Holding

The Supreme Court set aside the arbitrator’s norms and partially allowed the appeal, holding that courts may interfere with an arbitral award even if its conclusions are perverse.

Summary

The appellant ONGC required offshore vessels (OSVs) from the respondent Garware Shipping and the Shipping Corporation of India (SCI) under long‑term charters. Dispute arose over the computation of repair and maintenance (R&M) charges for the 11th to 16th years of operation, with the parties relying on recommendations of a Saxena Committee, a High Level Working Group (HLWG) and earlier reports. The arbitrator, Justice M.L. Pendse, held that the R&M rates should be based on the years of actual operation of the vessels rather than calendar years and equated the 12th year of SCI’s OSVs with the 13th year of the respondent’s OSVs, rejecting the appellant’s contention. ONGC challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the arbitrator exceeded the reference and applied a perverse interpretation. The Bombay High Court upheld the award, but the Supreme Court held that courts may interfere with an arbitral award even if its conclusions are perverse and set aside the arbitrator’s norms, partially allowing the appeal.

Issues considered

Whether the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 exceeds the reference and is perverse.
Whether the computation of R&M expenses should be based on years of actual operation or calendar years as per the Saxena Committee and HLWG reports.
Whether the Supreme Court can interfere with an arbitral award under Article 136 of the Constitution despite the award’s logical basis.

Legislation cited

Arbitration and Conciliation Act, 1996s. 34
Constitution of Indias. 136

Subjects

ArbitrationSection 34Arbitral award interferenceRepair and maintenance ratesOffshore vesselsHigh Level Working GroupArticle 136Charter contracts

Judgment

"

...
l

A ONGCLTD.
V.
GARWARE SHIPPING CORPN. LTD.

NOVEMBER 14, 2007
B
[DR. ARIJIT P ASAY AT AND S.H. KAPADIA, JJ.]

Arbitration and Conciliation Act, 1996-Section 34-Contractual
dispute-Issue with regard to computation of rates for repair and
c maintenance expenses of respondent's offshore vessels chartered to
appellant-Reference to arbitrator-Arbitration Award-Interference
with-Held: No proposition that Courts would be slow to interfere with
arbitrator's award even ifthe conclusions ofarbitrator are perverse,
and even when the very basis ofarbitrator's award is wrong-On facts,
D norms prescribed by arbitrator for mode ofcalculation as upheld by
High Court, not appropriate-Thus, interference under Article 136
called for and norms by Arbitrator set aside-Constitution of India,
1950-Article 136.
Appellant required offshore vessels (OSV) for supplying
E material from its onshore bases to its offshore in~tallations.
Respondent and shipping Corporation oflndia acquired offshore
vessels to charter them to the appellant. Appellant took on charter,
the OSV ofrespondent and the next year, the OSV ofSCL Contract
was .entered for first five years. It was extended by another five
F ;years. Charter was further extended by six years. Dispute arose
between appellant and the respondent and others with regard to
computation of the rates for repair and maintenance of offshore
vessels for 11 to 16 years of their operation. The Committee
submitted report with regard to a suitable formula for the charter
G rate for the further extended period. Government oflndia accepted
the recommendations of the Committee partially. Indian Shipping A
Companies and respondent made representations. Thereafter, _
Government oflndia appointed a High Level Working Group which
gave its recommendations. The dispute was referred to the
H 1154
ONGCLTD. v. GARWARESHIPPINGCORPN.LTD. 1155

