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Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., (SC) : Law Finder Doc Id # 30551

2004(1) BCR 245 : 2003(2) R.C.R.(Civil) 554 : 2003 AIR (Supreme Court) 2629 : 2003(5) SCC 705 :
2003(4) JT 171 : 2003(3) SCR 691 : 2003(3) ICC 890 : 2003(3) Andh LD 82 : 2003(2) ArbiLR 5 : 2003
DNJ 470 : 2003(1) W.L.C. 709 : 2003(2) R.A.J. 1 : 2003(2) CTC 282 : 2003(7) AIC 147 : 2003 AIR
(SCW) 3041 : 2003(3) Supreme 449 : 2003(4) M.L.W. 482 : 2003(4) J.C.R. 148 : 2003(2) Apex Court
Judgments (SC) 221

SUPREME COURT OF INDIA

Before:- M.B. Shah and Arun Kumar, JJ.

Civil Appeal No. 7419 of 2001. D/d. 17.4.2003

Oil & Natural Gas Corporation Ltd. - Appellant

Versus

SAW Pipes Ltd. - Respondent

For the Appearing Parties :- Ashok H. Desai, Dushyant A. Dave, Sunil Gupta, Ashwani Kumar,
Sr. Advs., Ms. Anuradha Bindra, Kashi Vishweshwaran, Ms. Padmalakshmi Nigam, Vikram
Mehtab, K.R. Sasiprabhu, A.M. Khattawala, Mahesh Agarwal, Rishi Agarwal, E.C. Agarwala,
Prabhjit Jauhar, S.S. Jauhar, Advocates.

A. Arbitration and Conciliation Act, 1996, Section 34 - Arbitration - Jurisdiction of

Arbitrator - Power and jurisdiction of the Arbitral Tribunal is prescribed under the Act -
If its award is de hors the provisions of the Act and is illegal on the face of it - It is liable
to be set aside.

[Para 10]

B. Arbitration and Conciliation Act, 1996, Section 34 - Arbitration - Jurisdiction of

Arbitrator - Power and jurisdiction of the Arbitral tribunal - If the Arbitrator has not
followed the mandatory procedure prescribed under section 24, 28 or 31(3) and has not
decided the dispute in accordance with the substantive law for the time being in force,
the award is liable to be set aside - Substantive law would include, Contract Act, Transfer
of Property Act and other such laws in force.

If the Arbitrator is directed to decide the dispute in accordance with the terms of the
contract under section 28(3), but the Arbitrator ignores the same; or

If the award is non-speaking one and is in violation of Section 31(3);

The Court can interfere which such an award under section 34 of the Act - "The
legislative intent could not be that if the award is in contravention of the provisions of
the Act, still however, it couldn't be set aside by the Court. If it is held that such award
could not be interfered, it would be contrary to basic concept of justice. If the arbitral
tribunal has not followed the mandatory procedure prescribed under the Act, it would
mean that it has acted beyond its jurisdiction and thereby the award would be patently
illegal which could be set aside under section 34."

[Paras 11, 61(1)]

C. Arbitration and Conciliation Act, 1996, Section 34(2)(b) - Public policy - Award against
public policy - Term 'Public Policy of India' is not defined under the Act - It has to be
construed in the context it has been used - Its definition may vary from generation to
generation - In Arbitration Act this term has to be given its meaning in the light and

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principles underlying this Act, Contract Act and Constitution of India - A wider meaning
has to be given to the term despite the fact that limited grounds have been provided
under section 34 to challenge the Arbitral award - Limited jurisdiction given to the Court
does not mean an illegal award to be enforced to promote injustice - Public Policy should
mean the matters concerned to public good.

[Paras 14, 24, 26 and 27]

D. Arbitration and Conciliation Act, 1996, Section 34 - Arbitration award - Illegality in the
award - Must go to the root of the matter - An award can also be set aside if it is against
the public policy, unfair, unreasonable and shocking the conscience of the court.

[Para 27]

E. Arbitration and Conciliation Act, 1996, Section 34 - Contract Act 1872, Sections 73 and
74 - Breach of contract - Damages - Under the Contract Act, to claim damages, one has to
prove the loss actually suffered due to the breach - However, under the Arbitration Act,
it is only where a breach is of general conditions, the actual loss is required to be proved -
Where the consequential damage has been specified and accepted by the parties in an
Arbitration agreement , there is no reason the penultimate clauses should not be given
effect to and the party is asked to prove the actual loss caused unless the court feels the
same to be unfair, unreasonable or against the public policy.

"However, when the terms of the contract are clear and unambiguous then its meaning
is to be gathered only from the words used therein. In a case where agreement is
executed by experts in the field, it would be difficult to hold that the intention of the
parties was different from the language used therein. In such a case, it is for the party
who contends the stipulated amount is not reasonable compensation, to prove the
same."

[Paras 35, 37, 39 and 40, 57, 60, 61(2), (2) & (4), 66]

F. Arbitration and Conciliation Act, 1996, Section 34 - Scope of interference by the Court -
Error of fact or law in arbitral award - If the error is in the conclusions reached on the
disputed questions referred to arbitrator , the court would have no jurisdiction to
interfere with the award - But, if there is a general reference for deciding the contractual
dispute between the parties and award is based on erroneous legal proposition, the
Court cannot interfere - Even a reasoned award , erroneous on the face of it, can also be
set aside - If a specific question of law has been referred to arbitrator , erroneous
decision in point of law does not make the award liable to be set aside unless the court is
satisfied that the arbitrator proceeded illegally - If the award is erroneous on the basis
of record with regard to proposition of law or its application, the Court will have
jurisdiction to interfere with it.

[Paras 47 and 48]

Conclusions :-

In the result, it is held that :-

A. (1) The Court can set aside the arbitral award under Section 34(2) of the Act if 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 ;

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(2) The Court may set aside the award :-

(i) (a) if the composition of the arbitral tribunal was not in accordance with the
agreement of the parties.

(b) failing such agreement , the composition of the arbitral tribunal was not in
accordance with Part-I of the Act.

(ii) if the arbitral procedure was not in accordance with :-

(a) the agreement of the parties, or

(b) failing such agreement , the arbitral procedure was not in accordance with Part-I of
the Act.

However, exception for setting aside the award on the ground of composition of
arbitral tribunal or illegality of arbitral procedure is that the agreement should not
be in conflict with the provisions of Part-I of the Act from which parties cannot
derogate.

(c) If the award passed by the arbitral tribunal is in contravention of provisions of the
Act or any other substantive law governing the parties or is against the terms of the
contract.

(3) The award could be set aside if it is against the public policy of India, that is to say, if
it is contrary to :-

(a) fundamental policy of Indian law;

(b) the interest of India; or

(c) justice or morality, or

(d) if it is patently illegal.

(4) It could be challenged -

(a) as provided under Section 13(5); and

(b) Section 16(6) of the Act.

B. (1) The impugned award requires to be set aside mainly on the grounds :-

(i) there is specific stipulation in the agreement that the time and date of delivery of the
goods was the essence of the contract;

(ii) in case of failure to deliver the goods within the period fixed for such delivery in the
schedule ONGC was entitled to recover from the contractor liquidated damages as
agreed ;

(iii) it was also explicitly understood that the agreed liquidated damages were genuine
pre-estimate of damages;

(iv) on the request of the respondent to extend the time limit for supply of goods, ONGC
informed specifically that time was extended but stipulated liquidated damages as
agreed would be recovered;

(v) liquidated damages for delay in supply of goods were to be recovered by paying
authorities from the bills for payment of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for recovering liquidated
damages was by way of penalty or that the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such
situation is taken care by Sections 73 and 74 of the Contract Act and in the present case
by specific term s of the contract.

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Cases Referred :-

Harish Chandra Bajpai v. Triloki Singh, 1957 SCR 370.

M.V. Elisabeth v. Harwan Investment & Trading Pvt. Ltd., 1993 Supp. (2) SCC 433.

Dhanna Lal v. Kalawatibai, 2002(2) RCR (Rent) 126 (SC) : 2002(6) SCC 16.

Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly and another, 1986
(3) SCC 156.

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.

Kedar Nath Motani v. Prahlad Rai, 1960(1) SCR 861.

Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp. (1) SCC 644.

Murlidhar Agarwal v. State of U.P., 1974(2) SCC 472.

Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs and others, 1991(3) SCC 67.

Bhai Panna Singh v. Bhai Arjun Singh, AIR 1929 Privy Council 179.

Delta International Ltd. v. Shyam Sunder Ganeriwalla and another, 1999(2) RCR (Civil) 471 :
1991(1) RCR (Rent) 447 : 1999(4) SCC 545.

Provash Chandra Dalui v. Biswanath Banerjee and another, 1989 Supp (1) SCC 487 : 1990(1)
RCR (Rent) 191 : 1990(1) RCR 207.

Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd., 1962 Supp.
(3) SCR 549.

Fateh Chand v. Balkishan Das, 1964(1) SCR 515.

Maula Bux v. Union of India, 1960(2) SCC 554.

Union of India v. Rampur Distillery and Chemical Co. Ltd., 1973(1) SCC 649.

Union of India v. Raman Iron Foundry, 1974(2) SCC 231.

M/s H.M. Kamaluddin Ansari and Co. v. Union of India and others, 1983(4) SCC 417.

M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960(2) SCR 793.

Champsey Bhara and Company v. Jivaraj Balloo Spinning and Weaving Company Limited, L.R.
50 IA 324.

Government of Kelantan v. Duff Development Company Limited, LR 1923 AC 395.

Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises and another, 1999(9)
SCC 283.

Sikkim Subba Associates v. State of Sikkim, 2001(5) SCC 629.

G.M. Northern Railway v. Sarvesh Chopra, 2002(4) SCC 45 : 2002(2) RCR (Civil) 466 (SC).

Union of India v. A.L. Rallia Ram, 1964(3) SCR 164.

Seth Thawardas Pherumal v. Union of India, 1955(2) SCR 48.

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F.R. Absalon Ltd. v. Great Western (London) Garden Village Society, [1933] AC 592.

Maharashtra State Electricity Board v. Sterlite Industries (India) and Another, 2001(4) RCR
(Civil) SC 832 : 2001(8) SCC 482.

Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd., 1967(1) SCR 105.

Arosan Enterprises Ltd. v. Union of India, 1999(9) SCC 449.

