WELSPUN SPECIALTY SOLUTIONS LIMITED (FORMERLY KNOWN AS REMI METALS GUJARAT LTD. versus OIL AND NATURAL GAS CORPORATION LTD. on 13 November 2021

[2021] 11 S.C.R.

AWELSPUN SPECIALTY SOLUTIONS LIMITED(FORMERLY KNOWN AS REMI METALS GUJARAT LTD.)

v.

OIL AND NATURAL GAS CORPORATION LTD.

B(Civil Appeal Nos. 2826-2827 of 2016)

NOVEMBER 13, 2021

[N. V. RAMANA, CJI AND SURYA KANT, JJ.]

Arbitration and Conciliation Act, 1996: ss. 37 and 34 –Appealable orders – Arbitral award – Sustainability of, under sectionC37 – On facts, execution of contract wherein appellant was to supplypipes to the respondent-ONGC – During execution of contract,certain delays in meeting the obligations as required under thecontract – Deduction of certain amount by respondent as liquidateddamages from various bills submitted by the supplier – DisputeDbefore the arbitral tribunal – Arbitral tribunal proceeded to determinethe actual damages, holding that the liquidated damages could notbe granted as there was no breach of contract since time was notessence of contract – Interference with – Held: It has to be culledout from the reading of the entire contract as well as the surroundingcircumstances whether time is essence of the contract – MerelyEhaving an explicit clause may not be sufficient to make time theessence of the contract – As the contract was spread over a longtenure, the intention of the parties to provide for extensions surelyreinforces the fact that timely performance was necessary – Factthat such extensions were granted indicates respondent’s effort toFuphold the integrity of the contract instead of repudiating the same– Thus, award cannot be interfered since the arbitral tribunal’sinterpretation of contractual clauses having extension procedureand imposition of liquidated damages, are good indicators that ‘timewas not the essence of the contract – Arbitral tribunal’s view toimpose damages accrued on actual loss basis could be sustained inGview of the waiver of liquidated damages and absence of preciselanguage which allows for reimposition of liquidated damages –High Court and District Court strayed beyond the limitation u/s. 34and 37 – Order of the High Court as well as the District Court is setaside – Award of the arbitral tribunal is upheld – Contract Act,H1872 - ss. 55 and 74.

Allowing CA Nos. 2826-2827 of 2016 and disposing of CANos. 6834 of 2021, the Court HELD: 1.1 The main challenge to the award is against theimposition of unliquidated damages, when the matter of fact stoodthat the contract between parties stipulated for pre-estimateddamages (liquidated damages). The concerned contract containedprovisions for liquidated damages for breach of contract,particularly breach of deadlines set in the contract. UnderContract law, such liquidated damages are recognized, subject tothe same being reasonable. [Para 26][136-B-D]

1.2 Time not being the essence of the contract’, asdetermined by the Arbitral Tribunal, was beyond reproach.Reliance on the contractual conditions and conduct of parties toconclude that existence of extension clause dilutes time beingthe essence of the contract, was in accordance with rules ofcontractual interpretation. The award concludes that as time wasnot the essence, liquidated damages could not be granted.[Para 27, 28][136-F-G]

1.3 In order to consider the relevancy of time conditionedobligations, some basic principles are that subject to the natureof contract, general rule is that promisor is bound to completethe obligation by the date for completion stated in the contract.That is subject to the exception that the promisee is not entitledto liquidated damages, if by his act or omissions he has preventedthe promisor from completing the work by the completion date.These general principles may be amended by the express termsof the contract as stipulated in this case. [Para 29][137-A-D]

1.4 It is now settled that ‘whether time is of the essence ina contract’, has to be culled out from the reading of the entirecontract as well as the surrounding circumstances. Merely havingan explicit clause may not be sufficient to make time the essenceof the contract. As the contract was spread over a long tenure,the intention of the parties to provide for extensions surelyreinforces the fact that timely performance was necessary. Thefact that such extensions were granted indicates ONGC’s effort

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Ato uphold the integrity of the contract instead of repudiating thesame. [Para 30][137-D-F]

1.5 Clause 9(i) of the Purchase Order makes it clear thattime is the essence of the contract, subject to extension grantedwithout prejudicing the right of ONGC to recover damages. TheseBdamages, by one reasonable interpretation, could be read asdamages based on actual loss. Such conclusion was based on theArbitral Tribunal’s interpretation of 2nd para of Section 55 of theContract Act. The Arbitral Tribunal construed the said provisionto interpret the term ‘loss’ to mean actual tangible loss provableby evidence, instead of pre-estimated loss. Such interpretation,Cin the facts and circumstances, could be held to be a reasonableinterpretation, as the other party was not able to impugn the sameby pointing to any documents or correspondence to the contrary.When a standard form of a contract is utilised, ONGC is assumedin law to have the larger bargaining power to enter into a contract,Dunless clear intention is shown to the contrary. In this case athand, a reasonable interpretation against ONGC may be utilised.[Para 31][137-F-G; 138-B-C]

