Supreme Court of India
OIL & NATURAL GAS CORPORATION. LTD.versusWESTERN GECO INTERNATIONAL LTD.
- Citation
- 2014 INSC 596
- Decided
- 4 September 2014
- Disposal
- Appeal(s) allowed
- Bench
- T S THAKUR
Holding
The Supreme Court modified the arbitral award because the tribunal had erroneously attributed the entire 4‑month‑22‑day delay to ONGC, failing to draw proper inferences and causing a miscarriage of justice, while upholding the tribunal’s other findings.
Summary
The Oil & Natural Gas Corporation (ONGC) awarded a contract to Western Geco for modernising a seismic vessel, which was to be returned by 9 July 2001. The vessel was delayed until 6 May 2002 due to licensing issues for US‑origin hydrophones and subsequent substitution with Canadian ones, leading ONGC to deduct amounts for excess engagement charges and alleged tax liabilities. An arbitral tribunal held that most of the delay was attributable to ONGC, allowing deductions, but awarded the respondent a sum for a four‑month period it deemed ONGC‑responsible. ONGC challenged the award under Section 34 of the Arbitration and Conciliation Act, alleging a miscarriage of justice and violation of public policy. The Supreme Court held that the tribunal erred by attributing the entire 4‑month‑22‑day period to ONGC without proper inference, constituting a miscarriage of justice, and therefore modified the award by reducing the attributable period by 56 days while upholding other findings, including the tax‑deduction rulings. The appeal was allowed and the award was partially modified.
Issues considered
- Whether the delay in returning the vessel was attributable to ONGC or Western Geco.
- Whether the arbitral tribunal erred in attributing the entire 4 months 22 days delay to ONGC.
- Whether deductions for excess engagement charges and tax adjustments were permissible.
- Whether the arbitral award violated the public policy of India under Section 34(2)(b)(ii).
- Whether the arbitral tribunal failed to draw proper inferences, resulting in miscarriage of justice.
- Whether the award should be set aside or modified under Section 34 of the Arbitration and Conciliation Act, 1996.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 34(2)(b)(ii)
- Income Tax Act, 1961
Subjects
ArbitrationSection 34Public policyAward modificationDelayLiquidated damagesExcess engagement chargesTax deductionNatural justiceMiscarriage of justice
Judgment
'
[2014] 12 S.C.R. 1
OIL & NATURAL GAS CORPORATION. LTD. A
v.
WESTERN GECO INTERNATIONAL LTD.
(Civil Appeal No. 3415 of 2007
SEPTEMBER 04, 2014
B
[T.S. THAKUR, C. NAGAPPAN,
ADARSH KUMAR GOEL, JJ.]
Arbitration and Conciliation Act, 1996 - s. 34 - Application
for setting aside of arbitral award-Award of contract in favour C
of respondent by appellant-Corporation whereby vessa/
handed over to respondent for carrying modernization and
upgradation work - Vessa/ could not be returned to the
appellant on the stipulated date - Payment made by
appellant - Deduction of certain amount towards excess D
engagement charges, change in tax law, correction for price
charges inclusive of income tax - Disputes between parties,
referred to arbitral tribunal - Tribunal holding that delay post
21.10.2001 could not be attributed to the respondent, that the
deduction towards excess engagement charges from E
01.11.2001to22.03.2002 by the appellant not justified as a/so
deduction on account of taxes - Petition u/s.34 by the
appellant that the award in conflict with the 'public policy of
India u/s. 34(2)(b)(ii) - Dismissed by the Single Judge of the
High Court however, partly allowed by the Division Bench by F
deleting pendente lite and future interest from the award made
- On appeal, held: If the arbitrators on facts proved before
them fail to draw an inference which ought to have been drawn
or if they have drawn an inference which is untenable resulting
in miscarriage of justice, the award would be open to
challenge - On facts, arbitrato~ erred in holding the appellant- G
Corporation responsible for the delay post 21.10.2001,
resulting in miscarriage of justice - They also failed to
appreciate and draw inferences that logically flow from such
1 H
2 SUPREME COURT REPORTS [2014] 12 S.C.R.
A proved facts - Out of the period of 4 months and 22 days
which the arbitrators have attributed to the appellant, period
of 56 days reduced - Deductions made by the appellant for
the said period upheld - Award made by the arbitrators
modified to that extent.
B
Allowing the appeal, the Court
HELD: 1.1. There was delay of 9 months and 28 days
from 9th July 2001 to 6th May 2002 in the return of the
vessel to the Corporation after upgradation. As regards
C the period between 01.11.2001 to 22.03.2002 which comes
to 4 months and 22 days the Arbitrators have found the
delay to be attributable to the appellant-Corporation. The
arbitrators held that delay in taking a decision whether
or not any formal application should be made to U.S.
D Authorities for the issue of license and a formal rejection
obtained by the respondent was attributable only to the
appellant-Corporation. Deduction made by the appellant
for the first interval that comprises period between 1st
November, 2001 and 25th November, 2001, both days
E inclusive, cannot, therefore, be sustained and the arbitral
award to that extent cannot be faulted. The second
interval comprising period between 26th November, 2001-
the date when the appellant-Corporation issued
instructions for making of a formal applicati~n for the
F grant of a license and 8th January, 2002-when such an
application was actually made by the respondent-
company, must be attributed to the respondent-claimant.
