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Arbitration – Tenders for supply of Nessie 4 streamers equipped with “Geopoint” Hydrophones of U.S. origin – USA not granted licence – conditions imposed for the replacement – the right to recover liquidated damages as per Clause 16 and for excess engagement of vessel as per Clause 14 of the subject contract. -deducted from its dues a sum of US $ 5,114,300.98 towards excess engagement charges in terms of Clause 14 of the contract. -further deducted a sum of US $ 410,641.20 based on a change in tax law applicable at 4.8% followed by a deduction of a sum of US $ 80,530.10 based on correction for price charges inclusive of income tax at 4.8%.- arbitration dispute – Single judge dismissed the claim – Division bench modified the award – Apex court held that In the result, we allow this appeal but only to the extent that out of the period of 4 months and 22 days which the arbitrators have attributed to the appellant-Corporation a period of 56 days comprising 42 days of the first interval and 14 days of the second referred to in the judgment shall be reduced. Resultantly, deductions made by the appellant-Corporation for the said period of 56 days shall stand affirmed and the award made by the arbitrators modified to that extent with a proportionate reduction in the amount payable to the respondent. No costs.= CIVIL APPEAL NO.3415 OF 2007 Oil & Natural Gas Corporation Ltd. …Appellant Versus Western Geco international Ltd. …Respondent = 2014 – Sept. Part – http://judis.nic.in/supremecourt/filename=41878

 Arbitration – Tenders for supply of Nessie  4  streamers equipped with “Geopoint” Hydrophones of U.S. origin – USA not granted licence – conditions  imposed  for  the  replacement  – the right to recover  liquidated  damages  as  per Clause 16 and for excess engagement of  vessel  as  per  Clause  14  of  the subject contract. –deducted from its dues a sum  of US $ 5,114,300.98 towards excess engagement charges in terms  of  Clause  14 of the contract.  –further deducted a sum of US $ 410,641.20 based on a  change  in tax law applicable at 4.8% followed  by  a  deduction  of  a  sum  of  US  $ 80,530.10 based on correction for price charges inclusive of income  tax  at 4.8%.- arbitration dispute – Single judge dismissed the claim – Division bench modified the award – Apex court held that  In the result, we allow this appeal but only to the  extent  that  out of the period of 4 months and 22 days which the arbitrators have  attributed to the appellant-Corporation a period of 56 days comprising 42 days  of  the first interval and 14 days of the second referred to in the  judgment  shall be reduced. Resultantly, deductions made by the  appellant-Corporation  for the said period of 56 days shall stand affirmed and the award  made  by  the arbitrators modified to that extent with a proportionate  reduction  in  the amount payable to the respondent.  No costs.=

whereby  OSA

No.24 of 2006 filed by the appellant-Corporation  has  been  partly  allowed

and the order passed by a single bench of  the  High  Court  in  Arbitration

Petition No.203 of  2005  affirmed  with  the  modification  that  award  of

pendente lite and future interest  by  the  Arbitral  Tribunal  shall  stand

deleted. =


 In  response  to  the  tender  notice  respondent-M/s  Western   Geco

International Ltd., submitted a bid offering to supply  Nessie  4  streamers

equipped with “Geopoint” Hydrophones of U.S. origin. =

A formal contract was in due course executed between  the  parties  on

18th June, 2001.=

Respondent’s further  case  is  that  its

source in US had informed it that the US  authorities  were  not  likely  to

grant a licence to sell hydrophones to India.=

The respondent informed the appellant-Corporation  that  if

the  Corporation  accepted  the  replacement,  those  hydrophones  could  be

substituted for the US hydrophones within a short time.

6.    The appellant-Corporation  was,  however,  in  no  mood  to  accept  a

substitute for the contracted hydrophones.  It was on the contrary  keen  to

have US made hydrophones fitted on the vessel. 

 The Corporation,  therefore,

required the respondent to continue its efforts to  secure  a  licence  from

the US Government in which direction the appellant-Corporation  on  its  own

moved the concerned Ministry in Government of India  to  secure  a  licence.=

It was only on 23rd March,  2002  that  the  respondent  conditionally

agreed to the proposed replacement of the US made hydrophones by those  made

in Canada.

One  of  the  conditions  imposed  for  the  replacement  by  the

appellant-Corporation was the right to recover  liquidated  damages  as  per

Clause 16 and for excess engagement of  vessel  as  per  Clause  14  of  the

subject contract. 

The replacement accordingly  took  place  and  the  Vessel

eventually delivered back to the Corporation with  Canadian  hydrophones  on

6th May, 2002. On 24th May, 2002, a formal amendment  to  the  contract  was

also effected to record the substitution of  the  US  hydrophones  by  those

made in Canada.=

With the upgradation and  modernisation  work  completed  as  per  the

amended contract, the respondent raised invoices for payment due to  it  but

realised that the appellant-Corporation had deducted from its dues a sum  of

US $ 5,114,300.98 towards excess engagement charges in terms  of  Clause  14

of the contract.

By another letter dated 20th August, 2002, the  appellant-

Corporation further deducted a sum of US $ 410,641.20 based on a  change  in

tax law applicable at 4.8% followed  by  a  deduction  of  a  sum  of  US  $

80,530.10 based on correction for price charges inclusive of income  tax  at

4.8%.