1.6 ONGC waived liquidated damages twice before givingextension with pre- estimated damages. The approach of theEArbitral Tribunal was to hold that once liquidated damages werewaived in the first extension, subsequent extension could not becoupled with liquidated damages unless a clear intention flowedfrom the contract; while this Court recognizes the autonomy ofthe party to engage in contractual obligation. Such obligation mustbe contracted in clear terms. Thus, it is clear that the promiseeF(ONGC) waived the liquidated damages initially and the samecannot be imposed, unless such imposition was clearly acceptedby parties. In this case, the interpretation of the Arbitral Tribunalcould not be faulted as being perverse. [Para 33][140-B-C]

1.7 It was submitted that the view taken by the ArbitralGTribunal was reasonable, as the loss sustained by ONGC is givenon the basis of actual loss. In this situation, the interpretation ofthe law and the facts provided under the award is a reasonableinterpretation, which can be sustained as being a plausible view.[Para 34][140-D-E]

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WELSPUN SPECIALTY SOLUTIONS LTD. (FORMERLY KNOWN ASREMI METALS GUJARAT LTD.) v. ONGC

1.8 The award cannot be interfered since the ArbitralTribunal’s interpretation of contractual clauses having extensionprocedure and imposition of liquidated damages, are goodindicators that ‘time was not the essence of the contract’. TheArbitral Tribunal’s view to impose damages accrued on actualloss basis could be sustained in view of the waiver of liquidateddamages and absence of precise language which allows forreimposition of liquidated damages. Such imposition is in linewith the 2nd para of Section 55 of the Contract Act. The ArbitralTribunal was correct in distinguishing the dictum of this Court inSaw Pipes’s case, which validated imposition of liquidated damagesin a similar contract. The High Court and District Court strayedbeyond the limitation under Section 34 and 37 of the ArbitrationAct. Other aspects of the award also do not require interference.[Para 35][140-E-H; 141-A]

ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 : [2003]3 SCR 691 – distinguished.

Project Director, National Highways No.45E and 220,National Highways Authority of India v. M. Hakeem.SLP (Civil) No. 13020 of 2020 – referred to.

1.9 The order of the High Court as well as the District Courtis set aside. The award of the Arbitral Tribunal is upheld. [Para36][141-B-C]

Associate Builders v. Delhi Development Authority(2015) 3 SCC 49 : [2014] 13 SCR 895; RenusagarPower Co. Ltd. v. General Electric Co. (1994) 1 Suppl.SCC 644 : [1993] 3 Suppl. SCR 22; ONGC Ltd. v.Western Geco International Limited (2014) 9 SCC 263: [2014] 12 SCR 1; Dyna Technologies Pvt. Ltd. v.Crompton Greaves Ltd. (2019) 20 SCC 1 – referred to.

Percy Bilton Ltd. v. Greater London Council [1982] 1WLR 794; Holme v. Guppy (1838) 3 M & W 387 –referred to.

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[2021] 11 S.C.R.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2826-B2827 of 2016.

From the Judgment and Order dated 27.07.2010 of the High Courtof Uttarakhand at Nainital in Review Petition No.1340 of 2008 in A.O.No. 472 of 2005.

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Civil Appeal No. 6834 of 2021

Shyam Divan, Sr. Adv., Astad Randeria, Y. P. Dandiwala, R. K.Satpalkar, Ms. Sugandha Yadav, Ms. Delnavaz Patel, Saswat Pattnaik,Aditya Panda, Hasan Murtaza, Somiran Sharma, K. R. Sasiprabhu,Vishnu Sharma, Tushar Bhardwaj, Advs. for the appearing parties.D

The Judgment of the Court was delivered by

N. V. RAMANA, CJI.

1. Leave granted in SLP (C) No. 19203 of 2012.

E2. Civil Appeal Nos. 2826-2827 of 2016, preferred by WelspunSpecialty Solutions Limited (formerly known as Remi Metals GujaratLtd.) hereinafter referred to as ‘Remi Metals’ for the sake of brevityand clarity, have been filed impugning the judgments and orders dated14.10.2008 and 27.07.2010 of the High Court of Uttarakhand at Nainitalin AO Nos. 472 and 466 of 2005 and Review Petition No. 1340 of 2008Fin AO No. 472 of 2005 respectively. Civil Appeal arising out of SLP(C)No. 19203 of 2012, 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 ofthe High Court of Uttarakhand at Nainital in Review Petition No. 1340of 2008 in AO No. 472 of 2005.G

3. The short question which arises for determination by this Courtis whether the impugned judgment was correct in setting aside thearbitration awardin favour of the ONGC.