JUDGMENT

M.B. Shah, J. - Court's Jurisdiction Under Section 34 of The Arbitration and Conciliation Act, 1966

Before dealing with the issues involved in this appeal, we would first decide the main point in
controversy, namely - the ambit and scope of Court's jurisdiction in case where award passed
by the Arbitral Tribunal is challenged under Section 34 of the Arbitration and Conciliation Act,
1996 (hereinafter referred to as "the Act") as the decision in this appeal would depend upon the
said finding. In other words - whether the Court would have jurisdiction under Section 34 of
the Act to set aside an award passed by the Arbitral Tribunal which is patently illegal or in
contravention of the provisions of the Act or any other substantive law governing the parties
or is against the terms of the contract ?

2. Learned senior counsel Mr. Ashok Desai appearing for the appellant submitted that in case
where there is clear violation of Sections 28 to 31 of the Act or the terms of the Contract
between the parties the said award can be and is required to be set aside by the Court while
exercising jurisdiction under Section 34 of the Act.

3. Mr. Dushyant Dave, learned senior counsel appearing on behalf of respondent-company

submitted to the contrary and contended that the Court's jurisdiction under Section 34 is
limited and the award could be set aside mainly on the ground that the same is in conflict with
the 'Public Policy of India'. According to his submission, the phrase 'Public Policy of India'
cannot be interpreted to mean that in case of violation of some provisions of law, the Court can
set aside the award.

4. For deciding this controversy, we would refer to the relevant part of Section 34 which reads
as under :-

"34. Application for setting aside arbitral award - (1) Recourse to a court against an
arbitral award may be made only by an application for seeing 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

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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."

5. For our purpose, it is not necessary to refer to the scope of self explanatory Clauses (i) to (iv)
of sub-section (2)(a) of Section 34 of the Act and it does not require elaborate discussion.
However, clause (v) of Sub-section 2(a) and clause (ii) of sub-section 2(b) require consideration.
For proper adjudication of the question of jurisdiction, we shall first consider what meaning
could be assigned to the term 'Arbitral Procedure'.

'Arbitral Procedure'

The ingredients of clause (v) are as under :-

1) The Court may set aside the award :-

(i) (a) if the composition of the arbitral Tribunal was not in accordance with the
agreement of the parties.

(b) failing such agreement, the composition of the arbitral tribunal was not in
accordance with Part-I of the Act.

(ii) if the arbitral procedure was not in accordance with :-

a) the agreement of the parties, or

b) failing such agreement, the arbitral procedure was not in accordance with Part-I of
the Act.

6. However, exception for setting aside the award on the ground of composition of arbitral
tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with
the provisions of Part-I of the Act from which parties cannot derogate.

7. In the aforesaid sub-clause (v), the emphasis is on the agreement and the provisions of Part-I
of the Act from which parties cannot derogate. It means that the composition of arbitral
tribunal should be in accordance with the agreement. Similarly, the procedure which is
required to be followed by the arbitrators should also be in accordance with the agreement of
the parties. If there is no such agreement then it should be in accordance with the procedure
prescribed in the Part-I of the Act i.e. Sections 2 to 43. At the same time, agreement for
composition of arbitral tribunal or arbitral procedure should not be in conflict with the
provisions of the Act from which parties cannot derogate. Chapter V of Part-I of the Act
provides for conduct of arbitral proceedings. Section 18 mandates that parties to the arbitral
proceedings shall be treated with equality and each party shall be given full opportunity to
present his case. Section 19 specifically provides that arbitral tribunal is not bound by the Civil
Procedure Code, 1908 or the Indian Evidence Act, 1872 and parties are free to agree on the
procedure to be followed by the arbitral tribunal in conducting its proceedings. Failing any
agreement between the parties subject to other provisions of Part-I, the arbitral tribunal is to
conduct the proceedings in the manner it considers appropriate. This power includes the
power to determine the admissibility, relevance, the materiality and weight of any evidence.
Sections 20, 21 and 22 deal with place of arbitration, commencement of arbitral proceedings
and language respectively. Thereafter. Sections 23, 24 and 25 deal with statements of claim and
defence, hearings and written proceedings and procedure to be followed in case of default of a
party.

At this stage, we would refer to Section 24 which is as under :-

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"24. Hearing and written proceedings - (1) Unless otherwise agreed by the parties, the
arbitral tribunal shall decide whether to hold oral hearings for the presentation of
evidence or for oral argument, or whether the proceedings shall be conducted on the
basis of documents and other materials :

Provided that the arbitral tribunal shall hold oral hearings, at an appropriate stage of the
proceedings, on a request by a party, unless the parties have agreed that no oral hearing
shall be held.

(2) The parties shall be given sufficient advance notice of any hearing and of any
meeting of the arbitral tribunal for the purposes of inspection of documents, goods or
other property.

(3) All statements, documents or other information supplied to, or applications made to
the arbitral tribunal by one party shall be communicated to the other party, and any
expert report or evidentiary document on which the arbitral tribunal may rely in
making its decision shall be communicated to the parties."

8. Thereafter, Chapter VI deals with making of arbitral award and termination of proceedings.
Relevant Sections which require consideration are Section 28 and 31. Sections 28 and 31 read
as under :-

"28. Rules applicable to substance of dispute -

(1) Where the place of arbitration is situate in India -

(a) in an arbitration other than an international commercial arbitration, the arbitral

tribunal shall decide the dispute submitted to arbitration in accordance with the
substantive law for the time being in force in India;

(b) in international commercial arbitration. -

(i) the arbitral tribunal shall decide the dispute in accordance with the rules of law
designated by the parties as applicable to the substance of the dispute;

(ii) any designation by the parties of the law or legal system of a given country shall be
construed, unless otherwise expressed, as directly referring to the substantive law of
that country and not to its conflict of law rules;

(iii) failing any designation of the law under clause (a) by the parties, the arbitral
tribunal shall apply the rules of law it considers to be appropriate given all the
circumstances surrounding the dispute.

(2) The arbitral tribunal shall decide ex aequo bono or as amiable compositeur only if the
parties have expressly authorised it to do so.

(3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the
contract and shall take into account the usages of the trade applicable to the transaction.

31. Form and contents of arbitral award - (1) An arbitral award shall be made in writing
and shall be signed by the members of the arbitral tribunal.

(2) For the purposes of sub-section (1), in arbitral proceedings with more than one
arbitrator, the signatures of the majority of all the members of the arbitral tribunal shall
be sufficient so long as the reason for any omitted signature is stated.

(3) The arbitral award shall state the reasons upon which it is based, unless -

(a) the parties have agreed that no reasons are to be given, or

(b) the award is an arbitral award on agreed terms under section 30.

(4) The arbitral award shall state its date and the place of arbitration as determined in
accordance with section 20 and the award shall be deemed to have been made at that
place.

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(5) After the arbitral award is made a signed copy shall be delivered to each party.

(6) The arbitral tribunal may, at any time during the arbitral proceedings, make an
interim arbitral award on any matter with respect to which it may make a final arbitral
award.

(7)(a). Unless otherwise agreed by the parties, where and in so far as an arbitral award is
for the payment of money, the arbitral tribunal may include in the sum for which the
award is made interest, at such rate as it deems reasonable, on the whole or any part of
the money, for the whole or any part of the period between the date on which the cause
of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise
directs, carry interest at the rate of eighteen per centum per annum from the date of the
award to the date of payment.

(8) Unless otherwise agreed by the parties, -

(a) the costs of an arbitration shall be fixed by the arbitral tribunal;

(b) the arbitral tribunal shall specify, -

(i) the party entitled to costs,

(ii) the party who shall pay the costs,

(iii) the amount of costs or method of determining that amount, and

(iv) the manner in which the costs shall be paid.

Explanation : For the purpose of clause (a), "costs" means reasonable costs relating to, -

(i) the fees and expenses of the arbitrators and witnesses,

(ii) legal fees and expenses,

(iii) any administration fees of the institution supervising the arbitration, and

(iv) any other expenses incurred in connection with the arbitral proceedings and the
arbitral award."

9. The aforesaid provisions prescribe the procedure to be followed by the arbitral tribunal
coupled with its powers. Power and procedure are synonymous in the present case. By
prescribing the procedure, the arbitral tribunal is empowered and is required to decide the
dispute in accordance with the provisions of the Act, that is to say, the jurisdiction of the
tribunal to decide the dispute is prescribed. In these sections there is no distinction between
the jurisdiction/power and the procedure. In Harish Chandra Bajpai v. Triloki Singh [1957
SCR 370], while dealing with Sections 90 and 92 of the Representation of The People Act, 1951
(as it stood), this Court observed thus :-

"It is then argued that Section 92 confers powers on the Tribunal in respect of certain
matters, while Section 90(2) applies the Civil Procedure Code in respect of matters
relating to procedure that there is a distinction between power and procedure, and that
the granting of amendment being a power and not a matter of procedure, it can be
claimed only under section 92 and not under Section 90(2). We do not see any antithesis
between 'procedure' in Section 90(2) and 'powers' under Section 92. When the respondent
applied to the Tribunal for amendment, he took a procedural step, and that he was
clearly entitled to do under Section 90(2). The question of power arises only with
reference to the order to be passed on the petition by the Tribunal. Is it to be held that
the presentation of a petition is competent, but the passing of any order thereon is not ?
We are of opinion that there is no substance in the contention either."

10. Hence, the jurisdiction or the power of the arbitral tribunal in prescribed under the Act and
if the award is de hors the said provisions, it would be, on the face of it, illegal. The decision of
the Tribunal must be within the bounds of its jurisdiction conferred under the Act or the
contract. In exercising jurisdiction the arbitral tribunal can not act in breach of some provision

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of substantive law or the provision of the Act.