These deductions  gave  rise  to  disputes  which  were  referred  for

adjudication to an arbitral tribunal comprising three former Chief  Justices

of India before whom the respondent claimed  a  sum  of  US  $  7,327,610.68

towards principal dues plus US $1,205,564.13 by  way  of  interest  for  the

period from 20th  August,  2003  to  15th  November,  2003  totalling  US  $

8,533,174,81 with interest pendent lite at 12% p.a. from  the  date  of  the

filing of the claim till the award at the same rate. =

Was the national origin of hydrophones used in  the  Nessie-4  streamers,  a

material term of the contact between the parties?

=

Issue  No.  1  was

answered in the negative holding that since the choice  of  the  hydrophones

was left to the bidders subject to the equipment meeting the  specifications

prescribed for the purpose and since the stipulations did not  indicate  the

make or the country of origin of the hydrophones,  the  national  origin  of

such hydrophones was not  a  material  term  of  the  contract  between  the

parties.

Was the respondent justified  in  refusing  to  allow  substitution  of  the

Canadian M-2 hydrophones for the US Geopoint hydrophones?

=

Issue  No.  2  was,  however,  answered  by  the  Tribunal   in   the

affirmative, who took the view that once the respondent had made the  choice

and contracted to  supply  hydrophones  made  in  the  U.S.  the  appellant-

Corporation  was  entitled  to  insist  on  the  supply  of  the  contracted

equipment.

Was the claimant’s declaration of force majeure justified  under  the  terms

of the contract?

=

The arbitral  tribunal

decided Issue No.3 against the respondent holding that none  of  the  events

mentioned in the contract had taken place  and  since  the  parties  to  the

contract did not belong to U.S.,  the force majeure clause  could  not  have

been validly invoked by the respondent.

Whether there was any delay in the performance of the contact?
If the answer to point No.4 is in the affirmative, who  is  responsible  for

such delay?
If the answer to point No.4 is in the affirmative, whether the  Claimant  is

entitled to damages?
Whether the respondent was entitled to adjust the sum of US  $  491,000  out

of the sum payable, in whole or in part,  as  alleged  in  para  30  of  the

statement?
Is respondent entitled to both  Liquidated  Damages  and  Excess  Engagement

charges for the same periods of time under the provisions of the Contract? =

Before  the  Division

Bench, a three-fold  submission  was  urged  on  behalf  of  the  appellant-

Corporation.  

Firstly, it was contended that  the  Tribunal  had  fallen  in

error in holding that the delay between 14th September 2001 and  21st  March

2002 was not attributable to  the  respondent  company.   

Secondly,  it  was

contended that the Arbitral Tribunal was  not  right  in  holding  that  the

deductions made by the appellant towards taxes was not legally  permissible.

 Thirdly it was contended that the award by the Arbitral  Tribunal  for  the

pendente lite and future interest was not  justified.   

While  the  Division

Bench rejected the first two contentions  the  respondent  appears  to  have

made a statement before the High Court waiving pendente  lite  interest  and

agreeing to the modification of the award to that extent.  

 The  High  Court

held that the Arbitral Tribunal’s findings to  the  effect  that  the  delay

between 16th October  and  21st  March  2002  is  not  attributable  to  the

respondent, was based on the consideration of  the  material  placed  before

the Arbitral Tribunal which called for no interference. 

 So also  deductions

towards payment  of  taxes  were,  according  to  the  High  Court,  rightly

disallowed by the Arbitrators.=

 

What is important in the context of the case at hand is that

if

on facts proved before them the arbitrators fail to draw an inference  which

ought to have been drawn

or if they have drawn an inference which is on  the

face of it, untenable resulting in miscarriage of justice, the  adjudication

even when made by an arbitral tribunal  that  enjoys  considerable  latitude

and play at the joints in making awards will be open to  challenge  and  may

be cast away or modified depending upon whether the offending part is or  is

not severable from the rest.

31.   Inasmuch as the arbitrators clubbed the  entire  period  between  16th

October, 2001 and 21st March, 2002 for purposes of  holding  the  appellant-

Corporation responsible for the delay, they committed an error resulting  in

miscarriage of justice apart from the fact that they  failed  to  appreciate

and draw inferences that logically flow from such  proved  facts.

We  have,

therefore, no hesitation in rejecting the contention urged on behalf of  the

respondent that the  arbitral  award  should  not  despite  the  infirmities

pointed out by us be disturbed.

32.   That brings us to the last submission that  deduction  on  account  of

taxes  not  paid  should  have  been  allowed  by  the   respondent-arbitral

tribunal.

The Tribunal has, in our opinion, correctly held that no  part  of

the work was undertaken outside Singapore which was  to  be  executed  on  a

turnkey basis for a price that was pre-determined.

The arbitrators have,  in

our opinion, rightly held that  no  taxes  were  payable  under  the  Indian

Income tax Act so as to entitle the Corporation  to  deduct  any  amount  on

that account by reason of non-payment of such taxes.

The  challenge  to  the

award to that extent must fail and is, hereby, rejected.

33.   In the result, we allow this appeal

but only to the  extent  that  out

of the period of 4 months and 22 days which the arbitrators have  attributed

to the appellant-Corporation a period of 56 days comprising 42 days  of  the

first interval and 14 days of the second referred to in the  judgment  shall

be reduced.

