Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.

ONGC deducted agreed liquidated damages (a sum the parties fix in advance as payable on breach) from the bills of a pipe supplier that delivered late. An arbitral tribunal ordered the money refunded with interest, because ONGC had not proved any loss. The Supreme Court set the award aside. In doing so it held that an award that is patently illegal can be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

Oil and Natural Gas Corporation Ltd. (ONGC) — appellant; a public sector undertaking that accepted the supplier’s offer of casing pipes and deducted liquidated damages for late supply.

Saw Pipes Ltd. — respondent; the supplier of 26-inch and 30-inch diameter casing pipes, which challenged the deduction in arbitration and won.

Procedural History

1. Arbitral award, 2 May 1999. The arbitral tribunal held that ONGC had wrongfully withheld US $ 3,04,970.20 and Rs.15,75,559/-. It ordered a refund with interest (Shah, J.).
2. Arbitration Petition No. 917/1999. ONGC challenged the award before the High Court of Bombay. The learned Single Judge dismissed the petition (Shah, J.).
3. Appeal No. 256/2000. The Division Bench of the High Court dismissed ONGC's appeal (Shah, J.).
4. Supreme Court. ONGC appealed to the Supreme Court. The Court first decided the scope of its jurisdiction under Section 34 and then applied that finding to the facts (Shah, J.).

Facts

1. Saw Pipes supplies equipment for offshore oil exploration and maintenance. In response to a tender, it offered by letter dated 27 December 1995 to supply 26-inch and 30-inch diameter casing pipes to ONGC on agreed terms (Shah, J.).
2. ONGC accepted the offer by a letter of intent dated 3 June 1996, followed by a detailed order. The goods had to be supplied on or before 14 November 1996 (Shah, J.).
3. According to Saw Pipes, under clause 18 of the agreement (a promise the law enforces), raw materials had to come from reputed and proven manufacturers or suppliers approved by Saw Pipes and listed in it (Shah, J.).
4. By letter dated 8 August 1996, Saw Pipes ordered steel plates, the raw material for the pipes, from Liva Laminati, Piani S.P.A., Italian suppliers. It stipulated shipment by the end of September 1996, as timely delivery was of the essence (Shah, J.).
5. Saw Pipes said there was a general strike of steel mill workers all over Europe, including Italy, in September and October 1996 (Shah, J.).
6. By letter dated 28 October 1996, Saw Pipes told ONGC that the Italian suppliers had labour problems and could not deliver on schedule. It asked for 45 days more, for reasons beyond its control (Shah, J.).
7. By letter dated 4 December 1996, ONGC extended the delivery time. The letter stated that an amount equal to liquidated damages for the delay would be recovered from Saw Pipes (Shah, J.).
8. Saw Pipes supplied the goods. ONGC paid after deducting US $ 3,04,970.20 and Rs.15,75,559/- as liquidated damages. The rupee amount covered customs duty, sales tax and freight charges (Shah, J.).
9. Saw Pipes disputed the deduction, and the dispute went to the arbitral tribunal (Shah, J.).
10. The tribunal held that strikes affecting supply of raw material to the claimant were not within the definition of force majeure (an event beyond the parties' control that excuses performance) in the contract. It also held that the customs duty point did not justify the delay (Shah, J.).
11. The tribunal considered decisions of the Supreme Court on recovery of liquidated damages. It held that it was for ONGC to prove that it had suffered loss because of the breach (Shah, J.).
12. The tribunal relied on the statement volunteered by a witness, Mr. Arumoy Das, that shortage of casing pipes was only one of several reasons for the change in deployment plan. It held that ONGC had failed to prove any loss in money terms (Shah, J.).
13. The tribunal held that ONGC had wrongfully withheld the agreed amounts. It awarded interest at 12 per cent per annum from 1 April 1997 till the filing of the statement of claim. It then awarded 18 per cent per annum pendente lite (while the case is pending), given the commercial nature of the transaction, till payment (Shah, J.).
14. The contract terms on which ONGC relied are set out below (Shah, J.):
    • Clause 11 made time and date of delivery the essence of the contract. It fixed liquidated damages at 1% of the contract price of the whole unit per week of delay or part of a week.
    • Clause 11 said the sum was an agreed, genuine pre-estimate of damages and not a penalty. Recovery could go up to 10% of the contract price of the whole unit.
    • The paying authorities would recover the damages from the contractor's bill. Equipment counted as delivered only when all its components and parts were delivered.
    • Clause 12 said liquidated damages would be imposed on the total order value unless 75% of the value was supplied in time. If 75% was supplied in time, they applied to the delayed supplies only. But in ONGC's judgment they applied to the full order value if the partial supply did not meet the operating need.
    • Clause 34.4 required payment within 60 days of a complete invoice. Delay on an undisputed claim attracted interest at 1% per month. It said no interest would be paid on disputed claims.

Issues Raised

1. Does a court have jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside an award that is patently illegal, contravenes the Act or other substantive law governing the parties, or goes against the terms of the contract?
2. What does arbitral procedure mean in Section 34(2)(a)(v)?
3. What does public policy of India mean in Section 34(2)(b)(ii)?
4. Was the award erroneous on its face in holding that ONGC could not recover the stipulated liquidated damages without proving loss, given Sections 73 and 74 of the Indian Contract Act?
5. Was Saw Pipes' claim for refund of the deducted amount a disputed or an undisputed claim, and was interest payable under clause 34.4?

Arguments Contended

For the appellant (ONGC), Mr. Ashok Desai, senior counsel:

• Where there is a clear violation of Sections 28 to 31 of the Act or of the contract terms, the court can and must set the award aside under Section 34 (Shah, J.).
• The award was vitiated by delay in supply. ONGC could recover liquidated damages of 1% of the contract price of the whole unit per week. The award therefore violated Section 28(3), which requires the tribunal to decide in accordance with the contract (Shah, J.).
• The award was illegal and erroneous on its face in holding that ONGC had to prove its loss before recovering liquidated damages. The tribunal misinterpreted the law (Shah, J.).
• The award of interest on the deducted sum was unjustified, unreasonable and against clause 34.4, which allows no interest on a disputed claim (Shah, J.).
• Relying on Delta International Ltd. v. Shyam Sundar Ganeriwalla ((1999) 4 SCC 545), the intention of the parties is gathered from the words they used, and there is no intention independent of that meaning (Shah, J.).
• The narrow meaning of public policy in Renusagar Power Co. Ltd. v. General Electric Co. was given where a final award was being executed. It was not a challenge to validity before the forum the Act prescribes (Shah, J.).
• Section 34 (setting aside a domestic award) and Section 48 (enforcing a foreign award) are not identical. A foreign award is subject to double exequatur, recognised by Section 48(1), and Section 34 has no parallel clause. He cited Lord Mustill and Stewart Boyd QC, Commercial Arbitration (2001), page 90 (Shah, J.).
• A foreign award can be set aside or suspended by the competent authority in its own country. For a domestic award the only recourse is Section 34 (Shah, J.).
• Arbitral proceedings are often delayed, and the Act sets no time limit for the award. So the respondent's argument on speedy finality has no bearing on interpreting Section 34 (Shah, J.).

