OIL AND NATURAL GAS CORPORATION LTD VS. SAW PIPES LTD.

CITATION	(2003) (4) SCALE 92
DATE OF JUDGMENT	17th April, 2003
COURT	Supreme Court of India
APPELLANT	Oil and Natural Gas Corporation Ltd.
RESPONDENT	Saw Pipes Ltd.
BENCH	M.B Shah, Arun Kumar

RELEVANT PROVISIONS

Sections 28 to 31, 34 of the 1996 Arbitration and Conciliation Act

Sections 73 and 74 of the 1872 Indian Contract Act

INTRODUCTION

Oil and Natural Gas Corporation Ltd. v/s Saw Pipes Ltd., 1997″ is a Landmark legal judgment by the Hon’ble Supreme Court of India. The following case involves ONGC as the appellant and Saw Pipes Ltd as the respondent. This case is associated with a legal dispute that arose due to an arbitral award given against the appellant ONGC and the same was appealed against in the Supreme Court. This case is from the year 1996 when a dispute arose between both parties regarding the payment of liquidated damages. Thus, the matter went for arbitration and an award was granted in the favour of the respondent. Furthermore, not satisfied with the decision of the arbitration tribunal, the appellant filed an appeal to the Supreme Court of India for relief and the court gave the judgment in 2003.

FACTS OF THE CASE

Oil and Natural Gas Corporation Ltd. (ONGC), a global oil and gas firm controlled by the Indian government, issued a tender for casing pipe supply. SAW Pipes Ltd., a firm that supplies equipment for offshore oil exploration and maintenance, responded to the tender request with a letter dated December 27, 1995. The SAW Ltd. letter outlined the terms and circumstances under which they will deliver the casing pipes of the requested size. It was agreed that the products would be delivered on or before November 14, 1996.

The contract stated that if there is a failure in the supply of the goods, ONGC, the appellant in this case, would be entitled to recover from the respondent, as agreed liquidated damages and not as a penalty, a sum equivalent to 1% of the contract price of the whole unit per week for such delay or part thereof, subject to a 10% ceiling from SAW Pipes Ltd., the respondent in this case. 

A broad strike by mill employees occurred in September and October of 1996. This strike affected practically the whole continent of Europe, including Italy, where the response supplied the necessary raw materials but was unable to supply them on time. This caused the respondent to request a 45-day extension from the agreed-upon date of order execution specified in the contract. The appellant granted the extension on the condition that the respondent pay the sum equal to the liquidated damages.

The products were delivered to the appellant, who paid but kept $3,04,970.20 in US dollars and Rs.15,75,559 in liquidated damages. According to the respondent, this payment deduction was contested. Under the Arbitration and Conciliation Act of 1996, this matter was submitted to the Arbitration Tribunal to seek redress and settle the disagreement and awarded in the favour of the respondent. 

ONGC which is a Public Sector Undertaking, has challenged the arbitral award dated 2nd May 1999 by filing Arbitration Petition No. 917/1999 before the High Court of Bombay. Learned Single Judge dismissed the same. Appeal No.256/2000 preferred before the Division Bench of the High Court was also dismissed. Hence, the appeal by ONGC was filed in the Supreme Court of India. 

ISSUE RAISED

1. The appeal mainly revolves around the controversy of “whether the Court would have jurisdiction under Section 34 of the Act to set aside an award passed by the Arbitral Tribunal which is patently illegal or in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract?
2. Whether ONGC was entitled to Liquidated Damages.
3. Whether patent infringement might be used to challenge the judgment under Section 34.
4. Whether the award can be set aside on the grounds of ‘public policy’ if it violates provisions of substantial law under Section 34 of the Arbitration and Conciliation Act, 1996?

CONTENTIONS OF APPELANT

1. Learned senior counsel Mr. Ashok Desai appearing for the appellant submitted that in case where there is a clear violation of Sections 28 to 31 of the Act or the terms of the Contract between the parties, the said award can be and is required to be set aside by the Court while exercising jurisdiction under Section 34 of the Act.
2. The appellant was entitled to collect agreed liquidated damages at the agreed rate under the terms of the contract, the award violated Section 28(3) of the Act.
3. The decision seemed to be unconstitutional and erroneous because the Arbitral Tribunal misread the law by determining that the appellant was obliged to establish its loss before receiving liquidated damages.
4. The Arbitral Tribunal’s grant of interest on the liquidated damages deducted by the appellant violated the contract’s express provisions, which stated that no interest would be given on “disputed claims.”
5. For the purpose of the construction of contracts, the intention of the parties has to be gathered from the words they have used and not independently thereof.

CONTENTIONS OF RESPONDENT

1. Mr. Dushyant Dave, learned senior counsel appearing on behalf of the respondent – company, contended that the Court’s jurisdiction under Section 34 is limited and that the award could be set aside primarily on the grounds that it is contrary to “Indian Public Policy.” According to his view, the phrase ‘Public Policy of India’ cannot be understood to suggest that the Court might set aside the award if any provisions of law are violated.
2. Mr. Dave said that it is accepted law that for breach of contract, the requirements of Section 74 of the Contract Act would apply, and compensation/damages may only be paid if the loss was caused by the breach of contract. He claimed that the Privy Council established this concept as early as 1929 in Bhai Panna Singh and others v. Bhai Arjun Singh and others [AIR 1929 PC 179]. 