Resultantly, deductions made by the  appellant-Corporation  for

the said period of 56 days shall stand affirmed and the award  made  by  the

arbitrators modified to that extent with a proportionate  reduction  in  the

amount payable to the respondent.  No costs.

2014 – Sept. Part – http://judis.nic.in/supremecourt/filename=41878   

REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3415 OF 2007

Oil & Natural Gas Corporation Ltd. …Appellant

Versus

Western Geco international Ltd. …Respondent

J U D G M E N T
T.S. THAKUR, J.

1. This appeal arises out of an order dated 10th February, 2006 passed
by a Division Bench of the High Court of Judicature at Bombay whereby OSA
No.24 of 2006 filed by the appellant-Corporation has been partly allowed
and the order passed by a single bench of the High Court in Arbitration
Petition No.203 of 2005 affirmed with the modification that award of
pendente lite and future interest by the Arbitral Tribunal shall stand
deleted.

2. The appellant-Corporation is engaged in the business of drilling and
exploration of oil and natural gases. In November, 1999, the appellant
invited offers for technical upgradation of Seismic Survey Vessel, M.V.
Sagar Sandhani (hereinafter referred to as the “Vessel”) with a view to
modernising the same. According to the tender conditions, one of the main
items of equipment required for upgradation of the Vessel was “Streamers”
fitted with hydrophones. The specifications, however, did not stipulate the
national origin of such hydrophones.

3. In response to the tender notice respondent-M/s Western Geco
International Ltd., submitted a bid offering to supply Nessie 4 streamers
equipped with “Geopoint” Hydrophones of U.S. origin. The appellant’s case
is that the term relating to supply of such Geopoint Hydrophones formed a
material part of the offer made by the respondent-company in whose favour
the appellant-Corporation eventually awarded a contract in terms of its
letter dated 10th October, 2000 duly accepted by the respondent on 25th
October, 2000. The Vessel was resultantly handed over to the respondent on
10th April, 2001 for carrying on the proposed modernisation and upgradation
work. A formal contract was in due course executed between the parties on
18th June, 2001.

4. It is common ground that “Geopoint” Hydrophones of U.S. origin were
in terms of the contract fitted in the vessel and test trials of the same
conducted. Even so the vessel could not be delivered back to the appellant
on 9th July, 2001, the due date for that purpose, because of some problem
which the respondent encountered in obtaining licence from the U.S.
authorities for sale of such hydrophones. The appellant-Corporation asserts
that the respondent had for the first time made an application to the U.S.
authorities for issuance of a licence as late as on 1st August, 2001 i.e.
nearly a month after the due date for delivery of the vessel back to the
Corporation. No formal rejection of the request for a license was according
to the Corporation communicated to it as the matter appeared to be under
some kind of negotiations between the respondent and the authorities in
U.S.

5. The respondent’s case per contra is that it continued its efforts to
obtain a licence only to be informed by its sources in the US that the
latter was likely to impose certain onerous conditions one of which could
be that US made hydrophones can be used only on loan basis that too for a
short duration of 24 months only. Respondent’s further case is that its
source in US had informed it that the US authorities were not likely to
grant a licence to sell hydrophones to India. Be that as it may while the
matter was pending with the Defence Department, a massive terrorist attack
on 11th September, 2001 shook America. The respondent’s hope of getting a
licence for sale of US made hydrophones receded further with this
unexpected development. The respondent accordingly informed the appellant-
Corporation about the new development and pleading force majeure the
respondent informed the appellant-Corporation of the former’s inability to
equip the vessel with U.S. made hydrophones. The appellant-Corporation
refuted the invocation of force Majeure by its letter dated 20th
September, 2001 and informed the respondent that since the field season was
starting shortly any further delay in the delivery of the vessel would
adversely affect its operation. The respondent on its part started looking
for and offering alternatives to the U.S. made hydrophones and argued with
the appellant-Corporation that since origin of the hydrophones was not
indicated in the bid documents it was testing replacement by M-2 US Geo
Spectrum Hydrophones made in Canada at its Norway facilities to check their
suitability which exercise the respondent hoped to complete by 27th
September, 2001. The respondent informed the appellant-Corporation that if
the Corporation accepted the replacement, those hydrophones could be
substituted for the US hydrophones within a short time.

6. The appellant-Corporation was, however, in no mood to accept a
substitute for the contracted hydrophones. It was on the contrary keen to
have US made hydrophones fitted on the vessel. The Corporation, therefore,
required the respondent to continue its efforts to secure a licence from
the US Government in which direction the appellant-Corporation on its own
moved the concerned Ministry in Government of India to secure a licence.
Further information and details in respect of the proposed Canadian
hydrophones was all the same called for by the Corporation from the
respondent. Since, however, the efforts to secure a licence from US
Government were making no progress, the respondent sought approval of the
appellant-Corporation to remove the US hydrophones from the vessel and
transfer them to their repair facility in Singapore to facilitate
replacement by the Canadian made hydrophones. The respondent also wrote a
detailed letter dated 10th October, 2001 to the appellant-Corporation
informing the latter that the US government was not likely to grant a
licence and that it had withdrawn the application made for that purpose to
prevent a denial. What is important is that by letter dated 16th October,
2001 the respondent clearly stated that it was not in a position to deliver
the vessel with streamers containing the Geopoint Hydrophones of US make.
This letter was followed by letter dated 21st October, 2001 addressed to
the appellant-Corporation with a request to permit removal of US
hydrophones and replacement of Canadian hydrophones which had been
extensively tested 1999 in connection with supply of Seismic Survey Vessel
delivered to NOIC for the Iran project. Further information required by
the appellant-Corporation was also supplied by the respondent by its letter
dated 24th October, 2001 with a request to the Corporation to approve the
proposed replacement. The respondent also agreed to give additional
warranty of one year for the replaced hydrophones. By another letter dated
13th November, 2001 the respondent assured the appellant-Corporation that
if the latter agreed to the replacement proposal there would be no
financial implications and the additional cost involved in fixing the
Canadian hydrophones would also be borne by the respondent.