For the respondent (Saw Pipes Ltd.), Mr. Dushyant Dave, senior counsel:

• The court's jurisdiction under Section 34 is limited. An award can be set aside mainly on the ground of conflict with the public policy of India, and that phrase does not mean that any violation of law lets the court set the award aside (Shah, J.).
• Parliament did not make much change when adopting Article 34 of the UNCITRAL Model Law. It did not provide error of law as a ground of challenge. Sections 68, 69 and 70 of the English Arbitration Act, 1996 give wider jurisdiction, and Parliament could have copied them (Shah, J.).
• Limited jurisdiction serves the purpose of resolving disputes early by giving finality to the award of the forum the parties chose (Shah, J.).
• For breach of contract, Section 74 of the Contract Act applies. Compensation can be awarded only if loss is suffered. He relied on Bhai Panna Singh v. Bhai Arjun Singh (AIR 1929 PC 179), which said the plaintiffs must prove the damages they suffered, and on other Supreme Court decisions (Shah, J.).
• Even if the tribunal erred in reaching that conclusion, the award cannot be interfered with under Section 34. Where two views of a statute or the facts are possible, the court will refuse to interfere with the award (Shah, J.).
• As a fact, the respondent's counsel before the tribunal, Mr. Setalwad, had not argued that the liquidated damages clause was a penalty (Shah, J.).

Court's Reasoning

The judgment has one opinion, by Shah, J., for the Bench of M.B. Shah and Arun Kumar, JJ. The judgment has no numbered paragraphs, so steps cite the opinion.

Shah, J. (for the Bench)

Court's jurisdiction under Section 34

1. Noted: The Court first decides the main point, the scope of a court's jurisdiction when an award is challenged under Section 34, because the appeal depends on it. (Shah, J.)
2. Noted: The question is whether a court can set aside an award that is patently illegal, contravenes the Act or other substantive law governing the parties, or is against the contract terms. (Shah, J.)
3. Noted: Section 34(1) allows recourse to a court against an award only by an application under sub-sections (2) and (3). Section 34(2) lets the court set aside an award only on listed grounds. (Shah, J.)
4. Noted: Under Section 34(2)(a), the applicant must prove one of these grounds. A party was under some incapacity. The arbitration agreement is not valid. The applicant had no proper notice or could not present its case. The award deals with matters outside the submission. (Shah, J.)
5. Noted: A proviso says that if decisions on matters submitted can be separated from those not submitted, only the part on matters not submitted may be set aside. (Shah, J.)
6. Noted: Section 34(2)(a)(v) covers a tribunal's composition or procedure that did not follow the parties' agreement. It applies unless the agreement conflicts with a provision of Part I that the parties cannot derogate from. (Shah, J.)
7. Noted: Under Section 34(2)(b), the court itself must find that the subject matter is not capable of settlement by arbitration, or that the award is in conflict with the public policy of India. (Shah, J.)
8. Noted: The Explanation says an award is in conflict with public policy if its making was induced or affected by fraud (deliberate deception to gain an advantage) or corruption, or was in violation of Section 75 or Section 81. (Shah, J.)
9. Noted: Clauses (i) to (iv) of Section 34(2)(a) are self-explanatory and need no discussion. Only clause (v) and Section 34(2)(b)(ii) need to be examined. The Court begins with the meaning of arbitral procedure. (Shah, J.)

Arbitral procedure

1. Noted: Under clause (v), the court may set the award aside if the tribunal was not composed as the parties agreed, or, failing agreement, as Part I of the Act requires. (Shah, J.)
2. Noted: The same applies if the arbitral procedure did not follow the agreement or, failing that, Part I. The exception is an agreement that conflicts with a non-derogable provision of Part I. (Shah, J.)
3. Noted: The emphasis is on the agreement and on Part I provisions that parties cannot derogate from. Without agreement, procedure must follow Part I, that is Sections 2 to 43. (Shah, J.)
4. Noted: Chapter V of Part I governs conduct of proceedings. Section 18 requires equal treatment and a full opportunity to present a case. (Shah, J.)
5. Noted: Section 19 says the tribunal is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872. Parties may agree the procedure. Failing agreement, the tribunal proceeds as it considers appropriate, including on admissibility, relevance, materiality and weight of evidence. (Shah, J.)
6. Noted: Sections 20, 21 and 22 deal with place of arbitration, commencement of proceedings and language. Sections 23, 24 and 25 deal with statements of claim and defence, hearings and written proceedings, and default of a party. (Shah, J.)
7. Noted: Section 24 lets the tribunal decide whether to hold oral hearings, unless the parties agree otherwise. It must hold an oral hearing on a party's request unless the parties agreed that none would be held. (Shah, J.)
8. Noted: Section 24 also requires sufficient advance notice of hearings and meetings. Statements, documents and expert reports must be communicated to the other party. (Shah, J.)
9. Noted: Chapter VI deals with the making of the award. Section 28(1)(a) requires a domestic tribunal to decide in accordance with the substantive law in force in India. Section 28(1)(b) covers international commercial arbitration. (Shah, J.)
10. Noted: Section 28(2) lets the tribunal decide ex aequo et bono (according to what is just and good) or as amiable compositeur only if the parties expressly authorise it. Section 28(3) requires decisions in accordance with the contract terms and trade usages. (Shah, J.)
11. Noted: Section 31 requires a written, signed award (sub-sections 1 and 2). It must state reasons unless the parties agreed otherwise or it is an award on agreed terms (sub-section 3). (Shah, J.)
12. Noted: Section 31 also requires the date and place of arbitration, and a signed copy to each party (sub-sections 4 and 5). It allows interim awards (sub-section 6). (Shah, J.)
13. Noted: Section 31(7) deals with interest. Unless the parties agreed otherwise, the tribunal may include interest at a reasonable rate on the sum awarded up to the award date. A sum awarded carries interest at eighteen per cent per annum from the award date to payment. (Shah, J.)
14. Noted: Section 31(8) deals with costs: the tribunal fixes them and specifies who pays, how much, and how. The Explanation lists what costs include. (Shah, J.)
15. Held: These provisions prescribe the procedure and the tribunal's powers. Power and procedure are synonymous here. There is no distinction between jurisdiction or power and procedure in these sections. (Shah, J.)
16. Noted: In Harish Chandra Bajpai v. Triloki Singh [1957 SCR 370], this Court saw no antithesis between procedure in Section 90(2) and "powers" in Section 92 of the Representation of the People Act, 1951. An amendment application was a procedural step. The question of power arose only for the order on it. (Shah, J.)
17. Held: The tribunal's jurisdiction is prescribed by the Act. An award de hors those provisions (outside them) is on its face illegal. The tribunal must act within its jurisdiction under the Act or the contract. It cannot breach substantive law or the Act. (Shah, J.)
18. Noted: The question is whether an award can be set aside if the tribunal did not follow the mandatory procedure of Sections 24, 28 or 31(3) in a way that affects the parties' rights. (Shah, J.)
19. Noted: Section 28(1)(a) makes the Indian Contract Act, the Transfer of Property Act and similar laws part of the substantive law. The Court asks whether an award in violation of them could stand. (Shah, J.)
20. Noted: The Court asks the same about an award that ignores the contract terms or trade usage under Section 28(3). It asks it also about a non-speaking award that breaches Section 31(3). (Shah, J.)
21. Held: Reading Section 34 with the other provisions, the legislature could not have intended that an award in contravention of the Act cannot be set aside. That would be contrary to the basic concept of justice. (Shah, J.)
22. Held: A tribunal that has not followed the mandatory procedure of the Act has acted beyond its jurisdiction. Its award is patently illegal and can be set aside under Section 34. (Shah, J.)
23. Noted: This reading fits the settled principle that procedural law cannot fail to provide relief when substantive law gives the right. In the Court's words, "there cannot be any wrong without a remedy". (Shah, J.)
24. Noted: In M.V. Elisabeth v. Harwan Investment & Trading Pvt. Ltd. [1993 Supp. (2) SCC 433], the Court said it must devise a procedure by analogy from other systems. This applies where substantive law demands justice and the statute gives no remedy. (Shah, J.)
25. Noted: In Dhanna Lal v. Kalawatibai [(2002) 6 SCC 16], the Court said a wrong must not be left unredeemed and a right not left unenforced. (Shah, J.)
26. Held: An award contrary to the substantive provisions of law, to the Act or to the contract terms is patently illegal. It can be interfered with under Section 34. However, such a failure of procedure should be patent and affect the parties' rights. (Shah, J.)

