2021 (11) TMI 593 - SC - Indian Laws

Validity of setting aside the arbitration award in favour of the ONGC - failure to complete supply on time - liability of liquidated damages - time and date of delivery of supply order - delayed supplies even delivery and/or accepted by the purchaser will be treated as supplied/effected after schedule period without prejudice to Failure Termination Clause or not - extension in delivery period - entitlement to claim damages under Failure Termination Clause unless purchaser clearly waives his right in writing to recover such damages with the approval of competent authority. HELD THAT - The Arbitral Tribunal, at the outset, held that merely having a clause in the contract making time the essence of it would not be determinative; rather, an overall view having regard to all the terms of contract are to be taken into consideration. Further, they noted that contracts containing provision for extension of time or payment of penalty on default would dilute the obligation of timely performance and render the clauses imbuing time as essence of the contract ineffective - On the aspect of liquidated damages, the Arbitral Tribunal held that liquidated damages, which are pre-estimated damages, cannot be granted as there was no breach of contract due to the fact that time was not the essence. Accordingly, the Arbitral Tribunal proceeded to determine the actual damages based on the evidence furnished. In this case at hand, the challenge of award is based on the fact that the same is against the public policy and patent illegality. Public policy as a ground of challenge has always been met with certain scepticism. The phrase public policy does not indicate a catch-all provision to challenge awards before an appellate forum on infinite grounds - the ambit of the same is so diversly interpreted that in some cases, the purpose of limiting the Section 34 jurisdiction is lost. This Court s jurisprudence also shows that Section 34(2)(b) has undergone a lot of churning and continue to evolve. The purpose of Section 34 is to strike a balance between Court s appellate powers and integrity of the arbitral process. The main challenge to the award is against the imposition of unliquidated damages, when the matter of fact stood that the contract between parties stipulated for pre-estimated damages (liquidated damages). The concerned contract contained provisions for liquidated damages for breach of contract, particularly breach of deadlines set in the contract. Under Indian Contract law, such liquidated damages are recognized, subject to the same being reasonable - It is now settled that whether time is of the essence in a contract , has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract. As the contract was spread over a long tenure, the intention of the parties to provide for extensions surely reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates ONGC s effort to uphold the integrity of the contract instead of repudiating the same. The Arbitral Tribunal s interpretation of contractual clauses having extension procedure and imposition of liquidated damages, are good indicators that time was not the essence of the contract - The Arbitral Tribunal s view to impose damages accrued on actual loss basis could be sustained in view of the waiver of liquidated damages and absence of precise language which allows for reimposition of liquidated damages. Such imposition is in line with the 2nd para of Section 55 of the Indian Contract Act - The High Court and District Court strayed beyond the limitation under Section 34 and 37 of the Arbitration Act. Appeal disposed off.

Summary

Issues Involved:
1. Whether time was the essence of the contract.
2. Justification for recovering liquidated damages by ONGC.
3. Entitlement of Remi Metals to extension of delivery dates without liquidated damages due to force majeure.
4. Basis for imposing liquidated damages on the entire value of the Purchase Orders by ONGC.
5. Entitlement of Remi Metals to refund of liquidated damages.
6. Entitlement of Remi Metals to interest on delayed payments.
7. Entitlement of Remi Metals to any interest, and the rate and period for the same.

Detailed Analysis:

Issue 1: Whether time was the essence of the contract.
The Arbitral Tribunal held that merely having a clause in the contract making time the essence would not be determinative. They noted that contracts with provisions for extension of time or penalties on default would dilute the obligation of timely performance. The Tribunal concluded that time was not the essence of the contract, stating, "The supply of material in the instant case was not for any specific purpose or urgent requirement... ONGC could extend the time for delivery and in fact ONGC did extend the delivery period without levying any LD."

Issue 2: Justification for recovering liquidated damages by ONGC.
The Arbitral Tribunal held that liquidated damages, being pre-estimated damages, cannot be granted without a breach of contract. Since time was not the essence, there was no breach, and thus, only actual damages could be awarded. ONGC's estimation of tangible losses was accepted, but losses during the extended period without liquidated damages were excluded. Ultimately, ONGC was entitled to retain ?2,09,28,995/- or its equivalent in US dollars.

Issue 3: Entitlement of Remi Metals to extension of delivery dates without liquidated damages due to force majeure.
The Tribunal considered the context of various extensions granted by ONGC and concluded that the extensions were accepted and the contract was satisfied by Remi Metals. The Tribunal's interpretation that ONGC's waiver of liquidated damages during initial extensions precluded their imposition in subsequent extensions was upheld.

Issue 4: Basis for imposing liquidated damages on the entire value of the Purchase Orders by ONGC.
The Tribunal found that ONGC's imposition of liquidated damages on the entire value was not justified as time was not the essence of the contract. The Tribunal's view was that damages should be based on actual loss rather than pre-estimated damages, especially given the waiver of liquidated damages in initial extensions.

Issue 5: Entitlement of Remi Metals to refund of liquidated damages.
The Tribunal's award included a refund of part of the liquidated damages recovered by ONGC. The High Court's interference with this aspect was set aside, and the Tribunal's award was upheld, recognizing that the imposition of liquidated damages was not justified.

Issue 6: Entitlement of Remi Metals to interest on delayed payments.
The Tribunal considered Remi Metals' claims for interest on delayed payments and awarded interest based on the actual loss sustained. The High Court's interference with the Tribunal's award on this aspect was set aside.

Issue 7: Entitlement of Remi Metals to any interest, and the rate and period for the same.
The Tribunal awarded interest on the amounts due based on the actual loss sustained by Remi Metals. The High Court's interference with the Tribunal's award on this aspect was set aside, and the Tribunal's award was upheld.

Conclusion:
The Supreme Court set aside the orders of the High Court and the District Court, upholding the award of the Arbitral Tribunal. The Tribunal's interpretation that time was not the essence of the contract, and the imposition of damages based on actual loss rather than liquidated damages, was deemed reasonable and plausible. The appeals by Remi Metals were allowed, and the appeal by ONGC was disposed of accordingly. Parties were to bear their own costs.