ONGC v Saw Pipes

ONGC v Saw Pipes

This case arose out of a challenge c hallenge to an arbitral award rendered with regard to a dispute relating to supply of equipment for off shore oil exploration by b y the respondent. The case was heard by by M.B Shah and Arun Kumar JJ. The udgment was written by Shah J.

FACTS

!il and "atural #as $ommission had placed an order on Saw %ipes for supply of equipment for off shore exploration& to be procured from appro'ed (uropean manufacturers. The deli'ery was delayed due to general stri)e of steel mill wor)ers in (urope. Timely deli'ery was the essence of the contract. !"#$ granted extension of time& but b ut it in'o)ed the clause for reco'ery reco'er y of *iquidated +amages by withholding the amount from the payment to the supplier. !"#$ deducted from the payment ,-&/&01.2 and 3s 45&15&551 towards customs duty& sales tax and freight charges. Saw pipes disputed the deduction and matter was referred to arbitration. 6hile the arbitral tribunal reected Saw %ipe7s defence of force maure& it required !"#$ to lead e'idence to establish the loss suffered by breach and proceed to hold& in absence of e'idence of financial losses& that the deduction of *iquidated damages was wrongful. The award was challenged by !"#$8 inter alia as being opposed to public policy !"#$7s case was that the arbitral tribunal failed to decide the dispute by not applying the pre'ailing substanti'e law& ignoring the terms of the contract and customary practices of usage of trade in such transactions. !"#$ challenged the award as being b eing patently illegal. The single udge and di'ision bench of Bombay 9igh $ourt dismissed $ourt dismissed the challenge. The Supreme $ourt set aside an arbitration award directing !"#$ to refund ,-&/&01.2 and 3s 45.1: *a)hs towards liquidated damages retained by it while ma)ing payment to the company.

Issues Raised

4; 6hether !"#$ had the right to *iquidated +amages. 2; 6hether %atent illegality could be used as a ground to assail the award under section -/.

Decision Of The Supreme Court

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The 9on7ble $ourt first extensi'ely discussed the court7s urisdiction to set aside an award under Section -/ of the Arbitration and $oncilliation Act 400: and the 'arious grounds on which interference was permissible. The 9on7ble $ourt first extensi'ely discussed the court7s  urisdiction to set aside an award under Section -/ of the Arbitration and $oncilliation Act 400: and the 'arious grounds on which interference was permissible.

%assing o'er to the question of damages& the 9on7ble $ourt opined that when the words of the contracts are clear& there is nothing that the court can do about it.
nion of
As regards forfeiture& after considering its decision in >nion of
Therefore& as regards *iquidated +amages and penalties& the primary conclusion of the court appears to be that *iquidated +amages should be regarded as reasonable compensation& while  penalties should not. @urther& it also appears to ha'e concluded in case of penalty damages will 1 AIR 1970, SC 1955 2 AIR 1973, SC 1098 2

ha'e to be pro'ed. The 9on7ble $ourt reaffirms that no compensation at all be awarded if the court concludes that no loss is li)ely to occur because of the breach. The court too) the 'iew that the appellant had rightfully deducted the amount of liquidated damages from the amount claimed by the respondent& and it was not necessary for the appellant to pro'e the loss suffered by it in 'iew of the pro'isions in the contract for the payment of liquidated damages& and the impugned award thus suffered from patent illegality and was& therefore liable to be set aside on the ground that the patent error of law was included in the ground of public policy. Patent Illealit! used as a round to assail the award under section "#  Patent Illegality

The court held that the urisdiction or the power of the arbitral tribunal is prescribed under the Act and if the award is de hors the said pro'isions& it would be& on the face of it& illegal. The legislati'e intent could not be that if that the award is in contra'ention of the pro'ision of the Act& howe'er& the court could still not set it aside. The decision of the tribunal must be within  bounds of its urisdiction conferred under the Act or the contract.
The 9on7ble $ourt interpreted patent illegality as meaning an y 'iolation of the substanti'e law in force in
contrary to an explicit and well defined public policy& as demonstrated by the positi'e statutory law of
Concept of Pu$lic Polic! %&panded  Public Policy