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4. Before we analyse the case at hand, it is necessary for us tohave a brief understanding of the facts. A global tender was floated bythe ONGC for purchase of aggregate quantity of 3,93,297 metres ofseamless steel casing pipes. Remi Metalswas a successful bidder. Itclaims that it had bid to supply pipes as a supplier on behalf of VolskiTube 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 willcommence 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, whichwere common to all the POs, are as under:

9. i) The time and date of delivery is the essence of the supplyorder and delivery must be completed not later than the datespecified therein.

ii) It must be noted that delayed supplies even delivery and/oraccepted by the purchaser will be treated as supplied/effectedafter schedule period without prejudice to Failure & TerminationClause.

iii) Even when extension in delivery period is granted, suchacceptance of extension as the case may be will be withoutprejudice to claim damages under Failure & Termination Clauseunless purchaser clearly waives his right in writing to recoversuch damages with the approval of competent authority.

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7. Further, relevant provisions of the General Terms and Conditionsappended with the POs are as follows:

10. FAILURE AND TERMINATION CLAUSE/LIQUIDATED DAMAGES:

Time and date of delivery shall be essence of the contract. If thecontractor fails to deliver the stores, or any instalment thereofwithin the period fixed for such delivery in the schedule or at anytime repudiates the contract before the expiry of such period, thepurchaser may, without prejudice to any right or remedy, availableto him to recover damages for breach of contract :- B

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(a) Recover from the contractor as agreed liquidated damagesand not by way of penalty, a sum equivalent to ½% (half percent)of the contract price of the whole unit per week for such delay orpart thereof (this is an agreed, genuine pre-estimate of damageduly agreed by the parties) which the contractors has failed todeliver within the period fixed for delivery in the schedule, wheredelivery thereof is accepted after expiry of the aforesaid period.It may be noted that such recovery of liquidated damages may beupto 5% of the contract price of whole unit of stores which thecontractor has failed to deliver within the period fixed for delivery;or D

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(e) It may further be noted that the clause (a) above provides forrecovery of liquidated damages on the cost of contract price ofdelayed supplies whole unit at the rate of ½% (half percent) ofFthe contract price of the whole unit per week for such delay orpart thereof upto a ceiling of 5% of the contract price of delayedsupplies (whole unit). Liquidated damages for delay in suppliesthus accrued will be recovered by the paying authorities of thepurchaser specified in the supply order, from the bill for paymentof the cost of material submitted by the contactor or his foreignGprincipals in accordance with the term of supply order or otherwise.

8. During the execution of contract, there were certain delays inmeeting 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:

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Remi Metals accepted the aforesaid extensions and satisfied thecontract.

9. In this context, it may be noted that the ONGC had deductedan aggregate amount of US $8,07,804.03 and Rs.1,05,367/- as liquidateddamages from various bills submitted by the Remi Metals. There wereother claims which were disputed by the Remi Metals which wereclaimed before a panel of arbitrators.

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10. In detail, the Remi Metals’ claims were hereunder:

CLAIM TITLEAMOUNTRefund of Liquidated damages claimed by US $807,804.03 and ONGC Rs. 1,05,367/-Customs Duty Reimbursement Rs. 1,90,43,037/- Interest on Delayed PaymentsUS $2,44,121.03 and Rs. 5,76,244.31Amount Short Received under invoices Rs. 18,11,456.72Failure to Furnish “C” formsUS $2,44,649.39Handling Charges Payable on ONGCRs. 24,86,369.86Wrongful reduction of price for balance 8.55% US $83,324.38 (16,174.78m) under PO No. 275 Award of the above amounts with 18% interest - from the date on which it ought to have been paid by ONGC and further interest till date of payment D

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11. The Arbitral Tribunal, on hearing the parties, had framed 17issues, of which we are concerned only with the following:

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(i) Was time the essence of the Agreement to make suppliesunder the four Purchase Orders and was the delivery dateto be reckoned from the date of the supply order?

G(ii)Was ONGC justified in recovering liquidated damages ofUS $8,07,804.03 and Rs.1,05,367/-?

(iii) Was the Claimant entitled to extension of delivery dateswithout levy of liquidated damages on account of forcemajeure condition as stated in paragraphs 12.D.3 and12.D.4 of the Statement of Claim?H

A(iv)Was ONGC entitled to impose liquidated damages on thebasis of the entire value of the Purchase Orders?