7. It was only on 23rd March, 2002 that the respondent conditionally
agreed to the proposed replacement of the US made hydrophones by those made
in Canada. One of the conditions imposed for the replacement by the
appellant-Corporation was the right to recover liquidated damages as per
Clause 16 and for excess engagement of vessel as per Clause 14 of the
subject contract. The replacement accordingly took place and the Vessel
eventually delivered back to the Corporation with Canadian hydrophones on
6th May, 2002. On 24th May, 2002, a formal amendment to the contract was
also effected to record the substitution of the US hydrophones by those
made in Canada.

8. With the upgradation and modernisation work completed as per the
amended contract, the respondent raised invoices for payment due to it but
realised that the appellant-Corporation had deducted from its dues a sum of
US $ 5,114,300.98 towards excess engagement charges in terms of Clause 14
of the contract. By another letter dated 20th August, 2002, the appellant-
Corporation further deducted a sum of US $ 410,641.20 based on a change in
tax law applicable at 4.8% followed by a deduction of a sum of US $
80,530.10 based on correction for price charges inclusive of income tax at
4.8%. These deductions gave rise to disputes which were referred for
adjudication to an arbitral tribunal comprising three former Chief Justices
of India before whom the respondent claimed a sum of US $ 7,327,610.68
towards principal dues plus US $1,205,564.13 by way of interest for the
period from 20th August, 2003 to 15th November, 2003 totalling US $
8,533,174,81 with interest pendent lite at 12% p.a. from the date of the
filing of the claim till the award at the same rate.

9. The appellant-Corporation stoutly contested the claim made against it
and alleged that hydrophones being an important component, the respondent
had not only offered to fit US made hydrophones in the streamer section of
the Vessel but actually fitted the same. The appellant’s case was that the
claimant having contracted to supply US made hydrophones was legally
obliged to handover the Vessel duly filled with such hydrophones within the
stipulated period of 90 days which expired on 9th July, 2001. The
appellant’s further case was that the requirement of a licence was first
mentioned by the respondent when letter dated July 9, 2001 was delivered to
the appellant’s representative on board the vessel at Singapore in an
attempt to explain the respondent’s failure to hand over the vessel on the
due date. The appellant-Corporation asserted that the respondent had not
even applied for a licence till then and had simply asked for an extension
of time. It was only when the appellant-Corporation asked the respondent to
specify on a realistic basis, the period for which extension was being
demanded that the respondent had by letter dated 26th July, 2001 stated
that according to their understanding the licence will be issued towards
the first week of September, 2001. Since time was the essence of the
contract between the parties, the respondent’s failure to return the vessel
duly upgraded within 9 months from the date of Letter of Acceptance or 90
days from the delivery of the vessel i.e. on or before 9th July, 2001 was a
clear breach of its contractual obligation rendering the respondent liable
to payment of liquidated damages and for excess engagement of the vessel,
argued the appellant-Corporation.

10. The Corporation also disputed the invocation of force majeure clause
in the fact situation of the case especially when securing of a licence for
the equipment was not a part of the contract between the parties, it being
the sole responsibility of the respondent to determine the type and make of
hydrophones. The terrorist attack on the twin towers was, according to the
appellant-Corporation a post-contractual period issue as the date of the
delivery of the vessel under the contract had since long expired by the
time the attack took place. It was also contended that the delay in the
completion of the contract was entirely attributable to the respondent who
when called upon by the appellant-Corporation to submit the performance
report of the M-2 hydrophones used in Seismic Survey Vessel PEJWAK
suggested that the appellant-Corporation should obtain the same directly
from NIOC forcing the appellant-Corporation to send a representative to
Oslo to verify the parameters of the M-2 hydrophones at their own expense.
It was asserted that once the respondent informed the appellant-Corporation
that the US department of Commerce had finally rejected the licence, the
appellant-Corporation was left with no alternative except to agree to the
replacement of the US made hydrophones by Canadian M-2 hydrophones
resulting in the delivery of the vessel back to the Corporation on 6th May,
2002 after considerable delay.

11. On the pleadings of the parties the Arbitral Tribunal framed the
following issues for determination:

Was the national origin of hydrophones used in the Nessie-4 streamers, a
material term of the contact between the parties?

Was the respondent justified in refusing to allow substitution of the
Canadian M-2 hydrophones for the US Geopoint hydrophones?

Was the claimant’s declaration of force majeure justified under the terms
of the contract?

Whether there was any delay in the performance of the contact?

If the answer to point No.4 is in the affirmative, who is responsible for
such delay?

If the answer to point No.4 is in the affirmative, whether the Claimant is
entitled to damages?