11. The question, therefore, which requires consideration is - whether the award could be set
aside, if the arbitral tribunal has not followed the mandatory procedure prescribed under
Sections 24, 28 or 31(3), which affects the rights of the parties ? Under sub-section (1)(a) of
Section 28 there is a mandate to the arbitral tribunal to decide the dispute in accordance with
the substantive law for the time being in force in India. Admittedly, substantive law would
include the Indian Contract Act, the Transfer of Property Act and other such laws in force.
Suppose, if the award is passed in violation of the provisions of the Transfer of Property Act or
in violation of the Indian Contract Act, the question would be - whether such award could be
set aside ? Similarly, under sub-section (3), arbitral tribunal is directed to decide the dispute in
accordance with the terms of the contract and also after taking into account the usage of the
trade applicable to the transaction. If arbitral tribunal ignores the terms of the contract or
usage of the trade applicable to the transaction, whether the said award could be interfered ?
Similarly, if the award is non-speaking one and is in violation of Section 31(3), can such award
be set aside ? In our view, reading Section 34 conjointly with other provisions of the Act, it
appears that the legislative intent could not be that if the award is in contravention of the
provisions of the Act, still however, it couldn't be set aside by the Court. If it is held that such
award could not be interfered, it would be contrary to basic concept of justice. If the arbitral
tribunal has not followed the mandatory procedure prescribed under the Act, it would mean
that it has acted beyond its jurisdiction and thereby the award would be patently illegal which
could be set aside under Section 34.

12. The aforesaid interpretation of the clause (v) would be in conformity with the settled
principle of law that the procedural law cannot fail to provide relief when substantive law
gives the right. Principles is - there cannot be any wrong without a remedy. In M.V. Elisabeth
and others v. Harwan Investment & Trading Pvt. Ltd. [1993 Supp. (2) SCC 433] this Court
observed that where substantive law demands justice for the party aggrieved and the statute
has not provided the remedy, it is the duty of the Court to devise procedure by drawing
analogy from other systems of law and practice. Similarly, in Dhanna Lal v. Kalawatibai and
others, 2002(2) RCR (Rent) 126 (SC) : [(2002) 6 SCC 16] this Court observed that wrong must
not be left unredeemed and right not left unenforced.

13. Result is - if the award is contrary to the substantive provisions of law or the provisions of
the Act or against the terms of the contrary, it would be patently illegal, which could be
interfered under Section 34. However, such failure of procedure should be patent affecting the
rights of the parties.

What Meaning Could Be Assigned To The Pharase 'Public Policy Of India' ?

14. The next clause which requires interpretation is clause (ii) of Sub-section 2(b) of Section 34
which inter alia provides that the Court may set aside arbitral award if it is in conflict with the
'Public Policy of India'. The phrase 'Public Policy of India' is not defined under the Act. Hence,
the said term is required to be given meaning in context and also considering the purpose of
the section and scheme of the Act. It has been repeatedly stated by various authorities that the
expression 'public policy' does not admit of precise definition and may vary from generation to
generation and from time to time. Hence, the concept 'public policy' is considered to be vague,
susceptible to narrow or wider meaning depending upon the context in which it is used.
Lacking precedent the Court has to give its meaning in the light and principles underlying the
Arbitration Act, Contract Act and Constitutional provisions.

15. For this purpose, we would refer to few decisions referred to by the learned counsel for the
parties. While dealing with the concept of public policy, this Court in Central Inland Water
Transport Corporation Limited and another. Brojo Nath Ganguly and another [(1986) 3
SCC 156] has observed thus :-

"92. The Indian Contract Act does not define the expression "public policy" or "opposed
to public policy". From the very nature of things, the expressions "public policy",
"opposed to public policy", or "contrary to public policy" are incapable of precise
definition. Public policy, however, is not the policy of a particular government. It
connotes some matter which concerns the public good and the public interest. The
concept of what is for the public good or in the public interest or what would be
injurious or harmful to the public good or the public interest has varied from time to
time. As new concepts take the place of old, transactions which were once considered
against public policy are now being upheld by the courts and similarly where there has
been a well recognised head of public policy, the courts have not shirked from extending
it to the new transactions and changed circumstances and have at times not even

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flinched from inventing a new head of public policy. There are two schools of thought -
"the narrow view" school and "the broad view" school. According to the former, courts
cannot create new heads of public policy whereas the latter countenances judicial law-
making in this area. The adherents of "the narrow view" school would not invalidate a
contract on the ground of public policy unless that particular ground had been well-
established by authorities. Hardly ever has the voice of the timorous spoken more
clearly and loudly than in these words of Lord Davey in Janson v. Driefontein
Consolidated Gold Mines Ltd. [(1902) AC 484, 500] : "Public Policy is always an unsafe
and treacherous ground for legal decision". That was in the year 1902. Seventy-eight years
earlier, Burrough, J., in Richardson v. Mellish [(1824) 2 Bing 229, 252] described public
policy as "a very unruly horse, and when once you get astride it you never know where it
will carry you." The Master of the Rolls, Lord Denning, however, was not a man to shy
away from unmanageable horses and in words which conjure up before our eyes the
picture of the young Alexander the Great taming Bucephalus, he said in Enderby Town
Football Club Ltd. v. Football Assn. Ltd. [(1971) Ch. 591, 606] : "With a good man in
the saddle, the unruly horse can be kept in control. It can jump over obstacles". Had the
timorous always held the field, not only the doctrine of public policy but even the
Common Law or the principles of Equity would never have evolved. Sir William
Holdsworth in his "History of English Law", Volume III, page 55, has said :

In fact, a body of law like the common law, which has grown up gradually with the
growth of the nation, necessarily acquires some fixed principles, and if it is to maintain
these principles it must be able on the ground of public policy or some other like ground,
to suppress practices which, under ever new disguises, seek to weaken or negative them.

It is thus clear that the principles governing public policy must be and are capable, on
proper occasion, of expansion or modification. Practices which were considered
perfectly normal at one time have today become obnoxious and oppressive to public
conscience. If there is no head of public policy which covers a case, then the court must
in consonance with public conscience and in keeping with public good and public
interest declare such practice to be opposed to public policy. Above all, in deciding any
case which may not be covered by authority our courts have before them the beacon
light of the Preamble to the Constitution. Lacking precedent, the court can always be
guided by that light and the principles underlying the Fundamental Rights and the
Directive Principles enshrined in our Constitution.

93. The normal rule of Common Law has been that a party who seeks to enforce an
agreement which is opposed to public policy will be non-suited. The case of A.
Schroeder Music Public Co. Ltd. v. Macaulay [(1974) 1 WLR 1308], however,
establishes that where a contract is vitiated as being contrary to public policy, the party
adversely affected by it can sue to have it declared void. The case may be different
where the purpose of the contract is illegal or immoral. In Kedar Nath Motani v.
Prahlad Rai [(1960) 1 SCR 861], reversing the High Court and restoring the decree
passed by the trial court declaring the appellants' title to the lands in suit and directing
the respondents who were the appellants' benamindars to restore possession, this Court,
after discussing the English and Indian law on the subject, said (at page 873) :

The correct position in law, in our opinion, is that what one has to see is whether the
illegality goes so much to the root of the matter that the plaintiff cannot bring his action
without relying upon the illegal transaction into which he had entered. If the illegality be
trivial or venial, as stated by Williston and the plaintiff is not required to rest his case
upon that illegality, then public policy demands that the defendant should not be
allowed to take advantage of the position. A strict view, of course, must be taken of the
plaintiff's conduct, and he should not be allowed to circumvent the illegality by resorting
to some subterfuge or by misstating the facts. If, however, the matter is clear and the
illegality is not required to be pleaded or proved as part of the cause of action and the
plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a
gross nature as to outrage the conscience of the court, the plea of the defendant should
not prevail.

The types of contracts to which the principle formulated by us above applies are not
contracts which are tainted with illegality but are contracts which contain terms which
are so unfair and unreasonable that they shock the conscience of the court. They are
opposed to public policy and require to be adjudged void."

16. Further, in Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp. (1) SCC 644],
this Court considered Section 7(1) of the Arbitration (Protocol and Convention) Act, 1937 which

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inter alia provided that a foreign award may not be enforced under the said Act, if the Court
dealing with the case is satisfied that the enforcement of the award will be contrary to the
Public Policy. After elaborate discussion, the Court arrived at the conclusion that Public Policy
comprehended in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act,
1961 is the 'Public Policy of India' and does not cover the public policy of any other country.
For giving meaning to the term 'Public Policy', the Court observed thus :-

"66. Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of the
Foreign Awards Act do not postulate refusal of recognition and enforcement of a foreign
award on the ground that it is contrary to the law of the country of enforcement and the
ground of challenge is confined to the recognition and enforcement being contrary to the
public policy of the country in which the award is set to be enforced. There is nothing to
indicate that the expression "public policy" in Article V(2)(b) of the New York Convention
and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which it
was used in Article I(c) of the Geneva Convention of 1927 and Section 7(1) of the Protocol
and Convention Act of 1937. This would mean that "public policy" in Section 7(1)(b)(ii)
has been used in a narrower sense and in order to attract to bar of public policy the
enforcement of the award must invoke something more than the violation of the law of
India. Since the Foreign Awards Act is concerned with recognition and enforcement of
foreign awards which are governed by the principles of private intentional law, the
expression "public policy" in Section 7(1)(b)(ii) of the Foreign Awards Act must
necessarily be construed in the sense the doctrine of public policy is applied in the field
of private international law. Applying the said criteria it must be held that the
enforcement of a foreign award would be refused on the ground that it is contrary to
public policy if such enforcement would be contrary to (i) fundamental policy of Indian
law; or (ii) the interests of India; or (iii) justice or morality."

The Court finally held that :-

"76. Keeping in view the aforesaid objects underlying FERA and the principles governing
enforcement of exchange control laws followed in other countries, we are of the view
that the provisions contained in FERA have been enacted to safeguard the economic
interests of India and any violation of the said provisions would be contrary to the
public policy of India as envisaged in Section 7(1)(b)(ii) of the Act."

This Court in Murlidhar Agarwal and another v. State of U.P. and others [1974(2) SCC 472]
while dealing with the concept of 'public policy' observed thus :-

"31. Public policy does not remain static in any given community. It may vary from
generation to generation and even in the same generation. Public policy would be almost
useless if it were to remain in fixed moulds for all time.

"32. ......The difficulty of discovering what public policy is at any given moment certainly
does not absolve the Judges from the duty of doing so. In conducting an enquiry, as
already stated, Judges are not hide-bound by precedent. The Judges must look beyond the
narrow field of past precedents, though this still leaves open the question, in which
direction they must cast their gaze. The Judges are to base their decision on the opinions
of men of the world, as distinguished from opinions based on legal learning. In other
words, the Judges will have to look beyond the jurisprudence and that in so doing, they
must consult not their own personal standards or predilections but those of the
dominant opinion at a given moment, or what has been termed customary morality. The
Judges must consider the social consequences of the rule propounded, especially in the
light of the factual evidence available as to its probable results. ....The point is rather that
this power must be lodged somewhere and under our Constitution and laws, it has been
lodged in the Judges and if they have to fulfil their function as Judges, it could hardly be
lodged elsewhere."

