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OIL AND NATURAL GAS COMMISSION V. SAW PIPES – A CASE STUDY

INTRODUCTION

In this case, the point of contention was an arbitral award given against the appellant ONGC and the same was appealed against in Supreme Court. The two important domains expanded upon by the Supreme Court, in this case, were regarding the notion of “Public Policy” in respect of section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as Act) and whether actual damage was required to be proved in a case where the Contract has an explicit clause for liquidated damages agreed upon by both the parties.

Given the condition of our judicial system in India, the primary aim of the Act was to get disputes resolved in a hassle-free and inexpensive way. The intervention of the Court in this mode of dispute resolution is minimal except in the case the award is against public policy. It is attempted via this article to focus on certain nuances of this case that carry significant importance to the field of arbitration and further look upon certain repercussions post the judgment of this case.  

FACTS AND ISSUES

The Company Saw Pipes (respondent) came into a contract with ONGC (appellant) for the supply of casting pipes to the appellant. Due to unprecedented strikes in all of Europe, the respondent was not able to supply the said materials on time. On bringing this to the notice of the appellant, the appellant granted an extension in time limit and also stated to recover liquidated damages as stipulated in the contract due to the delay in the deliveries. The damages were stated in the clause to be having a maximum limit of 10% of the whole price of the unit. On weekly basis, they were to be charged 1% of the part of delivery failed by the respondent or of the whole price of the unit. These damages were stated to be not a penalty and could be deducted from the bill payments. This was the scheme of agreement agreed upon by both the parties.

 Now in the background of all the delays, the appellant deducted a certain sum in the name of liquidated damages and to the said deduction, the respondent disputed and the matter was forwarded to the respective Arbitral tribunal. The award was given in favor of the respondent. Unhappy with the award, the same was appealed before the Bombay High Court. Again, the case was decided in favor of the respondent. Thus, the matter was appealed before the Supreme Court. So, the issue before the Court was whether the arbitral award in contention can be set aside under section 34 of the Arbitration and Conciliation Act, 1996 if it goes against public policy. And finally, whether a party needs to show actual damage to get abled to liquidated damages.

JUDGMENT

 The conundrum before the Court was whether the given award was violative of the substantive law and was so erroneous that it could be set aside under the purview of being against public policy as enunciated in section 34 of the Act. In the present case, the scope of interpretation of the public policy was extensively widened by the Court. New ground of “patent illegality” was added by the Court stating that an award that is patently in violation of the statutory provisions cannot be said to be in the public interest. It was termed by the court that such an award will adversely affect the administration of justice.[1]

On the other point in issue, the Court found the Arbitral tribunal wrong to favor the respondent since the appellant was not able to prove the loss suffered due to the breach. The tribunal was considered to have overlooked sections 73 and 74 of the Indian Contract Act, 1872. Also, they failed to consider the ratio given in the Fateh Chand case[2] by the Supreme Court. It was observed in this case by the court that the amount stipulated in the contract is not decisive but it is a good attempt to avoid litigation. The figure agreed upon by the parties was seen by the Court to give a head start to overcome the difficulty of proof.[3] So, keeping in mind the aforementioned grounds, the Court set aside the award given by the tribunal.

TRAIL OF PUBLIC POLICY

Before the Arbitration and Conciliation Act, 1996 served as a complete code to manage the arbitration scenario in India, the decision of the Supreme Court in Renusagar Power Electric Co. Ltd. v. General Electric Co.[4] elaborated upon the concept of public policy of India concerning the enforcement of a foreign arbitral award. Enforcement of such an award was allowed to be refused only if it was against fundamental policy; interest of the country; and justice or morality.[5] The credibility of this decision was bogged down due to uncertainty and no subsequent judicial backing. The Court faced this question again in the Sawpipes case wherein the Court propounded a new ground namely “patent illegality”. In layman’s terms, this means that if an arbitrational tribunal overlooks provisions of substantive law (including the Act) or the terms of a contract and erroneously grant an award in favor of a party, the Court could in such a case act as an appellate court and initiate proceedings under section 34 of the Act.

