Case: Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 4 SCALE 9
Case No. : Appeal (Civil) 7419 2001 of 518

Case Analysis

• Parties:
  • Petitioner: Oil & Natural Gas Corporation Ltd.
  • Respondent: SAW Pipes Ltd.
• Bench:
  • Hon'ble Mr. Justice M.B. Shah
  • Hon'ble Mr. Justice Arun Kumar
• Facts:
  • SAW Pipes, a supplier for offshore oil exploration, entered an agreement with ONGC to supply casing pipes.
  • Due to a worker's strike in Europe, raw material acquisition was delayed.
  • The contract stipulated liquidated damages for delays at 1% of the unit price per week, up to a ceiling of 10%.
  • ONGC withheld US $3,04,970.20 and Rs. 15,75,559/- for liquidated damages.
  • The respondent disputed the deduction, leading to an arbitral tribunal ruling in their favor.
  • ONGC's appeal to the Bombay High Court was dismissed.
• Issues:
  • Whether the Supreme Court has jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996?
  • Whether the award can be set aside if the tribunal failed to follow the prescribed procedure?
  • Whether the award can be set aside on the grounds of 'public policy' if it violates provisions of substantial law?
• Holding:
  • Section 28 and 34 of the Arbitration and Conciliation Act, 1996
  • Sections 73 and 74 of the Indian Contract Act, 1872
• Procedural History:
  • The arbitral tribunal found ONGC's recovery of liquidated damages unsupported by evidence of loss.
  • The tribunal directed ONGC to pay the deducted amount with interest.
  • ONGC's appeal to the High Court failed, leading them to approach the Supreme Court.
• Dicta:
  • Adherence to contractual obligations is crucial, and breaches carry legal consequences.
  • Factors for remedies in breach of contract were likely discussed.
• Petitioner's Arguments:
  • ONGC argued that SAW Pipes failed to deliver on schedule, causing financial losses.
  • ONGC sought compensation for damages due to breach of contract.
• Respondent's Arguments:
  • SAW Pipes claimed unforeseen circumstances hindered contract fulfillment.
  • They argued they took reasonable steps to mitigate delays.
• Court's Observations:
  • Examined the contract terms to determine obligations and breach.
  • Reviewed evidence for the delay and ONGC's damages.
  • Evaluated damages suffered by ONGC due to the breach.
• Judgment:
  • The Arbitration and Conciliation Act, 1996, grants the court the power to set aside an arbitral award. The tribunal was mandated under Section 28 to decide disputes in accordance with substantive law in India. The court ruled that the tribunal's decision violated the Indian Contract Act, 1872, as it failed to consider Sections 73 and 74 of the Act and the ratio laid down in Fateh Chand v. Balkishan Das.

Section 73 allows the party who suffers from a breach to receive compensation for any loss caused to them that the parties knew when they made the contract to be likely to result from the breach. Section 74 deals with penalties stipulated in the contract, and the party is only entitled to reasonable compensation for the loss suffered. However, if the compensation is the genuine pre-estimated loss, there is no question of proving the actual loss or the party is not required to lead evidence to prove the actual loss suffered.

The court considered whether the award violated provisions of the Arbitration Act and substantial law and if so, whether it could be set aside on the grounds of Section 34 of the Act. The court concluded that 'Public Policy' cannot be restrained and must be interpreted liberally, including 'patent illegality'. Force majeure clauses could not be invoked in the case due to the contract not enumerating the possibility of a strike.
In summary, the court set aside the tribunal's award on grounds of patent illegality violating 'public policy.

Written By: Bhoomi Mittal, Manav Rachna University