Meaning of public policy of India

1. Noted: The next clause is Section 34(2)(b)(ii), which lets a court set aside an award in conflict with the public policy of India. The Act does not define that phrase. (Shah, J.)
2. Noted: The phrase must be understood in context, and with the purpose and scheme of the section in view. Public policy does not admit precise definition. It varies from generation to generation and can be read narrowly or widely. (Shah, J.)
3. Noted: Lacking precedent, the Court gives the phrase its meaning in the light of the principles underlying the Arbitration Act, the Contract Act and the Constitution. (Shah, J.)
4. Noted: In Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC 156], the Court said public policy is not the policy of a particular government. It concerns the public good and the public interest, which vary from time to time. (Shah, J.)
5. Noted: The same judgment describes two schools, the narrow view and the broad view. It cites Lord Davey in Janson v. Driefontein Consolidated Gold Mines Ltd. [(1902) AC 484], who called public policy an unsafe and treacherous ground. (Shah, J.)
6. Noted: It cites Burrough, J. in Richardson v. Mellish [(1824) 2 Bing 229], who called it a very unruly horse. It also cites Lord Denning in Enderby Town Football Club Ltd. v. Football Assn. Ltd. [(1971) Ch. 591], who said a good rider can control the horse. (Shah, J.)
7. Noted: Sir William Holdsworth's History of English Law is cited to say that a body of law must be able to suppress practices that seek to weaken its principles. The principles of public policy can be expanded or modified. (Shah, J.)
8. Noted: If no head of public policy covers a case, the court must, in line with public conscience, good and interest, declare the practice opposed to public policy. The Preamble, the Fundamental Rights and the Directive Principles guide it. (Shah, J.)
9. Noted: The same judgment says the normal rule is that a party seeking to enforce a contract opposed to public policy is non-suited. A. Schroeder Music Public Co. Ltd. v. Macaulay [(1974) 1 WLR 1308] lets the affected party sue to have it declared void. (Shah, J.)
10. Noted: In Kedar Nath Motani v. Prahlad Rai [(1960) 1 SCR 861], the test was whether the illegality goes so much to the root of the matter that the plaintiff cannot sue without relying on it. Trivial or venial illegality does not defeat the plaintiff. The plaintiff’s conduct is viewed strictly, and he cannot circumvent the illegality by subterfuge or misstating facts. If he recanted before the illegal purpose was achieved, the defendant’s plea fails unless the illegality is so gross as to outrage the court’s conscience. (Shah, J.)
11. Noted: Brojo Nath Ganguly adds that contracts with terms so unfair and unreasonable that they shock the conscience of the court are opposed to public policy and void. (Shah, J.)
12. Noted: In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp. (1) SCC 644], the Court considered Section 7(1) of the Arbitration (Protocol and Convention) Act, 1937. It said a foreign award cannot be enforced if enforcement would be contrary to public policy. (Shah, J.)
13. Noted: Renusagar held that public policy in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 means the public policy of India only. It is used in a narrower sense than mere violation of Indian law. (Shah, J.)
14. Noted: Renusagar held that enforcement of a foreign award is refused as contrary to public policy if it is contrary to fundamental policy of Indian law, the interests of India, or justice or morality. It also held that violating the exchange control law (FERA) was contrary to the public policy of India. (Shah, J.)
15. Noted: In Murlidhar Agarwal v. State of U.P. [1974 (2) SCC 472], the Court said public policy does not remain static and varies between generations. Judges are not hide-bound by precedent and base decisions on the opinions of men of the world, not legal learning. They must look to the dominant opinion at a given moment, or customary morality, and consider social consequences. (Shah, J.)
16. Noted: Mr. Desai said Renusagar's narrow meaning arose in the context of executing an award that had attained finality. Section 34 and Section 48 differ, and a foreign award is subject to double exequatur. (Shah, J.)
17. Held: The Court accepts that submission. Public policy of India must be interpreted in the context of the jurisdiction of the court where the validity of the award is challenged before it becomes final and executable. (Shah, J.)
18. Held: Enforcement after finality is different, and the court's jurisdiction then can be limited. The same is true of executing a decree, which can be challenged only on limited grounds such as lack of jurisdiction or nullity. An appellate or revisional court has wider jurisdiction. (Shah, J.)
19. Held: Where an award's validity is challenged, there is no need for a narrower meaning of public policy of India. A wider meaning is needed so that a patently illegal award can be set aside. A narrow meaning would make some provisions of the Act nugatory. (Shah, J.)
20. Noted: An example is a contract that bars interest on delayed payment. If the arbitrator awards interest, the award is against the contract and Section 28(3). (Shah, J.)
21. Noted: Another example is a proved trade usage of 15 per cent interest on payments made after one month. If the arbitrator refuses interest on grounds of equity, the award violates Section 28(2) and (3). Section 28(2) allows decisions ex aequo et bono only if the parties expressly authorise them. (Shah, J.)
22. Held: An award patently against the statutory provisions of substantive law is open to challenge. So is an award passed without giving the parties a hearing under Section 24. So is an award without reasons where the parties did not agree to dispense with them. Each is set aside on the ground of patent illegality. (Shah, J.)
23. Noted: Mr. Dave said Parliament, in adopting Article 34 of the UNCITRAL Model Law, did not provide error of law as a ground. He compared Sections 68, 69 and 70 of the English Arbitration Act, 1996. (Shah, J.)
24. Noted: Section 68 lets a party challenge an award for serious irregularity that has caused substantial injustice. The listed irregularities include:
    • the tribunal's failure to comply with its general duty;
    • the tribunal exceeding its powers;
    • failure to follow the agreed procedure;
    • failure to deal with all issues;
    • an institution or person vested by the parties with powers exceeding those powers;
    • uncertainty or ambiguity as to the effect of the award;
    • an award obtained by fraud or contrary to public policy;
    • failure to comply with the form of the award;
    • any admitted irregularity.
    The court may remit the award, set it aside, or declare it of no effect. It may set aside or declare no effect only if remitting to the tribunal is inappropriate. Appeals need the court's leave. (Shah, J.)
25. Noted: Section 69 of the English Act allows an appeal on a point of law, and Section 70 gives supplementary provisions. (Shah, J.)
26. Noted: The Court accepts that the Indian legislature did not include exhaustive grounds of challenge or say when an appeal lies against the court's order. (Shah, J.)
27. Noted: The Court cites the opinion of Mr. Nani Palkhivala on a book on arbitration by Justice B.P. Saraf and Justice S.M. Jhunjhunuwala. He wished the Indian law had a provision like Section 68 of the English Act. (Shah, J.)
28. Noted: He endorsed giving public policy its full amplitude, and courts intervening where an irregularity caused substantial injustice. If an award has resulted in injustice, a court is well within its right to uphold the challenge as in conflict with public policy. (Shah, J.)
29. Held: The phrase public policy of India need not be given a narrower meaning. It can be read narrowly or widely depending on the object and purpose of the legislation. An award passed in contravention of Sections 24, 28 or 31 can be set aside. (Shah, J.)
30. Noted: Section 13(5) also allows a challenge to the constitution of the tribunal. Section 16 lets a party challenge the tribunal's decision on its own jurisdiction under Section 34. (Shah, J.)
31. Held: It is for Parliament to provide for limited or wider jurisdiction. But there is no reason for a narrow reading of public policy of India. In the Court's words, "wider meaning is required to be given so as to prevent frustration of legislation and justice". (Shah, J.)
32. Noted: In Rattan Chand Hira Chand v. Askar Nawaz Jung [(1991) 3 SCC 67], the Court said a contract tending to injure public interests is against public policy. The legislature often fails to keep pace with changing needs. It is then obligatory on the courts to fill the lacuna. (Shah, J.)
33. Noted: Mr. Dave said limited court jurisdiction ensures early resolution and finality. Mr. Desai replied that arbitral proceedings are delayed and the Act sets no time limit for the award. (Shah, J.)
34. Noted: The 1996 Act has no provision like Sections 23 and 28 of the Arbitration Act, 1940, under which the court fixed a reasonable time for the award. Delays do occur. (Shah, J.)
35. Held: It is for the parties to choose arbitrators who can decide within reasonable time. They must set the time limit and decide whether to continue with an arbitrator who cannot. The lack of a time limit does not affect the reading of Section 34. (Shah, J.)
36. Held: For speedier disposal, justice in accordance with law cannot be sacrificed. Limited jurisdiction for finality and speed would be more frustrated by letting a patently illegal award operate. A patently illegal award must be set at naught, otherwise it would promote injustice. (Shah, J.)
37. Held: The phrase Public Policy of India in Section 34 must have a wider meaning. It concerns public good and public interest. An award patently in violation of statutory provisions is not in the public interest and is likely to harm the administration of justice. (Shah, J.)
38. Held: In addition to the narrower meaning in Renusagar, the Court holds that an award can be set aside if it is patently illegal. (Shah, J.)
39. Held: An award can be set aside if it is contrary to:
    • the fundamental policy of Indian law;
    • the interest of India;
    • justice or morality; or
    • in addition, if it is patently illegal.
    (Shah, J.)
40. Held: "Illegality must go to the root of the matter". If the illegality is trivial, the award is not against public policy. (Shah, J.)
41. Held: An award can also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such an award is opposed to public policy and is decided to be void. (Shah, J.)