arbitrator. Arbitrator held the Committee did not recommend that A
irrespective of the period ofinduction, years should be calculated
as that of SCI; that the respondent did not question the
recommendations of High Level Working Group and Committee's
Report but merely contended that the mode of implementation
thereof was incorrect; that it was not open for him to go behind the B
report and the only area of enquiry was whether or not the report
was correctly implemented; that neither of the Committees
examined whether the entitlement of each OSV was to be
determined with reference to the years of actual user or only with
reference to the calendar years; that for the computation of repairs C
and maintenance expenses, it was necessary to take into
consideration the years of operation and not the calendar years; that
the 12th year of operation of SCl's OSVs should be equated with
the 13th year of operation of respondent's OSVs and so on; and that
tile interpretation suggested by appellant would lead to great D
injustice.
Appellant filed appeal under section 34 of the Arbitration and
Conciliation Act, 1996 challenging the award. Single Judge of High
Court dismissed the appeal. Aggrieved, appellant filed appeal.
Division Bench of High Court dismissed the same holding that the E
arbitrator had consi<Jered and construed the reports while arriving
at his conclusions; that the basis of the calculation adopted by the
arbitrator was not only logical but just and fair; that the provisions
of the said reports called for a proper interpretation and construction
before being applied to the facts of the case and the arbitrator did F
so; that even if the mode of calculation as applied by the arbitrator
is not very appropriate in its effect, that could not be a ground for
exercise of power under s. 34; that the reference did not include the
13th to 16th year to inspect; and that the arbitrator thought it
improper to open the same and that a narrow technical reading of G
the Award cannot be made. Hence the present appeal.
Appellant contended that the courts below failed to notice that
the Award made by the Arbitrator was beyond the reference made;
that the arbitrator's view that the corresponding year could be a more
H
1156 SUPREME COURT REPORTS [2007] 11 S.C.R.

A .appropriate factor is Without foundation; that the Bench mark of SCI
in a'particuiar yea'r could not be departed from; that there was lio
scope for shifting of figures; that ~he normative fig1ire for third period
remained constant; and that though in the Writ Petition there was
'challenge to the period 13 tO 16 years, a bare reading of the writ
:B petition shows.that it did not relate to the said period.
Respondent contended that as tWo views are possible, High
Court's view should not have been interfered; that arbifrator had
accepted one view whiCh is possible and was iiot de hors the
C Coniniittee's report; and that interference under Article 1:36 oftbe
Constitution was not called for as substantive justice had been done;
even though the order lllay.be wrong on some parts~
Partly allowing the appeai, the Court
HELD: 1. There is no proposition that the courts could be slow
D to interfere with the arbitrator's Award, even if the conClusions are
perverse, and even wheii the vefy basis of tiie Arbitrator's award is
wr<mg. In the ilistaiit case, interference is warrantid and th.e norms
prescribetlb.y the Arbitrator a~ upheld by the Single Judge and die
DivisiOri Bench are set aside. [Para 28) [1166~B, CJ
E
2.1. Higli Level Working Group concluded that repair and
niaiittenarice expenses were to be acttiaiized with effect from the ii th
year of operation. The Committee was seized Of the anomaly ofiower
rates being paid to those Owners who exercised greater
F management effectiveness by eiistifihg lower capital co.sts, fower
interest rates arid lower debt equity ratiOs. Therefore; High Level
Working G roiip, felt that though it was now not possible to correct
any anomalies tliat may have crept iri auring the first 12 years; at
least for the last term of four years the formula should reflect; as
G fat as practicable, the prindple of equal pay for equal work.
[Para 18 and 19J [1163-A, B, C, DJ
2.2. Operating costs are to be calculated Ori the basis of actual
expenditure incurred by SCI in operating SCl's OSVs for full (first)
one year period. [Para 22) [1164-E, F)
ONGCLTD. v. GARWARESHIPPINGCORPN.LTD. 1157

2.3. The concept of reimbursement is the measure fixed, the A .
year of operation is immaterial. The year of operation can vary is
an irrelevant factor. The Committee recommended the normative
R&M expenses of OSV of 5400 BHP for the year 1988-89 to 1993-
94 to be same as given in the JS&FA Committee report. The R&M
expenses for the subsequent years were recommended at the rate B
of9.5% escalation per annum on the expense of the year 1993-94
+
upto 1998-99 and the ainotii1t for of subsequent years @ 9.5%
escalation pet anliuin. The difference between the recommended
normative amount given and the actual R&M expense of SCI;s
OSVs of 5400 BHP (Audited statements) were to be reimbursed on c
year to year basis after receipt of the audited statement from SCI
additional reimbursement of corresponding overhead expenses in
the ratio of15:85 of the differential amount will also be made. The
differential amounts for other OSVs were recommended to be
calculated pro rata basis of the BHP of the respective OSVs w.r.t. D
above differential amountforOSVs ofS400 BHP.
[Paras 24 and 25] (1165-B, C, D, E]
2.4. Though there was some controversy as to whether the year
referred to is the financial year as reimbursement was on year to
year basis after receipt of the auditor's statement from SCI the E
norms obviously i"clate to financial year. The claiin was for 11th and
12th years and Hie award also covered from 13th to 16th year. The
HL WG referred to certain anomalies. But they related to the
previous years. The "Bench Mark" is the figure of SCI of particular
year. So when entry to business was made is irrelevant. F
[Para 26 and 27) [1165-F; 1166-AJ

