OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD

Citation: [2003] 3 S.C.R. 691

Court: Supreme Court of India

Bench: M.B. SHAH, ARUN KUMAR

Judgment text

OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. APRIL I7, 2003 [M. B. SHAH AND ARUN KUMAR, JJ.

] Arbitration and Conciliation Act, 1966; Sections 23, 24, 25, 28, 31 and 34: Contract for supply ofgoods-Time is the essence ofthe contract-Delay in supply of goods-Contractor's liability to purchaser-Award-Denial of compensation-Held: when liability to pay compensation in lieu ofdamages for breach ofany term ofthe contract by the other party is stipulated clearly and unambiguously, and in the absence ofevidence proving the compensation claimed as unreasonable, arbitral tribunal could not ignore clear terms ofthe agreement to determine liability of the defaulting party-It is not necessary for the claimant to produce evidence proving damages/loss suffered by him- Burden is on the contending party to prove that claim is unreasonable-Since contending party agrPed to pay damages, he cannot deny the same-Loss actually suffered by the purchaser need not be proved-Indian Contract Act,- Sections 73 and 74.

Claim-Deduction ofcompensation/claim by the purchaser from the bill of the contractor in lieu of damages for breach of agreeme/1/-Nature of- Held: such claim would be treated as disputed claim-Arbitrator to decide it-Under the facts and circumstances of the case, Arbitrator holding the claim as undisputed on the ground that goods were received and bill was no/ disputed-Such finding of the Arbitrator unjust and unreasonable. · Award by the arbitral tribzmal-lnterference with-Jurisdiction of the Court-Ambit and scope of-Held: arbitral tribunal is empowered lo decide the dispute referred to ii in accordance with the provisions of the Ac/- Procedural law provides relief against the right-Award passed in contravention ofthe provisions ofsubstantive law/Act would be patently illegal and contrary to the basic concept ofjustice-Hence could be interfered with by the Court.

Award in conflict with Public Policy of India-Power of the Court lo inteifere with-Held: since the phrase 'Public Policy ofIndia' is not defined I J"- · under the Act, 1he Court requires to give contextual meaning in the light of the principles underlying the Arbitralion Act/Contract Act/Constitutional provisions-It could either be construed in a narrower or broader sense- When award attains finality, jurisdiction of the Court to interfere with is limited on the ground ofpublic policy-It could be given wider meaning by ! he Court in exercise ofits appellatelrevisiona/jurisdiction-Award, in violation of statutory provisions, can not be termed to be in public interest-Hence against Public Policy of India and void-Interpretation ofStatutes. Domestic award and foreign award-Distinclion between-Discussed.

Words & Phrases: 'Arbitral Procedure', 'Substantive Law', 'Public Policy ofIndia', 'Force Majeure ', 'liquidated damages', 'wrtent illegality' and 'disputed claim'- Meaning of in the context ofArbitration and Conciliation Act, 1996. Respondent-foreign company, a contractor, had entered into an agreement with the appellant-company, a purchaser for supply of certain goods on agreed terms. Timely delivery of the goods was the essence of the agreement. As per terms of the agreement, any delay in supply of the goods would entail liability on the contractor to liquidate damages for delay in supply of goods. The respondent could not supply the goods in time due to strike of workers in that country and sought for extension of time. While conveying extension, the appellant specifically mentioned that the liquidated damages would be recovered from them. Accordingly it recovered the same by making deductions from the payment due to the respondent.

Since the respondent considered the deduction as wrongful, it referred the dispute to the arbitral tribunal. The tribunal held the deduction made by the appellant wrongful since it could not establish the actual monetary loss suffered by it due to delay in supply of goods under the contract and the tribunal passed an award accordingly. Appeal against the award was dismissed by the High Court. Hence the present appeal. It was contended for the appellant that since the Award passed by the arbitral tribunal was in violation of Sections 28 to 31 of the Arbitration and Conciliation Act, it could be set aside by the Court as per provisions under Section 34 of the Act; that since the impugned award was challenged before a Forum prescribed under the Act and did not attain finality, wider meaning could be assigned to the term 'Public Policy of India'; that the r provisions of law for setting aside domestic award and foreign award are OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD.

