on the ground
of error of law on the face of it, when in the award itself or in a
docu1nent actually incorporated in it, there is found some legal
G proposition which is the basis Qf the award and which is erroneous.
An error in law on the face of the award means: "you can find in the
award or a document actually incorporated thereto, as for instance, a
<
note appended by the arbitrator stating the reasons for his judgment,
some legal proposition which is the basis of the award and which you
can then say is erroneous. It does not mean that if in a narrative a
H
OIL & NATURAL GAS CORPORATION LTD. ,. SAW PlfES LTD. [SHAH, J.] 731
'reference is made to a contention of one party, that opens the door· A
to setting first what that contention is, and then going to the contract
on which the parties' rights depend to see if that contention is
sound" Champsey Bhara and Company v. Jivraj Ba/lo Spinning and.
Weaving Company Ltd., (I 932) L.R. 50 I.A. 324. But this rule does not
apply where questions of law are specifically referred to the arbitrator B
for his decision: the award of the arbitrator on those questions is
binding upon the parties, for by referring specific questions the parties
desire to have a decision from the arbitrator on those questions rather
than from the Court, and The Court will not unless it is satisfied that
the arbitrator had proceeded legally interfere with the decision."

The Court thereafter referred to the decision rendered in Seth Thawardas
c
Pherumal v. The Union of India, [1955] 2 SCR 48 wherein Bose, J. delivering
the judgment of the Court had observed:

"Therefore, when a question of law is the point at issue, unless
both sides specifically agree to refer it and agree to be bound by the D
arbitrator's decision, the jurisdiction of the Courts to set an arbitration
right when the error is apparent on the face of the award is not
ousted. The mere fact that both parties submit incidental arguments
about point of law in the course of the proceedings is not enough."

The learned Judge .also observed at p. 59 after referring to F.R. E
Absa/om Ltd. v. Great Western (London) Garden Village Society,
[1933] AC 592, 616:

Simply because the matter was referred to incidentally in the
pleadings and arguments in support of, or against, the
general issue about liability for damages, that is not enough F
to clothe the arbitrator with exclusive jurisdiction on a
point of law. "

The Court also referred to the test indicated by Lord Russell of Killowen
in F.R. Absa/om Ltd. v. Great Western (London) Garden Village Society Ltd., G
and observed that the said case adequately brings out a distinction between
a specific reference on a question of law, and a question of law arising for
determination by the arbitrator in the decision of the dispute. The Court
quoted the following observations with approval:-
r •
" ..... .it is, I think, essential to keep the case where disputes are referred H
732 SUPREME COURT REPORTS [2003] 3 S.C.R.

.A to an arbitrator in the decision of which a question of law becomes
material distinct from the case in which a specific question of law has
been referred to him for decision. xx xx The authorities.make a clear
distinction between these two cases, and, as they appear to me, they
decide that in the former case the Court can interfere if and when any
error of law appears on the face of the award, but that in the latter
B case no such interference is possible upon the ground that it so
appears that the decision upon the question of law is an erroneous
one."'

Further, in Maharashtra State Electricity Board v. Sterlite Industries
C (India) and Anr., [200 I] 8 SCC 482, the Court observed as under:-

"9. The position in law has been noticed by this Court in Union
of India v. A.L. Rallia Ram, AIR, (1963) SC 1685 and Madan/al
Roshanlal Mahajan v. Hukumchand Mills ltd, [1967] l $CR 105 to
the effect that the arbitrator's award both on facts and law is final
D that there is no appeal from his verdict: that court cannot review his
award and correct any mistake in his adjudication, unless the objection
to the legality of the award is apparent on the face of it. In
understanding what would be an error of law on the face of the award
the following observations in Champsey Bhara & Co. v. Jivraj Ba/loo
Spg and Wvg. Co. Ltd., (I 922-23) 60 IA 324 a decision of the Privy
E
Council, are relevant (A.P. 331)

"An error in law on the face of the award means, in
Their Lordship's view, that you can find in the award on a
document actually incorporated thereto, as for instance, a
F note appended by the arbitrator stating the reasons for his
judgment, some legal proposition which is the basis of the
award and which you can then say is erroneous."

