OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD.

"9. The position in law has been noticed by this Court in Union of India v. A.L. Rallia Ram, AIR, (1963) SC 1685 and Madan/al Roshanlal Mahajan v. Hukumchand Mills ltd, [1967] l $CR 105 to the effect that the arbitrator's award both on facts and law is final D that there is no appeal from his verdict: that court cannot review his award and correct any mistake in his adjudication, unless the objection to the legality of the award is apparent on the face of it. In understanding what would be an error of law on the face of the award the following observations in Champsey Bhara & Co. v. Jivraj Ba/loo Spg and Wvg. Co. Ltd., (I 922-23) 60 IA 324 a decision of the Privy E Council, are relevant (A.P. 331)

"An error in law on the face of the award means, in Their Lordship's view, that you can find in the award on a document actually incorporated thereto, as for instance, a F note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous."

10. In Arosan Enterprises ltd. v. Union of India, [1999] 9 SCC 449, this Court again examined this matter and stated that where the error of finding of fact having a bearing on the award is patent and is easily demonstrable without the necessity of carefully weighing the various possible viewpoints, the interference in the award based on an erroneous finding of fact is permissible and similarly, if an award is based by applying a principle of law which is patently erroneous, and but for such erroneous application of legal principle, the award could

OIL& NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD [SHAH,J.] 733 not have been made, such award is liable to be set aside by holding that there has been a legal misconduct on the part of the arbitrator."

Next question is - whether the legal proposition which is the basis of the award for arriving at the conclusion that ONGC was not entitled to recover the stipulated liquidated damages as it has failed to establish that it has suffered any loss is erroneous on the face of it? The arbitral tribunal after considering the decisions rendered by this Court in the cases of Fateh Chand, Mau/a Bux and Rampur Distillery, (supra) arrived at the conclusion that "in view of these three decisions of the Supreme Court, it is clear that it was for the respondents to establish that they had suffered any loss because of the breach committed by the claimant in the supply of goods under the contract between the parties after 14th November, 1996. In the words we have emphasized in Mau/a Bux decision, it is clear that if loss in terms of money can be determined, the party claiming the compensation 'must prove' the loss suffered by him''.

Thereafter the arbitral tribunal referred to the evidence and the following statement made by the witness Das:

"The re-deployment plan was made keeping in mind several constraints including shortage of casing pipes."

Further the arbitral tribunal came to the conclusion that under these circumstances, the shortage of casing pipes of26" diameter and 30" diameter pipes was not the only reason which led to redeployment of rig Trident II to Platform B 121. The arbitral tribunal also appreciated the other evidence and held that the attempt on the part of the ONGC to show that production of gas on Platform B 121 was delayed because of the late supply of goods by p the claimant failed. Thereafter, the arbitral tribunal considered the contention raised by the learned counsel for the ONGC that the amount of 10% which had been deducted by way of liquidated damages for the late supply of goods under the contract was not by way of penalty. In response thereto, it was pointed out that it was not the case of learned counsel Mr. Setalwad on behalf of the claimants that "these stipulations in the contract for deduction G of liquidated damages was by way of penalty''.

Further the arbitral tribunal observed that in view of the decisions rendered in Fateh Chand and Mau/a Bux cases, "all that we are required to consider is whether the respondents have established their case of actual loss H

734 SUPREME COURT REPORTS [2003] 3 S.C.R.

A in money terms because of the delay in the supply of the Casing Pipes under the contract between the parties''. Finally, the arbitral tribunal held that as the appellant has failed to prove the loss suffered because of delay in supply of goods as set out in the contract between the parties, it is required to ref\lnd the amount deducted by way of liquidated damages from the specified amount payable to the respondent.

It is apparent from the aforesaid reasoning recorded by the arbitral tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fateh Chand's case (supra) wherein it is specifically held that jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; and compensation has to be reasonable. 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 when they made the contract to be likely to result from the breach of it. This Section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia [relevant for the present case] provides that when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way ·of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of·proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for pro1dng that no loss is likely to occur by such breach. Take for illustration: if the parties have agreed to purchase cotton bales and the same were only to be kept as a stock-in-trace. Such bales are not delivered on the due date and thereafter the bales are delivered beyond the stipulated time, hence there is breach of the contract. Question which would arise for consideration is - whether by such breach party has suffered any loss. If the price of cotton bales fluctuated during that time, loss or gain could easily be

OIL & NATURAL GAS CORPORATION LTD. 1•. SAW PIPES LTD. [SHAH, J.] 735 proved. But if cotton bales are to be purchased for manufacturing yarn, consideration would be different.

In Mau/a Bux' case (supra), plaintiff - Maula Bux entered into a contract with the Government of India to supply potatoes at the Military Head Quarters, U.P. Area and deposited an amount .of Rs. 10000 as security for due performance of the contract. He entered into another contraci with the Government of India to supply at the same place poultry eggs and fish for one year and deposited an amount of Rs. 8500 for due performance of the contract. Plaintiff having made persistent default in making regular and fu II supplies of the commodities agreed to be supplied, the Government rescinded the contracts and forfeited the amounts deposited by the plaintiff, because under the terms of the agreement, the amounts deposited by the plaintiff as security for the date performance of the contracts were to stand forfeited in case plaintiff neglected to perform his part of the contract. In context of these facts, Court held that it was possible for the government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver "regularly and fully" the quantities stipulated under the terms of the contracts and after the contracts were terminated. They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring. the goods contracted for. But no such attempt was made. Hence, claim for damages was not granted. E In Mau/a Bux 's case (supra), the Court has specifically held that it is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree and the Court is competent to award reasorable compensation in a case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. The Court has also specifically held that in case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach.