(v) Is the Claimant entitled to refund of any part of the amountrecovered by ONGC as liquidated damages?

(vi) Is the Claimant entitled to US $2,44,121.03 andBRs.5,76,244.21 as interest on delayed payment as in Exhibit‘H’ to the Statement of Claim?

(vii) Whether the Claimant is entitled to any interest? If so, atwhat rate and for what period?

C12. The Arbitral Tribunal, at the outset, held that merely having aclause in the contract making time the essence of it would not bedeterminative; rather, an overall view having regard to all the terms ofcontract are to be taken into consideration. Further, they noted thatcontracts containing provision for extension of time or payment of penaltyon default would dilute the obligation of timely performance and renderDthe clauses imbuing time as essence of the contract ineffective.Additionally, the Arbitral Tribunal also noted that generally, underconstruction contracts, time is not the essence. Ultimately, on this issue,the Arbitral Tribunal noted as under:

“43.29. It may also be stated that the supply of material in theEinstant case was not for any specific purpose or urgentrequirement. The tender was a global tender for generalrequirement as stated by Mr. K. Bhattacharya (RW-1).

43.30. Besides, the contract provides for imposition of LD and/ortermination of the contract. It may also be noticed that ONGCFcould extend the time for delivery and in fact ONGC did extendthe delivery period without levying any LD. These and otherstipulations in the contract are a clear indication that the time wasnot the essence of contract.”

13. On the aspect of liquidated damages, the Arbitral TribunalGheld that liquidated damages, which are pre-estimated damages, cannotbe granted as there was no breach of contract due to the fact that timewas not the essence. Accordingly, the Arbitral Tribunal proceeded todetermine the actual damages based on the evidence furnished.

14. It was ONGC’s estimation that there were four categories ofHtangible losses, namely: (i) revenue loss; (ii) loss due to the use of higher ppf/grade casing; (iii) loss due to intra/inter-regional transportation; and(iv) loss due to foreign exchange fluctuation. In total, such losses wereestimated to be to the tune of Rs.3,80,64,830/-. The estimation was asfollows:

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15. The said estimation was accepted by the Arbitral Tribunal.However, it was also held that ONGC would not be entitled to claim anydamage for losses incurred during the extended period of delivery whereliquidated damages were expressly waived. The losses claimed duringsuch period without imposition of liquidated damages are to the tune ofRs.1,71,35,838, which were excluded from the total computation of lossby the Arbitral Tribunal. Ultimately, it was held that ONGC would beentitled to retention of Rs.2,09,28,995/-or its equivalent in US dollars atthe rate as on date of the award, i.e.US $440,610.42/-[1], out of the totalliquidated damages (US $8,07,804.03 and Rs.1,05,367/-) recovered.

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16. Aggrieved by the award of the Arbitral Tribunal, the ONGCfiled a Section 34 petition before the District Court claiming that theaward of the Arbitral Tribunal was not in tune with the contract, which isa justifiable ground for interference. They sought to address the concernon delayed acceptance by stating that such acceptance was valid andpermissible under contract law and the liquidated damages imposed onsuch acceptance was legally valid. Further, they pointed out that liquidateddamages could have been given as the same was a genuine andreasonable pre-estimate of the possible damages negotiated betweenthe parties at the time of entering into contract.

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17. The District Court, by order dated 19.07.2005, held that theTribunal was correct in holding that time was not the essence of thecontract and only the losses actually suffered could be granted. However,the District Judge modified the costs of arbitration from Rs.25 lakhs toRs.9,40,000/-.

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1 https://www.rbi.org.in/scripts/PublicationsView.aspx?id=15268 1 USD = 47.5 INRend of year 2002-03

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A18. Both parties, aggrieved by the order of the District Judge,appealed the same before the High Court of Uttarakhand in AO Nos.472of 2005 and 466 of 2005 under Section 37 of the Arbitration andConciliation Act, 1996. The High Court, by impugned order dated14.10.2008 held that both the arbitral award and order of the DistrictJudge erred in construction of the contract with respect to whether timeBwas the essence or not. Further, the High Court has reasoned that theArbitral Tribunal as well as District Judge committed gross error in arrivingat a conclusion that ONGC had to prove loss suffered before recoveringany damages. Moreover, the decree in respect of cost of arbitration wasupheld by the High Court. Accordingly, AO No.472 of 2005 filed byCONGC was allowed and AO No.466 of 2005 filed by Remi Metals (nowWelspun) was dismissed.