The tribunal failed to appreciate this aspect , thus, fell in
a palpable error leading to miscarriage of justice. The
G period between 8th January, 2002 and 8th March, 2002
comprising the third interval during which the U.S.
authorities decided the. application for the grant of a
license has been rightly counted against the appellant-
Corporation as it was at the instance of the Corporation
H that a formal application was made. The arbitral tribunal,
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 3
GECO INTERNATIONAL LTD.
rightly held that deduction for this period was not A
justified. There is no valid reason why the fourth interval
comprising the period between 8th March 2002 and 22nd
March 2002 when the rejection of the application was
conveyed to the appellant-Corporation should not be
counted against the respondent, who could and indeed B
should have conveyed the rejection to the appellant
forthwith, instead of taking nearly two weeks to do so .
.[Para 18, 20, 21, 23] [15-C-D, 17-B-H; 18-B-D, F]
1.2. The expression 'Fundamental policy of Indian
Law' include all such fundamental principles as providing C
a basis for administration of justice and enforcement of-
law in this country. The three distinct and fundamental
juristic principles are that in every determination whether
by a Court or other authority that affects the rights of a
citizen or leads to any civil consequences, the Court or D
authority concerned is bound to adopt a 'judicial
approach' in the matter. They cannot act in an arbitrary,
capricious or whimsical manner. Judicial approach
ensures that the authority acts bonafide and deals with
the subject in a fair, reasonable and objective manner and E
that its decision is not actuated by any extraneous
consideration. The second principle is that a Court and
so also a quasi-judicial authority must, while determining
the rights and obligations of parties before it, do so in
accordance with the principles of natural justice. The F
Court/authority deciding the matter must apply its mind
to the attendant facts and circumstances while taking a
view one way or the other, which is best done by
recording reasons in support of the decision which the
Court or authority is taking. The third principle is that a G
decision which is perverse or so irrational that no
reasonable person would have arrived at the same will
not be sustained in a Court of law. Perversity or
irrationality of decisions is tested on the touchstone of
H
4 SUPREME COURT REPORTS (2014] 12 S.C.R.
A Wednesbury's principle of reasonableness. [Para 26, 28,
29) [21-H; 22-A-C, E; 23-F-G; 24-8-C]
1.3. If on facts proved before them the arbitrators fail
to draw an inference which ought to have been drawn or
if they have drawn an inference which is on the face of
8
it, untenable resulting in miscarriage of justice, the
adjudication even when made by an arbitral tribunal that
enjoys considerable latitude and play at the joints in
making awards will be open to challenge and may be cast
away or modified depending upon whether the offending
C part is or is not severable from the rest.[Para 30] [24-E-F]
1.4. The arbitrators clubbed the entire period between
16th October, 2001 and 21st March, 2002 for purposes of
holding the appellant-Corporation responsible for the
D delay·, they committed an error resulting in miscarriage of
justice apart from the fact that they failed to appreciate
and draw inferences that logically flow from such proved
facts. The arbitrators rightly held that no taxes were
payable under the Income Tax Act. The challenge to the
E award to that extent is rejected. Out of the period of 4
months and 22 days which the arbitrators have attributed
to the appellant, a period of 56 days comprising 42 days
of the first interval and 14 days of the second interval
would be reduced. Deductions made by the appellant-
F Corporation for the said period of 56 days is affirmed and
the award made by the arbitrators is modified to that
extent with a proportionate reduction in the amount
payable to the respondent.[Para 23, 31,32,33) [18-F-G; 24·
F-G; 25-8-H]
G ONGC Ltd. v. Saw Pipes Ltd. 2003 (3) SCR 691 :(2003)
5 SCC 705; AC. Companies Ltd vs. P.N. Sharma and Anr.
1965 SCR 366:AIR 1965 SC 1595 - referred to.
Ridge v. Baldwin 1963 2 All ER 66 - referred to.
H
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 5
GECO INTERNATIONAL LTD.
Case Law Reference: A
2003 (3) SCR 69 Referred to Para 25
1963 2 All ER 66 Referred to Para 26
1965 SCR 3.66 Referred to Para 27
B
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
3415 of 2007.
From the Judgment and Order dated 10.02.2006 in Appeal
No. 24 of 2006 in Arbitration Petition No. 203 of 2005 of the c
High Court of Judicature at Bombay]
Paras Kuhad, Jitin Chaturvedi, Pranita Shekhar, Abhik
Chimni, Swati, Somiran Sharma, Vishnu Sharma, K.R.
Sasiprabhu for the appellant.
D
N. Ganpathy, Manpreet Lamba for the respondent.
The Judgment of the Court was delivered by
T.S. THAKUR, J. 1. This appeal arises out of an order
dated 10th February, 2006 passed by a Division Bench of the E
High Court of Judicature at Bombay whereby OSA No.24 of
2006 filed by the appellant-Corporation has been partly allowed
and the order passed by a single bench of the High Court in
Arbitration Petition No.203 of 2005 affirmed with the
modification that award of pendente lite and future interest by F
the Arbitral Tribunal shall stand deleted.