CIVIL APPELLATE JURJSDICTION : Civil Appeal No. 5210 of
2007.

From the Judgment and final Order dated 1.3.2005 of the High CoUlt G
of Judicature at Bombay in Appeal No. 57/2005 in A.P. No. 329/2004.
Ashok Desai, Gopal Jain, Vipin Nair, P.B. Suresh and Mridul (for
Temple Law Fim1) for the Appellant.
R.F. Nariman, Mukul Rohatgi, Biren Saraf, Santosh Paul, Abhishek H
~
1158 SUPREME COURT REPORTS [2007] 11 S.C.R. ·11

A K. Rao, Praji K.J. and M.J. Paul for the Respondent. r
·I
The Judgment of the Court was delivered by
DR. ARIJIT PASAYAT, J. 1. Leave granted.
2. Challenge in this appeal is to the judgment rendered by a Division
B
Bench of the Bombay IDgh Court dealing with an appeal questioning the
t·
correctness of the order passed by a learned Single Judge who dismissed
the appellant's appeal mder Section 34 of the Arbitration and Conciliati~~ ·11
Act, 1996 (in short the 'Act') questioning the Arbitrator's award. ;I
c 3. The controversy lies within a very narrow compass. ·I

4. Tue.factual backgromd is almost undisputed and is essentially*; :I
follows: I

•'
The appellant required off shore vessels (in short 'OSVs') inter,r.
D alia, for supplying material from its onshore bases to its offshore
installations. After initially meeting its requirements by chartering foreign .....

OSVs, the appellant decided to develop a fleet of Indian Flag vessels. ~
Various Indian companies including . . the respondent and the Shipping
Corporation oflndia (in short 'SCI') acquired OSVs, with a view to
E chartering them to the appellant. The respondent acquired five vessels-
(named Garware I to Garware V) which were handed over to th~
appellant in the months of November and December, 1983 and January ' I
. '

and March, 1984.
The dispute pertains to the cost of repairs and maintenance of th~
F respondent's OSVs for the eleventh to the sixteenth year o( theii; !.
A..
operation. Even though there is no dispute regarding the first two 1 term~
of five years each, reference to the manner in which the rates for the same
were arrived at is necessary. A working group mder the Director General
of Shipping was constituted by the Ministry of Petroleum to determine
G the floor day rate in respect of the vessels keeping two objects in mind,
i.e. (a) long term availability of the OSV's for the appellant and (b)
). '<(
economic viability to ensure the respondent's swvival in the business. The
report was submitted by the working group on 8.3.1984 suggesting the
day rate which comprised of two components, i.e. (a) capital recovery •IH:
H ..
- ONGCLTD. v. GARWARESHIPPINGCORPN.LTD.
(PASAYAT,J.]
1159