10. In Arosan Enterprises ltd. v. Union of India, [1999] 9 SCC 449,
this Court again examined this matter and stated that where the error
G of finding of fact having a bearing on the award is patent and is easily
demonstrable without the necessity of carefully weighing the various
possible viewpoints, the interference in the award based on an
erroneous finding of fact is permissible and similarly, if an award is
based by applying a principle of law which is patently erroneous, and
H but for such erroneous application of legal principle, the award could
OIL& NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD [SHAH,J.] 733
not have been made, such award is liable to be set aside by holding A
that there has been a legal misconduct on the part of the arbitrator."

Next question is - whether the legal proposition which is the basis of
the award for arriving at the conclusion that ONGC was not entitled to recover
the stipulated liquidated damages as it has failed to establish that it has
suffered any loss is erroneous on the face of it? The arbitral tribunal after B
considering the decisions rendered by this Court in the cases of Fateh
Chand, Mau/a Bux and Rampur Distillery, (supra) arrived at the conclusion
that "in view of these three decisions of the Supreme Court, it is clear that
it was for the respondents to establish that they had suffered any loss
because of the breach committed by the claimant in the supply of goods C
under the contract between the parties after 14th November, 1996. In the
words we have emphasized in Mau/a Bux decision, it is clear that if loss in
terms of money can be determined, the party claiming the compensation 'must
prove' the loss suffered by him''.

Thereafter the arbitral tribunal referred to the evidence and the following D
statement made by the witness Das:

"The re-deployment plan was made keeping in mind several constraints
including shortage of casing pipes."

Further the arbitral tribunal came to the conclusion that under these E
circumstances, the shortage of casing pipes of26" diameter and 30" diameter
pipes was not the only reason which led to redeployment of rig Trident II to
Platform B 121. The arbitral tribunal also appreciated the other evidence and
held that the attempt on the part of the ONGC to show that production of
gas on Platform B 121 was delayed because of the late supply of goods by p
the claimant failed. Thereafter, the arbitral tribunal considered the contention
raised by the learned counsel for the ONGC that the amount of 10% which
had been deducted by way of liquidated damages for the late supply of goods
under the contract was not by way of penalty. In response thereto, it was
pointed out that it was not the case of learned counsel Mr. Setalwad on
behalf of the claimants that "these stipulations in the contract for deduction G
of liquidated damages was by way of penalty''.

Further the arbitral tribunal observed that in view of the decisions
rendered in Fateh Chand and Mau/a Bux cases, "all that we are required to
consider is whether the respondents have established their case of actual loss H
734 SUPREME COURT REPORTS [2003] 3 S.C.R.

A in money terms because of the delay in the supply of the Casing Pipes under
the contract between the parties''. Finally, the arbitral tribunal held that as the
appellant has failed to prove the loss suffered because of delay in supply of
goods as set out in the contract between the parties, it is required to ref\lnd
the amount deducted by way of liquidated damages from the specified amount
B payable to the respondent.