2. The appellant-Corporation is engaged in the business
of drilling and exploration of oil and natural gases. In November,
1999, the appellant invited offers for technical upgradation of G
Seismic Survey Vessel, M.V. Sagar Sandhani (hereinafter
referred to as the "Vessef') with a view to modernising the
same. According to the tender conditions, one of the main items
of equipment required for upgradation of the Vessel was
"Streamers" fitted with hydrophones. The specifications, H
6 SUPREME COURT REPORTS [2014] 12 S.C.R.
A however, did not stipulate the national origin of such
hydrophones.
3. In response to the tender notice respondent-Mis
Weste!rn Geco International Ltd., submitted a bid offering to
supply Nessie 4 streamers equipped with "Geopoint•
8
Hydrophones of U.S. origin. The appellant's case is that the
term relating to supply of such Geopoint Hydrophones formed
a material part of the offer made by the respondent-company
in whose favour the appellant-Corporation eventually awarded
a contract in terms of its letter dated 1Oth October, 2000 duly
C accepted by the respondent on 25th October, 2000. The Vessel
was resultantly handed over to the respondent on 1Oth April,
2001 for carrying on the proposed modernisation and
upgradation work. A formal contract was in due course
executed between the parties on 18th June, 2001.
D
4. It is common ground that "Geopoint" Hydrophones of
U.S. origin were in terms of the contract fitted in the vessel and
test trials of the same conducted. Even so the vessel could not
be delivered back to the appellant on 9th July, 2001, the due
E date for that purpose, because of some problem which the
respondent encountered in obtaining licence from the U.S.
authorities for sale of such hydrophones. The appellant-
Corporation asserts that the respondent had for the first time
made an application to the U.S. authorities for issuance of a
F licence as late as on 1st August, 2001 i.e. nearly a month after
the due date for delivery of the vessel back to the Corporation.
No formal rejection of the request for a license was according
to the Corporation communicated to it as the matter appeared
to be under some kind of negotiations between the respondent
and the authorities in U.S.
G
5. The respondent's case per contra is that it continued
its efforts to obtain a licence only to be informed by its sources
in the US that the latter was likely to impose certain onerous
conditions one of which could be that US made hydrophones
H can _be used only on loan basis that too for a short duration of
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 7
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.)
24 months only. Respondent's further case is that its source in A
US had informed it that the US authorities were not likely to
grant a licence to sell hydrophones to India. Be that as it may
while the matter was pending with the Defence Department, a
massive terrorist attack on 11th September, 2001 shook
America. The respondent's hope of getting a licence for sale B
of US made hydrophones receded further with this unexpected
development. The respondent accordingly informed the
appellant-Corporation about the new development and
pleading force majeure the respondent informed the appellant-
Corporation of the farmer's inability to equip the vessel with C
U.S. made hydrophones. The appellant-Corporation refuted the
invocation of force Majeure by its letter dated 20th September,
2001 and informed the respondent that since the field season
was starting shortly any further delay in the delivery of the vessel
would adversely affect its operation. The respondent on its part D
started looking for and offering alternatives to the U.S. made
hydrophones and argued with the appellant-Corporation that
since origin of the hydrophones was not indicated in the bid
documents it was testing replacement by M-2 US Geo
Spectrum Hydrophones made in Canada at its Norway facilities
to check their suitability which exercise the respondent hoped E
to complete by 27th September, 2001. The respondent
informed the appellant-Corporation that if the Corporation
accepted the replacement, those hydrophones could be
substituted for the US hydrophones within a short time.
F
6. The appellant-Corporation was, however, in no mood to
accept a substitute for the contracted hydrophones. It was on
the contrary keen to have US made hydrophones fitted on the
vessel. The Corporation, therefore, required the respondent to
continue its efforts to secure a licence from the US Government G
in which direction the appellant-Corporation on its own moved
the concerned Ministry in Government of India to secure a
licence-. Further information and details in respect of the
proposed Canadian hydrophones was all the same called for
by the Corporation from the respondent. Since, however, the H
8 SUPREME COURT REPORTS [2014] 12 S.C.R.
A efforts to secure a licence from US Government were making
no progress, the respondent sought approval of the appellant-
Corporation to remove the US hydrophones from the vessel and
transfer them to their repair facility in Singapore to facilitate
replacement by the Canadian made hydrophones. The
B respondent also wrote a detailed letter dated 10th October,
2001 to the appellant-Corporation informing the latter that the
US government was not likely to grant a licence and that it had
withdrawn the application made for that purpose to prevent a
denial. What is important is that by letter dated 16th October,
C 2001 the respondent clearly stated that it was not in a position
to deliver the vessel with streamers containing the Geopoint
Hydmphones of US make. This letter was followed by letter
dated 21st October, 2001 addressed to the appellant-
Corporation with a request to permit removal of US
hydrophones and replacement of Canadian hydrophones which
0
had been extensively tested 1999 in connection with supply of
Seismic Survey Vessel delivered to NOIC for the Iran project.
Further information required by the appellant-Corporation was
also supplied by the respondent by its letter dated 24th October,
2001 with a request to the Corporation to approve the proposed
E replacement. The respondent also agreed to give additional
warranty of one year for the replaced hydrophones. By another
letter dated 13th November, 2001 the respondent assured the
appellant-Corporation that if the latter agreed to the
replacement proposal there would be no financial implications
F and the additional cost involved in fixing the Canadian
hydrophones would also be borne by the respondent.