19. Aggrieved by the aforesaid order, review petitions being ReviewPetition Nos.1340 of 2008 and 1339 of 2008 were filed which weredisposed of with the following observation:

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“…The judgement and order passed by the District Judge,Dehradun, in Arbitration Case No.31 of 2004 dated 19[th] July, 2005,is modified to the extent that the appeal with regard to Claim Nos.1 and 2 is allowed, while the judgement and order dated 19[th] July,2005, passed by the District Judge, Dehradun, shall remain intactEwith regard to claim Nos. 3 to 7…”

20. Aggrieved by the order passed in the review petitions, bothparties have filed these appeals before this Court.

21. Mr. Shyam Divan, learned senior counsel, appearing for RemiMetals (now Welspun), has submitted that:F

•The view taken by the Arbitral Tribunal was reasonable,plausible and can be sustained.

•Time was not the essence of the contract, as the contractprovided for extension of time as well as for liquidateddamages.

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•Further, once ONGC waived the liquidated damages inthe first two extensions, they could not have claimedliquidated damages for further extensions of deliverydate.

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•This Court should not interfere or set aside awards in acasual manner, while doing so this Court should come toa clear understanding that the award was patently illegal.[See Associate Builders v. Delhi DevelopmentAuthority (2015) 3 SCC 49 pg. 67]

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22. Learned Counsel appearing for ONGC has submitted that:

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•That the imposition of liquidated damages has alreadybeen upheld under similar circumstance by earlierjudgment in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5SCC 705.

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•The award cannot be sustained as in a contract havingprovision for liquidated damages, unliquidated damagescannot be given.

•Reading of the contract makes it clear that the time wasof the essence, which was also signified in everyextension given.D

•The award interprets the contractual clauses in a mannerwhich is not reasonable and plausible.

23. Before we analyse the award, we need to first ascertain thescope of Section 34 of Arbitration Act, before the 2015 amendment,Ewhich provided for certain specific grounds for challenge. Section 34, asit existed, reads as under:

34 Application for setting aside arbitral award. —

(1) Recourse to a Court against an arbitral award may be madeonly by an application for setting aside such award in accordanceFwith sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—

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(b) the Court finds that—

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(i) the subject-matter of the dispute is not capable of settlementby arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy ofIndia.

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(Emphasis supplied)

AThe limited grounds provided under Section 34 of the Act, hasbeen interpreted by this Court on numerous occasions. In this case athand, the challenge of award is based on the fact that the same is againstthe public policy and patent illegality. Public policy as a ground of challengehas always been met with certain scepticism. The phrase ‘public policy’does not indicate ‘a catch-all provision’ to challenge awards before anBappellate forum on infinite grounds. However, the ambit of the same isso diversly interpreted that in some cases, the purpose of limiting theSection 34 jurisdiction is lost. This Court’s jurisprudence also shows thatSection 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 appellateCpowers and integrity of the arbitral process.

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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 644, which inter alia provided that a foreign award may not beenforced under the said Act, if the court dealing with the case is satisfiedDthat the enforcement of the award will be contrary to the public policy.After elaborate discussion, the Court arrived at the conclusion that publicpolicy comprehended in Section 7(1)(b)(ii) of the Foreign Awards(Recognition and Enforcement) Act, 1961 is the “public policy of India”and does not cover the public policy of any other country. For givingmeaning to the term “public policy”, the Court observed thus:E

“66. Article V(2)(b) of the New York Convention of 1958and Section 7(1)(b)(ii) of the Foreign Awards Act do not postulaterefusal of recognition and enforcement of a foreign award on theground that it is contrary to the law of the country of enforcementand the ground of challenge is confined to the recognition andenforcement being contrary to the public policy of the country inwhich the award is set to be enforced. There is nothing to indicatethat the expression ‘public policy’ in Article V(2)(b) of the NewYork Convention and Section 7(1)(b)(ii) of the Foreign AwardsAct is not used in the same sense in which it was used in ArticleI(c) of the Geneva Convention of 1927 and Section 7(1) of theProtocol and Convention Act of 1937. This would mean that‘public policy’ in Section 7(1)(b)(ii) has been used in a narrowersense and in order to attract the bar of public policy theenforcement of the award must invoke something more thanthe violation of the law of India. Since the Foreign Awards Act F

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is concerned with recognition and enforcement of foreign awardswhich are governed by the principles of private international law,the expression ‘public policy’ in Section 7(1)(b)(ii) of the ForeignAwards Act must necessarily be construed in the sense thedoctrine of public policy is applied in the field of private internationallaw. Applying the said criteria it must be held that theenforcement of a foreign award would be refused on theground that it is contrary to public policy if such enforcementwould be contrary to (i) fundamental policy of Indian law; or(ii) the interests of India; or (iii) justice or morality.”

In ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, the scopeof Section 34 was expanded to include patent illegality as a ground forchallenging the award and held as under :

“31. Therefore, in our view, the phrase ‘public policy ofIndia’ used in Section 34 in context is required to be given a widermeaning. It can be stated that the concept of public policy connotessome matter which concerns public good and the public interest.What is for public good or in public interest or what would beinjurious or harmful to the public good or public interest has variedfrom time to time. However, the award which is, on the face of it,patently in violation of statutory provisions cannot be said to be inpublic interest. Such award/judgment/decision is likely to adverselyaffect the administration of justice. Hence, in our view in additionto narrower meaning given to the term ‘public policy’in Renusagar case [Renusagar Power Co. Ltd. v. GeneralElectric Co., 1994 Supp (1) SCC 644] it is required to be heldthat the award could be set aside if it is patently illegal. The resultwould 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 is oftrivial nature it cannot be held that award is against the publicpolicy. Award could also be set aside if it is so unfair andunreasonable that it shocks the conscience of the court. Such

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134SUPREME COURT REPORTS

Aaward is opposed to public policy and is required to be adjudgedvoid.

(…)

74. In the result, it is held that:

(A)(1) The court can set aside the arbitral award under SectionB34(2) of the Act if the party making the application furnishes proofthat:

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to whichCthe parties have subjected it or, failing any indication thereon, underthe law for the time being in force; or

(iii) the party making the application was not given proper noticeof the appointment of an arbitrator or of the arbitral proceedingsor was otherwise unable to present his case; or D(iv) the arbitral award deals with a dispute not contemplated byor not falling within the terms of the submission to arbitration, or itcontains decisions on matters beyond the scope of the submissionto arbitration.

(2) The court may set aside the award:

E(i)(a) if the composition of the Arbitral Tribunal was not inaccordance with the agreement of the parties, (b) failing such agreement, the composition of the Arbitral Tribunalwas not in accordance with Part I of the Act,

(ii) if the arbitral procedure was not in accordance with:

F(a) the agreement of the parties, or

(b) failing such agreement, the arbitral procedure was not inaccordance with Part I of the Act.

However, exception for setting aside the award on the ground ofGcomposition of Arbitral Tribunal or illegality of arbitral procedureis that the agreement should not be in conflict with the provisionsof Part I of the Act from which parties cannot derogate.

(c) If the award passed by the Arbitral Tribunal is in contraventionof the provisions of the Act or any other substantive law governingthe parties or is against the terms of the contract.H

(3) The award could be set aside if it is against the publicpolicy of India, that is to say, if it is contrary to:

(a) fundamental policy of Indian law; or (b) the interest of India; or

(c) justice or morality; or

(d) if it is patently illegal.

(4) It could be challenged:

(a) as provided under Section 13(5); and (b) Section 16(6) of the Act.

Eventually, a three-Judge Bench in ONGC Ltd. v. Western GecoInternational Limited, (2014) 9 SCC 263, while upholding Saw Pipescase (supra), noted that ‘illegality’ of the award must go to root of thematter. Illegality of a trivial nature could not be held to violate the publicpolicy.

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 Actlimits a challenge to an award only on the grounds provided thereinor as interpreted by various Courts. We need to be cognizant ofthe fact that arbitral awards should not be interfered with in acasual and cavalier manner, unless the Court comes to a conclusionthat the perversity of the award goes to the root of the matterwithout there being a possibility of alternative interpretation whichmay sustain the arbitral award. Section 34 is different in itsapproach and cannot be equated with a normal appellatejurisdiction. The mandate under Section 34 is to respect the finalityof the arbitral award and the party autonomy to get their disputeadjudicated by an alternative forum as provided under the law. Ifthe Courts were to interfere with the arbitral award in the usualcourse on factual aspects, then the commercial wisdom behindopting for alternate dispute resolution would stand frustrated.

25. Moreover, umpteen number of judgments of this Court havecategorically held that the Courts should not interfere with anaward merely because an alternative view on facts andinterpretation of contract exists. The Courts need to be cautious A

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Aand should defer to the view taken by the Arbitral Tribunal even ifthe reasoning provided in the award is implied unless such awardportrays perversity unpardonable under Section 34 of theArbitration Act.”

With these observations and limitations set out above, we need toBexamine whether the award can be sustained under Section 37 ofthe Arbitration Act.

