ONGC LTD. v. GARWARE SHIPPING CORPN. LTD

Citation: [2007] 11 S.C.R. 1154

Court: Supreme Court of India

Bench: ARIJIT PASAYAT, S.H. KAPADIA

Case summary

ONGC LTD. v. GARWARE SHIPPING CORPN. LTD.pdf

Judgment text

" ... l ONGCLTD. V. GARWARE SHIPPING CORPN. LTD. NOVEMBER 14, 2007 [DR. ARIJIT PASAYAT AND S. H. KAPADIA, JJ. ] Arbitration and Conciliation Act, 1996-Section 34-Contractual dispute-Issue with regard to computation ofrates for repair and maintenance expenses ofrespondent's offshore vessels chartered to appellant-Reference to arbitrator-Arbitration Award-Interference with-Held: No proposition that Courts would be slow to interfere with arbitrator's award even ifthe conclusions ofarbitrator are perverse, andeven when the very basis ofarbitrator's award is wrong-Onfacts, norms prescribed by arbitratorfor mode ofcalculation as upheld by High Court, not appropriate-Thus, interference under Article 136 calledfor and norms by Arbitrator set aside-Constitution ofIndia, 1950-Article 136. Appellant required offshore vessels (OSV) for supplying material from its onshore bases to its offshore in~tallations.

Respondent and shipping Corporation oflndia acquired offshore vessels to charter them to the appellant. Appellant took on charter, the OSV ofrespondent and the next year, the OSV ofSCL Contract was . entered for first five years. It was extended by another five ;years. Charter was further extended by six years. Dispute arose between appellant and the respondent and others with regard to computation of the rates for repair and maintenance of offshore vessels for 11 to 16 years of their operation. The Committee submitted report with regard to a suitable formula for the charter rate for the further extended period. Government oflndia accepted the recommendations of the Committee partially. Indian Shipping A Companies and respondent made representations. Thereafter, _ Government oflndia appointed a High Level Working Group which gave its recommendations. The dispute was referred to the arbitrator.

Arbitrator held the Committee did not recommend that irrespective ofthe period ofinduction, years should be calculated as that of SCI; that the respondent did not question the recommendations ofHigh Level Working Group and Committee's Report but merely contended that the mode of implementation thereofwas incorrect; that it was not open for him to go behind the report and the only area ofenquiry was whether or not the report was correctly implemented; that neither of the Committees examined whether the entitlement of each OSV was to be determined with reference to the years ofactual user or only with reference to the calendar years; that for the computation of repairs and maintenance expenses, it was necessary to take into consideration the years ofoperation and not the calendar years; that the 12th year ofoperation of SCl's OSVs should be equated with the 13thyear ofoperation ofrespondent's OSVs and so on; and that tile interpretation suggested by appellant would lead to great injustice.

Appellant filed appeal under section 34 ofthe Arbitration and Conciliation Act, 1996 challenging the award. Single Judge ofHigh Court dismissed the appeal. Aggrieved, appellant filed appeal. Division Bench ofHigh Court dismissed the same holding that the arbitrator had consi<Jered and construed the reports while arriving at his conclusions; that the basis ofthe calculation adopted by the arbitrator was not only logical but just and fair; that the provisions ofthe said reports called for a proper interpretation and construction before being applied to the facts ofthe case and the arbitrator did so; that even ifthe mode of calculation as applied by the arbitrator is not very appropriate in its effect, that could not be a ground for exercise ofpower under s. 34; that the reference did not include the 13th to 16th year to inspect; and that the arbitrator thought it improper to open the same and that a narrow technical reading of the Award cannot be made. Hence the present appeal.

Appellant contended that the courts below failed to notice that the Award made by the Arbitrator was beyond the reference made; that the arbitrator's view that the corresponding year could be a more . appropriate factor isWithoutfoundation; that the Bench mark ofSCI in a'particuiar yea'r could not be departed from; that there was lio scope for shifting offigures; that~he normative fig1ire for third period remained constant; and that though in the Writ Petition there was 'challenge to the period 13 tO 16 years, a bare reading of the writ :B petition shows. that it did not relate to the said period. Respondent contended that as tWo views are possible, High Court's view should not have been interfered; that arbifrator had accepted one view whiCh is possible and was iiot de hors the Coniniittee's report; and that interference under Article 1:36 oftbe Constitution was not called for as substantive justicehad been done; even though the order lllay.

be wrong on some parts~ Partly allowing the appeai, the Court HELD: 1. There is no proposition that the courts could be slow to interfere with the arbitrator's Award, even ifthe conClusions are perverse, and even wheii the vefy basis oftiie Arbitrator's award is wr<mg. In the ilistaiit case, interference is warrantid and th. e norms prescribetlb. y the Arbitrator a~ upheld by the Single Judge and die DivisiOri Bench are set aside. [Para 28) [1166~B, CJ 2. 1. Higli Level Working Group concluded that repair and niaiittenarice expenses were to be acttiaiized with effectfrom the iith year ofoperation. The Committeewas seized Ofthe anomaly ofiower rates being paid to those Owners who exercised greater management effectiveness by eiistifihg lower capital co. sts, fower interest rates arid lower debt equity ratiOs.