Application to the facts: liquidated damages

1. Noted: The tribunal's findings, as recorded in the Court's account of the facts, are set out in Facts above. The Court then took up ONGC's three challenges to the award. (Shah, J.)
2. Noted: Mr. Desai relied on Delta International Ltd. v. Shyam Sundar Ganeriwalla ((1999) 4 SCC 545) for construing contracts by the parties' words. (Shah, J.)
3. Held: The intention of the parties is gathered from the words used in the agreement. If the words are unambiguous and used with full understanding by experts, a different intention is hard to find. (Shah, J.)
4. Noted: Modi & Co. v. Union of India [(1968) 2 SCR 565] says nothing in law stops parties from setting up a term that a reading of the whole document shows they agreed. (Shah, J.)
5. Noted: Provash Chandra Dalui v. Biswanath Banerjee [1989 Supp (1) SCC 487] says the court must look at the words used unless they suggest the intention is not conveyed correctly. If the words are clear, the court can do little. (Shah, J.)
6. Held: The parties expressly agreed that recovery for breach was pre-estimated, genuine liquidated damages and not a penalty. There was no justifiable reason for the tribunal to hold that the purchaser must still prove its loss from the delay. (Shah, J.)
7. Held: The tribunal had to decide in accordance with the contract terms. ONGC could recover liquidated damages of 1% of the contract price of the whole unit per week, up to 10% of that price. (Shah, J.)
8. Noted: The agreement also provided that liquidated damages would be recovered from the contractor's bill. It also said the damages were not by way of penalty and were an agreed, genuine pre-estimate. Saw Pipes did not challenge the pre-estimate as unreasonable. (Shah, J.)
9. Noted: When Saw Pipes sought an extension, ONGC's letter dated 4.12.1996 extended time with a specific demand that liquidated damages would be recovered. Saw Pipes still supplied the goods. This shows it was then willing to pay liquidated damages. (Shah, J.)
10. Noted: Counsel referred to Sections 73 and 74 of the Indian Contract Act as interpreted in Sir Chunilal V. Mehta & Sons Ltd. v. The Century Spinning and Manufacturing Co. Ltd. [1962 Supp. (3) SCR 549]. They also cited Fateh Chand v. Balkishan Das [(1964) 1 SCR 515], Maula Bux v. Union of India [(1969) 2 SCC 554], Union of India v. Rampur Distillery and Chemical Co. Ltd. [(1973) 1 SCC 649] and Union of India v. Raman Iron Foundry [(1974) 2 SCC 231]. (Shah, J.)
11. Noted: Section 73 entitles the party who suffers by a breach to compensation for loss arising naturally from the breach, or which the parties knew when contracting was likely to result. Remote and indirect loss is excluded. (Shah, J.)
12. Noted: Section 74 applies where a sum is named in the contract as payable on breach, or the contract contains another stipulation by way of penalty. The complaining party gets reasonable compensation not exceeding the named sum, whether or not actual loss is proved. The Explanation says a stipulation for increased interest from the date of default may be a penalty. (Shah, J.)
13. Held: On these sections, the party who suffers a breach is entitled to compensation for loss that arises naturally. If the parties knew a particular loss was likely, they can agree on compensation for it. Then no evidence to prove damages is needed, unless the Court concludes that no loss is likely. (Shah, J.)
14. Held: Where the term is a penalty, the Court may grant reasonable compensation up to the named amount, on proof of damages. When the terms are clear and unambiguous, meaning comes from the words. (Shah, J.)
15. Held: Where experts executed the agreement, it is hard to say the parties meant something different. In the Court's words, "it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same". (Shah, J.)
16. Noted: In Fateh Chand's case, the plaintiff claimed to forfeit Rs.25,000, made up of Rs.1,000 earnest money and Rs.24,000 payable out of the sale price on delivery of possession. The Court allowed forfeiture of the earnest money. (Shah, J.)
17. Noted: For the Rs.24,000, Fateh Chand referred to Section 74 and its two classes of cases. The measure is reasonable compensation not exceeding the penalty stipulated. The Court's jurisdiction is unqualified except as to the maximum, but compensation must be reasonable. (Shah, J.)
18. Noted: Fateh Chand said Section 74 dispenses with proof of actual loss or damages, but does not justify compensation where the breach caused no legal injury. It also said the Court's duty is not to enforce a penalty clause but only to award reasonable compensation. (Shah, J.)
19. Held: Fateh Chand was not dealing with a contract that named a sum payable on breach. It dealt with a stipulation by way of penalty. (Shah, J.)
20. Noted: The three-Judge Bench in Maula Bux said the aggrieved party need not prove actual loss before it can claim a decree. The expression whether or not actual damage or loss is proved covers different classes of contracts. (Shah, J.)
21. Noted: Maula Bux said that where the Court cannot assess compensation, a named sum can be taken into account if it is a genuine pre-estimate, but not if it is a penalty. Where loss in money can be determined, the claimant must prove it. (Shah, J.)
22. Noted: In Rampur Distillery, the two-Judge Bench referred to Maula Bux. It said forfeiture of reasonable earnest money is not a penalty and is outside Section 70. But an undertaking to pay a sum, or forfeit a sum already paid, on breach is of the nature of a penalty. (Shah, J.)
23. Noted: In Raman Iron Foundry, the Court read clause 18 as applying only to a sum presently due. It said Indian law makes no qualitative difference between liquidated and unliquidated damages. It also said the stipulated amount is merely the outside limit. (Shah, J.)
24. Noted: Raman Iron Foundry said Section 74 removes the English common-law refinements between liquidated damages and penalty. The Indian legislature enacted one uniform principle: even a stipulated liquidated sum gives only reasonable compensation, with the sum as the outside limit. (Shah, J.)
25. Noted: Raman Iron Foundry also said a claim for unliquidated damages gives rise to no debt until adjudicated. On breach, the party in breach does not at once incur a pecuniary obligation. (Shah, J.)
26. Held: Raman Iron Foundry did not refer to the five-Judge Bench decision in Fateh Chand or the three-Judge Bench decision in Maula Bux. (Shah, J.)
27. Noted: In M/s H.M. Kamaluddin Ansari and Co. v. Union of India [(1983) 4 SCC 417], a three-Judge Bench overruled Raman Iron Foundry. It read a similar clause as giving ample power to withhold amounts, and refused an injunction (a court order to do or not do something) against withholding. (Shah, J.)
28. Held: In the light of these decisions, there is much force in ONGC's contention. (Shah, J.)
29. Noted: Mr. Dave said that even if the award is erroneous, a court will refuse to interfere where two views of the statute or facts are possible. (Shah, J.)
30. Held: If the tribunal merely made an error of fact or law on the disputed question referred to it, the court has no jurisdiction to interfere. But this depends on the reference. (Shah, J.)
31. Held: Three propositions follow:
    • If there is a general reference on a contractual dispute and the award rests on an erroneous legal proposition, the court can interfere.
    • A reasoned award can be set aside if it is on its face erroneous on the proposition of law or its application.
    • If a specific question of law is referred, an erroneous decision on it does not make the award bad, unless the court is satisfied that the arbitrator proceeded illegally.
    (Shah, J.)