Whether the respondent was entitled to adjust the sum of US $ 491,000 out
of the sum payable, in whole or in part, as alleged in para 30 of the
statement?

Is respondent entitled to both Liquidated Damages and Excess Engagement
charges for the same periods of time under the provisions of the Contract?

12. In the award which the Tribunal made and published Issue No. 1 was
answered in the negative holding that since the choice of the hydrophones
was left to the bidders subject to the equipment meeting the specifications
prescribed for the purpose and since the stipulations did not indicate the
make or the country of origin of the hydrophones, the national origin of
such hydrophones was not a material term of the contract between the
parties.

13. Issue No. 2 was, however, answered by the Tribunal in the
affirmative, who took the view that once the respondent had made the choice
and contracted to supply hydrophones made in the U.S. the appellant-
Corporation was entitled to insist on the supply of the contracted
equipment. The arbitrators further held that once the respondent had
informed the appellant that the option of U.S. made hydrophones was closed,
the later was not justified in insisting that the request for a license
with the U.S. authorities should be pursued further. The arbitral tribunal
decided Issue No.3 against the respondent holding that none of the events
mentioned in the contract had taken place and since the parties to the
contract did not belong to U.S., the force majeure clause could not have
been validly invoked by the respondent.

14. Dealing with the question of delay in the performance of the contract
and its consequences covered by Issue Nos. 4 to 8, the Arbitrators held
that the respondent-claimant had completed the performance of the
contractual obligations within the stipulated time frame and would have but
for the U.S. licence requirement delivered the vessel to the appellant on
July 9, 2001 in which event there would have been no necessity to invoke
the force majeure clause or to seek extension of time or to offer the
Canadian hydrophones. Even so the fact remained that the respondent had not
delivered the vessel back to the appellant-Corporation on time. The
Tribunal then examined whether the respondent was responsible for the
entire delay between July 9, 2001 and 6th May 2002 when the vessel was
actually returned. The Tribunal rejected the contention on behalf of the
respondent that extension of time for completing the contracted works had
the effect of waiving the rights vested in the appellant under clause 14
and 16 of the contract. The Tribunal held that waiver ought to be express
or the fact situation must be necessary implication manifest an intention
to waive. Mere extension of time did not signify waiver of the rights
flowing from clause 15 and 16 of the contract, observed the Arbitral
Tribunal. Having said so the Tribunal held that since the respondent had
informally intimated to the appellant Corporation as early as on October
24, 2001 that it did not desire to pursue the request for a licence with
the U.S. authorities any further and since by a letter dated 25th October
2001 the final particulars in regard to the Canadian hydrophones were duly
supplied, allowing some time to the respondent to take a decision, the
delay post October 21, 2001 could not be attributed to the respondent.
That finding, observed the Tribunal, did not impact the amount deducted by
the respondent towards liquidated damages as the capping provision limited
to 10% was less than the sum payable for the delay upto October 31, 2001.
As regards excess engagement charges the Arbitrators held that except for
the period commencing November 1, 2001 to March 22, 2002 the appellant
Corporation was justified in making deductions for the rest of the period
from the claim of the respondent. The Arbitrators held that the deductions
in relation to the period from November 1, 2001 to March 22, 2002 amounting
to US$ 2,445,246.54 were wrongly made by the appellant-Corporation which
amount the respondent was entitled to get from the appellant together with
interest at the rate indicated in the award.

15. As regards deductions based on change of tax law or non payment of
taxes under the Indian Law, the Tribunal held that the same were not
permissible in the facts and circumstances of the case especially when the
contracted work was to be executed and completed at the ship repair unit of
the respondent claimant in Singapore and so was the handing over of the
completed vessel to the appellant-Corporation. No part of the work having
been undertaken outside Singapore no deduction could be made on account of
non-payment of any tax. The Arbitrators held that since no taxes were
attracted under the Indian Income Tax Act the price could not include the
said tax component. The Arbitrators accordingly held that deductions made
on two counts, being of US $ 410,641.20 and US $ 80,530.10 were also
unjustified and unwarranted by law or contract.

16. Aggrieved by the award made by the Arbitral Tribunal, the appellant
Corporation preferred a petition under Section 34 of the Arbitration and
Conciliation Act, 1996 which failed and was dismissed by a Single Judge of
the High Court but was allowed in part in O.S.A No. 241 of 2006 by the
Division Bench of the High Court to the extent of deleting pendente lite in
future interest from the award made by the Tribunal. Before the Division
Bench, a three-fold submission was urged on behalf of the appellant-
Corporation. Firstly, it was contended that the Tribunal had fallen in
error in holding that the delay between 14th September 2001 and 21st March
2002 was not attributable to the respondent company. Secondly, it was
contended that the Arbitral Tribunal was not right in holding that the
deductions made by the appellant towards taxes was not legally permissible.
Thirdly it was contended that the award by the Arbitral Tribunal for the
pendente lite and future interest was not justified. While the Division
Bench rejected the first two contentions the respondent appears to have
made a statement before the High Court waiving pendente lite interest and
agreeing to the modification of the award to that extent. The High Court
held that the Arbitral Tribunal’s findings to the effect that the delay
between 16th October and 21st March 2002 is not attributable to the
respondent, was based on the consideration of the material placed before
the Arbitral Tribunal which called for no interference. So also deductions
towards payment of taxes were, according to the High Court, rightly
disallowed by the Arbitrators.