26. The main challenge to the award is against the imposition ofunliquidated damages, when the matter of fact stood that the contractbetween parties stipulated for pre-estimated damages (liquidatedCdamages). The concerned contract contained provisions for liquidateddamages for breach of contract, particularly breach of deadlines set inthe contract. Under Indian Contract law, such liquidated damages arerecognized, subject to the same being reasonable. Section 74 of the IndianContract Act, provides that:

D74. Compensation for breach of contract where penalty

D74. Compensation for breach of contract where penalty stipulated for.—When a contract has been broken, if a sum isnamed in the contract as the amount to be paid in case of suchbreach, or if the contract contains any other stipulation by way ofpenalty, the party complaining of the breach is entitled, whetheror not actual damage or loss is proved to have been caused thereby,Eto receive from the party who has broken the contract reasonablecompensation not exceeding the amount so named or, as the casemay be, the penalty stipulated for.

27. In order to examine whether the delayed execution of contractby the Remi Metals was liable for compensation, the tribunal examinedFwhether time was of the essence in the contract. In our consideredopinion, ‘time not being the essence of the contract’, as determined bythe Arbitral Tribunal, was beyond reproach. Reliance on the contractualconditions and conduct of parties to conclude that existence of extensionclause dilutes time being the essence of the contract, was in accordanceGwith rules of contractual interpretation.

28. In this context, the award concludes that as time was not theessence, liquidated damages could not be granted, in the following manner:

“Since time was not the essence of the contract, the measureof damages specified under Clause/ Liquidated damages,Hwhich was the essence of the contract, cannot be regarded as appropriate for determining the loss sustained byONGC”

(Emphasis supplied)

29. In order to consider the relevancy of time conditionedobligations, we may observe some basic principles:

a. Subject to the nature of contract, general rule is that promisoris bound to complete the obligation by the date for completionstated in the contract. [Refer to Percy Bilton Ltd. v. GreaterLondon Council, [1982] 1 WLR 794]

b. That is subject to the exception that the promisee is not entitledto liquidated damages, if by his act or omissions he hasprevented the promisor from completing the work by thecompletion date. [Refer Holme v. Guppy, (1838) 3 M & W387]

c. These general principles may be amended by the express termsof the contract as stipulated in this case.

30. It is now settled that ‘whether time is of the essence in acontract’, has to be culled out from the reading of the entire contract aswell as the surrounding circumstances. Merely having an explicit clausemay not be sufficient to make time the essence of the contract. As thecontract was spread over a long tenure, the intention of the parties toprovide for extensions surely reinforces the fact that timely performancewas necessary. The fact that such extensions were granted indicatesONGC’s effort to uphold the integrity of the contract instead of repudiatingthe same.

31. Clause 9(i) of the Purchase Order reproduced above makes itclear that time is the essence of the contract, subject to extension grantedwithout prejudicing the right of ONGC to recover damages. Thesedamages, by one reasonable interpretation, could be read as damagesbased on actual loss. Such conclusion was based on the Arbitral Tribunal’sinterpretation of 2[nd] para of Section 55 of the Contract Act, which readsas under:

Effect of such failure when time is not essential.- If it wasnot the intention of the parties that time should be of the essenceof the contract, the contract does not become voidable by thefailure to do such thing at or before the specified time; but the 137A

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Apromisee is entitled to compensation from the promisorfor any loss occasioned to him by such failure.

(emphasis supplied)

The Arbitral Tribunal construed the aforesaid provision to interpretthe term ‘loss’ to mean actual tangible loss provable by evidence, insteadBof pre-estimated loss. Such interpretation, in the facts and circumstances,could be held to be a reasonable interpretation, as the other party wasnot able to impugn the same by pointing to any documents orcorrespondence to the contrary. When a standard form of a contract isutilised, ONGC is assumed in law to have the larger bargaining power toCenter into a contract, unless clear intention is shown to the contrary.Inthis case at hand, a reasonable interpretation against ONGC may beutilised.

32. In Saw Pipes case (supra), impugned clause for liquidateddamages was considered and upheld by this Court in the followingDmanner:

46. From the aforesaid sections, it can be held that when a contracthas been broken, the party who suffers by such breach is entitledto receive compensation for any loss which naturally arises in theusual course of things from such breach. These sections furtherEcontemplate that if parties knew when they made the contractthat a particular loss is likely to result from such breach, they canagree for payment of such compensation. In such a case, theremay not be any necessity of leading evidence for proving damages,unless the court arrives at the conclusion that no loss is likely tooccur because of such breach. Further, in case where the courtFarrives at the conclusion that the term contemplating damages isby way of penalty, the court may grant reasonable compensationnot exceeding the amount so named in the contract on proof ofdamages. However, when the terms of the contract are clear andunambiguous then its meaning is to be gathered only from theGwords used therein. In a case where agreement is executed byexperts in the field, it would be difficult to hold that the intention ofthe parties was different from the language used therein. In sucha case, it is for the party who contends that stipulated amount isnot reasonable compensation, to prove the same.