factor and (b) operating expenses. Contracts were accordingly entered A
into for the first five year period beginning from 1983-84. The Government
of India by an order dated 18.8.1984 approved the report in certain
respects only. There is no dispute between the parties regarding the
payments of operating costs for the first five years. The charter was
extended by another five years. A committee presided over by Dr. AN. B'
Saxena was formed to review the operating costs payable for the
extended term. The Government approved the report of the Committee
on 5.8.1993. There is no dispute between the parties in respect of the
payments regarding the second five year period also.
5. The present dispute relates to the period beyond ten years so far
c
as relates to the basis for computing the rates for repairs and maintenance.
By an order dated 29.4.1993 the charter was extended by a further six
years. By an order dated 16.3.1995 and as modified by an order dated
14.9.1995, a committee also presided over by Dr. AN. Saxena was D
formed to recommend a suitable fonnula for the charter rate for the further
extended period.
6. The committee submitted its report on 14.9.1997. This committee
made recommendations inter-alia in respect of repair and maintenance
expenses. The reference to arbitration was confined only to the payment E
of these repairs and maintenance expenses.
7. The Governmentoflndia by a letter dated 15.6.1998 accepted
the recommendations of the second Dr. AN. Saxena Committee only
partially, Representations were thereafter made by the Indian Shipping
Companies including the respondent for reconsideration of the F
recommendations. Pursuant thereto, the Government of India appointed
a High Level Working Group presided over by Mr. Naresh Narad for
considering the o~tstanding pending issues. The following
recommendations of the High Power Committee are relevant:
G
"Pending Issues.
~~ ,,..... 1. Detennination of year a) 1 to 5 years as per
from which R & M payments already
expenses are to be made. Settled cases
actualized. Not to be reopened. H
1160 SUPREME COURT REPORTS (2007] 11 S.C.R.

A b) ,6 to 10 years as per
nonns fixed by Dr.
Saxena Committee
of 1995-77.

B c) 11 and 12 years to.
actualized on the basis t·
of S.C.ls' OSVs as
recommended by
Dr. Saxena Committee
c of 1995-77."
8. Disputes and differences arose between the appellant and _inter-
alia the respondent and others regarding the method to the adopted for
calculating rates payable with reference to the eleventh to the sixteenth
years. The respondent, therefore, filed Writ Petition No. 2788 of2001
D for various reliefs.
9. By an order dated 7.12.2001 aDivisionBenchofthe High Court
recorded that the Writ Petition involved certain con~tual disputes and
that both the parties had agreed to refer the disputes raised in the Writ
Petition to the sole arbitration of Mr. Justice M.L Pendse (a former Judge
E ofthe Bombay High Court and the former Chief JustiGe of the Karnataka
a
High Court). The order which is short one, reads as follows:
"This writ petition involves certain contractual disputes relating to
repairs and maintenance expenses etc, contract between the parties
F contain an arbitration clause. Both the_ parties agree to refer the
disputes raised in the wnt petition to sole arbitration of Justice M.L.
Pendse (Retd.). Parties further agree that in case Justice Pendse
is nqt in a position to take up the· arbitration, Justice D.R. Rege
(Retd.) shall be the arbitrator for the disputes betWeen the p'arties.
G.
Arbitrator is requested to dispose of the arbitration as expeditiously
as possible.
Petition is disposed of." ·
10. The learned arbitrator noted the respondent's submission that
H . while calculating the payments due for the 11th to 16th years of the
ONGC LTD. v. GARWARE SHIPPINGCORPN. LTD. 1161
[PASAYAT,J.]
operation of the OSVs of the respondent, the appellant has overlooked A
the important fact that the OSVs of the respondent were taken on charter
one year prior to the appellant obtaining the OSV s of the SCI. The
respondent, therefore, contended that it was not correct that the
corresponding years of SCI should be taken into account while
determining aniounts payable to the respondent. The learned arbitrator B
rejected the appellant's contention. He held that the committee nowhere
recommended that irrespective of the period of induction, the years should
be calculated of that of the SCI. He held that the respondent had not
-questioned the recommendations made by the High Level Working Group
Report and the second Saxena Committee Report but merely contended c
that the mode of implementation thereof was incorrect. The arbitrator
further observed and accepted that it was not open for him to go behind
the report and the only area of enquiry is whether or not the report was
correctly implemented. He came to the conclusion that on a close scrutiny
of the reports, it was clear that neither of the committees examined whether D
the entitlement of each OSV is to be detennined with reference to the
years of actual user or only with reference to the calendar years. He also
came to the conclusion that for the computation of repairs and
maintenance expenses, it was necessary to take into consideration the years
of operation and not the calendar years. It was held that the 12th year of E
operation of SCI's OSVs should be equated with the 13th year of
operation of the OSVs of the respondent and so on. He also held that
the interpretation suggested by the appellant would lead to great injustice.
For instance, the OSV of the respondent would complete 11 years of
operation while the OSVs of the SCI would have operated only for 10 F
years.
11. Appellant questioned con-ectness of learned Arbitrator's
conclusion by filing an appeal under Section 34 of the Act. Learned Single
Judge dismissed the appeal holding that the conclusion was rational. An
appeal filed was also dismissed. G
12. According to the Division Bench, the learned arbitrator has
considered and construed the reports while arriving at his conclusions.
The entire dispute in the Writ Petition and before the learned arbitrator
centered around this issue. The basis of the calculation adopted by the
H
1162 SUPREME COURT REPORTS [2007] 11 S.C.R.