32. Held: Taking the contractual term as it is, the award is on its face erroneous and violates Section 28(3). The reference was not on a question of law. It was a general reference on the respondent's claim. So the court has jurisdiction to interfere if the award is erroneous on record in its legal proposition or its application. (Shah, J.)
33. Noted: In M/s Alopi Parshad & Sons Ltd. v. The Union of India [(1960) 2 SCR 793], the Court said an award may be set aside for an error on its face only where a legal proposition that is its basis is erroneous. It cited Champsey Bhara and Company v. Jivaraj Balloo Spinning and Weaving Company Limited [LR 50 IA 324]. (Shah, J.)
34. Noted: Alopi Parshad also said that where a specific question is submitted and answered, an erroneous answer does not make the award bad on its face. It cited In the matter of an arbitration between King and Duveen [LR (1913) 2 KBD 32] and Government of Kelantan v. Duff Development Company Limited [LR 1923 AC 395]. (Shah, J.)
35. Noted: Alopi Parshad held that on a general reference an award can be set aside if erroneous on its face. Under Section 56 of the Contract Act, a party cannot ignore the express terms and claim payment at other rates on a vague plea of equity. The arbitrators were not justified in ignoring the express terms. (Shah, J.)
36. Noted: This law has been followed continuously in Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises [(1999) 9 SCC 283]. It was also followed in Sikkim Subba Associates v. State of Sikkim [(2001) 5 SCC 629] and G.M., Northern Railway v. Sarvesh Chopra [(2002) 4 SCC 45]. (Shah, J.)
37. Noted: In Union of India v. A.L. Rallia Ram [(1964) 3 SCR 164], the Court said an award is bad for error of law on its face when a legal proposition that is its basis is erroneous. Champsey Bhara says a narrative mention of a party's contention does not open the door. (Shah, J.)
38. Noted: Rallia Ram said the rule does not apply where questions of law are specifically referred for decision. There, the court does not interfere unless the arbitrator proceeded illegally. (Shah, J.)
39. Noted: In Seth Thawardas Pherumal v. The Union of India [(1955) 2 SCR 48], Bose, J. said the court's jurisdiction is not ousted unless both sides specifically agree to refer a question of law and to be bound by the arbitrator. Incidental arguments on law are not enough. (Shah, J.)
40. Noted: Thawardas Pherumal referred to F.R. Absalom Ltd. v. Great Western (London) Garden Village Society [1933 AC 592], where Lord Russell of Killowen distinguished two cases. One is a dispute where a question of law becomes material. The other is a specific reference on a question of law. (Shah, J.)
41. Noted: In Maharashtra State Electricity Board v. Sterilite Industries (India) [(2001) 8 SCC 482], the Court said the arbitrator's award on facts and law is final. The court cannot correct a mistake unless the objection is apparent on its face. It cited Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd. [(1967) 1 SCR 105] and Champsey Bhara. (Shah, J.)
42. Noted: Sterilite also cited Arosan Enterprises Ltd. v. Union of India [1999 (9) SCC 449]. It said an error of fact that is patent and easily demonstrable can justify interference. An award based on a patently erroneous legal principle is liable to be set aside as legal misconduct. (Shah, J.)
43. Noted: The next question was whether the legal proposition on which the award rests is erroneous on its face. The proposition was that ONGC could not recover the stipulated liquidated damages as it had not proved loss. (Shah, J.)
44. Noted: The tribunal relied on Fateh Chand, Maula Bux and Rampur Distillery, and held that ONGC had to prove loss. It cited Maula Bux for the point that where loss in money can be determined, the claimant must prove it. (Shah, J.)
45. Noted: The tribunal relied on the witness's statement that the redeployment plan considered several constraints, including shortage of casing pipes. It held that the shortage was not the only reason for redeploying the rig Trident II to Platform B 121. (Shah, J.)
46. Noted: The tribunal held that ONGC failed to show that gas production on Platform B 121 was delayed by late supply. It noted that Mr. Setalwad had not argued that the deduction clause was by way of penalty. (Shah, J.)
47. Noted: The tribunal said it need only consider whether ONGC established actual loss in money terms. It held that ONGC had failed and must refund the amount deducted. (Shah, J.)
48. Held: The tribunal failed to consider Sections 73 and 74 and the ratio of Fateh Chand. Fateh Chand says the Court's jurisdiction to award compensation is unqualified except as to the maximum stipulated, and compensation must be reasonable. (Shah, J.)
49. Held: Section 74 stresses reasonable compensation whether or not actual loss is proved. If the sum named is a penalty, the party gets only reasonable compensation for loss suffered. (Shah, J.)
50. Held: If the sum named is a genuine pre-estimate of the loss the parties knew was likely, there is no question of proving loss. The party need not lead evidence of actual loss. The burden is on the other party to prove that no loss is likely. (Shah, J.)
51. Noted: The Court gives an example. If cotton bales are bought only as stock-in-trade and delivered late, loss or gain from price changes is easily proved. If they are bought to make yarn, the position is different. (Shah, J.)
52. Noted: In Maula Bux, the plaintiff had contracts to supply potatoes (security Rs.10,000) and eggs and fish (security Rs.8,500). He made persistent default and the Government rescinded and forfeited the deposits. (Shah, J.)
53. Noted: In Maula Bux, the Government could have proved the rates at which it bought the goods and other incidental charges, but did not try. So its claim for damages was not granted. (Shah, J.)
54. Noted: Maula Bux also held that a person aggrieved by breach need not prove actual loss in every case. It held that in some contracts it may be impossible to assess compensation. (Shah, J.)
55. Noted: Delay in building a road or bridge is a similar case, where the loss to society or State is hard to prove. Here, delay in deploying rigs changed the plan for gas production from Platform B-121. (Shah, J.)
56. Held: The witness said shortage of casing pipes was one of several reasons. In such a contract, exact loss is hard to prove. If the parties pre-estimated the loss after clear understanding, it is totally unjustified to hold that the party in breach need not pay. It would offend Sections 73 and 74. (Shah, J.)
57. Held: Nothing on record showed the agreed compensation to be unreasonable. The contract said it was an agreed, genuine pre-estimate, "an agreed, genuine pre-estimate of damages duly agreed by the parties". It also said the damages were not a penalty and were to be recovered from the contractor's bills. (Shah, J.)
58. Held: Saw Pipes led no evidence that the condition was a penalty or unreasonable. There was no reason for the tribunal not to rely on the clear terms. Saw Pipes was also told, when time was extended, that it must pay the stipulated damages. (Shah, J.)
59. Held: Four propositions follow:
    • The contract terms must be considered before deciding whether the party claiming damages is entitled to them.
    • If the terms are clear and stipulate liquidated damages, the party in breach must pay them, unless the estimate is held unreasonable or a penalty. That is what Section 73 provides.
    • Section 74 is read with Section 73. The aggrieved party need not prove actual loss before claiming a decree, and the Court can award reasonable compensation even without proof of actual damage.
    • Where compensation is impossible to assess, the Court can award a genuine pre-estimate by the parties as reasonable compensation, if it is not a penalty or unreasonable.
    (Shah, J.)
60. Held: The award directing ONGC to refund the amount deducted under the contract is set aside. (Shah, J.)