7. It was only on 23rd March, 2002 that the respondent
conditionally agreed to the proposed replacement of the US
G made hydrophones by those made in Canada. One of the
conditions imposed for the replacement by the appellant-
Corporation was the right to recover liquidated damages as per
Clause 16 and for excess engagement of vessel as per Clause
14 of the subject contract. The replacement accordingly took
H place and the Vessel eventually delivered back to the
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 9
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
Corporation with Canadian hydrophones on 6th May, 2002. On A
24th May, 2002, a formal amendment to the contract was also
effected to record the substitution of the US hydrophones by
those made in Canada.
8. With the upgradation and modernisation work B
completed as per the amended contract, the respondent raised
invoices for payment due to it but realised that the appellant-
Corporation had deducted from its dues a sum of US $
5, 114,300.98 towards excess .engagement charges in terms
of Clause 14 of the contract. By another letter dated 20th
August, 2002, the appellant-Corporation further deducted a C
sum of US$ 410,641.20 based on a change in tax law
applicable at 4.8% followed by a deduction of a sum of US $
80,530.10 based on correction for price charges inclusive of
income tax at 4.8%. These deductions gave rise to disputes
which were referred for adjudication to an arbitral tribunal D
comprising three former Chief Justices of India before whom
the respondent claimed a sum of US$ 7,327,610.68 towards
principal dues plus US $1,205,564.13 by way of interest for the
period from 20th August, 2003 to 15th November, 2003
totalling US$ 8,533,174,81 with interest pendent lite at 12% E
p.a. from the date of the filing of the claim till the award at the
same rate.
9. The appellant-Corporation stoutly contested the claim
made against it and alleged that hydrophones being an F
important component, the respondent had not only offered to
fit US made hydrophones in the streamer section of the Vessel
but actually fitted the same. The appellant's case was that the
claimant having contracted to supply US made hydrophones
was legally obliged to handover the Vessel duly filled with such G
hydrophones within the stipulated period of 90 days which
expired on 9th July, 2001. The appellant's further case was that
the requirement of a licence was first mentioned by the
· respondent when letter dated July 9, 2001 was delivered to the
appellant's representative on board the vessel at Singapore in H
10 SUPREME COURT REPORTS [2014] 12 S.C.R.
A an atteimpt to explain the respondent's failure to hand over the
vessel on the due date. The appellant-Corporation asserted that
the respondent had not even applied for a licence till then and
had simply asked for an extension of time. It was only when the
appellant-Corporation asked the respondent to specify on a
B realistic basis, the period for wh.ich extension was being
demanded that the respondent had by letter dated 26th July,
2001 stated that according to their understanding the licence
will bi~ issued towards the first week of September, 2001.
Since time was the essence of the contract between the parties,
c the respondent's failure to return the vessel duly upgraded within
9 months from the date of Letter of Acceptance or 90 days from
the deilivery of the vessel i.e. on or before 9th July, 2001 was a
clear breach of its contractual obligation rendering the
respondent liable to payment of liquidated damages and for
excess engagement of the vessel, argued the appellant-
0
Corporation.
10. The Corporation also disputed the invocation of force
majeure clause in the fact situation of the case especially when
securing of a licence for the equipment was not a part of the
E contract between the parties, it being the sole responsibility of
the respondent to determine the type and make of
hydrophones. The terrorist attack on the twin towers was,
according to the appellant-Corporation a post-contractual
period issue as the date of the delivery of the vessel under the
F contract had since long expired by the time the attack took
place. It was also contended that the delay in the completion
of thE! contract was entirely attributable to the respondent who
when called upon by the appellant-Corporation to submit the
performance report of the M-2 hydrophones used in Seismic
G Survey Vessel PEJWAK suggested that the appellant-
Corporation should obtain the same directly from NIOC forcing
the appellant-Corporation to send a representative to Oslo to
verify the parameters of the M-2 hydrophones at their own
expense. It was asserted that once the respondent informed the
H appellant-Corporation that the US department of Commerce
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 11
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.)
had finally rejected the licence, the appellant-Corporation was A
left with no alternative except to agree to the replacement of
the .US made hydrophones by Canadian M-2 hydrophones
resulting in the delivery of the vessel back to the Corporation
on 6th May, 2002 after considerable delay.
B
11. On the pleadings of the parties the Arbitral Tribunal
framed the following issues for determination:
(1) Was the national origin of hydrophones used in
the Nessie-4 streamers, a material term of the
contact betWeen the parties? C
(2) Was the respondent justified' in refusing to allow
substitution of the Canadian M-2 hydrophones for
the US Geopoint hydrophones?
(3) Was the claimant's declaration of force majeure D
justified under the terms of the contract?
(4) Whether there was any delay in the performance
of the contact?
E
(5) If the answer to point No.4 is in the affirmative, who
is responsible for such delay?
(6) If the answer to point No.4 is in the affirmative,
whether the Claimant is entitled to damages?
F
(7) Whether the respondent was entitled to adjust the
sum of US $ 491,000 out of the sum payable, in
whole or in part, as alleged in para 30 of the
statement?
G
(8) Is respondent entitled to both Liquidated
Damages and Excess Engagement charges for
the same periods of time under the provisions of
the Contract?
