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TMI Blog2021 (11) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12, preferred by Oil and Natural Gas Corporation Ltd. (hereinafter referred to as ONGC for the sake of brevity and clarity), has been filed impugning the judgment and order dated 27.07.2010 of the High Court of Uttarakhand at Nainital in Review Petition No. 1340 of 2008 in AO No. 472 of 2005. 3. The short question which arises for determination by this Court is whether the impugned judgment was correct in setting aside the arbitration award in favour of the ONGC. 4. Before we analyse the case at hand, it is necessary for us to have a brief understanding of the facts. A global tender was floated by the ONGC for purchase of aggregate quantity of 3,93,297 metres of seamless steel casing pipes. Remi Metals was a successful bidder. It claims that it had bid to supply pipes as a supplier on behalf of Volski Tube Mills, Russia. In furtherance of the same, 4 purchase orders (POs) No. 275, 276, 277 and 286 were issued in the following manner: 5. It was mentioned in the POs that the delivery period will commence within 16 weeks and will be completed in 40 weeks, or earlier, from the date of the PO. 6. Some of the important conditions mentioned in the POs, which were common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in the supply order, from the bill for payment of the cost of material submitted by the contactor or his foreign principals in accordance with the term of supply order or otherwise. 8. During the execution of contract, there were certain delays in meeting the obligation as required under the contract. In this context, various extensions were given by the ONGC to fulfil their obligation. The extensions were granted as follows: Remi Metals accepted the aforesaid extensions and satisfied the contract. 9. In this context, it may be noted that the ONGC had deducted an aggregate amount of US $8,07,804.03 and ₹ 1,05,367/- as liquidated damages from various bills submitted by the Remi Metals. There were other claims which were disputed by the Remi Metals which were claimed before a panel of arbitrators. 10. In detail, the Remi Metals claims were hereunder: CLAIM TITLE MOUNT Refund of Liquidated damages claimed by ONGC US $807,804.03 and ₹ 1,05,367/- Customs Duty Reimbursement ₹ 1,90,43,037/- Interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imately, on this issue, the Arbitral Tribunal noted as under: 43.29. It may also be stated that the supply of material in the instant case was not for any specific purpose or urgent requirement. The tender was a global tender for general requirement as stated by Mr. K. Bhattacharya (RW-1). 43.30. Besides, the contract provides for imposition of LD and/or termination of the contract. It may also be noticed that ONGC could extend the time for delivery and in fact ONGC did extend the delivery period without levying any LD. These and other stipulations in the contract are a clear indication that the time was not the essence of contract. 13. 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. 14. It was ONGC s estimation that there were four categories of tangible losses, namely: (i) revenue loss; (ii) loss due to the use of higher ppf/grade casing; (iii) loss due to intra/inter-regional transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be granted. However, the District Judge modified the costs of arbitration from ₹ 25 lakhs to ₹ 9,40,000/-. 18. Both parties, aggrieved by the order of the District Judge, appealed the same before the High Court of Uttarakhand in AO Nos.472 of 2005 and 466 of 2005 under Section 37 of the Arbitration and Conciliation Act, 1996. The High Court, by impugned order dated 14.10.2008 held that both the arbitral award and order of the District Judge erred in construction of the contract with respect to whether time was the essence or not. Further, the High Court has reasoned that the Arbitral Tribunal as well as District Judge committed gross error in arriving at a conclusion that ONGC had to prove loss suffered before recovering any damages. Moreover, the decree in respect of cost of arbitration was upheld by the High Court. Accordingly, AO No.472 of 2005 filed by ONGC was allowed and AO No.466 of 2005 filed by Remi Metals (now Welspun) was dismissed. 19. Aggrieved by the aforesaid order, review petitions being Review Petition Nos.1340 of 2008 and 1339 of 2008 were filed which were disposed of with the following observation: The judgement and order passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the dispute is not capable of 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. (Emphasis supplied) The limited grounds provided under Section 34 of the Act, has been interpreted by this Court on numerous occasions. 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. However, 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. 24. The first case, which expounded on the scope of public policy was Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, 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 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 administration of justice. Hence, in our view in addition to narrower meaning given to the term public policy in Renusagar case [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] it is required to be held that the award 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 (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 if the illegality i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Section 16(6) of the Act. Eventually, a three-Judge Bench in ONGC Ltd. v. Western Geco International Limited, (2014) 9 SCC 263, while upholding Saw Pipes case (supra), noted that illegality of the award must go to root of the matter. Illegality of a trivial nature could not be held to violate the public policy. 25. In Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1, this Court held: 24. There is no dispute that Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or as interpreted by various Courts. We need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. 28. In this context, the award concludes that as time was not the essence, liquidated damages could not be granted, in the following manner: Since time was not the essence of the contract, the measure of damages specified under Clause/ Liquidated damages, which was the essence of the contract, cannot be regarded as appropriate for determining the loss sustained by ONGC (Emphasis supplied) 29. In order to consider the relevancy of time conditioned obligations, we may observe some basic principles: a. Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Refer to Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794] b. That is subject to the exception that the promisee is not entitled to liquidated damages, if by his act or omissions he has prevented the promisor from completing the work by the completion date. [Refer Holme v. Guppy, (1838) 3 M W 387] c. These general principles may be amended by the express terms of the contract as stipulated in this case. 30. It is now settled that whether time is of the essence in a contract , has to be cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties 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 that no loss is likely to occur because of such breach. Further, in case where the court arrives 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 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 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. 64. 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat ONGC waived liquidated damages twice before giving extension with pre-estimated damages. The approach of the Arbitral Tribunal was to hold that once liquidated damages were waived in the first extension, subsequent extension could not be coupled with liquidated damages unless a clear intention flowed from the contract; while this Court recognizes the autonomy of the party to engage in contractual obligation. Such obligation must be contracted in clear terms. From the aforesaid discussion, it is clear that the promisee (ONGC) waived the liquidated damages initially and the same cannot be imposed, unless such imposition was clearly accepted by parties. In this case, the interpretation of the Arbitral Tribunal could not be faulted as being perverse, for the reasons stated above. 34. Mr. Shyam Diwan, learned senior counsel, appearing on behalf of the Remi Metals, submitted that the view taken by the Arbitral Tribunal was reasonable, as the loss sustained by ONGC is given on the basis of actual loss. In this situation, the interpretation of the law and the facts provided under the award is a reasonable interpretation, which can be sustained as being a plausible view. 35. This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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