Disputed or undisputed claim, and interest

1. Noted: Since the refund award is set aside, no question of interest arises. The Court still deals with interest to show that the award was erroneous on its face on this point. (Shah, J.)
2. Noted: The tribunal held that ONGC had wrongfully deducted US $ 3,04,970.20 for delay in supply and Rs.15,75,559/- for excise duty, sales tax and freight, as liquidated damages. It held that the deduction was from an undisputed invoice amount, so the claim was not a disputed claim. (Shah, J.)
3. Noted: The tribunal then awarded interest at 12% per annum from 1.4.1997 till the statement of claim and 18% per annum pendente lite till payment. (Shah, J.)
4. Held: The contractor's claim was disputed. It was an agreed term that ONGC could recover liquidated damages for delay from the bills. If the contractor claims the deduction back because ONGC did not prove loss, that is undoubtedly a disputed claim. (Shah, J.)
5. Held: The arbitrators had to decide on the facts and the law whether the deduction was justified. That itself shows the claim was disputed. (Shah, J.)
6. Held: The arbitrators' reason was that the goods were received and the bills were not disputed. That reason is, on its face, unjust, unreasonable, unsustainable and patently illegal, and against the express terms of the contract. (Shah, J.)
7. Held: Clause 34.4 says no interest is payable on a disputed claim. It also says interest of 1% per month is payable on delay in paying an undisputed claim. (Shah, J.)
8. Held: The primary duty of arbitrators is to enforce the promise the parties made and to uphold the sanctity of the contract. The interest award is against the contract terms and violates Section 28(3). (Shah, J.)