It is apparent from the aforesaid reasoning recorded by the arbitral
tribunal that it failed to consider Sections 73 and 74 of the Indian Contract
Act and the ratio laid down in Fateh Chand's case (supra) wherein it is
specifically held that jurisdiction of the Court to award compensation in case
C of breach of contract is unqualified except as to the maximum stipulated; and
compensation has to be reasonable. Under Section 73, when a contract has
been broken, the party who suffers by such breach is entitled to receive
compensation for any loss caused to him which the parties knew when they
made the contract to be likely to result from the breach of it. This Section is
to be read with Section 74, which deals with penalty stipulated in the contract,
D inter alia [relevant for the present case] provides that when a contract has
been broken, if a sum is named in the contract as the amount to be paid in
case of such breach, the party complaining of breach is entitled, whether or
not actual loss is proved to have been caused, thereby to receive from the
party who has broken the contract reasonable compensation not exceeding
E the amount so named. Section 74 emphasizes that in case of breach of
contract, the party complaining of the breach is entitled to receive reasonable
compensation whether or not actual loss is proved to have been caused by
such breach. Therefore, the emphasis is on reasonable compensation. If the
compensation named in the contract is by way ·of penalty, consideration
would be different and the party is only entitled to reasonable compensation
F for the loss suffered. But if compensation named in the contract for such
breach is genuine pre-estimate of loss which the parties knew when they
made the contract to be likely to result from the breach of it, there is no
question of·proving such loss or such party is not required to lead evidence
to prove actual loss suffered by him. Burden is on the other party to lead
G evidence for pro1dng that no loss is likely to occur by such breach. Take for
illustration: if the parties have agreed to purchase cotton bales and the same
were only to be kept as a stock-in-trace. Such bales are not delivered on the
due date and thereafter the bales are delivered beyond the stipulated time,
hence there is breach of the contract. Question which would arise for
consideration is - whether by such breach party has suffered any loss. If the
H price of cotton bales fluctuated during that time, loss or gain could easily be
OIL & NATURAL GAS CORPORATION LTD. 1•. SAW PIPES LTD. [SHAH, J.] 735
proved. But if cotton bales are to be purchased for manufacturing yarn, A
consideration would be different.

In Mau/a Bux' case (supra), plaintiff - Maula Bux entered into a contract
with the Government of India to supply potatoes at the Military Head Quarters,
U.P. Area and deposited an amount .of Rs. 10000 as security for due B
performance of the contract. He entered into another contraci with the
Government of India to supply at the same place poultry eggs and fish for
one year and deposited an amount of Rs. 8500 for due performance of the
contract. Plaintiff having made persistent default in making regular and fu II
supplies of the commodities agreed to be supplied, the Government rescinded
the contracts and forfeited the amounts deposited by the plaintiff, because C
under the terms of the agreement, the amounts deposited by the plaintiff as
security for the date performance of the contracts were to stand forfeited in
case plaintiff neglected to perform his part of the contract. In context of these
facts, Court held that it was possible for the government of India to lead
evidence to prove the rates at which potatoes, poultry, eggs and fish were D
purchased by them when the plaintiff failed to deliver "regularly and fully"
the quantities stipulated under the terms of the contracts and after the
contracts were terminated. They could have proved the rates at which they
had to be purchased and also the other incidental charges incurred by them
in procuring. the goods contracted for. But no such attempt was made. Hence,
claim for damages was not granted. E
In Mau/a Bux 's case (supra), the Court has specifically held that it is
true that in every case of breach of contract the person aggrieved by the
breach is not required to prove actual loss or damage suffered by him before
he can claim a decree and the Court is competent to award reasorable F
compensation in a case of breach even if no actual damage is proved to have
been suffered in consequence of the breach of contract. The Court has also
specifically held that in case of breach of some contracts it may be impossible
for the Court to assess compensation arising from breach.