17. The present appeal assails the correctness of the Award of the
Arbitral Tribunal and the orders passed by the High Court as noticed in the
beginning of this order.

18. We have heard learned counsel for the parties at length who have
taken us through the award made by the Arbitral Tribunal, provisions of the
contract executed between the parties and the correspondence exchanged
between them. There is no denying the fact that there was delay in the
return of the vessel to the Corporation after upgradation. In terms of the
contractual time schedule the vessel ought to have returned to the
Corporation by 9th July 2001 which was instead returned to the Corporation
only on 6th May 2002 i.e. after a delay of 9 months and 28 days. Who is
responsible for this delay is the essence of the dispute between the
parties. According to the appellant-Corporation the delay is entirely
attributable to the respondent while according to the respondent the delay
is attributable to the appellant. The Arbitrators have after examining the
material placed before them recorded a finding to the effect that the delay
between 10th July 2001 and 31st March 2001 was entirely attributable to the
respondent. That finding was not challenged by the respondent before the
High Court nor is it under challenge before us. The Arbitrators have on
the basis of the finding recorded by them allowed to the appellant-
Corporation excess engagement charges under clause 14 besides liquidated
damages under clause 16 of the Contract executed between the parties. But
for the period between 1st November, 2001 and 22nd March, 2002 which comes
to 4 months and 22 days the Arbitrators have found the delay to be
attributable to the appellant-Corporation. Deduction made by the
Corporation in regard to this period has been faulted by the arbitrators
and the amount directed to be released in favour of the respondent-Company.
The award deals with this period and the amount deducted for the same in
the following words:

“In the result we are of the opinion that except for the period from
November 1, 2001 to March 23, 2002 for which deduction has been made from
the Claimant’s invoices, no exception can be taken for the rest of the
deduction made from the claim of the Claimant. The deduction in relation
to the period from November 1, 2001 to March 22, 2002 (4 months + 22 days)
works out to a sum of US $ 2,445,246.53 which the Claimant would be
entitled to from the Respondent together with interest at the rate of
indicated hereafter”.

19. The above period of 4 months and 22 days between 1st November, 2001
and 22nd March, 2002, in our opinion, comprises four separate intervals.
The first of these four intervals is the period between 1st November, 2001
and 26th November, 2001 which period was taken by the appellant-Corporation
to take a final decision whether or not an application should be made to
the U.S authorities for the issue of a licence. The second interval
comprises time taken by the respondent-claimant to make an application
between 27th November, 2001 and 7th January, 2002, both days inclusive. The
application for grant of a license was filed by the respondent only on 8th
January, 2002. The third interval comprises time taken by the U.S
Authorities between 8th January, 2002 and 7th March, 2002 to formally
decline the issue of a license for sale of US made hydrophones to India.
The fourth interval comprises time taken by the respondent-claimant to
convey the decision of the U.S Authorities between 8th March, 2002 and 21st
March, 2002. It is common ground that while the U.S Authorities had
rejected the request for grant of a license on 8th March, 2002, the said
rejection was conveyed to the appellant-corporation only on 22nd March,
2002.

20. From the findings of the fact recorded by the arbitrators with which
we see no reason to interfere or disagree, it is evident, that the
appellant-corporation was solely responsible for the delay in taking a
decision in the matter between 24th October, 2001 and 26th November, 2001.
The arbitrators have found and, in our opinion, rightly so that the
respondent-claimant had by its letter dated 24th October, 2001 clearly
informed the appellant that there was no use pursuing the matter with the
U.S. Authorities any further. Even particulars regarding Canadian
hydrophones were supplied to the appellant in terms of a letter dated 25th
October, 2001. The arbitrators have held that delay in taking a decision
whether or not any formal application should be made and a formal rejection
obtained by the respondent was attributable only to the appellant-
Corporation. There is, in our opinion, no legal flaw, infirmity or
perversity in that finding which we hereby affirm. Deduction made by the
appellant-Corporation for the First interval that comprises period between
1st November, 2001 and 25th November, 2001, both days inclusive, cannot,
therefore, be sustained and the arbitral award to that extent cannot be
faulted.

21. That brings us to the second interval comprising period between 26th
November, 2001-the date when the appellant-Corporation issued instructions
for making of a formal application for the grant of a license and 8th
January, 2002-when such an application was actually made by the respondent-
company. This period reckoned from 27th November, 2001 to 7th January, 2002
works out to 42 (Forty two) days which must be attributed to the respondent-
claimant, who could and indeed ought to have acted diligently and with
reasonable despatch in the matter instead of taking the same easy, and if
we may say so somewhat reluctantly. We cannot help saying with utmost
respect at our command for the eminence and erudition of the distinguished
jurists comprising the Arbitral Tribunal that the tribunal failed to
appreciate this aspect hence fell in a palpable error leading to
miscarriage of justice. The test adopted by the Tribunal for holding the
appellant-Corporation responsible for delay ought to have been applied to
the respondent as well for its failure to take action in the right earnest
instead of sitting over the matter leading to detention of the vessel for a
period more than what was absolutely necessary.