The Arbitration and $onciliation Act 400:& was concei'ed by the compulsions of globaliation leading to adoption of the >nited "ation $ommissions on "$T3A*; model law. This Act is by and large an integrated 'ersion of the 40/ Act which go'erned domestic arbitration& The Arbitration ?protocol and con'ention; Act& 40-1 and the foreign award ?recognition and enforcement; Act& 40:4 which go'erned into arbitral awards. Apparently chapter < C D<<< of the >"$T3A* are replicas of $hapter < C D<< of the %art < of the 400: Act& with the difference that in >"$T3A* the pro'isions are called Article7 whereas under the act they are called section7. The main obecti'es set out in the statement of obects and reasons of 400: Act are= Eto minimie the super'isory role of courts in arbitral process and E to pro'ide that e'ery final arbitral award is enforced in the same manner as if it were a decree of the courtF

%ublic %olicy is that principle of law which holds that no subect can do& which has a tendency to  be inurious to the public or against the public good& which may be termed as it sometimes has  been policy of the law or public policy in relation to administration of the law. %ublic %olicy connotes some matter which concerns public good and public interest. The concept of %ublic %olicy 'aries from time to time.

The udgment expanded the concept of %ublic %olicy to add that the award would be contrary to  public policy if it is Epatently illegalF. An earlier Supreme $ourt decision of a three udge ?larger  bench; bench& in the case of 3enu Sagar %ower $o ' #eneral (lectrical $orporation had construed the ground of public policy narrowly as confined to the Efundamental policy of
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6hile analying the ratio of 3enusagar case-& the court held that it was to be understood in the context of foreign award. The ratio of 3enusagar could not be applied while interpreting section -/?2;?b;?ii; of the 400: Act& though applicable in case of challenge to foreign awards.
@undamental policy of
Critical Appraisal

This decision has pro'o)ed considerable ad'erse comments. A common criticism of the Saw  pipe udgment is that it has erroneously expanded the meaning of public policy in
$ourt in the 3enusagar case. "<$
Mr @ali. S. "ariman& one of the greatest lawyer s of our generation& remar)s: on the udgments as ha'ing 'irtually set at naught the entire Arbitration and $oncillation Act of 400:.To ha'e introduced by udicial inno'ation C a fresh ground of challenge and placed it under the head of  public policy was first contrary to the established doctrine of precedent. The di'ision of - udge  bench binding on a bench of 2 udges. 17 7 O.P.Malhotra. th !a" # Pra$t%$ %& Ar'%trat%o *h%r+ +%t%o, 2014. Pp. 1360.. 6

The contra 'iew in fa'our of !"#$ is that there is no rational ustification to fault !"#$ merely because it had added one more head to thos who set forth in accordance with the substanti'e law in force in
Ramification of the Case)*

The Supreme $ourt in Saw %ipes confined the expansion of public policy to domestic awards as an earlier larger bench decision of the court in case of 3enusagar %ower $o 's #eneral (lectricals0 had construed narrowly this ground as limited to fundamental policy of
The Saw pipes udgment has come in for sharp criticisms from se'eral quarters . 3ead literally& the udgment sets the cloc) bac) to the old position where an award could be challenged on merit and indeed renders the court as a court of appeal. the udgement was followed by two udge bench of the Supreme $ourt in $entrotrade Minerals  Metals 133. 9 (1994) Supp 1 SCC 644 at p. 671, para 33 ;AIR 1994 SC 860; 1994 (2) Ar' !R 405 (SC) 10 2006 (3) Ar' !R 201 SC; (2006) 11 SCC 245; @2006 Supp. (2) SCR 146. 11 2013 (3) Ar' !R 1; 2013 (8) SCA! 489 7

insofar as proceedings for setting aside an award under section -/ is concerned& the principles laid down in Saw pipes would go'ern the scope of proceedings foe setting aside an award under section -/ is concerned& the principles laid down in the Saw %ipes would go'ern the scope of  proceedings.
Some udicial decisions ha'e tried to reign in this effect of Saw %ipes. !ne instance of this is the Supreme $ourt decision in case of Mc+ermott 24 13 (2006) 11 SCC 181 8

the expediency and finality offered by it.F

$ommenting on Saw %ipes it held C E6e are not unmindful that the decision of this court in !"#$ had in'ited considerable ad'erse comments but the correctness or otherwise of the said decision is not in question before us.
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iii; Justice and morality& thus retaining the meaning gi'en by Supreme $ourt in 3enusagar %ower  $o

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This can be seen as a positi'e step in Arbitration law of
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