CASE ANALYSIS – ONGC Ltd. v. Discovery Enterprises (P) Ltd. (2022) 8 SCC 42

2. Detailed Facts of the Case 

1. The dispute with which the case is concerned was a commercial dispute between a public sector undertaking called ONGC versus a privately owned organization known as Discovery Enterprises (P) Ltd. over the terms and interpretation of a contract of providing a service of off shore oil and gas activities. The agreement between the parties that contained specific conditions on the contractual relationship regulating it also contained arbitration as a method of resolving disputes.
2. ONGC had contracted Discovery Enterprises to provide it with technical and operational services to the offshore infrastructure and maintenance. Discovery Enterprises stated that it had performed its contractual duties as required and had invoiced it on the same. On the contrary ONGC has denied paying some of these invoices in full, or has paid partially due to delay, non-adherence to some specifications and piggybacking of the service clause.
3. This prompted Discovery Enterprises to resort to arbitration of the contract. Looking into the claims and counterclaims, the arbitral tribunal rendered an award in favor of Discovery Enterprises holding ONGC to pay the outstanding sums with interest. The arbitrator construed the stipulations of the contract which upheld the rendition and grounds of Discovery Enterprises and threw out the counter-arguments of ONGC on not performing and delay by Discovery Enterprises.
4. ONGC opposed the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 because the award was vitiated in its nature on the basis of patent illegality, misreading of the contract and infringement of the public policy. Delhi High Court upheld the award and also dismissed the petition of ONGC. Then ONGC turned to Supreme Court under Article 136 of the Constitution with a special allowance of appeal.
5. The main pattern of argumentation by ONGC related that the arbitrator had wrongly interpreted the text of the contract and failed to consider material evidence and, therefore made an award which was against the fundamental principle of the law and with the interests of the society. It noted that being a public sector undertaking, its money is the money of the people and a recovery against it without any valid legal and factual foundations will affect the State treasury.
6. Discovery Enterprises, however, responded that the arbitrator had acted in his spheres of competence, comprehensibly interpreted the contract and that he had explained each claim granted in sufficient detail. It stressed that arbitral awards are beyond interference in view of the fact that the court then may have construed the contract differently.

3. Issues:

1. Whether the arbitral award was of a kind to which Section 34 (2A) Arbitration and Conciliation Act, 1996 applied? 
2. Whether the interpretation given to any of the clauses of the contract by the arbitral tribunal can be done away by the interruption of a court under Section 34of the Act? 
3. Whether the arbitral award had contravened the Indian public policy and was open to be set aside?

4. Judgment:

The Supreme Court didn’t accept the appeal of ONGC and upheld the arbitral award in the favour of Discovery Enterprises (P) Ltd. The Court found that, although Article 136, Article 137, Article 139, Article 177 and Article 22 of the Agreement presented substantive provisions that the Court was bound to uphold, the grounds raised by ONGC, even though substantial came nowhere near the test of interference as offered in the section 34 of the Arbitration and Conciliation Act, 1996.

The ruling confirmed what was already established that an arbitral award that is made under a reasonable interpretation of the contract which may not necessarily be the only interpretation yet it is not disturbed unless it shocks the conscience of the court or it is obviously unlawful.

5. Reasoning: 

In a well-argued and elaborate judgment, the Supreme Court reiterated the position that arbitral awards are sacrosanct, and judicial intrusion is very narrow in the provisions of Section 34. The Court adhered to a logical order of analysis of the case in terms of statutory interpretation, precedence, and policy:

1. Doctrine of Limited Judicial Review: In its approach to the present matter, the Court reiterated the fact that under the Arbitration and Conciliation Act, 1996, in particular, following the amendment acts of 2015 and 2019, that court involvement in arbitral awards should be limited. Section 34 has intentionally been made narrow-scoped so as to encourage finality to arbitral proceedings and so as to ensure that courts cannot be drawn into being de facto appellate courts.

The Court referred to Associate Builders v. DDA, (2015) 3 SCC 49, and Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, in order to emphasize that a patent illegality is an obvious and blatant and patent error of law and that either being going to the root of the proceeding or causing a miscarriage of justice. Nevertheless, the mere misinterpretation of facts or law, for that matter, is not sufficient in order to overturn an award unless it is so outrageous that no decent human could have arrived to such a decision.

2. Contract Term Interpretation of an Arbitrator: One of the main grounds of ONGC in the argument was that the arbitrator misconstrued the meaning of the contract and therefore the award was open to attack. The Court however held that interpretation of contracts is at the discretion of the arbitrator and the arbitrator is the only one who makes the interpretation unless the interpretation is perverse or absurd, the court cannot voice their interpretation.

The Court noted that the interpretation of the contract by the arbitrator was plausible, reasonable and based on the matrix of facts and thus not subject to challenge. The circumstance that ONGC thought that another interpretation was better placed was not enough to make the opinion of the arbitrator illegal.

3. No Patent Illegality: ONGC argued that the award overlooked critical conditions of contracts and even evidence. The Court did not entertain this and said that all the material was taken into account by the arbitrator and the complaint of ONGC was tantamount to a request of revaluation of evidence which cannot be done as per Section 34.

The Court made it clear that an award is only patent improper only when it is arrived at on the totally irrational or absurd perception or when there is a complete Sharpening of the rule of law. In the present instance, the arbitrator had not given minimal reasoning, evaluation of evidence and decision made.

4. Refutation of Public Policy Argument: ONGC invoked the forum as the award contravened the Indian public policy since it unfairly placed the financial burden on the public sector body. The Court quite categorically declined this contention wherein it said that the concept of public policy does not imply the inconvenience of a governmental institution or loss of a revenue to the exchequer.

In order to seek the right of public policy the award should be contrary to some basic principles of law, morality, or justice. Such contravention was not present in this case. Arbitrator had been working within his jurisdiction and the award has not leaked to the conscience of the Court.

5. Preference of Arbitration Policy: The Court, under the final aspect of its reasoning, stated the intent of the legislature that was to limit the application of laws and courts in arbitration. It cited that any interference with the arbitral awards by the courts may render the entire concept of arbitration inefficient and sluggish in future; and thus is a contradiction of the very reasoning behind arbitration selection.

The Court felt grieved about how governmental organizations such as ONGC aimed at re-litigation of arbitral award, even when they enter into arbitration agreements since this practice negates the purpose of alternative methods of dispute resolution.

6. References: 

• ONGC Ltd. v. Discovery Enterprises (P) Ltd., (2022) 8 SCC 42.
• Arbitration and Conciliation Act, 1996, s. 34.
• Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49.
• Ssangyong Engineering and Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131.
• Ministry of Law and Justice, Report of the High-Level Committee to Review the Institutionalization of Arbitration Mechanism in India (Government of India, 2017).
• https://indiankanoon.org/doc/51803644/ 

Written by Prerna Puthela an Intern under Legal Vidhiya.

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.

Karan Chhetri

‘Social Media Head’ and ‘Case Analyst’ of Legal Vidhiya.