H
12 SUPREME COURT REPORTS (2014] 12 S.C.R..
A 12. In the award which the Tribunal made and published
Issue No. 1 was answered in the negative holding that since
the choice of the hydrophones was left to the bidders subject
to the equipment meeting the specifications prescribed for the
purpose and since the stipulations did not indicate the make
B or the country of origin of the hydrophones, the national origin
of such hydrophones was not a material term of the contract
betwe!en the parties.
13. Issue No. 2 was, however, answered by the Tribunal
C in the affirmative, who took the view that once the respondent
had made the choice and contracted to supply hydrophones
madei in the U.S. the appellant-Corporation was entitled to insist
on the supply of the contracted equipment. The arbitrators
further held that once the respondent had informed the
appellant that the option of U.S. made hydrophones was closed,
D the later was not justified in insisting that the request for a
license with the U.S. authorities should be pursued further. The
arbitral tribunal decided Issue No.3 against the respondent
holding that none of the events mentioned in the contract had
taken place and since the parties to the contract did not belong
E to U.S., the force majeure clause could not have been validly
invoked by the respondent.
14. Dealing with the question of delay in the performance
of the contract and its consequences covered by Issue Nos. 4
F to 8, the Arbitrators held that the respondent-claimant had
completed the performance of the contractual obligations within
the stipulated time frame and would have but for the U.S.
licence requirement delivered the vessel to the appellant on July
9, 2001 in which event there would have been no necessity to
G ·invoke the force majeure clause or to seek extension of time
or to offer the Canadian hydrophones. Even so the fact
remained that the respondent had not delivered the vessel back
to the appellant-Corporation on time. The Tribunal then
examined whether the respondent was responsible for the
H entire delay between July 9, 2001 and 6th May 2002 when the
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 13
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
vessel was actually returned. The Tribunal rejected the A
contention on behalf of the respondent that extension of time
for completing the contracted works had the effect of waiving
the rights vested in the appellant under clause 14 and 16 of the
contract. The Tribunal held that waiver ought to be express or
the fact situation must be necessary implication manifest an s
intention to waive. Mere extension of time did not signify waiver
of the rights flowing from clause 15 and 16 of the contract,
observed the Arbitral Tribunal. Having said so the Tribunal held
that since the respondent had informally intimated to the
appellant Corporation as early as on October 24, 2001 that it c
did not desire to pursue the request for a licence with ~he U.S.
authorities any further and since by a letter dated 25th October
2001 the final particulars in regard to the Canadian
hydrophones were duly supplied, allowing some time to the
respondent to take a decision, the delay post October 21, 2001
0
could not be attributed to the respondent. That finding,
observed the Tribunal, did not impact the amount deducted by
the respondent towards liquidated damages as the capping
provision limited to 10% was less than the sum payable for the
delay upto October 31, 2001. As regards excess engagement E
charges the Arbitrators held that except for the period
commencing November 1, !2001 to March 22, 2002 the
appellant Corporation was justified in making deductions for the
rest of the period from the claim of the respondent. The
Arbitrators held that the deductions in relation to the period from
November 1, 2001 to March 22, 2002 amounting to US$ F
2,445,246.54 were wrongly made by the appellant-Corporation
which amount the respondent was entitled to get from the
appellant together with interest at the rate indicated in the
award.
G
15. As regards deductions based on change of tax law or
non payment of taxes under the Indian Law, the Tribunal held
that the same were not permissible in the facts and
circumstances of the case especially when the contracted work
was to be executed and completed at the ship repair unit of H
14 SUPREME COURT REPORTS [2014] 12 S.C.R.
A the respondent claimant in Singapore and so was the handing
over of the completed vessel to the appellant-Corporation. No
part of the work having been undertaken outside Singapore no
deduction could be made on account of non-payment of any
tax. The Arbitrators held that since no taxes were attracted
B under the Indian Income Tax Act the price could not include the
said tax component. The Arbitrators accordingly held that
deductions made on two counts, being of US $ 410,641.20 and
US $ 80,530.10 were also unjustified and unwarranted by law
or contract.
c 16. Aggrieved by the award made by the Arbitral Tribunal,
the appellant Corporation preferred a petition under Section 34
of the Arbitration and Conciliation Act, 1996 which failed and
was dismissed by a Single Judge of the High Court but was
allowed in part in O.S.A No. 241 of 2006 by the Division Bench
D of the High Court to the extent of deleting pendente lite in future
interest from the award made by the Tribunal. Before the
Division Bench, a three-fold submission was urged on behalf
of t'he appellant-Corporation. Firstly, it was contended that the
Tribunal had fallen in error in holding that the delay between 14th
E September 2001 and 21st March 2002 was not attributable to
the respondent company. Secondly, it was contended that the
Arbitral Tribunal was not right in holding that the deductions
made by the appellant towards taxes was not legally
permissible. Thirdly it was contended that the award by the
F Arbitral Tribunal for the pendente lite and future interest was
not justified. While the Division Bench rejected the first two
contentions the respondent appears to have made a statement
before the. High Court waiving pendente lite interest and
agreeing to the modification of the award to that extent. The
G High Court held that the Arbitral Tribunal's findings to the effect
that the delay between 16th October and 21st March 2002 is
not attributable to the respondent, was based on the
consideration of the material placed before the Arbitral Tribunal
which called for no interference. So also deductions towards
H
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 15
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
payment of taxes were, according to the High Court, rightly A
disallowed by the Arbitrators.
17. The present appeal assails the correctness of the
Award of the Arbitral Tribunal and the orders passed by the
High Court as noticed in the beginning of this order.