H…

64. … Under Section 73, when a contract has been broken, theparty who suffers by such breach is entitled to receivecompensation for any loss caused to him which the parties knewwhen they made the contract to be likely to result from the breachof it. This section is to be read with Section 74, which deals withpenalty stipulated in the contract, inter alia (relevant for thepresent case) provides that when a contract has been broken, if asum is named in the contract as the amount to be paid in case ofsuch breach, the party complaining of breach is entitled, whetheror not actual loss is proved to have been caused, thereby to receivefrom the party who has broken the contract reasonablecompensation not exceeding the amount so named. Section 74emphasizes that in case of breach of contract, the party complainingof the breach is entitled to receive reasonable compensationwhether or not actual loss is proved to have been caused by suchbreach. Therefore, the emphasis is on reasonable compensation.… But if the compensation named in the contract for such breachis genuine pre-estimate of loss which the parties knew when theymade the contract to be likely to result from the breach of it, thereis no question of proving such loss or such party is not required tolead evidence to prove actual loss suffered by him..

…

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66. In Maula Bux case [(1969) 2 SCC 554] the Court hasspecifically held that it is true that in every case of breach ofcontract the person aggrieved by the breach is not required toprove actual loss or damage suffered by him before he can claima decree and the court is competent to award reasonablecompensation in a case of breach even if no actual damage isproved to have been suffered in consequence of the breach ofcontract. The Court has also specifically held that in case of breachof some contracts it may be impossible for the court to assesscompensation arising from breach.

Although the aforesaid case was cited by the Arbitral Tribunal, itdistinguished the same by observing that the aforesaid case was silenton the aspect.We need to accept the aforesaid distinction based on thedifferent set of circumstances this case emanates from. In Saw Pipes(supra), the purchaser therein had extended the time for supply of goodssubject to the specific condition that purchaser would recover the agreed ABC

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Astipulated damages from the contractor. Thus, the aspect of waiver is animportant distinguishing factor, which was not dealt with in the earlierjudgment.

33. This brings us to the waiver.It may be noted that ONGC waivedliquidated damages twice before giving extension with pre-estimatedBdamages. The approach of the Arbitral Tribunal was to hold that onceliquidated damages were waived in the first extension, subsequentextension could not be coupled with liquidated damages unless a clearintention flowed from the contract;while this Court recognizes theautonomy of the party to engage in contractual obligation. Such obligationmust be contracted in clear terms. From the aforesaid discussion, it isCclear that the promisee (ONGC) waived the liquidated damages initiallyand the same cannot be imposed, unless such imposition was clearlyaccepted by parties. In this case, the interpretation of the Arbitral Tribunalcould not be faulted as being perverse, for the reasons stated above.

34. Mr. Shyam Diwan, learned senior counsel, appearing on behalfDof the Remi Metals, submitted that the view taken by the Arbitral Tribunalwas reasonable, as the loss sustained by ONGC is given on the basis ofactual loss. In this situation, the interpretation of the law and the factsprovided under the award is a reasonable interpretation, which can besustained as being a plausible view.E35. This Court cannot interfere with this award, as the award is aplausible view for the following reasons:

a. The Arbitral Tribunal’s interpretation of contractual clauseshaving extension procedure and imposition of liquidateddamages, are good indicators that ‘time was not the essenceFof the contract’.

b. The Arbitral Tribunal’s view to impose damages accrued onactual loss basis could be sustained in view of the waiver ofliquidated damages and absence of precise language whichallows for reimposition of liquidated damages. Such impositionGis in line with the 2[nd] para of Section 55 of the Indian ContractAct.

c. The Arbitral Tribunal was correct in distinguishing the dictumof this Court in Saw Pipes(supra), which validated impositionof liquidated damages in a similar contract.H

d. The High Court and District Court strayed beyond the limitationunder Section 34 and 37 of the Arbitration Act.

e. Other aspects of the award also do not require interference ofthis Court, in view of the law laid down in the Project Director,National Highways No.45E and 220, National HighwaysAuthority of India v. M. Hakeem.[2]

36. Therefore, we set aside the order of the High Court as well asthe District Court’s interference, and uphold the award of the ArbitralTribunal. Accordingly, Civil Appeal Nos. 2826-2827 of 2016 are allowedand Civil Appeal arising out of SLP (C) 19203 of 2012 is disposed ofaccordingly.

37. Parties are to bear their own costs.

Nidhi Jain

Appeals disposed of.

2 SLP (CIVIL) NO.13020 OF 2020

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