Conclusions as recorded

1. Held: A court can set aside an award under Section 34(2) if the applicant proves one of the grounds in sub-clauses (i) to (iv) of clause (a). These are incapacity, an invalid arbitration agreement, no proper notice or inability to present the case, and matters beyond the submission. (Shah, J.)
2. Held: The court may set the award aside if the tribunal was not composed, or the procedure not followed, as the parties agreed or, failing that, as Part I requires. The exception is an agreement in conflict with a non-derogable provision of Part I. (Shah, J.)
3. Held: The court may set aside an award passed in contravention of the Act or any other substantive law governing the parties, or against the terms of the contract. (Shah, J.)
4. Held: An award can be set aside if against the public policy of India. That means contrary to the fundamental policy of Indian law, the interest of India, justice or morality, or patently illegal. (Shah, J.)
5. Held: An award can also be challenged under Section 13(5) and Section 16(6). (Shah, J.)
6. Held: The award must be set aside mainly on these grounds:
   • The agreement made time and date of delivery the essence of the contract.
   • On failure to deliver in time, ONGC was entitled to recover agreed liquidated damages.
   • It was explicitly understood that the liquidated damages were a genuine pre-estimate.
   • When time was extended, ONGC said the stipulated liquidated damages would be recovered.
   • The damages were to be recovered by the paying authorities from the contractor's bills.
   • Nothing on record showed that the stipulation was a penalty or the sum unreasonable.
   • In certain contracts it is impossible to assess or prove damages. Sections 73 and 74 of the Contract Act, and here the specific contract terms, take care of that.
   (Shah, J.)

Authorities

• Harish Chandra Bajpai v. Triloki Singh ([1957] SCR 370): no antithesis between procedure and power under Sections 90(2) and 92 of the Representation of the People Act, 1951 (Shah, J.).
• M.V. Elisabeth v. Harwan Investment & Trading Pvt. Ltd. (1993 Supp. (2) SCC 433): the Court must devise a procedure where substantive law demands justice (Shah, J.).
• Dhanna Lal v. Kalawatibai ((2002) 6 SCC 16): a wrong must not be left unredeemed (Shah, J.).
• Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly ((1986) 3 SCC 156): meaning of public policy; unfair terms that shock the conscience are void (Shah, J.). It quotes Janson v. Driefontein Consolidated Gold Mines Ltd. ([1902] AC 484), Richardson v. Mellish ((1824) 2 Bing 229), Enderby Town Football Club Ltd. v. Football Assn. Ltd. ([1971] Ch. 591), A. Schroeder Music Public Co. Ltd. v. Macaulay ([1974] 1 WLR 1308) and Kedar Nath Motani v. Prahlad Rai ([1960] 1 SCR 861).
• Renusagar Power Co. Ltd. v. General Electric Co. (1994 Supp. (1) SCC 644): narrow meaning of public policy for foreign awards; distinguished for domestic awards under Section 34 (Shah, J.).
• Murlidhar Agarwal v. State of U.P. (1974 (2) SCC 472): public policy is not static (Shah, J.).
• Rattan Chand Hira Chand v. Askar Nawaz Jung ((1991) 3 SCC 67): courts must fill the lacuna and prevent frustration of legislation (Shah, J.).
• Bhai Panna Singh v. Bhai Arjun Singh (AIR 1929 PC 179): relied on by the respondent; plaintiffs must prove damages under Section 74 (Shah, J.).
• Delta International Ltd. v. Shyam Sundar Ganeriwalla ((1999) 4 SCC 545): construing contracts by the words used (Shah, J.).
• Modi & Co. v. Union of India ((1968) 2 SCR 565) and Provash Chandra Dalui v. Biswanath Banerjee (1989 Supp (1) SCC 487): clear words in a contract govern (Shah, J.).
• Sir Chunilal V. Mehta & Sons Ltd. v. The Century Spinning and Manufacturing Co. Ltd. (1962 Supp. (3) SCR 549): cited by counsel on Sections 73 and 74 (Shah, J.).
• Fateh Chand v. Balkishan Das ((1964) 1 SCR 515): five-Judge Bench; Section 74 gives reasonable compensation and dispenses with proof of actual loss; distinguished as a penalty case (Shah, J.).
• Maula Bux v. Union of India ((1969) 2 SCC 554): three-Judge Bench; a genuine pre-estimate may be taken as reasonable compensation (Shah, J.).
• Union of India v. Rampur Distillery and Chemical Co. Ltd. ((1973) 1 SCC 649): forfeiture of a sum paid is of the nature of a penalty (Shah, J.).
• Union of India v. Raman Iron Foundry ((1974) 2 SCC 231): held to have ignored Fateh Chand and Maula Bux; overruled in Kamaluddin Ansari (Shah, J.).
• M/s H.M. Kamaluddin Ansari and Co. v. Union of India ((1983) 4 SCC 417): three-Judge Bench; overruled Raman Iron Foundry (Shah, J.).
• M/s Alopi Parshad & Sons Ltd. v. The Union of India ((1960) 2 SCR 793): an award can be set aside for an error on its face on a general reference (Shah, J.). It cites Champsey Bhara and Company v. Jivaraj Balloo Spinning and Weaving Company Limited (LR 50 IA 324; also cited as Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd., (1922-23) 50 IA 324), King and Duveen (LR (1913) 2 KBD 32) and Government of Kelantan v. Duff Development Company Limited (LR 1923 AC 395).
• Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises ((1999) 9 SCC 283), Sikkim Subba Associates v. State of Sikkim ((2001) 5 SCC 629) and G.M., Northern Railway v. Sarvesh Chopra ((2002) 4 SCC 45): followed Alopi Parshad (Shah, J.).
• Union of India v. A.L. Rallia Ram ((1964) 3 SCR 164): error of law on the face of the award (Shah, J.).
• Seth Thawardas Pherumal v. The Union of India ((1955) 2 SCR 48): jurisdiction not ousted unless a question of law is specifically referred (Shah, J.). It refers to F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. ([1933] AC 592).
• Maharashtra State Electricity Board v. Sterilite Industries (India) ((2001) 8 SCC 482): award final unless an error is apparent on its face; cites Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd. ((1967) 1 SCR 105) and Arosan Enterprises Ltd. v. Union of India (1999 (9) SCC 449) (Shah, J.).
• Other sources referred to: Sir William Holdsworth, History of English Law, Volume III, page 55; Lord Mustill and Stewart C. Boyd QC, Commercial Arbitration (2001), page 90; Mr. Nani Palkhivala's opinion on Justice B.P. Saraf and Justice S.M. Jhunjhunuwala's Law of Arbitration and Conciliation (Shah, J.).