B
18. We have heard learned counsel for the parties at length
who have taken us through the award made by the Arbitral
Tribunal, provisions of the contract executed between the
parties and the correspondence exchanged between them.
There is no denying the fact that there was delay in the return C
of the vessel to the Corporation after upgradation. In terms of
the contractual time schedule the vessel ought to have returned
to the Corporation by 9th July 2001 which was instead returned
to the Corporation only on 6th May 2002 i.e. after a delay of 9
months and 28 days. Who is responsible for this delay is the D
essence of the dispute between the. parties. According to the
appellant-Corporation the delay is entirely attributable to the
respondent while according to the respondent the delay is
attributable to the appellant. The Arbitrators have after
examining the material placed before them recorded a finding E
to the effect that the delay between 10th July 2001 and 31st
March 2001 was entirely attributable to the respondent. That
finding was not challenged by the respondent before the High
Court nor is it under challenge before us. The Arbitrators have
on the basis of the finding recorded by them allowed to the F
appellant-Corporation excess engagement charges under
clause 14 besides liquidated damages under clause 16 of the
Contract executed between the parties. But for the period
between 1st November, 2001 and 22nd March, 2002 which
comes to 4 months and 22 days the Arbitrators have found the
delay to be attributable to the appellant-Corporation. Deduction G
made by the Corporation in regard to this period has been
faulted by the arbitrators and the amount directed to be
released in favour of the respondent-Company. The award
H
16 SUPREME COURT REPORTS [2014) 12 S.C.R.
A deals with this period and the amount deducted for the same
in the following words:
"In the result we are of the opinion that except for the
period from November 1, 2001 to March 23, 2002 for
which deduction has been made from the Claimant's
B
invoices, no exception can be taken for the rest of the
deduction made from the claim of the Claimant. The
deduction in relation to the period from November 1,
:2001 to March 22, 2002 (4 months + 22 days) works out
to a sum of US$ 2,445,246.53 which the Claimant would
c be entitled to from the Respondent together with interest
at the rate of indicated hereafter".
19. The above period of 4 months and 22 days between
1st November, 2001 and 22nd March, 2002, in our opinion,
D comprises four separate intervals. The first of these four intervals
is the period between 1st November, 2001 and 26th November,
2001 which period was taken by the appellant-Corporation to
take a final decision whether or not an application should be
made to the U.S authorities for the issue of a licence. The
E second interval comprises time taken by the respondent-
claimant to make an application between 27th November, 2001
and 7th January, 2002, both days inclusive. The application for
grant of a license was filed by the respondent only on 8th
January, 2002. The third interval comprises time taken by the
F U.S Authorities between 8th January, 2002 and 7th March, ·
2002 to formally decline the issue of a license for sale of US
made hydrophones to India. The fourth interval comprises time
taken by the respondent-claimant to convey the decision of the
U.S Authorities between 8th March, 2002 and 21st March,
G 2002. It is common ground that while the U.S Authorities had
rejected the request for grant of a license on 8th March, 2002,
the said rejection was conveyed to the appellant-corporation
only on 22nd March, 2002.
20. From the findings of the fact recorded by the arbitrators
H with which we see no reason to interfere or disagree, it is
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 17
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
evident, that the appellant-corporation was solely responsible A
for the de!ay in taking a decision in the matter between 24th
October, 2001 and 26th November, 2001. The arbitrators have
found and, in our opinion, rightly so that the respondent-claimant
had by its letter dated 24th October, 2001 clearly informed the
appellant Iha~ there was no use pursuing the matter with the B
U.S. Authorities any further. Even particulars regarding
Canadian hydrophones were supplied to the appellant in terms
of a letter dated 25th October, 2001. The arbitrators have held
that delay in taking a decision whether or not any formal
application should be made and a formal rejection obtained by c
the respondent was attributable only to the appellant-
. Corporation. There is, in our opinion, no legal flaw, infirmity or
perversity in that finding which we hereby affirm. Deduction
made by the appellant-Corporation for the First interval that
comprises period between 1st November, 2001 and 25th 0
November, 2001, both days inclusive, cannot, therefore, be
sustained and the arbitral award to that extent cannot be
faulted.
21. That brings us to the second interval comprising period
between 26th November, 2001-the date when the appellant- E
Corporation issued instructions for making of a formal
application for the grant of a license and 8th January, 2002-
when such an application was actually made by the respondent-
company. This period reckoned from 27th November, 2001 to
7th January, 2002 works out to 42 (Forty two) days which must F
be attributed to the respondent-claimant, who could and indeed
ought to have acted diligently and with reasonable despatch in
the matter instead of taking the same easy, and if we may say
so somewhat reluctantly. We cannot help saying with utmost
respect at our command for the eminence and erudition of the G
distinguished jurists comprising the Arbitral Tribunal that the
tribunal failed to appreciate this aspect hence fell in a palpable
error leading to miscarriage of justice. The test adopted by the
Tribunal for holding the appellant-Corporation responsible for
delay ought to have been applied to the respondent as well for H
18 SUPREME COURT REPORTS [2014) 12 S.C.R.
A its failure to take action in the right earnest instead of sitting
over the matter leading to detention of the vessel for a period
more than what was absolutely necessary.