17. Mr. Desai submitted that the narrow meaning given to the term 'public policy' in
Renusagur's case is in context of the fact that the question involved in the said matter was with
regard to the execution of the award which had attained finality. It was not a case where
validity of the Award is challenged before a forum prescribed under the Act. He submitted that
the scheme of Section 34 which deals with setting aside the domestic arbitral award and
Section 48 which deals with enforcement of foreign award are not identical. A foreign award
by definition is subject to double exequatur. This is recognised inter alia by Section 48(1) and
there is no parallel provision to this clause in Section 34. For this, he referred to Lord Mustill &
Stewart C. Boyd QC's "Commercial Arbitration" 2001 wherein [at page 90] it is stated as under :-

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"Mutual recognition of award is the glue which holds the international arbitrating
community together, and this will only be strong if the enforcing court is willing to trust,
as the convention assumes that they will trust, the supervising authorities of the chosen
venue. It follows that if, and to the extent that the award has been struck down in the
local court it should be a matter of theory and practice be treated when enforcement is
sought as if to the extent it did not exist."

18. He further submitted that in foreign arbitration, the award would be subject to being set
aside or suspended by the competent authority under the relevant law of that country whereas
in the domestic arbitration the only recourse is to Section 34.

19. The aforesaid submission of the learned senior counsel requires to be accepted. From the
judgments discussed above, it can be held that the term 'public policy of India' is required to be
interpreted in the context of the jurisdiction of the Court where the validity of award is
challenged before it becomes final and executable. The concept of enforcement of the award
after it becomes final is different and the jurisdiction of the Court at that stage could be limited.
Similar is the position with regard to the execution of a decree. It is settled law as well as it is
provided under Civil Procedure Code that once the decree has attained finality, in an execution
proceeding, it may be challenged only on limited grounds such as the decree being without
jurisdiction or nullity. But in a case where the judgment and decree is challenged before the
Appellate Court or the Court exercising revisional jurisdiction, the jurisdiction of such Court
would be wider. Therefore, in a case where the validity of award is challenged there is no
necessity of giving a narrower meaning to the term 'public policy of India'. On the contrary,
wider meaning is required to be given so that the 'patently illegal award' passed by the arbitral
tribunal could be set aside. If narrow meaning as contended by the learned senior counsel Mr.
Dave is given, some of the provisions of the Arbitration Act would become nugatory. Take for
illustration a case wherein there is a specific provision in the contract that on delayed payment
of the amount due and payable, no interest would be payable, still however, if the Arbitrator
has passed an award grating interest, it would be against the terms of the contract and thereby
against the provision of Section 28(3) of the Act which specifically provides that "arbitral
tribunal shall decide in accordance with the terms of the contract". Further, where there is a
specific usage of the trade that if the payment is made beyond a period of one month, then the
party would be required to pay the said amount with interest at the rate of 15 per cent. Despite
the evidence being produced on record for such usage, if the arbitrator refuses to grant such
interest on the ground of equity, such award would also be in violation of sub-sections (2) and
(3) of Section 28. Section 28(2) specifically provides that arbitrator shall decide ex aequo et bono
[according to what is just and good] only if the parties have expressly authorised him to do so.
Similarly, if the award is patently against the statutory provisions of substantive law which is
in force in India or is passed without giving an opportunity of hearing to the parties as
provided under section 24 or without giving any reason in a case where parties have not
agreed that no reasons are to be recorded, it would be against the statutory provisions. In all
such cases, the award is required to be set aside on the ground of the 'patent illegality'.

20. The learned senior counsel Mr. Dave submitted that the Parliament has not made much
change while adopting Article 34 of the UNCITRAL Model Law by not providing error of law as
a ground of challenge to the arbitral award under Section 34 of the Act. For this purpose, he
referred to Sections 68, 69 and 70 of the Arbitration Act, 1996 applicable in England and
submitted that if the legislature wanted to give a wider jurisdiction to the Court, it would have
done so by adopting similar provisions.

21. Section 68 of the law applicable in England provides that the award can be challenged on
the ground of serious irregularities mentioned therein. Section 68 read thus :-

"68. Challenging the award : serious irregularity -

(1) A party to arbitral proceedings may (upon notice to the other parties and to the
tribunal) apply to the court challenging an award in the proceedings on the ground of
serious irregularity affecting the tribunal, the proceedings or the award.

A party may lose the right to object (see Section 73) and the right to apply is subject to
the restrictions in section 70(2) and (3).

(2) Serious irregularity means an irregularity of one or more of the following kinds
which the court considers has caused or will cause substantial injustice to the applicant -

(a) failure by the tribunal to comply with section 33 (general duty of tribunal);

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(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive
jurisdiction; see section 67);

(c) failure by the tribunal to conduct the proceedings in accordance with the procedure
agreed by the parties;

(d) failure by the tribunal to deal with all the issues that were put to it;

(e) any arbitral or other institution or person vested by the parties with powers in
relation to the proceedings or the award exceeding its powers;

(f) uncertainty or ambiguity as to the effect of the award;

(g) the award being obtained by fraud or the award or the way in which it was procured
being contrary to public policy;

(h) failure to comply with the requirement as to the form of the award; or

(i) any irregularity in the conduct of the proceedings or in the award which is admitted
by the tribunal or by any arbitral or other institution or person vested by the parties
with powers in relation to the proceedings or the award.

(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or
the award, the court may -

(a) remit the award to the tribunal, in whole or in part, for reconsideration;

(b) set the award aside in whole or in part, or

(c) declare the award to be of no effect, in whole or in part.

The Court shall not exercise its powers to set aside or to declare an award to be of no
effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the
matters in question to the tribunal for reconsideration.

(4) The leave of the Court is required for any appeal for a decision of the court under this
section."

Similarly, Section 69 provides that appeal on point of law would be maintainable and the
procedure thereof is also provided. Section 70 provides supplementary provisions.

22. It is true that Legislature has not incorporated exhaustive grounds for challenging the
award passed by the arbitral tribunal or the ground on which appeal against the order of the
Court would be maintainable.

23. On this aspect, eminent Jurist & Senior Advocate Late Mr. Nani Palkhivala while giving his
opinion to 'Law of Arbitration and Conciliation' by Justice Dr. B.P. Saraf and Justice S.M.
Jhunjhunuwala, noted thus:-

"I am extremely impressed by your analytical approach in dealing with complex subject
of arbitration which is emerging rapidly as an alternate mechanism for resolution of
commercial disputes. The new arbitration law has been brought in parity with statutes
in other countries, though I wish that the Indian law had a provision similar to section
68 of the English Arbitration Act, 1996 which gives power to the Court to correct error of
law in the award.

I welcome your view on the need for giving the doctrine of "public policy" its full
amplitude. I particularly endorse your comment that Courts of law may intervene to
permit challenge to an arbitral award which is based on an irregularity of a kind which
has caused substantial injustice.

If the arbitral tribunal does not dispense justice, it cannot truly be reflective of an
alternate dispute resolution mechanism. Hence, if the award has resulted in an injustice, a
Court would be well within its right in upholding the challenge to the award on the ground
that it is in conflict with the public policy of India."

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24. From the discussion it would be clear that the phrase 'public policy of India' is not required
to be given a narrower meaning. As stated earlier, the said term is susceptible of narrower or
wider meaning depending upon the object and purpose of the legislation. Hence, the award
which is passed in contravention of Sections 24, 28 or 31 could be set aside. In addition to
Section 34, Section 13(5) of the Act also provides that constitution of the arbitral tribunal could
also be challenged by a party. Similarly, Section 16 provides that a party aggrieved by the
decision of the arbitral tribunal with regard to its jurisdiction could challenge such arbitral
award under Section 34. In any case, it is for the Parliament to provide for limited or wider
jurisdiction to the Court in case where award is challenged. But in such cases, there is no
reason to give narrower meaning to the term 'public policy of India' as contended by learned
senior counsel Mr. Dave. In our view, wider meaning is required to be given so as to prevent
frustration of legislation and justice. This Court in Rattan Chand Hira Chand v. Askar
Nawaz Jung (Dead) By Lrs and others [(1991) 3 SCC 67], this Court observed thus :-

"17. ..It cannot be disputed that a contract which has a tendency to injure public interests
or public welfare is one against public policy. What constitutes an injury to public
interests or welfare would depend upon the times and climes. ....The legislature often
fails to keep pace with the changing needs and values nor as it realistic to expect that it
will have provided for all contingencies and eventualities. It is, therefore, not only
necessary but obligatory on the courts to step in to fill the lacuna. When courts perform
this function undoubtedly they legislate judicially. But that is a kind of legislation which
stands implicitly delegated to them to further the object of the legislation and to promote
the goals of the society. Or to put it negatively, to prevent the frustration of the legislation
or perversion of the goals and values of the society."

25. Learned senior counsel Mr. Dave submitted that the purpose of giving limited jurisdiction
to the Court is obvious and is to see that the disputes are resolved at the earliest by giving
finality to the award passed by the forum chosen by the parties. As against this, learned senior
counsel Mr. Desai submitted that in the present system even the arbitral proceedings are
delayed on one or the other ground including the ground that the arbitrator is not free and the
matters are not disposed of for months together. He submitted that the legislature has not
provided any time limit for passing of the award and this indicates that the contention raised
by the learned counsel for the respondent has no bearing in interpreting Section 34.

26. It is true that under the Act, there is no provision similar to Sections 23 and 28 of the
Arbitration Act, 1940, which specifically provided that the arbitrator shall pass award within
reasonable time as fixed by the Court. It is also true that on occasions, arbitration proceedings
are delayed for one or other reason, but it is for the parties to take appropriate action of
selecting proper arbitrator(s) who could dispose of the matter within reasonable time fixed by
them. It is for them to indicate the time limit for disposal of the arbitral proceedings. It is for
them to decide whether they should continue with the arbitrator(s) who cannot dispose of the
matter within reasonable time. However, non-providing of time limit for deciding the dispute
by the arbitrators could have no bearing on interpretation of Section 34. Further, for achieving
the object of speedier disposal of dispute, justice in accordance with law cannot be sacrificed.
In our view, giving limited jurisdiction to the Court for having finality to the award and
resolving the dispute by speedier method would be much more frustrated by permitting
patently illegal award to operate. Patently illegal award is required to be set at naught,
otherwise it would promote injustice.