JUDGEMENT

1. Dealing with a similar question, this Court in M/s Alopi Parshad & Sons Ltd. v. The Union of India [(1960) 2 SCR 793] observed that the extent of jurisdiction of the Court to set aside the award on the ground of an error in making the award is well defined and held thus: –
2. An arbitrator’s award may be set aside on the basis of an error on the face thereof only when some legal proposition is found in the award or in any document incorporated with it, such as a note appended by the arbitrators, stating the reasons for his decision, which is erroneous-Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Limited [L.R. 50 IA 324].”
3. If, on the other hand, a specific question is posed to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law does not render the award invalid on its face, as in the case of an arbitration between King and Duveen and others [LR (1913) 2 KBD 32] and Government of Kelantan v. Duff Development Company Limited [LR 1923 AC 395]. 
4. The Supreme Court granted the appeal, ruling that the Arbitral Tribunal did not operate in line with Section 32(2)(a)(v), which dictates the composition of the Arbitration Tribunal in accordance with the agreement. The provision further states that the entire arbitration procedure shall be in conformity. The Tribunal should resolve the issue in line with the Act’s requirements. As a result, if the award falls outside the scope of the aforementioned regulations, it would be unlawful.
5. The Supreme Court ruled that the Arbitral Tribunal exceeded its authority by violating key articles of substantive law and the Act. The Court noted that the judgment would be obviously unconstitutional and might be set aside under Section 34 of the Arbitration and Conciliation Act because the Arbitral Tribunal had not followed the correct procedure provided by the Act and had gone outside its authority.
6. As a result, where a matter of law is at stake, unless both parties expressly agree to refer to it and agree to be bound by the arbitrator’s decision, the courts’ competence to set an arbitration right when the mistake is obvious on the face of the award remains unaffected.
7. The mere submission of incidental legal arguments by both parties over the course of the proceedings is insufficient.

PUBLIC POLICY OVERVIEW

There is no definition for “Indian public policy.” It is tough to define phrases like this. Public policy is a fluid idea that evolves through time. The theory of public policy is only a part of common law, and it, like all other branches of common law, is guided by precedents.

The judgment of the case of Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd. was used to interpret the public policy of India under Section 32 (2)(b)(ii) of the Act, and the court stated that in our opinion, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning.

The notion of public policy may be defined as something that concerns the public benefit and the public interest. What is for the public good or in the public interest, and what is detrimental or destructive to the public good or public interest, has shifted over time. However, the award, which appears to be clearly in breach of legislative prohibitions, cannot be argued to be in the public interest. Such an award/judgment/decision is likely to have a negative impact on the administration of justice.

As a result, in addition to the limited definition of the word “public policy” in the Renu Sagar case, we believe that the judgment should be set aside if it is clearly unconstitutional. As a result, if the award is averse to (a) essential policy of Indian law; (b) the interest of India; (c) justice or morality; or (d) in addition, if it is blatantly illegal, it may be set aside.

Illegality must be pursued to its logical conclusion, and if the illegality is minor, the award cannot be deemed to be against public policy. The award may also be thrown aside if it is so unjust and irrational that it shocks the court’s conscience. Such an award is contrary to public policy and must be declared void.

The concept of public policy is Ex Dolo Malo Non-Oritur Actio- No court will assist a man whose cause of action is based on an immoral or unlawful act. Anything that goes against the general people’s interests is said to go against public policy. The Supreme Court described the theory of public policy in Gherulal Parakh v. Mahadeo Das Maiya.

CONCLUSION

The terms punishment or Liquidated Damages do not always indicate that a provision is a penalty or a Liquidated Damages clause. The provision will be reviewed by the court in light of the facts at the time of contracting. Even under English law, however, a liquidated damages provision will result in the plaintiff receiving the given money without being required to establish damages and regardless of any real loss, even if the actual damage is obviously less than the stipulated figure. 

The purpose of fixing a sum is stated in the Chitty to facilitate recovery of damage without the difficulty and expense of proving actual damage or to avoid the risk under compensation where the rules on the remoteness of damage may not cover consequential, indirect, or idiosyncratic loss or to give the promise an assurance that he can safely rely on the fulfillment of the promise. Contracts that accelerate an existing duty to pay are distinguished from those that establish or enhance a liability to pay.

The latter are punishable, whilst the former is not. Contracts that provide for the forfeiture of previously paid monies are also significant in this regard. Equitable compensation may be offered if the sum paid is punitive and it is unconscionable for the payee to keep the money. The true pre-establishment of damages criteria, however, does not apply in these circumstances. Nonetheless, courts will consider whether the amount to be forfeited is significantly larger than the damage produced by the violation.

REFERENCE

1. https://indiankanoon.org 
2. https://www.legalserviceindia.com 
3. https://ijassonline.in 
4. www.juscorpus.com 

This case analysis is drafted by Bhoomi Sharma student at Lloyd Law College; and intern at Legal Vidhiya.