A· learned arbitrator was, not only logical but just and fair. The provisions
of the said reports are not such 11at they required no interpretation and
were·merely to be applied without anything more. They called for a proper
interpretation and construction before being applied to the facts of the
case. The learned arbitrator did so.
B
l3. The learned Single Judge held that undoubtedly there was no
reference so far as the period of 13 to 16 years are concerned to the
learned Arbitrator. But the prayers and the writ petitions clearly indicated
that even for that period an issue was raised.
c 14. The Division Bench was of the view that even if the mode of
calculation as applied by the arbitrator is not very appropriate in its effect,
that could not be a ground for exercise of power under Section 34.
15. It noted that the reference in fact did not include the 13th to the
16th year to inspect that the arbitrator thought it improper to open the
D same. The High Court was of the view that a narrow technical reading of
the Award cannot be made.
16. In support of the appeal, learned counsel for the appellant
submitted that both learned Single Judge and the Division Bench failed to
E notice that the Award made by the Arbitrator was beyond the reference
ma:de. The arbitrator's view that the corresponding year could be a more
appropriate factor is without foundation. The Bench mark of SCI in a
particular year could not be departed from. There was no scope_ for shifting
of figures. There is no rule of universal application that the cost of
F · maintenance would be more when the vehicle becomes older. The
normative figure for third period remained constant. The order of operation
is the operating order and the financial order is defining. Though in the
Writ Petition there was challenge to 13 to 16 years, a bare reading of the
writ petition shows that it did not relate to the said period.
G 17. In response, learned counsel for the respondent submitted that
two views are possible and, therefore, High Court's view should not have
interfered. Arbitrator had accepted one view which is possible. No one
says that it is de hors the Committee's report. It is a case where no
interference is called for under Article 136 of the Constitution oflndia,
H
ONGCLTD. v. GARWARESHIPPINGCORPN.LTD.
- [PASAYAT,J.]
1163

1950 (in short the 'Constitution') as substantive justice had been done, A
even though the order may be wrong on some parts.
18. Some of relevant parts of the Report of HLWG need to be noted:
"This High Level Working Group therefore, concludes that
R&M expenses are to be actualized with effect from the 11th year B
of operation."
It was further noted as follows:
"This Committee was seized of the anomaly of lower rates being
paid to those Owners who exercised greater management C
effectiveness by ensuring lower capital costs, lower interest rates
and lower debt equity ratios.
19. The High Level Working Group, therefore, felt that though it is
now not possible to correct any anomalies that may have crept in dwing D
the first twelve years, at least for the last term of four years the formula
should reflect, as far as pra~ticable, the principle of equal pay for equal
work.
20. It is to be noted that the anomalies referred to in the subsequent
paragraphs relate to the anomaly oflower rates being paid to owners to E
exercise greater management effectiveness by ensuring lower capital
because oflower interest rate and lower rate equality ratio.
21. The recommendations of the HLWG are as follows:
1. Determination of year from a. 1st to 5th year as per payments F
which R&M expenses are to already made. Settled cases not
be actualized to be reopened.

b. 6th to 10th year as per norms
fixed by the Dr. Saxena Committee
0
of 1995-97.

c. 11th and 12th years to be
actualised on the basis of SCI' s
OSVs as recommended by the Dr.
H
1164 SUPREME COURT REPORTS [2007] 11 S.C.R.
.
;-

A Saxena Committee of 1995-97~

5. Ceiling rates for'~A" type a. From 1st to 5th year ceiling
Vessels only pertaining to rates as already paid by ONGC.
the period beyond 12
B years of operation
b. From 6th to l0t4 year floor rates
to be paid by ONG<;.