Take for illustration construction of a road or a bridge. If there is delay G
in completing ·the construction· of road or bridge within stipulated time, then
it would be difficult to prove how much loss is suffered by the Society. State,
Similarly, in the present case, delay took place in deployment of rigs and on_
, that basis actual production of gas from platform B-121 had to be changed.
•" It is undoubtedly true that the witness has stated that redeployment plan was H
736 SUPREME COURT REPORTS [2003] 3 S.C.R.
>
A made keeping in mind several constraints including shortage of casing pipes.
Arbitral Tribunal, therefore, took into consideration the aforesaid statement
volunteered by the witness that shortage of casing pipes was only one of the
several reasons and not the only reason which led to change in deployment
of plan or redeployment ofrigs Trident-II platform B-121. In our view, in such
B a contract, it would· be difficult to prove exact loss or damage which the
parties suffer because of the breach thereof. In such a situation, if the parties
have pre-estimated such loss after clear understanding, it would be totally
unjustified to arrive at the conclusion that party who has committed breach
of the contract is not liable to pay compensation. It would be against the
specific provisions of Sections 73 and 74 of the Indian Contract Act. There
C was nothing on record that compensation contemplated by the parties was
in any way unreasonable. It has been specifically mentioned that it was an
agreed genuine pre-estimate of damages duly agreed by the parties. It was
also mentioned that the liquidated damages are not by way of penalty. It was
also provided in the contract that such damages are to be recovered by the
D purchaser from the bills for payment of the cost of material submitted by the
contractor. No evidence is led by the claimant to establish that stipulated
condition was by way of penalty or the compensation contemplated was, in
any way, unreasonable. There was no reason for the tribunal not to rely upon
the clear and unambiguous terms of agreement stipulating pre-estimate
damages because of delay in supply of goods. Further, while extending the
E time for delivery of the goods, respondent was informed that it would be
required to pay stipulated damages.

From the aforesaid discussions, it can be held that:-

{I) Terms of the contract are required to be taken into consideration
F
before arriving at the conclusion whether the party claiming
damages is entitled to the same;

(2) If the terms are clear and unambiguous stipulating the liquidated
damages in case of the breach of the contract unless it is held
G that such estimate of damages/compensation is unreasonable or
is by way of penalty, party who has committed the breach is
required to pay such compensation and that is what is provided
in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in
H
OIL& NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD [SHAH, l.) 737
every case of breach of contract, the person aggrieved by the A
breach is not required to prove actual loss or damage suffered
by him before he can claim a decree. The Court is competent to
award reasonable compensation in case of breach even if no
actual damage is proved to have been suffered in consequences
of the breach of a contract.
B
(4) In some contracts, it would be impossible for the Court to assess
the compensation arising from breach and if the compensation
contemplated is not by way of penalty or unreasonable, Court
can award the same it is genuine pre-estimate by the parties as
the measure of reasonable compensation. C
For the reasons stated above, the impugned award directing the appellant
to refund the amount deducted for the breach as per contractual tenns requires
to be set aside and is hereby set aside.

Whether the claim of refund of the amount deducted by the appellant D
from the bills is disputed or undisputed claim?

As the award directing the appellant to refund the amount deducted is
set aside, question of granting interest on the same would not arise. Still
however, to demonstrate that the award passed by the arbitral tribunal is, on E
the face of it, erroneous with regard to grant of interest, we deal with the
same.

Arbitral Tribunal arrived at the conclusion that the appellant wrongfully
withheld/deducted the aggregate amount of US $ 3,04,970.20 on account of
delay in supply of goods and amount of Rs. 15,75,559 on account of excise F
duty, sales tax, freight charges deducted as and by way of liquidated damages
from the amount payable by the respondent and thereafter arrived at the
conclusion that the said amount was deducted from undisputed invoice
. amount, therefore, the said claim of the respondent cannot be held to be
disputed claim.' G
It is apparent that the claim of the contractor to recover the said amount
was disputed mainly because it was agreed tenn between the parties that in
case of delay in supply of goods appellant was entitled to recover damages
at the rate as specified in the agreement. It was also agreed that the said
liquidated damages were to be recovered by paying authorities from the bills H
738 SUPREME COURT REPORTS (2003] 3 S.C.R.