22. The period between 8th January, 2002 and 8th March,
B 2002 comprising the third interval during which the U.S.
authorities decided the application for the grant of a license has
been rightly counted against the appellant-Corporation as it
was at the instance of the Corporation that a formal application
was made. The time spent by the U.S. authorities for disposal
c of the request could not in the facts and circumstances be
attributed to or counted against the respondent-claimant who
had advised the appellant against any such move. The arbitral
Tribunal, therefore rightly held that deduction for this period was
not justified.
D 23. That leaves us with the fourth and the last interval
comprising the period between 8th March, 2002 and 22nd
March, 2002 when the rejection of the application was conveyed
to the appellant-Corporation. There is, in our opinion, no valid
reason why this period.should not be counted against the
E respondent, who could and indeed should have conveyed the
rejection to the appellant-Corporation forthwith, instead of
taking nearly two weeks to do so. To sum up; the period of 4
months and 22 days which the arbitrators have attributed to the
appellant-Corporation shall have to be reduced by 42 days
F comprising the first interval and 14 days comprising the fourth
making a total of 56 days. Resultantly, deduction made by the
appellant-Corporation for 56 days referred to above deserve
to be affirmed, and the award made by the arbitrators modified
to that extent. It follows that the amount awarded to the
G respondent-Company shall on a proportionate basis, stand
reduced.
24. We may at this stage deal with the contention urged
on behalf of the respondent that the jurisdiction of the Court to
H set aside an arbitral award being limited to grounds set out in
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 19
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
Section 34 of the Arbitration and Conciliation Act, 1996, this A
Court ought not to interfere with the same. It was contended that
none of the grounds on which a Court is authorised to interfere
with an arbitral award are present in the case at hand.
Alternatively, it was contended that even if a contrary view is
possible on the facts proved before the Arbitral Tribunal, the s
Court cannot, in the absence of any compelling reason, interfere
with the view taken by the Arbitrators as if it was sitting in
appeal over the award made by the Tribunal. Section 34 of the
Arbitration and Conciliation Act, 1996 reads :
"34. Application for setting aside arbitral award.-(1) C
Recourse to a court against an arbitral award may be
made only by an application for setting aside such award
in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the court only D
if.-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity, or
E
(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
F
(iii) the party making the application was not given proper
notice of the appointment of an arbitrator or of the arbitral
proceedings or was otherwise unable to present his case;
or
(iv) the arbitral award deals with a dispute not G
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:
H
20 SUPREME COURT REPORTS [2014] 12 S.C.R.
A 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
B
(v) the composition of the Arbitral Tribunal or the arbitral
procedure was not in accordance with the agreement of
the parties, unless such agreement was in conflict with a
provision of this Part from which the parties cannot
derogate, or, failing such agreement, was not in
c accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of
o settlement by arbitration under the law for the time being
in force, or
(ii) the arbitral award is in conflict with the public policy
of India.
E 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 fraud or corruption or was in violation of Section 75 or
F Section 81."
25. It is true that none of the grounds enumerated under
Section 34(2)(a) were set up before the High Court to assail
the arbitral award. What was all the same urged before the High
Court and so also before us was that the award made by the
G arbitrators was in conflict with the "public policy of India" a
ground recognised under Section 34(2)(b)(ii) (supra). The
expression "Public Policy of India" fell for interpretation before
this Court in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705
and was, after a comprehensive review of the case law on the
H
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 21
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
subject, explained in para 31 of the decision in the following A
words:
"31. 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
8
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 C
cannot be said to be in public interest. Such award!
judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view in addition
to narrower meaning given to the term "public policy" in
Renusagar case1il it is required to be held that the award D
could be set aside if it is patently illegal. The result would
be - award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
E
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
F
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 and is required to be adfudged void." G
26. What then would constitute the 'Fundamental policy
of Indian Law' is the question. The decision in Saw Pipes Ltd.
(supra) does not elaborate that aspect. Even so, the expression
must, in our opinion, include all such fundamental principles as H
22 SUPREME COURT REPORTS (2014] 12 S.C.R.
A providing a basis for administration of justice and enforcement
of law in this country. Without meaning to exhaustively
enumerate the purport of the expression "Fundamental Policy
of Indian Law", we may refer to three distinct and fundamental
juristic principles that must necessarily be understood as a part
B and parcel of the Fundamental Policy of Indian law. The first
and foremost is the principle that in every determination
whether by a Court or other authority that affects the rights of a .
citizen or leads to any civil consequences, the Court or authority
concerned is bound to adopt what is in legal parlance called a
C judicial approach' in the matter. The duty to adopt a judicial
approach arises from the very nature of the power exercised
by the Court or the authority does not have to be separately or
additionally enjoined upon the fora concerned. What must be
remembered is that the importance of Judicial approach in
judicial and quasi judicial determination lies in the fact so long
0
as the Court, Tribunal or the authority exercising powers that
affect the rights or obligations of the parties before them shows
fidelity to judicial approach, they cannot act in an arbitrary,
capricious or whimsical manner. Judicial approach ensures that
the authority acts bonafide and deals with the subject in a fair,
E reasonable and objective manner and that its decision is not
actuated by any extraneous consideration. Judicial approach
in that sense acts as a check against flaws and faults that can
render the decision of a Court, Tribunal or Authority vulnerable
to challenge. In Ridge v. Baldwin [1963 2 All ER 66], the
F House of Lords was considering the question whether a Watch
Committee in exercising its authority under Section 191 of the
Municipal Corporations Act, 1882 was required to act judicially.