22. The period between 8th January, 2002 and 8th March, 2002 comprising
the third interval during which the U.S. authorities decided the
application for the grant of a license has been rightly counted against the
appellant-Corporation as it was at the instance of the Corporation that a
formal application was made. The time spent by the U.S. authorities for
disposal of the request could not in the facts and circumstances be
attributed to or counted against the respondent-claimant who had advised
the appellant against any such move. The arbitral Tribunal, therefore
rightly held that deduction for this period was not justified.

23. That leaves us with the fourth and the last interval comprising the
period between 8th March, 2002 and 22nd March, 2002 when the rejection of
the application was conveyed to the appellant-Corporation. There is, in our
opinion, no valid reason why this period should not be counted against the
respondent, who could and indeed should have conveyed the rejection to the
appellant-Corporation forthwith, instead of taking nearly two weeks to do
so. To sum up; the period of 4 months and 22 days which the arbitrators
have attributed to the appellant-Corporation shall have to be reduced by 42
days comprising the first interval and 14 days comprising the fourth making
a total of 56 days. Resultantly, deduction made by the appellant-
Corporation for 56 days referred to above deserve to be affirmed, and the
award made by the arbitrators modified to that extent. It follows that the
amount awarded to the respondent-Company shall on a proportionate basis,
stand reduced.
24. We may at this stage deal with the contention urged on behalf of the
respondent that the jurisdiction of the Court to set aside an arbitral
award being limited to grounds set out in Section 34 of the Arbitration and
Conciliation Act, 1996, this Court ought not to interfere with the same.
It was contended that none of the grounds on which a Court is authorised to
interfere with an arbitral award are present in the case at hand.
Alternatively, it was contended that even if a contrary view is possible on
the facts proved before the Arbitral Tribunal, the Court cannot, in the
absence of any compelling reason, interfere with the view taken by the
Arbitrators as if it was sitting in appeal over the award made by the
Tribunal. Section 34 of the Arbitration and Conciliation Act, 1996 reads :

“34. Application for setting aside arbitral award.—(1) Recourse to a court
against an arbitral award may be made only by an application for setting
aside such award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the court only if—
(a) the party making the application furnishes proof that—
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which 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
(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:
Provided that, if the decisions on matters submitted to arbitration can be
separated from those not so submitted, only that part of the arbitral award
which contains decisions on matters not submitted to arbitration may be set
aside; or
(v) the composition of the Arbitral Tribunal or the arbitral procedure was
not in accordance with the agreement of the parties, unless such agreement
was in conflict with a provision of this Part from which the parties cannot
derogate, or, failing such agreement, was not in accordance with this Part;
or
(b) the court finds that—
(i) the subject-matter of the dispute is not capable of settlement by
arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.—Without prejudice to the generality of sub-clause (ii), it is
hereby declared, for the avoidance of any doubt, that an award is in
conflict with the public policy of India if the making of the award was
induced or affected by fraud or corruption or was in violation of Section
75 or Section 81.”
25. It is true that none of the grounds enumerated under Section 34(2)(a)
were set up before the High Court to assail the arbitral award. What was
all the same urged before the High Court and so also before us was that the
award made by the arbitrators was in conflict with the “public policy of
India” a ground recognised under Section 34(2)(b)(ii) (supra). The
expression “Public Policy of India” fell for interpretation before this
Court in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 and was, after a
comprehensive review of the case law on the subject, explained in para 31
of the decision in the following words:

“31. Therefore, in our view, the phrase “public policy of India” used in
Section 34 in context is required to be given a wider meaning. It can be
stated that the concept of public policy connotes some matter which
concerns public good and the public interest. What is for public good or in
public interest or what would be injurious or harmful to the public good or
public interest has varied from time to time. However, the award which is,
on the face of it, patently in violation of statutory provisions cannot be
said to be in public interest. Such award/judgment/decision is likely to
adversely affect the administration of justice. Hence, in our view in
addition to narrower meaning given to the term “public policy” in Renusagar
case10 it is required to be held that the award could be set aside if it is
patently illegal. The result would be — award could be set aside if it is
contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
[pic](d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of
trivial nature it cannot be held that award is against the public policy.
Award could also be set aside if it is so unfair and unreasonable that it
shocks the conscience of the court. Such award is opposed to public policy
and is required to be adjudged void.”

26. What then would constitute the ‘Fundamental policy of Indian Law’ is
the question. The decision in Saw Pipes Ltd. (supra) does not elaborate
that aspect. Even so, the expression must, in our opinion, include all such
fundamental principles as providing a basis for administration of justice
and enforcement of law in this country. Without meaning to exhaustively
enumerate the purport of the expression “Fundamental Policy of Indian Law”,
we may refer to three distinct and fundamental juristic principles that
must necessarily be understood as a part and parcel of the Fundamental
Policy of Indian law. The first and foremost is the principle that in
every determination whether by a Court or other authority that affects the
rights of a citizen or leads to any civil consequences, the Court or
authority concerned is bound to adopt what is in legal parlance called a
‘judicial approach’ in the matter. The duty to adopt a judicial approach
arises from the very nature of the power exercised by the Court or the
authority does not have to be separately or additionally enjoined upon the
fora concerned. What must be remembered is that the importance of Judicial
approach in judicial and quasi judicial determination lies in the fact so
long as the Court, Tribunal or the authority exercising powers that affect
the rights or obligations of the parties before them shows fidelity to
judicial approach, they cannot act in an arbitrary, capricious or whimsical
manner. Judicial approach ensures that the authority acts bonafide and
deals with the subject in a fair, reasonable and objective manner and that
its decision is not actuated by any extraneous consideration. Judicial
approach in that sense acts as a check against flaws and faults that can
render the decision of a Court, Tribunal or Authority vulnerable to
challenge. In Ridge v. Baldwin [1963 2 All ER 66], the House of Lords was
considering the question whether a Watch Committee in exercising its
authority under Section 191 of the Municipal Corporations Act, 1882 was
required to act judicially. The majority decision was that it had to act
judicially and since the order of dismissal was passed without furnishing
to the appellant a specific charge, it was a nullity. Dealing with the
appellant’s contention that the Watch Committee had to act judicially, Lord
Reid relied upon the following observations made by Atkin L.J. in [1924] 1
KB at pp. 206,207:

“Wherever any body of persons having legal authority to determine questions
affecting the rights of subjects, and having the duty to act judicially,
act in excess of their legal authority, they are subject to the controlling
jurisdiction of the King’s Bench Division exercised in these writs.”

27. The view taken by Lord Reid was relied upon by a Constitution Bench
of this Court in A.C. Companies Ltd vs. P.N. Sharma and Anr. (AIR 1965 SC
1595) where Gajendragadkar, C.J. speaking for the Court observed :

“In other words, according to Lord Reid’s judgment, the necessity to follow
judicial procedure and observe the principles of natural justice, flows
from the nature of the decision which the watch committee had been
authorised to reach under S.191(4). It would thus be seen that the area
where the principles of natural justice have to be followed and judicial
approach has to be adopted, has become wider and consequently, the horizon
of writ jurisdiction has been extended in a corresponding measure. In
dealing with questions as to whether any impugned orders could be revised
under A. 226 of our Constitution, the test prescribed by Lord Reid in this
judgment may afford considerable assistance.”

28. Equally important and indeed fundamental to the policy of Indian law
is the principle that a Court and so also a quasi-judicial authority must,
while determining the rights and obligations of parties before it, do so in
accordance with the principles of natural justice. Besides the celebrated
‘audi alteram partem’ rule one of the facets of the principles of natural
justice is that the Court/authority deciding the matter must apply its mind
to the attendant facts and circumstances while taking a view one way or the
other. Non-application of mind is a defect that is fatal to any
adjudication. Application of mind is best demonstrated by disclosure of
the mind and disclosure of mind is best done by recording reasons in
support of the decision which the Court or authority is taking. The
requirement that an adjudicatory authority must apply its mind is, in that
view, so deeply embedded in our jurisprudence that it can be described as a
fundamental policy of Indian Law.

29. No less important is the principle now recognised as a salutary
juristic fundamental in administrative law that a decision which is
perverse or so irrational that no reasonable person would have arrived at
the same will not be sustained in a Court of law. Perversity or
irrationality of decisions is tested on the touchstone of Wednesbury’s
principle of reasonableness. Decisions that fall short of the standards of
reasonableness are open to challenge in a Court of law often in writ
jurisdiction of the Superior courts but no less in statutory processes
where ever the same are available.

30. It is neither necessary nor proper for us to attempt an exhaustive
enumeration of what would constitute the fundamental policy of Indian law
nor is it possible to place the expression in the straitjacket of a
definition. What is important in the context of the case at hand is that if
on facts proved before them the arbitrators fail to draw an inference which
ought to have been drawn or if they have drawn an inference which is on the
face of it, untenable resulting in miscarriage of justice, the adjudication
even when made by an arbitral tribunal that enjoys considerable latitude
and play at the joints in making awards will be open to challenge and may
be cast away or modified depending upon whether the offending part is or is
not severable from the rest.

31. Inasmuch as the arbitrators clubbed the entire period between 16th
October, 2001 and 21st March, 2002 for purposes of holding the appellant-
Corporation responsible for the delay, they committed an error resulting in
miscarriage of justice apart from the fact that they failed to appreciate
and draw inferences that logically flow from such proved facts. We have,
therefore, no hesitation in rejecting the contention urged on behalf of the
respondent that the arbitral award should not despite the infirmities
pointed out by us be disturbed.

32. That brings us to the last submission that deduction on account of
taxes not paid should have been allowed by the respondent-arbitral
tribunal. The Tribunal has, in our opinion, correctly held that no part of
the work was undertaken outside Singapore which was to be executed on a
turnkey basis for a price that was pre-determined. The arbitrators have, in
our opinion, rightly held that no taxes were payable under the Indian
Income tax Act so as to entitle the Corporation to deduct any amount on
that account by reason of non-payment of such taxes. The challenge to the
award to that extent must fail and is, hereby, rejected.

33. In the result, we allow this appeal but only to the extent that out
of the period of 4 months and 22 days which the arbitrators have attributed
to the appellant-Corporation a period of 56 days comprising 42 days of the
first interval and 14 days of the second referred to in the judgment shall
be reduced. Resultantly, deductions made by the appellant-Corporation for
the said period of 56 days shall stand affirmed and the award made by the
arbitrators modified to that extent with a proportionate reduction in the
amount payable to the respondent. No costs.

………………………………….…..…J.
(T.S. THAKUR)

.…………………………..……………..J.
(C. NAGAPPAN)

..…………………………..…………….J.
(ADARSH KUMAR GOEL)
New Delhi
September 4, 2014

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