17 December 2021, Friday

1 year ago

Award not patently illegal where imposition of liquidated damages (LD) was disallowed on the reasoning that time was not of essence (and the LD clause had been worked out on the assumption that it was): Supreme Court of India

13 November 2021 | Welspun Specialty Solutions Limited Ltd. v. Oil and Natural Gas Corporation Ltd. | Civil Appeal Nos. 2826-2827 of 2016 | NV Ramana CJ & Surya Kant J | Supreme Court of India | 2021 SCC OnLine SC 105

Welspun’s predecessor Remi had to supply casing steel pipes to ONGC (3, 93,297 meters length). A clause of their contract--purchase orders--stated that the time and date of delivery is of essence. However, ONGC could extend the timeline without prejudice to claim damages unless it clearly waived its right in writing to recover such damages (with approval of the competent authority). A clause in the GCC of the purchase order gave ONGC the right to levy liquidated damages for delay in supply.

Four purchase orders were issued for different lengths. For each order, ONGC extended the time seven times. In each case, liquidated damages was waived for the first two extensions, but they were levied for the remaining five extensions.

Welspun (Remi) executed the contract. Later it initiated arbitration for refund of liquidated damages deducted by ONGC and a few other claims. ONGC, the respondent in the arbitration, led evidence that it had suffered tangible losses

The tribunal concluded as follows:

  1. On an overall consideration of the contract, time was not the essence despite a clause stating that it was because, among others, time could be extended by ONGC, it was actually extended on two occasions without levying liquidated damages.
  2. The liquidated damages clause in the contract had been worked out on the assumption that time was of the essence. Since time was not of the essence, the measure of damages specified under the liquidated damages clause could not be regarded as appropriate for determining the loss.
  3. Where time is not of essence, Section 55 of Indian Contract Act (second para) applied under which the promisee is entitled to compensation “for any loss occasioned” by the promisee’s failure. In the facts, the loss for delayed supply had to be measured in terms of the actual damage suffered as established by ONGC.
  4. Of the loss that ONGC established, it could not claim any loss for the period in which it had waived the levy of liquidated damages, that is, the time where extension was granted [Ed. This is presumably on the logic that waiving liquidated damages is acceptance that there is no loss].
  5. ONGC v. SAW Pipes (2003) 5 SCC 705 where the court has considered a similar clause and had upheld award of liquidated damages, was distinguishable because, among others, because the extension in that case was made subject to a specific condition preserving the right to recover the liquidated damages.
  6. Also, subsequent extensions could not be coupled with liquidated damages unless a clear intention was established form the contract.

A  court rejected the set aside petition but in appeal the High Court set-aside the award. It relied on SAW Pipes as direct authority on the point.

In considering a challenge to the High Court’s order, the 3-judge bench of the Supreme Court has made the following observations on the public policy ground during the course of its examination of the award:

  1. The phrase ‘public policy’ does not indicate ‘a catch-all provision’ to challenge awards before an appellate forum on infinite grounds. However, the ambit of the same is so diversly interpreted that in some cases, the purpose of limiting the Section 34 jurisdiction is lost.
  2. This court's jurisprudence also shows that Section 34(2)(b) has undergone a lot of churning and continue to evolve.
  3. The purpose of Section 34 is to strike a balance between the court's appellate powers and integrity of the arbitral process.

The court then examined the award’s reasoning and concluded that its conclusions were plausible views (reasons summarized at para 42 of the SCC Online report).

[Ed. It is difficult to critically read judgments like these where the arbitrator’s findings are not set out in full. To take one example, the court says at paragraph 14 (SCC) that “the Arbitral tribunal held that liquidated damages … cannot be granted as there was no breach of contract due to the fact that time was not the essence.” A closer reading of the judgment together with the High Court’s decision of 14 October 2008 (esp. para 19) suggests that Supreme Court’s paragraph 14 is an erroneous description. What the court presumably means to say is that as per the tribunal since the liquidated damages clause assumed that time is of essence, that clause could be not be applied because time was actually not of essence].

Read the judgment here.


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