Take for illustration construction of a road or a bridge. If there is delay in completing ·the construction· of road or bridge within stipulated time, then it would be difficult to prove how much loss is suffered by the Society. State, Similarly, in the present case, delay took place in deployment of rigs and on_ , that basis actual production of gas from platform B-121 had to be changed. •" It is undoubtedly true that the witness has stated that redeployment plan was H

736 SUPREME COURT REPORTS [2003] 3 S.C.R.

> A made keeping in mind several constraints including shortage of casing pipes. Arbitral Tribunal, therefore, took into consideration the aforesaid statement volunteered by the witness that shortage of casing pipes was only one of the several reasons and not the only reason which led to change in deployment of plan or redeployment ofrigs Trident-II platform B-121. In our view, in such B a contract, it would· be difficult to prove exact loss or damage which the parties suffer because of the breach thereof. In such a situation, if the parties have pre-estimated such loss after clear understanding, it would be totally unjustified to arrive at the conclusion that party who has committed breach of the contract is not liable to pay compensation. It would be against the specific provisions of Sections 73 and 74 of the Indian Contract Act. There C was nothing on record that compensation contemplated by the parties was in any way unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed by the parties. It was also mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods. Further, while extending the time for delivery of the goods, respondent was informed that it would be required to pay stipulated damages.

From the aforesaid discussions, it can be held that:-

{I) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same;

(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in H

OIL& NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD [SHAH, l.) 737 every case of breach of contract, the person aggrieved by the A breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract. B (4) In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same it is genuine pre-estimate by the parties as the measure of reasonable compensation. C For the reasons stated above, the impugned award directing the appellant to refund the amount deducted for the breach as per contractual tenns requires to be set aside and is hereby set aside.

Whether the claim of refund of the amount deducted by the appellant from the bills is disputed or undisputed claim?

As the award directing the appellant to refund the amount deducted is set aside, question of granting interest on the same would not arise. Still however, to demonstrate that the award passed by the arbitral tribunal is, on the face of it, erroneous with regard to grant of interest, we deal with the same.

Arbitral Tribunal arrived at the conclusion that the appellant wrongfully withheld/deducted the aggregate amount of US $ 3,04,970.20 on account of delay in supply of goods and amount of Rs. 15,75,559 on account of excise duty, sales tax, freight charges deducted as and by way of liquidated damages from the amount payable by the respondent and thereafter arrived at the conclusion that the said amount was deducted from undisputed invoice . amount, therefore, the said claim of the respondent cannot be held to be disputed claim.' G It is apparent that the claim of the contractor to recover the said amount was disputed mainly because it was agreed tenn between the parties that in case of delay in supply of goods appellant was entitled to recover damages at the rate as specified in the agreement. It was also agreed that the said liquidated damages were to be recovered by paying authorities from the bills H

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.. A for payment of the cost of material submitted by the contractor. If this agreed amount is deducted and thereafter contractor claims it back on the ground that the appellant was not entitled to deduct the same as it has failed to prove loss suffered by it, the said claim undoubtedly would be a 'disputed claim'. The arbitrators were required to decide by considering the facts and the law applicable, whether the deduction was justified or not? That itself would indicate that the claim of the contractor was 'disputed claim' and not 'undisputed'. The reason recorded by the arbitrators that as the goods were received and bills are not disputed, therefore, the claim for recovering the amount of bills cannot be held to be 'disputed claim' is, on the face of it, unjust, unreasonable, unsustainable and patently illegal as well as against the expressed terms of the contract. As quote~ above, clause 34.4 in terms provides that no. interest would be payable in 'disputed claim'. It also provides that in which set of circumstances, interest amount would be paid in case of delay in payment of undisputed claim. In such case, the interest rate is also specified at I % per month on such undisputed claim amount. Despite this clause, the arbitral tribunal came to the conclusion that it was undisputed claim and held that in law, appellant was not entitled to withhold these two payments from the invoice raised by the respondent and hence directed that the appellant was liable to pay interest on wrongful deductions at the rate 12% p.a. Trom 1.4.1997 till the date of filing of the statement of claim and thereafter having regard to the commercial nature of the transaction at the rate of 18% p.a. pendente lite till payment.

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.

Conclusions: G In the result, it is held that: -

A. (I) The Court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:- H (i) a party was under some incapacity, or

OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 739 (ii) the arbitration agreement is not valid under the law to which A the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or B (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration. c (2) The Court may set aside the award :

(i) (a) If the composition of the arbitral tribunal was not i.n accordance with the agreement of the parties.

(b) failing such agreement, the composition of the arbitral tribunal D was not in accordance with Part-I of the Act.

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

(a) the agreement of the parties, or E (b) failing such agreement, the arbitral procedure was not in accordance with Part-I of the Act.

However, exception for setting aside the award on the ground of composition of arbitral tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part-I of the Act from which parties cannot derogate.

(c) If the award passed by the arbitral tribunal is in contravention of provisions of the Act or any other substantive law governing the parties or is against the terms of the contract. G (3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:-

(a) fundamental policy of Indian law; H

740 SUPREME COURT REPORTS [2003] 3 S.C.R.

A (b) the interest of India; or

(c) justice or morality, or

(d) if it is patently illegal

B (4) it could be challenged:-

(a) as provided under Section 13(5);

(b) Section 16(6) of the Act.

B. (B) The impugned award requires to be set aside mainly on the c grounds:-

(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract;

D (ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed;

(iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages; E (iv) on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was . extended but stipulated liquidated damages as agreed would be recovered; F (v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract.

OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. [SHAH, J.] 741 For the reasons stated above, the impugned award directing the appellant A . to refund US$3,04,970.20 and Rs. 15,75,559 with interest which were deducted for the breach of contract as per the agreement requires to be set aside and is hereby set aside. The appeal is allowed accordingly. There shall be no order as to costs.

S.K.S. Appeal allowed. B