Oil & Natural Gas Corporation Ltd. v Saw Pipes (2001)
(Setting aside of arbitral award for violating ‘public policy’)
(Section 34, Arbitration & Conciliation Act)
• Whether the liquidation of damages by ONGC legally right?
• Whether Patent illegality could be used as a ground to assail the award under section 34?
• Oil and Natural Gas Commission had placed an order on Saw Pipes for the supply of equipment for offshore exploration, to be procured from approved European manufacturers. There was a delay in delivery due to a strike in Europe.
• Delivery of goods in time was the indispensable clause of the contract and though ONGC extended the time, it invoked the clause for recovery of Liquidated Damages by withholding the amount from the payment to the supplier.
• Saw pipes disputed the deduction and matter were referred to arbitration. While the arbitral tribunal rejected Saw Pipe's defence of force majure, it required ONGC to lead evidence to establish the loss suffered by the breach and proceed to hold, in absence of evidence of financial losses, that the deduction of Liquidated damages was wrongful.
• The award was challenged by ONGC; inter alia as being opposed to public policy ONGC's case was that the arbitral tribunal failed to decide the dispute by not applying the prevailing substantive law, ignoring the terms of the contract and customary practices of usage of trade in such transactions. ONGC challenged the award as being patently illegal. The single judge and a division bench of Bombay High Court dismissed the challenge.
• The appellant contended that where there was a clear violation of Sections(28 - 31) of the Arbitration and Conciliation Act, 1996 or the terms of the contract between the parties, the award could be set aside by the court while exercising jurisdiction under Section 34 of the Act.
• It was argued that since under the terms of the contract the appellant was entitled to recover agreed liquidated damages at the agreed rate, the award was contrary to Section 28(3) of the Act, the award was on the face of it illegal and erroneous as the Arbitral Tribunal had misinterpreted the law in holding that the appellant was required to prove the loss suffered by it before recovering the liquidated damages, the grant of interest by the Arbitral Tribunal on the liquidated damages deducted by the appellant was against the specific terms of the contract which provided that on a disputed claim no interest would be payable, and for the purpose of construction of contracts, the intention of the parties has to be gathered from the words they have used and not independently thereof.
• The respondents argued that the court's jurisdiction is limited in Section 34 and the award can be set aside only if it conflicts with the public policy of India.
The Supreme Court allowed the appeal mentioning the failure of compliance of rules by the Arbitral Tribunal and held that the tribunal acted beyond its jurisdiction.
"It is to be reiterated that it is the primary duty of the arbitrators to enforce a promise which the parties have made and to uphold the sanctity of the contract which forms the basis of the civilized society and also the jurisdiction of the arbitrators. Hence, this part of the award passed by the arbitral tribunal granting interest on the amount deducted by the appellant from the bills payable to the respondent is against the terms of the contract and is, therefore, violative of Section 28(3) of the Act."
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