Therefore; High Level Working Groiip, felt that though it was now not possible to correct any anomalies tliat may have crept iri auring the first 12 years; at least for the last term of four years the formula should reflect; as fat as practicable, the prindple ofequal pay for equal work. [Para 18 and 19J [1163-A, B, C, DJ 2. 2. Operating costs are to be calculated Ori the basis ofactual expenditure incurred by SCI in operating SCl's OSVs for full (first) one year period. [Para 22) [1164-E, F) 2. 3. The concept of reimbursement is the measure fixed, the . year of operation is immaterial. The year ofoperation can vary is an irrelevant factor. The Committee recommended the normative R&M expenses ofOSV of5400 BHP for the year 1988-89 to 1993- 94 to be same as given in the JS&FA Committee report. The R&M expenses for the subsequent years were recommended at the rate of9. 5% escalation per annum on the expense ofthe year 1993-94 + upto 1998-99 and the ainotii1t for of subsequent years @ 9.

5% escalation pet anliuin. The difference between the recommended normative amount given and the actual R&M expense of SCI;s OSVs of5400 BHP (Audited statements) were to be reimbursed on year to year basis after receipt ofthe audited statement from SCI additional reimbursement ofcorresponding overhead expenses in the ratio of15:85 ofthe differential amount will also be made. The differential amounts for other OSVs were recommended to be calculated pro rata basis of the BHP of the respective OSVs w. r. t. D above differential amountforOSVs ofS400 BHP. [Paras 24 and 25] (1165-B, C, D, E] 2. 4. Though there was some controversy as to whether the year referred to is the financial year as reimbursement was on year to year basis after receipt of the auditor's statement from SCI the norms obviously i"clate to financial year. The claiin was for 11th and 12thyears and Hie award also covered from 13th to 16th year. The HLWG referred to certain anomalies. But they related to the previous years.

The "Bench Mark" is the figure ofSCI ofparticular year. So when entry to business was made is irrelevant. [Para 26 and 27) [1165-F; 1166-AJ CIVIL APPELLATE JURJSDICTION : Civil Appeal No. 5210 of 2007. From the Judgment and final Order dated 1. 3. 2005 ofthe High CoUlt ofJudicature at Bombay in Appeal No. 57/2005 in A. P. No. 329/2004. Ashok Desai, Gopal Jain, Vipin Nair, P. B. Suresh and Mridul (for Temple Law Fim1) for the Appellant. R. F. Nariman, Mukul Rohatgi, Biren Saraf, Santosh Paul, Abhishek ~ r K. Rao, Praji K. J. and M. J. Paul for the Respondent. ·I The Judgment ofthe Court was delivered by DR. ARIJIT PASAYAT, J. 1. Leave granted. 2.

Challenge in this appeal is to the judgment rendered by a Division Bench ofthe Bombay IDgh Court dealing with an appeal questioning the t· correctness ofthe order passed by a learned Single Judge who dismissed the appellant's appeal mder Section 34 ofthe Arbitration and Conciliati~~ ·11 Act, 1996 (in short the 'Act') questioning the Arbitrator's award. ;I 3. The controversy lies within a very narrow compass. ·I 4. Tue. factual backgromd is almost undisputed and is essentially*; :I follows: I •' The appellant required off shore vessels (in short 'OSVs') inter,r. alia, for supplying material from its onshore bases to its offshore ..... installations. After initially meeting its requirements by chartering foreign ~ OSVs, the appellant decided to develop a fleet ofIndian Flag vessels. Various Indian companies including the respondent and the Shipping . . Corporation oflndia (in short 'SCI') acquired OSVs, with a view to chartering them to the appellant.

The respondent acquired five vessels- (named Garware I to Garware V) which were handed over to th~ appellant in the months ofNovember and December, 1983 and January . ' ' I and March, 1984. The dispute pertains to the cost of repairs and maintenance ofth~ respondent's OSVs for the eleventh to the sixteenth year o( theii; !. A.. operation. Even though there is no dispute regarding the first two1term~ offive years each, reference to the manner in which the rates for the same were arrived at is necessary. A working group mder the Director General ofShipping was constituted by the Ministry ofPetroleum to determine the floor day rate in respect ofthe vessels keeping two objects in mind, i. e. (a) long term availability of the OSV's for the appellant and (b) ). '<( economic viability to ensure the respondent's swvival in the business. The report was submitted by the working group on 8. 3. 1984 suggesting the day rate which comprised oftwo components, i. e. (a) capital recovery •IH: ..

factor and (b) operating expenses. Contracts were accordingly entered into for the first five year period beginning from 1983-84. The Government of India by an order dated 18. 8. 1984 approved the report in certain respects only. There is no dispute between the parties regarding the payments of operating costs for the first five years. The charter was extended by another five years. A committee presided over by Dr. AN. B' Saxena was formed to review the operating costs payable for the extended term. The Government approved the report ofthe Committee on 5. 8. 1993. There is no dispute between the parties in respect ofthe payments regarding the second five year period also. 5. The present dispute relates to the period beyond ten years so far as relates to the basis for computing the rates for repairs and maintenance. By an order dated 29. 4. 1993 the charter was extended by a further six years. By an order dated 16. 3. 1995 and as modified by an order dated 14. 9.

