2003 Supreme(SC) 477

2003(3) Supreme 449
Supreme Court of India
(From Mumbai High Court)
M.B. Shah and Arun Kumar, JJ.
Oil & Natural Gas Corporation Ltd. —Appellant
versus
SAW Pipes Ltd. —Respondent
Civil Appeal No. 7419 of 2001
Decided on 17-4-2003
 
Counsel for the Parties :
For the Appearing Parties : Ashok H. Desai, Dushyant A. Dave, Sunil Gupta, Ashwani Kumar, Sr. Advocates, Ms. Anuradha Bindra, Kashi Vishweshwaran, Ms. Padmalakshmi Nigam, Vikram Mehta, K.R. Sasiprabhu, A.M. Khattawala, Mahesh Agarwal, Rishi Agarwal, E.C. Agarwala, Prabhjit Jauhar, S.S. Jauhar, Advocates.

Important point
If the arbitral award is contrary to the substantive provisions of law or the provisions of the Arbitration and Conciliation Act, 1996 or against the terms of the contract, it would be patently illegal, which could be interfered under Section 34 of the Act.

Headnote:(i) Arbitration and Conciliation Act, 1996—Section 34—Arbitral Award—Setting aside of—Grounds for.

       Held : (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-1 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.

       (Para 70)

       (ii) Arbitration and Conciliation Act, 1996—Section 34—Arbitral Award—Jurisdiction of Court where award passed by Arbitral Tribunal—Ambit and scope—Arbitral procedure, meaning—Composi­tion of arbitral tribunal should be in accordance with the agree­ment—Procedure which is required to be followed by arbitrators should also be in accordance with the agreement of parties—Whether award could be set aside, if arbitral tribunal has not followed mandatory procedure prescribed under Sections 24, 28 or 31(3) which affects rights of parties?—(Yes).

       Held : 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. 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. (Paras 12 and 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 contract, 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. (Para 14)

       (iii) Arbitration and Conciliation Act, 1996—Section 34(2b)(ii)—Phrase ‘public policy of India’—Meaning—Wider meaning required to be given.

       Held : 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. (Para 27)

       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.

       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. (Para 30)

       (iv) Arbitration and Conciliation Act, 1996—Section 34—Indian Contract Act, 1872—Sections 73 and 74—Arbitral Award—Legality challenged—Agreement to supply casing pipes—Timely delivery was of essence of the agreement—Respondent requested for extension of 45 days time for execution of order—Time for delivery of pipes extended with a specific statement that amount equivalent to liquidated damages for delay would be recovered from respon­dent—Appellant made payment of goods supplied after wrongfully deducting an amount as liquidated damages—Deduction disputed by respondent—Award of Arbitral Tribunal stating that appellant has wrongfully withheld the agreed amount by deducting liquidated damages—Whether sustainable?—(No)—Deduction of liquidated damages being as per terms of the agreement.

       Held : 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;

       (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 such estimate of damages/compensation is 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 damage 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. (Para 64)

       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 right or 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.

       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. (Paras 40 and 41)

       (v) Arbitration and Conciliation Act, 1996—Section 34—Arbitral Award—Legality of—Delay in supply of goods by contractor—Entitlement to recover damages—Contractor’s claim that appellant was not entitled to deduct damages as it has failed to prove loss—Whether claim of refund of amount deducted from bills is disputed or undisputed claim—Held, it was disputed claim—Grant of interest on amount deducted held unjustified.

       Held : 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. 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 civilized 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. (Paras 68 and 69)