Provisions mentioned

• Section 34, Arbitration and Conciliation Act, 1996: the only recourse against an award, by application to set it aside on the listed grounds, including conflict with the public policy of India.
• Sections 13(5) and 16: a challenge to the constitution of the tribunal, and to its decision on its jurisdiction. Both feed into Section 34.
• Sections 18 to 25: conduct of proceedings: equal treatment, procedure, place, commencement, language, pleadings, hearings and default.
• Section 28: substantive law to apply. Sub-section (2) allows decisions ex aequo et bono only if expressly authorised. Sub-section (3) requires decisions per the contract terms and trade usages.
• Section 31: form and contents of the award, including reasons (sub-section 3), interest (sub-section 7) and costs (sub-section 8).
• Sections 20, 30, 33, 67, 70(2)-(3) and 73, English Arbitration Act, 1996: Sections 33, 67, 70(2)-(3) and 73 appear only in the quoted Section 68. Section 20 (place of arbitration) is referred to in Section 31(4), and Section 30 (award on agreed terms) in Section 31(3).
• Sections 48, 75 and 81 and Sections 2 to 43: Section 48 deals with enforcement of foreign awards. Sections 75 and 81 appear in the Explanation to Section 34(2)(b). Part I comprises Sections 2 to 43.
• Section 73, Indian Contract Act: compensation for loss or damage caused by breach.
• Section 74, Indian Contract Act: reasonable compensation not exceeding the sum named or the penalty stipulated, whether or not actual loss is proved.
• Section 56 and Section 70, Indian Contract Act: Section 56 was applied in Alopi Parshad. Section 70 is mentioned in the extract from Rampur Distillery.
• Sections 23 and 28, Arbitration Act, 1940: provided for the court to fix the time for the award.
• Sections 90 and 92, Representation of the People Act, 1951: procedure and powers of the tribunal, discussed in Harish Chandra Bajpai.
• Section 7(1), Arbitration (Protocol and Convention) Act, 1937, and Section 7(1)(b)(ii), Foreign Awards (Recognition and Enforcement) Act, 1961: refusal to enforce a foreign award contrary to public policy.
• Article V(2)(b), New York Convention, 1958, and Article I(c), Geneva Convention, 1927: public policy grounds discussed in Renusagar.
• Article 34, UNCITRAL Model Law, and Sections 68, 69 and 70, English Arbitration Act, 1996: compared by Mr. Dave.
• Foreign Exchange Regulation Act (FERA): its violation was held contrary to the public policy of India in Renusagar.
• Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993: governs interest on delayed payments to such undertakings under clause 34.4.
• Code of Civil Procedure, 1908; Indian Evidence Act, 1872; Transfer of Property Act: the first two do not bind the tribunal; the last is an example of substantive law under Section 28(1)(a).
• Preamble, Fundamental Rights and Directive Principles of the Constitution: guide the courts in finding public policy where there is no precedent.

Judgement

1. The impugned award directing ONGC to refund US $ 3,04,970.20 and Rs.15,75,559/-, with interest, deducted for breach of contract as per the agreement, is set aside (Shah, J.).
2. The appeal is allowed (Shah, J.).
3. There is no order as to costs (Shah, J.).

Legal Principle / Ratio

A court can set aside an arbitral award under Section 34 if it is patently illegal. That means it contravenes the Act, other substantive law governing the parties, or the contract terms. Public policy of India in Section 34 is wider than the Renusagar meaning. Where a contract names liquidated damages as a genuine pre-estimate, the party claiming them need not prove actual loss, and the other party must show the sum is unreasonable or a penalty. In the Court's words: "the award could be set aside if it is patently illegal".

Critical Analysis

Analysis based on the judgment text.

The Court fixes the limits of patent illegality only by example. It says illegality must go to the root of the matter and that a trivial illegality does not make an award contrary to public policy. It also says the failure of procedure should be patent. The judgment does not set out a general test for when an error becomes patent illegality.

The Court's reading goes beyond the text of Section 34. It accepts that the Indian Act has no clause like Section 68 of the English Act and that the legislature did not list exhaustive grounds of challenge. It then adds patent illegality to the meaning of public policy, and says it is for Parliament to provide for limited or wider jurisdiction. The result rests on the Court's own reading of public policy in context.

The Court treats the type of reference as decisive. It says a mere error on a question referred to the arbitrator gives no jurisdiction to interfere. It then holds that this reference was general, not on a question of law. The judgment does not say what happens when a general reference and a specific question of law are mixed.

Significance

• The judgment holds that public policy of India in Section 34 covers patent illegality, in addition to the three heads in Renusagar.
• It says the narrow Renusagar meaning suits enforcement of a foreign award, and a wider reading suits a challenge to a domestic award before it is final.
• It links the arbitration statute to the Contract Act. An award that ignores Sections 73 and 74 or the contract terms can be set aside as patently illegal.
• On liquidated damages, it holds that a named sum that is a genuine pre-estimate does not need proof of actual loss, and it puts the burden on the other side to show that it is unreasonable.
• It ties Section 28(3), which requires deciding by the contract terms, to the ground of patent illegality.

Exam-Important Points

• Facts in one line: ONGC deducted agreed liquidated damages from a late supplier's bills. The tribunal ordered a refund with interest as ONGC proved no loss. The Supreme Court set the award aside.
• Rule: an award can be set aside under Section 34 if it is contrary to fundamental policy of Indian law, the interest of India, justice or morality, or if it is patently illegal.
• Trap: illegality must go to the root of the matter. A trivial illegality does not make an award against public policy.
• Trap: the Renusagar narrow meaning was for enforcing a foreign award. The Court refused to apply it to a challenge to a domestic award.
• Liquidated damages: under Section 74, the claimant need not prove actual loss if the sum is a genuine pre-estimate. Where loss in money can be determined, Maula Bux says the claimant must prove it. The Court held that this contract was one where loss is hard to prove.
• Reference: a general reference lets the court interfere with an award that is erroneous on its face. A specific question of law referred to the arbitrator does not, unless the arbitrator proceeded illegally.
• Interest: clause 34.4 bars interest on a disputed claim. The Court held the claim was disputed, so the interest award violated Section 28(3).
• Costs: no order as to costs.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.