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Case Comment: Oil and Natural Gas Corporation Ltd v/s Saw Pipes Ltd

Oil and Natural Gas Corporation Ltd.[1] v. Saw Pipes Ltd.[2] is a case in which the Supreme Court delivered a landmark judgement. This case is of year 1996 when a dispute arose between both the parties regarding the payment of liquidated damages. The appellant moved to the Arbitral Tribunal for relief. The Arbitral Tribunal ordered in favour of the appellant that is SAW Pipes Ltd. directing the defendant that was Oil and Natural Gas Corporation Ltd.(ONGC) to pay the amount not paid by the defendant.

ONGC moved to High Court appealing against the decision of the Arbitration Tribunal. The High Court dismissed this appeal giving no relief to ONGC. They moved to the Supreme Court against the order of the High Court. In the Supreme Court their appeal was upheld and the order of the Arbitral Tribunal was adjudged to be beyond its jurisdiction.

The question of law in this case is whether the order passed by the Arbitral Tribunal this case is against the public policy of India. In this case both the judges, Justice M.B. Shah and Justice Arun Kumar has referred many cases and tried to interpret the application of the public policy of India in the present case.

The judgement of this case also establishes a strong reasoning which can be used in cases in future. This case involved two big parties, big in the sense that both of them were giants in the industrial field. ONGC which is presently one of the four Maharatnas of the country and SAW Pipes Ltd. is part of the O.P. Jindal group.

The case involved jurists like Ashok H. Desai, Dushyant A. Dave and Sunil Gupta who all brought in the different facets of the issues involved in the said case. 1996 can be said to be the starting of Arbitration as the way of settlement, therefore, this case was important for the growth of Arbitration in India.

Facts of The Case
Oil and Natural Gas Corporation Ltd.(ONGC), a multinational oil and gas company owned by the Government of India floated a tender for supply of casing pipes. The SAW Pipes Ltd. a company engaged in the supply of equipment for offshore oil exploration and maintenance, responded to the tender notice by sending a letter dated 27.12.1995. The letter sent by the SAW Ltd. specified certain terms and conditions under which they will supply the casing pipes of the specified size. It was decided that the goods will be delivered on or before 14.11.1996.

The contract deed contained that if there is a failure in the supply of the goods then ONGC, the appellant in the present case would be, without prejudice to any other right or remedy, entitled to recover from the respondent as agreed liquidated damages and not by way of penalty, a sum equivalent to 1% of the contract price of the whole unit per week for such delay or part thereof subject to a ceiling of 10% from the SAW Pipes Ltd., the respondent in the present case. This pre-estimate of the damages was agreed upon by both the parties. It was also agreed that the payment of the damages will be from the bill for payment of the cost of the material which is sent by the respondent[3]

During September and October of the year 1996 there was a general strike by the mill workers. This strike was in almost whole of the Europe which affected Italy from where the respondent supplied the requisite raw materials, they were not able to deliver the materials on time. This compelled the respondent to ask the appellant for extension of 45 days from the agreed date of execution of order mentioned in the contract. The appellant granted the extension but with a condition that the amount equal to the liquidated damages will be recovered from the respondent.

The goods were delivered to the appellant and the appellant made the payment but retained an amount of US dollars 3,04,970.20 and Rs.15,75,559 as liquidated damages.[4] This deduction of the amount of payment was disputed according to the respondent. This dispute was referred to the Arbitration Tribunal under the Arbitration and Conciliation Act,1996 to seek relief and resolve the dispute.

Procedural History
The SAW Pipes Ltd. moved to the Arbitration Tribunal for remedy. The Arbitration tribunal after listening to both the parties decided that there has been a wrong and the appellant has wrongly deduced the amount of payment without any reasoning or justified loss suffered by them because of the delay caused in the execution of the contract. The Arbitration Tribunal held that the recovery of the liquidated damages by the appellant must be supported by the establishment of that it had suffered any loss due to the late supply of the goods.

The appellant failed to establish any evidence proving their loss due to the late delivery of the goods. The Arbitration Tribunal decided in favour of the respondent and directed the appellant to pay the deducted amount with interest at the rate which was mention in the award. The appellant not happy with the decision of the Arbitration Tribunal moved to the High Court appealing against the order of the Arbitration Tribunal.
The appellant was unsuccessful in High Court to as the High Court did not reverse the decision of the Arbitration Tribunal.

After this the appellant moved to the Supreme Court with the following contentions:
  1. where there was clear violation of section 28 to 31 of the Act or the terms of the contract between the parties, the award could be set aside by the court while exercising jurisdiction under Section 34 of the Act,
  2. since under the terms of the contract the appellant was entitled to recover agreed liquidated damages at the agreed rate, the award was contrary to Section 28(3) of the Act,
  3. the award was on the face of it illegal and erroneous as the Arbitral Tribunal had misinterpreted the law in holding that the appellant was required to prove the loss suffered by it before recovering the liquidated damages,
  4. the grant of interest by the Arbitral Tribunal on the liquidated damages deducted by the appellant was against the specific terms of the contract which provided that on “disputed claim” no interest would be payable, and
  5. for the purpose of construction of contracts, the intention of the parties has to be gathered from the words they have used and not independently thereof.[5]
The respondents argued that the court’s jurisdiction is limited on the Section 34 and the award can be set aside only if it conflicts with the public policy of India[6].

Judgement
The Supreme Court allowed the appeal stating that the Arbitral Tribunal did not act according to the Section 32(2)(a)(v), which directs the Arbitration Tribunal’s composition in accordance with the agreement. The section also mentions that the whole procedure of the arbitration should be in accordance. The Tribunal should decide the dispute in accordance with the provisions of the Act. Therefore, if the award is outside the scope of the said provisions would be illegal.