c. For the 11th and 12th years ceiling
c rates to be paid by ONGC
6. Compensation in lieu of CRF a. The Operating Expenses
(including Crew Salary & Wages
covering agreements between INSA
and MUI/ NUSI) as determined on
D the last day of the 12th year of
operation for each vessel, (as per
recommendations of the Dr. Saxena
Committee and further modified b)'
this Working Group) to be fixed and
E made applicable for the next four
year i.e. from the 13th to the 16th
year.
22. Operating costs are to be calculated on the basis of actual
~xpenditure incUITed by SCI in operating SCI's OSVs for full (first) one
F year period. ·
I 23. The committee observed that the actual expenses of SCI have
not followed any uniform pattern. The scale to be suggested by the
icommittee needed to be based on some normative amount for a base
G ryear over which an escalation of 9.5% per annum may be considered for
:a block of five years and for subsequent block of five year the base may
.be changed in the same pattern as that of victualling cost The c0mmittee
'observed that the total cost of repair and maintenance for the block of
five years, that is, 1988-89 to 1992-93 of SCI' s OSV s is Rs.106.482
H lacs per OSV as against·the recommended amount ofRs.97.618 lacs
ONGCLTD. v. GARWARESHIPPINGCORPN.LTD. 1165
[PASAYAT,J.]
given in the JS & FA committee report. The committee considered that A
the SCI' s audited statement of R&M expenses may be considered as
appropriate amount for reimbursement to Shipowners. The difference
between SCI's audited R&M expenses and the normative amount was
to be reimbursed to the Shipowners on receipt of SCI's audit statement
from time to time in proportion to the BHP of the respective OSVs. B
24. As the concept of reimbursement is the measure fixed, the year
of operation can vary is an irrelevant factor. The repair and maintenance
expenses have also been dealt by the Committee.
25. In accordance with the deliberation of the Committee on this at c
para 3.5.5, the committee recommended the normative R&M expenses
of OSV of 5400 BHP for the year 1988-89 to 1993-94 to be same as
given in the JS&F A Committee report. The R&M expenses for the
subsequent years were recommended at the rate of 9.5% escalation per
annum on the expense of the year 1993-94 upto 1998-99 and the amount D
for of subsequent years @ 9.5% escalation per annum. The difference
between the recommended normative amount given and the actual R&M
expense of SCI' s OSVs of 5400 BHP (Audited statements) were to be
reimbursed on year to year basis after receipt of the audited statement
from SCI additional reimbursement of corresponding overhead expenses E
in the ratio of 15:85 of the differential amount will also be made. The
differential amounts for other OSVs were recommended to be calculated
pro rata basis of the BHP of the respective OSVs w.r.t. above differential
amount for OSVs of 5400 BHP.
26. Though there was some controversy as to whether the year F
referred to is the financial year as reimbursement was on year to year
basis after receipt of the auditor's statement from SCI the norms obviously
relate to financial year.
27. A few factual aspects need to be noted. So far as Essar is G
concerned, the year is same as SCI. In case of Bann, there was one time
settlement and it is only JESCO which challenged the report. SCI' s first
year of operation was 1984-85. The figures for that year provide some
material for rationalization. It is to be noted that stress is on re-
imbursement. Thus the measure is fixed and, therefore, year of operation H
1166 SUPREME COURT REPORTS [2007] 11 S.C.R.

A is immaterial. It needs no reiteration that claim was for 11th and 12th years
and the award also covered from 13th to 16th year. It is also to be noted
that the HL WG referred to certain anomalies. But they related to the
previous years. The "Bench Mark" is the figure of SCI of particular year.
So when entry to business was made is irrelevant.
B 28. There is no proposition that the courts could be slow to interfere
with the arbitrator's Award, even ifthe conclusions are perverse, and even
when the very basis of the Arbitrator's award is wrong. In any case this
is a case where interference is warranted and we set aside the norms
prescribed by the Arbitrator as upheld by the learned Single Judge and
C the Division Bench.
29. The appeal is allowed to the aforesaid extent with no order as
to costs.
N.J. Appeal partly allowed.

( ... ;