27. 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's case
(supra) it is required to be held that the award could be set aside if it is patently illegal. 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

(d) in addition, if it is patently illegal.

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Illegality must go to the roof of the matter and if he 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.

Now On Facts :-

28. The brief facts of the case are as under :-

Appellant-ONGC which is a Public Sector Undertaking, has challenged the arbitral award
dated 2nd May, 1999 by filing Arbitration Petition No. 917/1999 before the High Court of
Bombay. Learned Single Judge dismissed the same. Appeal No. 256/2000 preferred before
the Division Bench of the High Court was also dismissed. Hence, the present appeal.

29. It is stated that in response to a tender, respondent-Company which is engaged in the

business of supplying equipment for Offshore Oil exploration and maintenance by its letter
dated 27th December, 1995 on agreed terms and conditions, offered to supply to the appellant
26" diameter and 30" diameter casing pipes. The appellant by letter of intent dated 3rd June,
1996 followed by a detailed order accepted the offer of the respondent-Company. As per terms
and conditions, the goods were required to be supplied on or before 14th November, 1996.

30. It was the contention of the respondent that as per clause (18) of the agreement, the raw
materials, were required to be procured from the reputed and proven manufacturers/suppliers
approved by the respondent as listed therein. By letter dated 8th August, 1996, respondent
pleaded an order for supply of steel plates, that is, the raw material required for
manufacturing the pipes with Liva Laminati, Piani S.P.A., Italian suppliers stipulating that
material must be shipped latest by the end of September 1996 as timely delivery was of the
essence of the order. It is also their case that all over Europe including Italy there was a general
strike of the steel mill workers during September/October 1996. Therefore, respondent by its
letter dated 28th October, 1996 conveyed to the appellant that Italian suppliers had faced
labour problems and was unable to deliver the material as per agreed schedule. Respondent,
therefore, requested for an extension of 45 days time for execution of the order in view of the
reasons beyond its control. By letter dated 4th December, 1996, the time for delivery of the
pipes was extended with a specific statement inter alia that the amount equivalent to
liquidated damages for delay in supply of pipes would be recovered from the respondent. It is
the contention of the respondent that the appellant made payment of the goods supplied after
wrongfully deducting an amount of US $ 3,04,970.20 and Rs. 15,75,559/- as liquidated damages.
That deduction was disputed by the respondent and therefore, dispute was referred to the
arbitral tribunal. The arbitral tribunal arrived at the conclusion that strikes affecting the
supply of raw material to the claimant are not within the definition of 'Force Majeure' in the
contract between the parties, and hence, on that ground, it cannot be said that the amount of
liquidated damages was wrongfully withheld by the appellant. With regard to other contention
on the basis of customs duty also, the arbitral tribunal arrived at the conclusion that it would
not justify the delay in the supply of goods. Thereafter, the arbitral tribunal considered various
decisions of this Court regarding recovery of liquidated damages and arrived at the conclusion
that it was for the appellant to establish that they had suffered any loss because or the breach
committed by the respondent in not supplying the goods within the prescribed time limit. The
arbitral tribunal thereafter appreciated the evidence and arrived at the conclusion that in view
of the statement volunteered by Mr. Arumoy Das, it was clear that shortage of casing pipes was
only one of the other reasons with led to the change in the deployment plan and that it has
failed to establish its case that it has suffered any loss in terms of money because of delay in
supply of goods under the contract. Hence, the arbitral tribunal held that appellant has
wrongfully withheld the agreed amount of US $ 3,04,970.20 and Rs. 15,75,559/- on account of
customs duty, sales tax, freight charges deducted by way of liquidated damages. The arbitral
tribunal further held that the respondent was entitled to recover the said amount with interest
at the rate of 12 per cent p.a. from 1st April, 1997 till the date of the filing of statement of claim
and thereafter having regard to the commercial nature of the transaction at the rate of 18 per
cent per annum pendente lite till payment is made.

31. For challenging the said award, learned senior counsel Mr. Desai submitted that :-

(1) the award is vitiated on the ground that there was delay on the part of respondent in
supplying agreed goods/pipes and for the delay, appellant was entitled to recover agreed
liquidated damages i.e. a sum equivalent to 1% of the contract price for whole unit per
week of such delay or part thereof. Thereby, the award was contrary to Section 28(3)
which provides that the arbitral tribunal shall decide the dispute in accordance with the
terms of the contract;

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(2) the award passed by the arbitrator is on the face of it illegal and erroneous as it
arrived at the conclusion that the appellant was required to prove the loss suffered by it
before recovering the liquidated damages. He submitted that the arbitral tribunal
misinterpreted the law on the subject;

(3) in any set of circumstances, the award passed by the arbitrator granting interest on
the liquidated damages deducted by the appellant is, on the face of it, unjustified,
unreasonable and against the specific terms of the contract, namely clause 34.4. of the
agreement, which provides that on 'disputed claim', no interest would be payable.

32. As against this, learned senior counsel Mr. Dave submitted that it is settled that for the
breach of contract provisions of Section 74 of the Contract Act would be applicable and
compensation/damages could be awarded only if the loss is suffered because of the breach of
contract. He submitted that this principle is laid down by the Privy Council as early as in 1929
in Bhai Panna Singh and others v. Bhai Arjun Singh and others [AIR 1929 Privy Council
179], wherein the Privy Council observed thus :-

"The effect of Section 74, Contract Act of 1872, is to disentitle the plaintiffs to recover
simpliciter the sum of Rs. 10,000/- whether penalty or liquidated damages. The plaintiffs
must prove the damages they have suffered."

33. He submitted that this Court has also held that the plaintiff claiming liquidated damages
has to prove the loss suffered by him. In support of this contention, he referred to and relied
upon various decisions. In any case, it is his contention that even if there is any error in
arriving at the said conclusion, the award cannot be interfered with under Section 34 of the
Act.

34. At this stage, we would refer to the relevant terms of the contract upon which learned
counsel for the appellant has based his submissions, which are as under:-

"11. Failure and Termination Clause/Liquidated Damages :-

Time and date of delivery shall be essence of the contract. If the contractor fails to deliver
the stores, or any installment thereof within the period fixed for such delivery in the
schedule or at any time repudiates the contract before the expiry of such period, the
purchaser may, without prejudice to any other right or remedy, available to him to
recover damages for breach of the contract :-

(a) Recovery from the contractor as agreed liquidated damages are not by way of penalty, a
sum equivalent to 1% (one percent) of the contract price of the whole unit per week for
such delay or part thereof (this is an agreed, genuine pre-estimate of damages duly agreed
by the parties) which the contractor has failed to deliver within the period fixed for
delivery in the schedule, where delivery thereof is accepted after expiry of the aforesaid
period. It may be noted that such recovery of liquidated damages may be upto 10% of
the contract price of while unit of stores which the contractor has failed to deliver within
the period fixed for delivery, or

(c) It may further be noted that clause (a) provides for recovery of liquidated damages on
the cost of contract price of delayed supplies (whole unit) at the rate of 1% of the
contract price of the whole unit per week for such delay or part thereof upto a ceiling of
10% of the contract price of delayed supplies (whole unit). Liquidated damages for delay
in supplies thus accrued will be recovered by the paying authorities of the purchaser
specified in the supply order, from the bill for payment of the cost of material submitted by
the contractor or his foreign principals in accordance with the terms of supply order or
otherwise.

(f) Notwithstanding anything stated above equipment and materials will be deemed to
have been delivered only when all its components, parts are also delivered. If certain
components are not delivered in time the equipment and material will be considered as
delayed until such time all the missing parts are also delivered.

12. Levy of liquidated damages (LD) due to delay in supplies.

LD will be imposed on the total value of the order unless 75% of the value ordered is
supplied within the stipulate delivery period. Where 75% of the value ordered has been
supplied within stipulated delivery period, LD will be imposed on the order value of
delayed supply(ies). However, where in judgment of ONGC, the supply of partial quantity

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does not fulfill the operating need, LD will be imposed on full value of the supply order.

34.4. Delay in Release of Payment :-

In case where payment is to be made on satisfactory receipt of materials at destination

or where payment is to be made after satisfactory commissioning of the equipment as
per terms of the supply order, ONGC shall make payment within 60 days of receipt of
invoice/claim complete in all respects. Any delay in payment on undisputed
claim/amount beyond 60 days of the receipt of invoice/claim will attract interest @ 1%
per month. No interest will be paid on disputed claims. For interest on delayed payments
to small scale and Ancillary Industrial Undertakings, the provisions of the "Interest of
delayed payments to small scale and Ancillary Industrial Undertakings Act, 1993 will
govern."

35. Mr. Desai referred to the decision rendered by this Court in Delta International Ltd. v.
Shyam Sunder Ganeriwalla and another, 1999(2) RCR (Civil) 471 : 1991(1) RCR (Rent) 447 :
[(1999) 4 SCC 545] and submitted that for the purpose of construction of contracts, the
intention of the parties is to be gathered from the words they have used and there is no
intention independent of that meaning.

36. It cannot be disputed that for construction of the contract, it is settled law that the intention
of the parties is to be gathered from the words used in the agreement. If words are
unambiguous and are used after full understanding of their meaning by experts, it would be
difficult to gather their intention different from the language used in the agreement. If upon a
reading of the document as a whole, it can fairly be deduced from the words actually used
therein that the parties had agreed on a particular term, there is nothing in law which prevents
them from setting up that term. {Re: Modi & Co. v. Union of India [(1968) 2 SCR 565]}.
Further, in construing a contract, the Court must look at the words used in the contract unless
they are such that one may suspect that they do not convey the intention correctly. If the words
are clear, there is very little the court can do about it. {Re: Provash Chandra Dalui and
another v. Biswanath Banerjee and another [1989 Supp (1) SCC 487] : 1990(1) RCR (Rent)
191 : 1990(1) RRR 207]}.

37. Therefore, when parties have expressly agreed that recovery from the contractor for
breach of the contract is pre-estimated genuine liquidated damages and is not by way of
penalty duly agreed by the parties, there was no justifiable reason for the arbitral tribunal to
arrive at a conclusion that still the purchaser should prove loss suffered by it because of delay
in supply of goods.