The judgement in the Sawpipes case has been subject to criticism primarily because it subdues the very core of the arbitrational structure. Even in its 246th report in 2014, the Law Commission India suggested substantial changes to section 34 and the scope of term public policy, and also the decision of the Sawpipes case was greatly criticized. In the aftermath of this report, the legislature acted to cure the lacunae in the impugned section, and in 2015, the Act was finally amended. Changes were made to section 34(2)(b)(ii)[6], wherein two new explanations were added, and also section 34 (2-A) was added. This was an attempt by the legislature to close the floodgates which were opened due to the Sawpipes case.

CONTENTIONS UPON LIQUIDATED DAMAGES

In the recent case, Kailash Nath Associates v Delhi Development Authority[7], the Supreme Court held that even though there might be an existence of a clause stipulating liquidated damages, the same won’t be given if the party suffering breach doesn’t suffer actual loss or damages. Looking back upon the decision in Sawpipes, it was laid down by the Court that a party need not prove damages in the events of breach of contract and the liquidated damages clause would trigger on its own as the parties have agreed upon genuine pre-determined damages which are to be awarded in case of a breach.[8]

Now on looking at the Kailash Nath case via the lens of section 74 of the Indian Contract Act, 1872, it can be seen that there isn’t any breach of contract in this case. So, the requirement of proof in the Kailash Nath case owes to the difference in the situation when compared with the Sawpipes case. In this respect, it can be inferred that the ratio of the Sawpipes case still holds good precedential value.

CONCLUSION

On the two aspects that have been enunciated above, the ONGC vs Sawpipes case stands egregiously wrong on one part and somewhat reliable on the other. In respect of the liquidated damages clause, the case still stands as a reliable precedent. It is the other part over which this case faces criticism. Arbitration is an alternative system to get justice where the traditional Court’s interventions are kept at bay other than in some exceptional cases. What the decision of Sawpipes did was to open the floodgates by creating new grounds of “patent illegality” under section 34 of the Act. Every award under this section became open to litigation. The effective backbone that the Renusagar case gave was shattered by the decision of the Sawpipes case. The Court gave itself so much power to modify/alter the awards that the effectiveness of arbitration as a whole was diminished. The purpose and trust over the arbitral mode of justice stand useless in light of such wide discretionary powers in the hands of the Court.

What needs to be done is to contain the wide domain of the term “public policy” and follow the principles that were laid down in the Renusagar case. Although these principles might seem wide in their scope, they provide a solid foundation. Legislature has shown its intent to improve upon the loopholes in the law and to further create a strong case for the field of alternative dispute resolution (ADR) mechanisms. It is time for the Court to show its willingness to restrain the judicial power in this field and to let it grow. This will provide people with the means to get justice in case of disputes, which is effective both in theory and practice.

Author(s) Name: Rishabh Tyagi (Campus Law Centre, University of Delhi)

Reference(s):

[1] ONGC Ltd vs Saw Pipes Ltd, (2003) 5 SCC 705

[2] Fateh Chand vs Balkishan Dass, AIR 1963 SC 1405

[3] Avtar Singh, Contract and Specific Relief 536 (Eastern Book Company 2022).

[4] Renusagar Power Electric Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644

[5] SCC Online Blog, https://www.scconline.com/blog/post/2021/06/22/apex-court-v-the-unruly-horse-journey-from-renusagar-to-ssangyong-engineering/#_ftn2 (last visited June 6, 2022)

[6] Arbitration and Conciliation Act, 1996, § 34(2)(b)(ii), No. 3, Acts of Parliament, 1996 (India).

[7] Kailash Nath Associates v Delhi Development Authority, (2015) 4 SCC 136

[8] Bar and Bench, https://www.barandbench.com/columns/liquidated-damage-clauses-did-kailash-nath-dilute-the-saw-pipes-position (last visited June 6, 2022)