The majority decision was that it had to act judicially and since
the order of dismissal was passed without furnishing to the
G appellant a specific charge, it was a nullity. Dealing with the
appellant's contention that the Watch Committee had to act
judicially, Lord Reid relied upon the following observations
made by Atkin L.J. in (1924] 1 KB at pp. 206,207:
"Wherever any body of persons having legal authority to
H
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 23
GECO INTERNATIONAL LTD. [T.S. THAKUR, J.]
determine questions affecting the rights of subjects, and A
having the duty to act judicially, act in excess of their legal
authority, they are subject to the controlling jurisdiction
of the King's Bench Division exercised in these writs."
27. The view taken by Lord Reid was relied upon by a
B
Constitution Bench of this Court in A.C. Companies Ltd vs.
P.N. Sharma and Anr. (AIR 1965 SC 1595) where
Gajendragadkar, C.J. speaking for the Court observed :
"In other words, according to Lord Reid's judgment, the
necessity to follow judicial procedure and observe the C
principles of natural justice, flows from the nature of the
decision which the watch committee had been authorised
to reach under S.191(4). It would thus be seen that the
area where the principles of natural justice have to be
followed and judicial approach has to be adopted, has D
become wider and consequently, the horizon of writ
jurisdiction has been extended in a corresponding
measure. In dealing with questions as to whether any
impugned orders could be revised under A. 226 of our
Constitution, the test prescribed by Lord Reid in this E
judgment may afford considerable assistance."
28. Equally important and indeed fundamental to the policy
of Indian law is the principle that a Court and so also a quasi-
judicial authority must, while determining the rights and
obligations of parties before it, do so in accordance with the F
principles of natural justice. Besides the celebrated 'audi
· alteram partem' rule one of the facets of the principles of natural
justice is that the Court/authority deciding the matter must apply
its mind to the attendant facts and circumstances while taking
a view one way or the other. Non-application of mind is a defect G
that is fatal to any adjudication. Application of mind is best
demonstrated by disclosure of the mind and disclosure of mind
is best done by recording reasons in support of the decision
which the Court or authority is taking. The requirement that an
adjudicatory authority must apply its mind is, in that view, so H
24 SUPREME COURT REPORTS [2014] 12 S.C.R.
A deeply embedded in our jurisprudence that it can be described
as a fundamental policy of Indian Law.
29. No less important is the principle now recognised as
a salutary juristic fundamental in administrative law that a
8 decision which is perverse or so irrational that no reasonable
person would have arrived at the same will not be sustained in
a Court of law. Perversity or irrationality of decisions is tested
on the touchstone of Wednesbury's principle of
reasonableness. Decisions that fall short of the standards of
C reasonableness are open to challenge in a Court of law often
in writ jurisdiction of the Superior courts but no less in statutory
processes where ever the same are available.
30. It is neither necessary nor proper for us to attempt an
exhaustive enumeration of what would constitute the
D fundamental policy of Indian law nor is it possible to place the
expression in the straitjacket of a definition. What is important
in the context of the case at hand is that if on facts proved
before them the arbitrators fail to draw an inference which ought
to have been drawn or if they have drawn an inference which
E is on the face of it, untenable resulting in miscarriage of justice,
the adjudication even when made by an arbitral tribunal that
enjoys considerable latitude and play at the joints in making
awards will be open to challenge and may be cast away or
modified depending upon whether the offending part is or is
F not severable from the rest.
31. Inasmuch as the arbitrators clubbed the entire period
between 16th October, 2001 and 21st March, 2002 for
purposes of holding the appellant-Corporation responsible for
the delay, they committed an error resulting in miscarriage of
G justice apart from the fact that they failed to appreciate and
d.raw inferences that logically flow from such proved facts. We
have, therefore, no hesitation in rejecting the contention urged
on behalf of the respondent that the arbitral award should not
despite the infirmities pointed out by us be disturbed.
H
OIL & NATURAL GAS CORPORATION. LTD. v. WESTERN 25
GECO INTERNATIONAL LTD. [TS.THAKUR, J.] ·
32. That brings us to the last submission that deduction A
on account of taxes not paid should have been allowed by the
respondent-arbitral tribunal. The Tribunal has, in our opinion,
correctly held that no part of the work was undertaken outside
Singapore which was to be executed on a turnkey basis for a
price that was pre-determined. The arbitrators have, in our B
opinion, rightly held that no taxes were payable under the Indian
Income tax Act so as to entitle the Corporation to deduct any
amount on that account by reason of non-payment of such
taxes. The challenge to the award to that extent must fail and
is, hereby, rejected. c
33. In the result, we allow this appe~I but only to the extent
that out of the period of 4 months and 22 days which the
arbitrators have attributed to the appellant-Corporation a period
of 56 days comprising 42 days of the first interval and 14 days
of the second referred to in the judgment shall be reduced. 0
Resultantly, deductions made bY, the appellant-Corporation for
the said period of 56 days shall stand affirmed and the award
made by the arbitrators modified to that extent with a
proportionate reduction in the amount payable to the
respondent. No costs. ·· H
Nidhi Jain Appeal allowed.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "Arbitration"Sign in to search