693 different and the domestic award could be set aside under Section 34 of the Act; that since no time limit for passing the award has been prescribed under the Act, impliedly legislature did not intend to give limited jurisdiction to the Court, and the award passed by the tribunal could not be said to have attained finality; that since the award was contrary to the provisions of sub-section (3) of Section 28, it was vitiated and the appellant was entitled to recover liquidated damages from the respondent; that the award was illegal since appellant was required to prove the loss suffered by it due to. delay in supply of goods in contradiction to the terms of the agreement; and that the interest as granted in the award was unreasonable/ unjustified since it was against the specific terms of the agreement.

On behalf of the respondent, it was submitted that the phrase 'Public Policy of India' could not be so interpreted to mean that the Court possesses jurisdiction to set aside the award in violation of some provisions of law; that Parliament did not intend to give wider jurisdiction to the Court to challenge the arbitral award; otherwise it would have adopted similar provisions of English Law on the subject; that limited jurisdiction is given to the Court under the provisions of the Act with the object of resolving disputes at the earliest by giving finality to the award passed by the arbitral tribunal; and that compensation/damages would be awarded for the breach of contract only if loss was suffered and proved. Allowing the appeal, the Court HELD: I. I. The arbitral tribunal is empowered and is required to decide the dispute in accordance with the provisions of the Arbitration and Conciliation Act.

Since the jurisdiction or the power of the arbitral tribunal is prescribed under the Act, the award de hors the provisions, 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 of substantive law or the provisions of the Act. 1706-B, F, GJ Harish Chandra Bajpai v. Triloki Singh, (19571SCR370, relied on. 1. 2. In view of Section 34 and other provisions of the Act 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 interfered and 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. Such interpretation of clause (v) would be in conformity with the settled principle of law - there cannot be any wrong without a remedy - that procedural law cannot fail to provide relief when substantive law gives the right. (707-D-EJ M V. Elisabeth and Ors v. Harwan Investment & Trading Pvt. Ltd, (1993) Supp. 2 SCC 433 and Dhanna Lal v. Kalawatibai and Ors. , (2002) 6 SCC 16, relied on. 2. 1. The phrase 'Public Policy of India' is not defined under the Act. Hence, the said term is re:;_;, ed 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 of principles underlying the Arbitration Act, Contract Act and Constitutional provisions. (708-A, Bl 2. 2. 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 Code of Civil Procedure 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, a wider meaning is required to be given so that the 'patently illegal award' passed by the arbitral tribunal could be set aside. It is for the Parliament to provide OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 695 for limited or wider jurisdiction to the Court in case where award is challenged. But in s.

uch cases, there is no reason to give narrower meaning to the term 'Public Policy of India'. Instead, wider meaning is required to be given so as to prevent frustration of legislation and justice. The phrase 'Public Policy of India' used in Section 34 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. 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. (713-C-E; 718-A-D; 716-GJ Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr. , (1986] 3 SCC 156; Murlidhar Agarwal and Anr. v. State ofU. P. and Ors.

, (1974) 2 SCC 472 and Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs. and Ors. , (1991] 3 SCC 67 , referred to. • Renusagar Power Co. ltd. v. General Electric Co. , [1994) Supp. 1 SCC 644, distinguished. 'law ofArbitration and Conciliation' by Justice Dr. B. P. Saraf and Justice SM Jhunjhunwala, referred to. 2. 3. 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 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 such cases, the award is required to be set aside on the ground of 'patent illegality'. (714-A, B] 2. 4.

It is true that under the Act, there is no provision which specifically provides that the arbitrator shall pass award within reasonable time as fixed by the Court; that on occasions, arbitration proceedings are delayed for one or the other reason, but it is for the parties to take appropriate action in that regard. 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 can not be sacrificed. Thus, giving limited jurisdiction to the Court for havi. ng finality to the award by the arbitrator 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. [717-E-H; 718-Al 2. 5.