Further, in arbitration proceedings, the arbitral tribunal is required to decide the dispute in
accordance with the terms of the contract. The agreement between the parties specifically
provides that without prejudice to any other remedy if the contractor fails to deliver the stores
within the stipulated time, appellant will be entitled to recover from the contractor, as agreed,
liquidated damages equivalent to 1% of the contract price of the whole unit per week for such
delay. Such recovery of liquidated damage could be at the most up to 10% of the contract price
of whole unit of stores. Not only this, it was also agreed that :-

(a) liquidated damages for delay in supplies will be recovered by paying authority from
the bill for payment of cost of material submitted by the contractor,

(b) liquidated damages were not by way of penalty and it was agreed to be genuine, pre-
estimate of damages duly agreed by the parties;

(c) This pre-estimate of liquidated damages is not assailed by the respondent as

unreasonable assessment of damages by the parties.

38. Further, at the time when respondent sought extension of time for supply of goods, time
was extended by letter dated 4.12.1996 with a specific demand that the clause for liquidated
damages would be invoked and appellant would recover the same for such delay. Despite this
specific letter written by the appellant, respondent had supplied the goods which would
indicate that even at that stage, respondent was agreeable to pay liquidated damages.

39. On this issue, learned counsel for the parties referred to the interpretation given to Sections
73 and 74 of the Indian Contract Act in Sir Chunilal V. Mehta & Sons Ltd. v. The Century
Spinning and Manufacturing Co. Ltd. [1962 Supp. (3) SCR 549], Fateh Chand v. Balkishan
Das [(1964) 1 SCR 515 at 526], Maula Bux v. Union of India [(1960) 2 SCC 554]; Union of
India v. Rampur Distillery and Chemical Co. Ltd. [(1973) 1 SCC 649] and Union of India v.

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Raman Iron Foundry [(1974) 2 SCC 231].

Relevant part of Sections 73 and 74 of Contract Act are as under :-

"73. Compensation for loss or damage caused by breach of contract :- When a contract has
been broken, the party who suffers by such breach is entitled to receive, from the party
who has broken the contract compensation for any loss or damage cause to him thereby,
which naturally arose in the usual course of things from such breach, or which the
parties knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.

74. Compensation for breach of contract where penalty stipulated for. - When a contract
has been broken, if a sum is named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to
have been caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for.

Explanation. - A stipulation for increased interest from the date of default may be a
stipulation by way of penalty."

40. From the aforesaid Sections, it can be held that when a contract has been broken, the party
who suffers by such breach is entitled to receive compensation for any loss which naturally
arise in the usual course of things from such breach. These sections further contemplate that if
parties knew when they made the contract that a particular loss is likely to result from such
breach, they can agree for payment of such compensation. In such a case, there may not be any
necessity of leading evidence for proving damages, unless the Court arrives at the conclusion
that no loss is likely to occur because of such breach. Further, in case where Court arrives at
the conclusion that the term contemplating damages is by way of penalty, the Court may grant
reasonable compensation not exceeding the amount so named in the contract on proof of
damages. However, when the terms of the contract are clear and unambiguous then its
meaning is to be gathered only from the words used therein. In a case where agreement is
executed by experts in the field, it would be difficult to hold that the intention of the parties
was different from the language used therein. In such a case, it is for the party who contends
that stipulated amount is not reasonable compensation, to prove the same.

41. Now, we would refer to various decisions on the subject. In Fateh Chand's case (supra), the
plaintiff made a claim to forfeit a sum of Rs. 25000/- received by him from the defendant. The
sum of Rs. 25000/- consisted of two items - Rs. 1000/- received as earnest money and Rs. 24000/-
agreed to be paid by the defendant as out of sale price against the delivery of possession of the
property. With regard to earnest money, the Court held that the plaintiff was entitled to forfeit
the same. With regard to claim of remaining sum of Rs. 24000/-, the Court referred to Section 74
of Indian Contract Act and observed that Section 74 deals with the measures of damages in two
classes of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where
the contract contains any other stipulation by way of penalty. The Court observed thus :-

"The measure of damages in the case of breach of a stipulation by way of penalty is by

Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing
damages the Court has subject to the limit of the penalty stipulated, jurisdiction to award
such compensation as it deems reasonable having regard to all the circumstances of the
case. Jurisdiction of the Court to award compensation in case of breach of contract is
unqualified except as to the maximum stipulated; but compensation has to be reasonable,
and that imposes upon the Court duty to award compensation according to settled
principles. The section undoubtedly says that the aggrieved party is entitled to receive
compensation from the party who has broken the contract, whether or not actual damage
or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof
of "actual loss or damages"; it does not justify the award of compensation when in
consequence of the breach no legal injury at all has resulted, because compensation for
breach of contract can be awarded to make good loss or damage which naturally arose in
the usual course of things, or which the parties knew when they made the contract, to be
likely to result from the breach.

The Court further observed as under :-

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".......Duty not to enforce the penalty clause but only to award reasonable compensation
is statutorily imposed upon courts by Section 74. In all cases, therefore, where there is a
stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the
terms of contract which expressly provides for forfeiture, the court has jurisdiction to
award such sum only as it considers reasonable, but not exceeding the amount specified
in the contract as liable to forfeiture."

42. From the aforesaid decision, it is clear that the Court was not dealing with a case where
contract named a sum to be paid in case of breach but with a case where the contract
contained stipulation by way of penalty.

The aforesaid case and other cases were referred to by three Judge Bench in Maula Bux's case
(supra) wherein the Court held thus :-

".....It is true that in every case of breach of contract the person aggrieved by the breach is
not required to prove actual loss or damage suffered by him before he can claim a decree,
and the Court is competent to award reasonable compensation in case of breach even if no
actual damage is proved to have been suffered in consequence of the breach of contract.
But the expression "whether or not actual damage or loss is proved to have been caused
thereby" is intended to cover different classes of contracts which come before the Courts.
In case of breach of some contracts it may be impossible for the Courts to assess
compensation arising from breach, while in other cases compensation can be calculated in
accordance with established rules. Where the Court is unable to assess the compensation,
the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into
consideration as the measure of reasonable compensation, but not if the sum named is in
the nature of a penalty. Where loss in terms of money can be determined, the party
claiming compensation must prove the loss suffered by him."

43. In Rampur Distillery and Chemical Co. Ltd.'s case (supra) also, two Judge Bench of this Court
referred to Maula Bux's case and observed thus :-

"...It was held by this Court that forfeiture of earnest money under a contract for sale of
property does not fall within Section 70 of the Contract Act, if the amount is reasonable,
because the forfeiture of a reasonable sum paid as earnest money does not amount to
the imposition of a penalty. But, "where under the terms of the contract the party in
breach has undertaken to pay a sum of money or to forfeit a sum of money which he has
already paid to the party complaining of a breach of contract, the undertaking is of the
nature of a penalty."

44. In Raman Iron Foundry's case (supra), this Court considered clause 18 of the Contract
between the parties and arrived at the conclusion that it applied only where the purchaser has
a claim for a sum presently due and payable by the contractor. Thereafter, the Court observed
thus :-

"11. Having discussed the proper interpretation of Clause 18, we may now turn to
consider what is the real nature of the claim for recovery of which the appellant is
seeking to appropriate the sums due to the respondent under other contracts. The claim
is admittedly one for damages for breach of the contract between the parties. Now, it is
true that the damages which are claimed are liquidated damages under Clause 14, but so
far as the law in India is concerned, there is no qualitative difference in the nature of the
claim whether it be for liquidated damages or for unliquidated damages. Section 74 of
the Indian Contract Act eliminates the somewhat elaborate refinements made under the
English common law in distinguishing between stipulations providing for payment of
liquidated damages and stipulations in the nature of penalty. Under the common law a
genuine pre-estimate of damages by mutual agreement is regarded as a stipulation
naming liquidated damages and binding between the parties : a stipulation in a contract
in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved
party only reasonable compensation. The Indian Legislature has sought to cut across the
web of rules and presumptions under the English common law, by enacting a uniform
principle applicable to all stipulations naming amounts to be paid in case of breach, and
stipulations by way of penalty, and according to this principle, even if there is a
stipulation by way of liquidated damages, a party complaining of breach of contract can
recover only reasonable stipulated amount being merely the outside limit. It, therefore,
makes no difference in the present case that the claim of the appellant is for liquidated
damages. It stands on the same footing as a claim for unliquidated damages. Now the
law is well settled that a claim for unliquidated damages does not give rise to a debt until
the liability is adjudicated and damages assessed by a decree or order of a Court or other

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adjudicatory authority. When there is a breach of contract, the party who commits the
breach does not to instanti incur any pecuniary obligation, nor does the party
complaining of the breach becomes entitled to a debt due from the other party. The only
right which the party aggrieved by the breach of the contract has is the right to sue for
damages."

45. Firstly, it is to be stated that in the aforesaid case Court has not referred to earlier decision
rendered by the five Judge Bench in Fateh Chand's case or the decision rendered by the three
Judge Bench in Maula Bux's case. Further in M/s H.M. Kamaluddin Ansari and Co. v. Union
of India and others [(1983) 4 SCC 417], three Judge Bench of this Court has over-ruled the
decision in Raman Iron Foundry's case (supra) and the Court while interpreting similar term of
the contract observed that it gives wider power to Union of India to recover the amount
claimed by appropriating any sum then due or which at any time may become due to the
contractors under other contracts and the Court observed that clause 18 of the Standard
Contract confers ample powers on the Union of India to withhold the amount and no
injunction order could be passed restraining the Union of India from withholding the amount.

46. In the light of the aforesaid decisions, in our view, there is much force in the contention
raised by the learned counsel for the appellant. However, the learned counsel Mr. Dave
submitted that even if the award passed by the arbitral tribunal is erroneous, it is settled law
that when two views are possible with regard to interpretation of statutory provisions and or
facts, the Court would refuse to interfere with such award.