The Supreme Court decided that the Arbitral Tribunal acted beyond its jurisdiction by breaching various provisions of the substantive law and the provisions of the Act. The Court stated that since the Arbitral Tribunal had not followed the right procedure prescribed under the Act and acted beyond its jurisdiction, the award would be patently illegal and which could be set aside under Section 34 of the Arbitration and Conciliation Act.

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.’[7]

Justice Shah stated, 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 or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration; provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate or, failing such agreement, was not in accordance with this part; or
     
  • (b) the court finds that- (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India.”[8]
    The Court ordered that the order which directed the appellant to refund the impugned award of US Dollars 3,04,970.20 and Rs. 15,75,559/- with interest which were deducted was the delay in execution of the contract would be set aside and the appeal is allowed accordingly.

THE BROADER PICTURE: PUBLIC POLICY OF INDIA
The term “public policy of India” do not have a definition. It is difficult for expressions like these to be defined. Public policy is a dynamic concept is ever changing with time.[9] The doctrine of public policy is only a branch of common law and just like any other common law it is governed by the precedents.[10]

In the case of Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd. the judgement of the case of Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd. was used to interpret the public policy of India under Section 32 (2)(b)(ii) of the Act, the court stated that 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 case it is required to be held that the award could be set aside if it is patently illegal. The result would be — award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.[11]

The principle of public policy is: ex dolo malo non oritur actio- No court will lend its aid to a man who found his cause of action upon an immoral or an illegal act. No exhaustive list can be prepared of all the agreements opposed to public policy. Anything which goes against the interest of general public will be deemed to be opposed to public policy. The doctrine of public policy was summarised by the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya.

“Public policy or the policy of the laws is an elusive concept; it has been described as “untrustworthy guide”, “variable quality”, “uncertain one”, “unruly horse”, etc: the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts, which forms the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy.”[12]
The law relating to public policy is not a fixed and immutable matter, rather it is alterable by the passage of time.

The general head of public policy covers wide range of topics. Some of these are:
  1. Trading with the enemy: Those contracts which tend either, to benefit an enemy country or to disturb the good relations of a country with a friendly country, are against public policy. An agreement with an enemy is likely to benefit the enemy. It is for this reason such contracts, during war, are either suspended or dissolved. If they are not likely to benefit the enemy, these may be suspended during the war and can be revived after the hostilities are over.

  2. Stifling Prosecution: Stifling implies abuse of law. The law does not permit a person to make money out of a crime. You shall not make a trade of a felony. It is based on the noble doctrine that if a person has committed a crime, he must be tried by a Court of law and if found guilty, must be punished. The principle is “that you shall not make a trade of a felony”. If a person has committed an offence he should be punished and, therefore, “no court of law can countenance or give effect to an agreement which attempts to take the administration of law out of the hands of the judges and put it in the hands of private individuals.”[13] Thus, a criminal offence cannot be arbitration. but an agreement to refer a civil dispute to arbitration is perfectly valid.

  3. Champerty: the term champerty in India is not always void, it is only if it is grossly unfair or against the public policy of India. Thus, an agreement to share the proceeds of litigation if recovered in consideration of other party’s supplying the funds in good faith to continue the litigation is not in itself opposed to public policy. However, where the advances are made by way of gambling in litigation, the agreement to share the proceeds of litigation is opposed to public policy and hence void.[14]

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.[15]

It cannot be disputed that a contract which tends 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.[16]

In Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd. it was held that (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.[17]

Conclusion and Suggestion
The scope of arbitration in India is unlimited and for its success it has to be devoid of any flaw or loophole. The contemporary world prefers arbitration in times of dispute, the parties involved in a dispute does not want the matter to take more time than it deserves. Therefore, arbitration seems to be a perfect way of getting relief. It will be a better option than time consuming litigation.

The analysis of the judgement of the ONGC v. SAW Pipes Ltd. case has made it 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.[18]

End-Notes:
  1. Maharatna ONGC is the largest crude oil and natural gas Company in India, contributing around 70 per cent to Indian domestic production. Crude oil is the raw material used by downstream companies like IOC, BPCL, and HPCL to produce petroleum products like Petrol, Diesel, Kerosene, Naphtha, and Cooking Gas-LPG.
  2. Jindal SAW Ltd. is the market leader capacity wise in manufacturing of large diameter submerged Arc Welded (SAW) Pipes
  3. Oil and Natural Gas Ltd. v SAW Pipes Ltd. (2003) 5 SCC 705.
  4. Ibid.
  5. Ibid.
  6. Ibid.
  7. Seth Thawardas Pherumal v. The Union of India : [1955] 2 SCR 48.
  8. Oil and Natural Gas Ltd. v SAW Pipes Ltd. (2003) 5 SCC 705.
  9. 1 Frederick Pollock & Dinshaw Fardunji Mulla, THE INDIAN CONTRACT & SPECEFIC RELIEF ACTS, pg.532 (15th ed. 2017).
  10. State of Rajasthan v. Basant Nahata, AIR 2005 SC 3401.
  11. Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd. (2014) 9 SCC 263.
  12. Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781.
  13. Sudhindra Kumar V. Ganesh Chandra AIR 1938 Cal 840.
  14. Sudhir Singh, Short essay on Agreements Opposed to Public Policy of legality, PRESERVE ARTICLES (Jan. 08, 2019, 10 A.M.), http://www.preservearticles.com/2012012621503/short-essay-on-agreements-opposed-to-public-policy-of-ligality.html.
  15. Murlidhar Agarwal and Anr. v. State of U.P. and Ors. [1975] 1 SCR 575.
  16. Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By LRs and Ors.: [1991] 1 SCR 327.
  17. Oil and Natural Gas Ltd. v SAW Pipes Ltd. (2003) 5 SCC 705.
  18. Ibid.

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