An award could be set aside if it is contrary to:- (a) fundamental policy of Indian law; or (b) th:; 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. [739-H; 740-A, Bl .. 3. 1. lt 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 not be appropriate to gather their intention different from the language used in the agreement.

If upon a reading of the documents 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. 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. [723-B, C, El Modi & Co. v. Union ofIndia, [196812 SCR 565 and Provash Chandra Dalui andAnr. v. Biswanath Banerjee andAnr. , [1989[ Supp 1SCC487, relied on. 3. 2. The arbitral tribunal is required to decide the dispute in accordance with the terms of the contract.

In the instant case, the agreement between the parties specifically provides that without prejudice to any other OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 697 right or remedy if the contractor fails to deliver the stores within the stipulated time, appellant will be entitled to recover from the contractor liquidated damages on agreed terms. Further, when respondent sought extension of time for supply of goods, time was extended with a specific demand that the clause for liquidated damages would be invoked and appellant would recover the same for such delay. Despite such specific indication by the appellant, respondent had supplied the goods which would indicate that even at that stage, respondent was agreeable to pay liquidated damages. 1723-F, G; 724-8, Cl 3. 3.

From the provisions of law under Sections 73 and 74 of Indian Contract Act, 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. And 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 arrLves 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 iii 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, and it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same. 1725-C-EI Mazda Bux v. Union of India, 119691 2 SCC 554; H. M. Kamaluddin Ansari & Co. v. Union of India and Ors. , 119831 4 SCC 417 and Union of India v. Rampur Distillery & Chemical Co. Ltd. , 119731 I SCC 649, relied on. Fateh Chand v. Ba/kishan Das, 119641 I SCR 515, distinguished. Union of India v. Raman Iron Foundry, 119741 2 SCC 231, held inapplicable. 3. 4. It is true that if the arbitral tribunal has committed mere error I ;A 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 illegally. (729-D, El 3. 5. In the facts of the instant case, 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 ofthe contract and thereby it violatPs Section 28(3) of the Act.

The reference to the arbitral tribunal was · Jt 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. 1729-F, GI Mis. Alopi Parshad & Sons Ltd. v. Union ofIndia, 11960] 2 SCR 793; Maharashtra State Electricity Board v. Sterilite Industries (India) and Anr. , 120011 8 SCC 482; Union of India v. A. L. Ra/lia Ram, [1964] 3 SCR 164; Seth Thawardas Pherumal v. Union ofIndia, [1955] 2 SCR 48; Rajasthan State Mines & Minerals Ltd v. Eastern Engineering Enterprises and Anr. , [199919 sec 283; Sikkim Subba Associates v. State ofSikkim, [200115sec629 and -- G. M Northern Railway andAnr. v. Sarvesh Chopra, [200214 SCC 45, referred to. F. R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. , (1993) AC 592, referred to. 4:1.

The arbitral tribunal failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in *Fateh Chandv. Balkishan Das 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. The emphasis is on reasonable compensation. Ifthe compensation named in the contract OIL & NATURAL GAS CORPORATION LTD. v. SAW PIPES LTD. 699 is by way of penalty, consideration would be different and the party is only entitled to 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 bv such breach. (734-C-GI *Fateh Chand v. Balkishan Das, (196411 SCR 515, followed. Mau/a Bux v. Union ofIndia, (196912 SCC 554, relied on. 4. 2. In the instant case, no evidence is led by the claimant to establish that stipulated condition was by way ofpenalty 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 preestimate damages because of delay in supply of goods. [736-EI 4. 3. When the 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, such claim undoubtedly would be a 'disputed claim'. The arbitrators were-required to decide the undisputed claim by considering the facts and the law applicable.

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. 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, that 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. (738-A-C-F( CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7419 of2001. From the Judgment an(l Order dated 21. 6. 2000 of the Mumbai High Court in A. No. 256 of 2000. Ashok H.