47. It is true that if the arbitral tribunal has committed mere error of fact or law in reaching its
conclusion on the disputed question submitted to it for adjudication then the Court would have
no jurisdiction to interfere with the award. But, this would depend upon reference made to the
arbitrator : (a) If there is a general reference for deciding the contractual dispute between the
parties and if the award is based on erroneous legal proposition, the Court could interfere; (b)
It is also settled law that in a case of reasoned award, the Court can set aside the same if it is, on
the face of it, erroneous on the proposition of law or its application; (c) If a specific question of
law is submitted to the arbitrator, erroneous decision in point of law does not make the award
bad, so as to permit of its being set aside, unless the Court is satisfied that the arbitrator had
proceeded illegality.

48. In the facts of the case, it cannot be disputed that if contractual term, as it is, is to be taken
into consideration, the award is, on the face of it, erroneous and in violation of the terms of the
contract and thereby it violates Section 28(3) of the Act. Undisputedly, reference to the arbitral
tribunal was not with regard to interpretation of question of law. It was only a general
reference with regard to claim of respondent. Hence, if the award is erroneous on the basis of
record with regard to proposition of law or its application, the Court will have jurisdiction to
interfere with the same.

49. Dealing with the similar question, this Court in M/s Alopi Parshad & Sons Ltd. v. The
Union of India [(1960) 2 SCR 793] observed that the extent of jurisdiction of the Court to set
aside the award on the ground of an error in making the award is well defined and held thus :-

"The award of an arbitrator may be set aside on the ground of an error on the face
thereof only when in the award or in any document incorporated with it, as for instance,
a note appended by the arbitrators, stating the reasons for his decision, there is found
some legal proposition which is the basis of the award and which is erroneous -
Champsey Bhara and Company v. Jivaraj Balloo Spinning and Weaving Company
Limited [L.R. 50 IA 324]. If, however, a specific question is submitted to the arbitrator
and he answers it, the fact that the answer involves an erroneous decision in point of
law, does not make the award bad on its face so as to permit of its being set aside - In the
matter of an arbitration between King and Duveen and others [LR (1913) 2 KBD 32] and
Government of Kelantan v. Duff Development Company Limited [LR 1923 AC 395].

Thereafter, the Court held that if there was a general reference and not a specific reference on
any question of law then the award can be set aside if it demonstrated to be erroneous on the
face of it. The Court, in that case, considering Section 56 of the Indian Contract Act held that the
Indian Contract Act does not enable a party to a contract to ignore the express provisions
thereof and to claim payment of consideration for performance of the contract at rates
different from the stipulated rates, on some vague plea of equity and that the arbitrators were
not justified in ignoring the expressed terms of the contract prescribing the remuneration payable
to the agents. The aforesaid law has been followed continuously. {Re: Rajasthan State Mines
& Minerals Ltd. v. Eastern Engineering Enterprises and another [(1999) 9 SCC 283],
Sikkim Subba Associates v. State of Sikkim [(2001) 5 SCC 629] and G.M. Northern Railway

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and another v. Sarvesh Chopra [(2002) 4 SCC 45)] : 2002(2) RCR (Civil) SC 466]}.

50. There is also elaborate discussion on this aspect in Union of India v. A.L. Rallia Ram
[(1964) 3 SCR 164] wherein the Court succinctly observed as under :-

"..But it is now firmly established that an award is bad on the ground of error of law on the
face of it, when in the award itself or in a document actually incorporated in it, there is
found some legal proposition which is the basis of the award and which is erroneous. An
error in law on the face of the award means : "you can find in the award or a document
actually incorporated thereto, as for instance, a note appended by the arbitrator stating
the reasons for his judgment, some legal proposition which is the basis of the award and
which you can then say is erroneous. It does not mean that if in a narrative a "reference
is made to a contention of one party, that opens the door to setting first that contention
is, and then going to the contract on which the parties' rights depend to see if that
contention is sound" Champsey Bhara and Company v. Jivraj Balloo Spinning and
Weaving Company Ltd. [(1932) L.R. 50 I.A. 324] But this rule does not apply where
questions of law are specifically referred to the arbitrator for his decision; the award of
the arbitrator on those questions is binding upon the parties, for by referring specific
questions the parties desire to have a decision from the arbitrator on those questions
rather than from the Court, and the Court will not unless it is satisfied that the arbitrator
had proceeded illegally interfere with the decision."

51. The Court thereafter referred to the decision rendered in Seth Thawardas Pherumal v.
The Union of India [(1955) 2 SCR 48] wherein Bose, J. delivering the judgment of the Court
had observed :-

"Therefore, when a question of law is the point at issue, unless both sides specifically
agree to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the
Courts to set an arbitration right when the error is apparent on the face of the award is
not ousted. The mere fact that both parties submit incidental arguments about point of
law in the course of the proceedings is not enough."

The learned Judge also observed at p. 59 after referring to F.R. Absalon Ltd. v. Great
Western (London) Garden Village Society [1933] AC 592, 615:

Simply because the matter was referred to incidentally in the pleadings and arguments
in support of, or against, the general issue about liability for damages, that is not enough
to clothe the arbitrator with exclusive jurisdiction on a point of law."

52. The Court also referred to the test indicated by Lord Russell of Killowen in F.R. Absalom
Ltd. v. Great Western (London) Garden Village Society Ltd., and observed that the said case
adequately brings out a distinction between a specific reference on a question of law, and a
question of law arising for determination by the arbitrator in the decision of the dispute. The
Court quoted the following observations with approval :-

"..it is, I think, essential to keep the case where disputes are referred to an arbitrator in
the decision of which a question of law becomes material distinct from the case in which
a specific question of law has been referred to him for decision. x x x x The authorities
make a clear distinction between these two cases, and, as they appear to me, they decide
that in the former case the Court can interfere if and when any error of law appears on
the face of the award, but that in the latter case no such interference is possible upon the
ground that it so appears that the decision upon the question of law is an erroneous
one."

53. Further, in Maharashtra State Electricity Board v. Sterlite Industries (India) and
Another [2001(4) RCR (Civil) SC 832 : (2001) 8 SCC 482], the Court observed as under :-

"9. The position in law has been noticed by this Court in Union of India v. A.L. Rallia
Ram [ AIR 1963 Supreme Court 1685] and Madanlal Roshanlal Mahajan v.
Hukumchand Mills Ltd. [(1967) 1 SCR 105] to the effect that the arbitrator's award both
on facts and law is final that there is no appeal from his verdict; that the court cannot
review his award and correct any mistake in his adjudication, unless the objection to the
legality of the award is apparent on the face of it. In understanding what would be an
error of law on the face of the award the following observations in Champsey Bhara &
Co. v. Jivraj Balloo Spg and Wvg. Co. Ltd., [(1922-23) 50 IA 324] a decision of the Privy
Council, are relevant (IA p. 331)

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"An error in law on the face of the award means, in Their Lordships' view, that you can
find in the award on a document actually incorporated thereto, as for instance, a note
appended by the arbitrator stating the reasons for his judgment, some legal proposition
which is the basis of the award and which you can then say in erroneous."

10. In Arosan Enterprises Ltd. v. Union of India [1999(9) SCC 449], this Court again
examined this matter and stated that where the error of finding of fact having a bearing
on the award is patent and is easily demonstrable without the necessity of carefully
weighing the various possible viewpoints, the interference in the award based on an
erroneous finding of fact is permissible and similarly, if an award is based by applying a
principle of law which is patently erroneous, and but for such erroneous application of
legal principle, the award could not have been made, such award is liable to be set aside
by holding that there has been a legal misconduct on the part of the arbitrator."

54. Next question is - whether the legal proposition which is the basis of the award for arriving
at the conclusion that ONGC was not entitled to recover the stipulated liquidated damages as it
has failed to establish that it has suffered any loss is erroneous on the face of it ? The arbitral
tribunal after considering the decisions rendered by this Court in the cases of Fateh Chand,
Maula Bux and Rampur Distillery (supra) arrived at the conclusion that "in view of these three
decisions of the Supreme Court, it is clear that it was for the respondents to establish that they
had suffered any loss because of the breach committed by the claimant in the supply of goods
under the contract between the parties after 14th November, 1996. In the words we have
emphasised in Maula Bux decision, it is clear that if loss in terms of money can be determined,
the party claiming the compensation 'must prove' the loss suffered by him."

55. Thereafter the arbitral tribunal referred to the evidence and the following statement made
by the witness Das :

"The re-deployment plan was made keeping in mind several constraints including
shortage of casing pipes."

56. Further, the arbitral tribunal came to the conclusion that under these circumstances, the
shortage of casing pipes of 26" diameter and 30" diameter pipes was not the only reason which
led to redeployment of rig Trident II to Platform B 121. The arbitral tribunal also appreciated
the other evidence and held that the attempt on the part of the ONGC to show that production
of gas on Platform B 121 was delayed because of the late supply of goods by the claimant failed.
Thereafter, the arbitral tribunal considered the contention raised by the learned counsel for
the ONGC that the amount of 10% which had been deducted by way of liquidated damages for
the late supply of goods under the contract was not by way of penalty. In response thereto, it
was pointed out that it was not the case of learned counsel Mr. Setalwad on behalf of the
claimants that "these stipulations in the contract for deduction of liquidated damages was by
way of penalty". Further, the arbitral tribunal observed that in view of the decisions rendered
in Fateh Chand and Maula Bux cases, "all that we are required to consider is whether the
respondents have established their case of actual loss in money terms because of the delay in
the supply of the Casing Pipes under the contract between the parties." Finally, the arbitral
tribunal held that as the appellant has failed to prove the loss suffered because of delay in
supply of goods as set out in the contract between the parties, it is required to refund the
amount deducted by way of liquidated damages from the special amount payable to the
respondent.