.. A for payment of the cost of material submitted by the contractor. If this agreed
amount is deducted and thereafter contractor claims it back on the ground
that the appellant was not entitled to deduct the same as it has failed to prove
loss suffered by it, the said claim undoubtedly would be a 'disputed claim'.
The arbitrators were required to decide by considering the facts and the law
B applicable, whether the deduction was justified or not? That itself would
indicate that the claim of the contractor was 'disputed claim' and not
'undisputed'. The reason recorded by the arbitrators that as the goods were
received and bills are not disputed, therefore, the claim for recovering the
amount of bills cannot be held to be 'disputed claim' is, on the face of it,
unjust, unreasonable, unsustainable and patently illegal as well as against the
C expressed terms of the contract. As quote~ above, clause 34.4 in terms
provides that no. interest would be payable in 'disputed claim'. It also provides
that in which set of circumstances, interest amount would be paid in case of
delay in payment of undisputed claim. In such case, the interest rate is also
specified at I % per month on such undisputed claim amount. Despite this
D clause, the arbitral tribunal came to the conclusion that it was undisputed
claim and held that in law, appellant was not entitled to withhold these two
payments from the invoice raised by the respondent and hence directed that
the appellant was liable to pay interest on wrongful deductions at the rate
12% p.a. Trom 1.4.1997 till the date of filing of the statement of claim and
E thereafter having regard to the commercial nature of the transaction at the rate
of 18% p.a. pendente lite till payment.

It is to be reiterated that it is the primary duty of the arbitrators to
enforce a promise which the parties have made and to uphold the sanctity
of the contract which forms the basis of the civilized society and also the
F jurisdiction of the arbitrators, Hence, this part of the award passed by the
arbitral tribunal granting interest on the amount deducted by the appellant
from the bills payable to the respondent is against the terms of the contract
and is, therefore, violative of Section 28(3) of the Act.

Conclusions:
G
In the result, it is held that: -

A. (I) The Court can set aside the arbitral award under Section 34(2)
of the Act if the party making the application furnishes proof that:-
H (i) a party was under some incapacity, or
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 739
(ii) the arbitration agreement is not valid under the law to which A
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 B
(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.
c
(2) The Court may set aside the award :

(i) (a) If the composition of the arbitral tribunal was not i.n
accordance with the agreement of the parties.

(b) failing such agreement, the composition of the arbitral tribunal D
was not in accordance with Part-I of the Act.

(ii) if the arbitral procedure was not in accordance with:-

(a) the agreement of the parties, or
E
(b) failing such agreement, the arbitral procedure was not in
accordance with Part-I of the Act.

However, exception for setting aside the award on the ground
of composition of arbitral tribunal or illegality of arbitral
procedure is that the agreement should not be in conflict F
with the provisions of Part-I of the Act from which parties
cannot derogate.

(c) If the award passed by the arbitral tribunal is in contravention
of provisions of the Act or any other substantive law
governing the parties or is against the terms of the contract. G

(3) The award could be set aside if it is against the public policy
of India, that is to say, if it is contrary to:-

(a) fundamental policy of Indian law;
H
740 SUPREME COURT REPORTS [2003] 3 S.C.R.

A (b) the interest of India; or

(c) justice or morality, or

(d) if it is patently illegal

B (4) it could be challenged:-

(a) as provided under Section 13(5);

(b) Section 16(6) of the Act.

B. (B) The impugned award requires to be set aside mainly on the
c grounds:-

(i) there is specific stipulation in the agreement that the time
and date of delivery of the goods was the essence of the
contract;

D (ii) in case of failure to deliver the goods within the period fixed
for such delivery in the schedule, ONGC was entitled to
recover from the contractor liquidated damages as agreed;

(iii) it was also explicitly understood that the agreed liquidated
damages were genuine pre-estimate of damages;
E
(iv) on the request of the respondent to extend the time limit for
supply of goods, ONGC informed specifically that time was .
extended but stipulated liquidated damages as agreed would
be recovered;
F
(v) liquidated damages for delay in supply of goods were to be
recovered by paying authorities from the bills for payment
of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for
G recovering liquidated damages was by way of penalty or that
the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages
or prove the same. Such situation is taken care by Sections
73 and 74 of the Contract Act and in the present case by
H specific terms of the contract.
OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 741
For the reasons stated above, the impugned award directing the appellant A
. to refund US$3,04,970.20 and Rs. 15,75,559 with interest which were deducted
for the breach of contract as per the agreement requires to be set aside and
is hereby set aside. The appeal is allowed accordingly. There shall be no order
as to costs.

S.K.S. Appeal allowed. B