Desai, Dushyant A. Dave, Sunil Gupta, Ashwani Kumar, 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 and S. S. Jauhar for the Appearing parties. The Judgment of the Court was delivered by SHAH, J. Court's Jurisdiction Under Section 34 ofthe 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? Learned senior counsel Mr. Ashok Desai appearing for the appellant submitted that in case where there is clear violation of Section 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. 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. For deciding this controversy, we would refer to the relevant part of Section 34 which reads as under:- "34. Application for setting aside arbitra/ award-{! ) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the court only if- (a) the party making the application furnishes proof that- (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms ofthe 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 arbitra/ tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision ofthis 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) arbitral award is in conflict with the public policy ofIndia.

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 ji·aud or corruption or was in violation of Section 75 or Section 81. " 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 subsection 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 tenn 'Arbitral Procedure. ' 'Arbitral Procedure. ' The ingredients of clause (v) are as under:- (I) The Court may set aside the award:- (i) (a) ifthe composition ofthe arbitral Tribunal was not in accordance with the agreement of the parties.

(b) failing such agreement, the composition ofthe 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. 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. Section 2 to 43. At the same time, agreement for composition ofarbitral 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 Code ofCivil Procedure, 1903 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 materially and weight of any evidence. Sections 20, 21 and 22 deal with place of arbitration, commencement ofarbitral proceedings and language respectively. Thereafter, Section, 23 24 and 25 deal with statements ofclaim 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:- "24. Hearings and written proceedings-( I) 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 ofany 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. " Thereafter, Chapter VI deals with making ofarbitral award and termination of proceedings. Relevant Sections which require consideration are Sections 28 and 31. Section 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 of 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 partie~ as applicable to the substance of the dispute; (iO 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; (iiO 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 et bona 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 ofarbitral award-(! ) 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 (I), 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 tern1s under section 30.

(4) The arbitral award shall state is date and the place ofarbitratinn as determined in accordance with section 20 and the award shall be deemed to have been made at that plare. (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 ofthe 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,- (0 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.

" 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 ! 'eople Act, 1951 (as it stood), this Court observed thus:- "It is then argued that S. 92 confers powers on the Tribunal in respect of certain matters, While S.

90(2) applies the CPC in resoect 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 S. 90(2). We do not see any antithesis between 'procedure' in S. 90(2) and 'powers' under S. 92. When the respondent applied to the Tribunal for amendment, he took a procedural step, and that he was clearly entitled to do under S. 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. " Hence, the jurisdiction or the power of the arbitral tribunal is prescribed under the Act and if the award is do 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 of substantive law or the provision of the Act. The question, therefore, which requires consideration is-whether the award could be set aside, ifthe arbitral tribunal has not followed the mandatory procedure prescribed uhder Section 24, 28 or 31(3), which affects the rights of the parties? Under sub-section (I )(a) of Section 28 there is a mandate to the arbitral tribunal to decide the dispute in accordance with the substanuve OIL & NATURAL GAS CORPORATION LTD. '"SAW PIPES LTD. [SHAH, J ] 707 law of 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 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 ~nder Section 34. ,.. The aforesaid interpreta 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 ofplan or redeployment ofrigs 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 provisions 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-estimate 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 damages 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. From the aforesaid discussions, it can be held that:- {I) 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) Ifthe 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 OIL& NATURAL GAS CORPORATION LTD. v.

SAW PIPES LTD [SHAH, l. ) 737 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 it is genuine pre-estimate by the parties as the measure of reasonable compensation. For the reasons stated above, the impugned award directing the appellant to refund the amount deducted for the breach as per contractual tenns 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?

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. 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.

' It is apparent that the claim of the contractor to recover the said amount was disputed mainly because it was agreed tenn 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 quote~ above, clause 34. 4 in terms provides that no. interest would be payable in '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 I % 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 12% p. a. Trom 1.

4. 1997 till the date of filing of the statement of claim and thereafter having regard to the commercial nature ofthe 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. Conclusions: In the result, it is held that: - A.

(I) 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 ofthe 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 i. n accordance with the agreement of the parties.

(b) failing such agreement, the composition ofthe 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) Ifthe 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); (b) Section 16(6) of the Act. B. (B) 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 terms of the contract. For the reasons stated above, the impugned award directing the appellant A . 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. S. K. S. Appeal allowed. B