57. It is apparent from the aforesaid reasoning recorded by the arbitral tribunal that it failed to
consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fateh Chand's
case (supra) wherein it is specifically held that jurisdiction of the Court to award compensation
in case of breach of contract is unqualified except as to the maximum stipulated; and
compensation has to be reasonable. Under Section 73, when a contract has been broken, the
party who suffers by such breach is entitled to receive compensation for any loss accused to
him which the parties knew when they made the contract to be likely to result from the breach
of it. This Section is to be read with Section 74, which deals with penalty stipulated in the
contract, inter alia [relevant for the present case] provides that when a contract has been
broken, if a sum is named in the contract as the amount to be paid in case of such breach, the
party complaining of breach is entitled, whether or not actual loss is proved to have been
caused, thereby to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named. Section 74 emphasised that in case of
breach of contract, the party complaining of the breach is entitled to receive reasonable
compensation whether or not actual loss is proved to have been caused by such breach.
Therefore, the emphasis is on reasonable compensation. If the compensation named in the
contract is by way of penalty, consideration would be different and the party is only entitled to

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reasonable compensation for the loss suffered. But if the compensation named in the contract
for such breach is genuine pre-estimate of loss which the parties knew when they made the
contract to be likely to result from the breach of it, there is no question of proving such loss or
such party is not required to lead evidence to prove actual loss suffered by him. Burden is on
the other party to lead evidence for proving that no loss is likely to occur by such breach. Take
for illustration; if the parties have agreed to purchase cotton bales and the same were only to
be kept as a stock-in-trade. Such bales are not delivered on the due date and thereafter the
bales are delivered beyond the stipulated time, hence there is breach of the contract. Question
which would arise for consideration is - whether by such breach party has suffered any loss. If
the price of cotton bales fluctuated during that time, loss or gain could easily be proved. But if
cotton bales are to be purchased for manufacturing yarn, consideration would be different.

58. In Maula Bux's case (supra), plaintiff-Maula Bux entered into a contract with the
Government of India to supply potatoes at the Military Head Quarters, U.P. Area and deposited
an amount of Rs. 10000/- as security for due performance of the contract. He entered into
another contract with the Government of India to supply at the same place poultry eggs and
fish for one year and deposited an amount of Rs. 8500/- for due performance of the contract.
Plaintiff having made persistent default in making regular and full supplies of the commodities
agreed to be supplied, the Government recinded the contracts and forfeited the amounts
deposited by the plaintiff, because under the terms of the agreement, the amounts deposited by
the plaintiff as security for the due performance of the contracts were to stand forfeited in case
plaintiff neglected to perform his part of the contract. In context of these facts, Court held that
it was possible for the Government of India to lead evidence to prove the rates at which
potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver
"regularly and fully" the quantities stipulated under the terms of the contracts and after the
contracts were terminated. They could have proved the rates at which they had to be
purchased and also the other incidental charges incurred by them in procuring the goods
contracted for. But no such attempt was made. Hence, claim for damages was not granted.

59. In Maula Bux's case (supra), the Court has specifically held that it is true that in every case
of breach of contract the person aggrieved by the breach is not required to prove actual loss or
damage suffered by him before he can claim a decree and the Court is competent to award
reasonable compensation in a case of breach even if no actual damage is proved to have been
suffered in consequence of the breach of contract. The Court has also specifically held that in
case of breach of some contracts it may be impossible for the Court to assess compensation
arising from breach.

60. Take for illustration construction of a road or a bridge. If there is delay in completing the
construction of road or bridge within stipulated time, then it would be difficult to prove how
much loss is suffered by the Society/State. Similarly, in the present case, delay took place in
deployment of rigs and on that basis actual production of gas from platform B-121 had to be
changed. It is undoubtedly true that the witness has stated that redeployment plan was made
keeping in mind several constraints including shortage of casing pipes. Arbitral Tribunal,
therefore, took into consideration the aforesaid statement volunteered by the witness that
shortage of casing pipes was only one of the several reasons and not the only reason which led
to change in deployment of plan or redeployment of rigs Trident-II platform B-121. In our view,
in such a contract, it would be difficult to prove exact loss or damage which the parties suffer
because of the breach thereof. In such a situation, if the parties have pre-estimated such loss
after clear understanding, it would be totally unjustified to arrive at the conclusion that party
who has committed breach of the contract is not liable to pay compensation. It would be
against the specific provision of Sections 73 and 74 of the Indian Contract Act. There was
nothing on record that compensation contemplated by the parties was in any way
unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estumate of
damages duly agreed by the parties. It was also mentioned that the liquidated damages are not
by way of penalty. It was also provided in the contract that such damage are to be recovered by
the purchaser from the bills for payment of the cost of material submitted by the contractor.
No evidence is led by the claimant to establish that stipulated condition was by way of penalty
or the compensation contemplated was, in any way, unreasonable. There was no reason for the
tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-
estimate damages because of delay in supply of goods. Further, while extending the time for
delivery of the goods, respondent was informed that it would be required to pay stipulated
damages.

61. From the aforesaid discussion, it can be held that :-

(1) Terms of the contract are required to be taken into consideration before arriving at
the conclusion whether the party claiming damages is entitled to the same;

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(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of
the breach of the contract unless it is held that since estimate of damages/compensation
in unreasonable or is by way of penalty, party who has committed the breach is required
to pay such compensation and that is what is provided in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach
of contract, the person aggrieved by the breach is not required to prove actual loss or
damages suffered by him before he can claim a decree. The Court is competent to award
reasonable compensation in case of breach even if no actual damage is proved to have
been suffered in consequences of the breach of a contract.

(4) In some contracts, it would be impossible for the Court to assess the compensation
arising from breach and if the compensation contemplated is not by way of penalty or
unreasonable, Court can award the same if it is genuine pre-estimate by the parties as
the measure of reasonable compensation.

62. For the reasons stated above, the impugned award directing the appellant to refund the
amount deducted for the breach as per contractual terms requires to be set aside and is hereby
set aside.

Whether The Claim of Refund of the Amount Deducted By the Appellant From the Bills is Disputed
or Undisputed Claim ?

63. As the award directing the appellant to refund the amount deducted is set aside, question of
granting interest on the same would not arise. Still, however, to demonstrate that the award
passed by the arbitral tribunal is, on the face of it, erroneous with regard to grant of interest,
we deal with the same.

64. Arbitral Tribunal arrived at the conclusion that the appellant wrongfully
withheld/deducted the aggregate amount of US $ 3,04,970.20 on account of delay in supply of
goods and amount of Rs. 15,75,559/- on account of excise duty, sales tax, freight charges
deducted as and by way of liquidated damages from the amount payable by the respondent
and thereafter arrived at the conclusion that the said amount was deducted from undisputed
invoice amount, therefore, the said claim of the respondent cannot be held to be disputed
claim'.

65. It is apparent that the claim of the contractor to recover the said amount was disputed
mainly because it was agreed term between the parties that in case of delay in supply of goods
appellant was entitled to recover damages at the rate as specified in the agreement. It was also
agreed that the said liquidated damages were to be recovered by paying authorities from the
bills for payment of the cost of material submitted by the contractor. If this agreed amount is
deducted and thereafter contractor claims it back on the ground that the appellant was not
entitled to deduct the same as it has failed to prove loss suffered by it, the said claim
undoubtedly would be a 'disputed claim'. The arbitrators were required to decide by
considering the facts and the law applicable, whether the deduction was justified or not ? That
itself would indicate that the claim of the contractor was 'disputed claim' and not 'undisputed'.
The reason recorded by the arbitrators that as the goods were received and bills are not
disputed, therefore, the claim for recovering the amount of bills cannot be held to be 'disputed
claim' is, on the face of it, unjust, unreasonable, unsustainable and patently illegal as well as
against the expressed terms of the contract. As quoted above, clause 34.4 in terms provides that
no interest would be payable on 'disputed claim'. It also provides that in which set of
circumstances, interest amount would be paid in case of delay in payment of undisputed claim.
In such case, the interest rate is also specified at 1% per month on such undisputed claim
amount. Despite this clause, the arbitral tribunal came to the conclusion that it was undisputed
claim and held that in law, appellant was not entitled to withhold these two payments from the
invoice raised by the respondent and hence directed that the appellant was liable to pay
interest on wrongful deductions at the rate of 12% p.a. from 1.4.1997 till the date of filing of the
statement of claim and thereafter having regard to the commercial nature of the transaction at
the rate of 18% p.a. pendente lite till payment.

66. It is to be reiterated that it is the primary duty of the arbitrators to enforce a promise which
the parties have made and to uphold the sanctity of the contract which forms the basis of the
civilised society and also the jurisdiction of the arbitrators. Hence, this part of the award
passed by the arbitral tribunal granting interest on the amount deducted by the appellant from
the bills payable to the respondent is against the terms of the contract and is, therefore,
violative of Section 28(3) of the Act.

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Conclusions :-

In the result, it is held that :-

A. (1) The Court can set aside the arbitral award under Section 34(2) of the Act if 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;

2) The Court may set aside the award :-

(i) (a) if the composition of the arbitral tribunal was not in accordance with the
agreement of the parties.

(b) failing such agreement, the composition of the arbitral tribunal was not in
accordance with Part-I of the Act.

(ii) if the arbitral procedure was not in accordance with :-

(a) the agreement of the parties, or

(b) failing such agreement, the arbitral procedure was not in accordance with Part-I of
the Act.

However, exception for setting aside the award on the ground of composition of arbitral
tribunal or illegality of arbitral procedure is that the agreement should not be in conflict
with the provisions of Part-I of the Act from which parties cannot derogate.

(c) If the award passed by the arbitral tribunal is in contravention of provisions of the
Act or any other substantive law governing the parties or is against the terms of the
contract.

(3) The award could be set aside if it is against the public policy of India, that is to say, if
it is contrary to :-

(a) fundamental policy of Indian law;

(b) the interest of India; or

(c) justice or morality, or

(d) if it is patently illegal.

(4) It could be challenged -

(a) as provided under Section 13(5); and

(b) Section 16(6) of the Act.

B. (1) The impugned award requires to be set aside mainly on the grounds :-

(i) there is specific stipulation in the agreement that the time and date of delivery of the
goods was the essence of the contract;

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(ii) in case of failure to deliver the goods within the period fixed for such delivery in the
schedule ONGC was entitled to recover from the contractor liquidated damages as
agreed;

(iii) it was also explicitly understood that the agreed liquidated damages were genuine
pre-estimate of damages;

(iv) on the request of the respondent to extend the time limit for supply of goods, ONGC
informed specifically that time was extended but stipulated liquidated damages as
agreed would be recovered;

(v) liquidated damages for delay in supply of goods were to be recovered by paying
authorities from the bills for payment of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for recovering liquidated
damages was by way of penalty or that the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such
situation is taken care by Sections 73 and 74 of the Contract Act and in the present case
by specific terms of the contract.

67. For the reasons stated above, the impugned award directing the appellant to refund US$
3,04,970.20 and Rs. 15,75,559/- with interest which were deducted for the breach of contract as
per the agreement requires to be set aside and is hereby set aside. The appeal is allowed
accordingly. There shall be no order as to costs.

Appeal allowed.

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