1995, a committee also presided over by Dr. AN. Saxena was formed to recommend a suitable fonnula for the charter rate for the further extended period. 6. The committee submitted its report on 14. 9. 1997. This committee made recommendations inter-alia in respect ofrepair and maintenance expenses. The reference to arbitration was confined only to the payment ofthese repairs and maintenance expenses. 7. The Governmentoflndia by a letter dated 15. 6. 1998 accepted the recommendations ofthe second Dr. AN. Saxena Committee only partially, Representations were thereafter made by the Indian Shipping Companies including the respondent for reconsideration of the recommendations. Pursuant thereto, the Government ofIndia appointed a High Level Working Group presided over by Mr. Naresh Narad for considering the o~tstanding pending issues. The following recommendations ofthe High Power Committee are relevant: "Pending Issues. ~~ ,,..... 1.

Detennination ofyear a) 1 to 5 years as per from which R & M payments already expenses are to be made. Settled cases actualized. Not to be reopened. b) ,6 to 10 years as per nonns fixed by Dr. Saxena Committee of 1995-77. c) 11 and 12 years to. t· actualized on the basis of S. C. ls' OSVs as recommended by Dr. Saxena Committee of 1995-77. " 8. Disputes and differences arose between the appellant and _interalia the respondent and others regarding the method to the adopted for calculating rates payable with reference to the eleventh to the sixteenth years. The respondent, therefore, filed Writ Petition No. 2788 of2001 for various reliefs. 9. By an order dated 7. 12. 2001 aDivisionBenchofthe High Court recorded that the Writ Petition involved certain con~tual disputes and that both the parties had agreed to refer the disputes raised in the Writ Petition to the sole arbitration ofMr. Justice M.

L Pendse (a former Judge ofthe Bombay High Court and the former ChiefJustiGe ofthe Karnataka High Court). The order which is ashort one, reads as follows: "This writ petition involves certain contractual disputes relating to repairs and maintenance expenses etc, contract between the parties contain an arbitration clause. Both the_parties agree to refer the disputes raised inthe wnt petition to sole arbitration ofJustice M. L. Pendse (Retd. ). Parties further agree that in case Justice Pendse is nqt ina position to take up the· arbitration, Justice D. R. Rege (Retd. ) shall be the arbitrator for the disputes betWeen the p'arties. Arbitrator is requested to dispose ofthe arbitration as expeditiously G. as possible. Petition is disposed of. " · 10. The learned arbitrator noted the respondent's submission that H . while calculating the payments due for the 11th to 16th years of the ONGC LTD. v. GARWARE SHIPPINGCORPN. LTD.

1161 operation of the OSVs ofthe respondent, the appellant has overlooked the important fact that the OSVs ofthe respondent were taken on charter one year prior to the appellant obtaining the OSVs of the SCI. The respondent, therefore, contended that it was not correct that the corresponding years of SCI should be taken into account while determining aniounts payable to the respondent. The learned arbitrator rejected the appellant's contention. He held that the committee nowhere recommended that irrespective ofthe period ofinduction, the years should be calculated of that of the SCI. He held that the respondent had not -questioned the recommendations made by the High Level Working Group Report and the second Saxena Committee Report but merely contended that the mode ofimplementation thereofwas incorrect. The arbitrator further observed and accepted that it was not open for him to go behind the report and the only area ofenquiry is whether or not the report was correctly implemented.

He came to the conclusion that on a close scrutiny ofthe reports, it was clear that neither ofthe committees examined whether the entitlement ofeach OSV is to be detennined with reference to the years ofactual user or only with reference to the calendar years. He also came to the conclusion that for the computation of repairs and maintenance expenses, it was necessary to take into consideration the years ofoperation and not the calendar years. It was held that the 12th year of operation of SCI's OSVs should be equated with the 13th year of operation of the OSVs ofthe respondent and so on. He also held that the interpretation suggested by the appellant would lead to great injustice. For instance, the OSV of the respondent would complete 11 years of operation while the OSVs of the SCI would have operated only for 10 years. 11. Appellant questioned con-ectness of learned Arbitrator's conclusion by filing an appeal under Section 34 ofthe Act.

Learned Single Judge dismissed the appeal holding that the conclusion was rational. An appeal filed was also dismissed. 12. According to the Division Bench, the learned arbitrator has considered and construed the reports while arriving at his conclusions. The entire dispute in the Writ Petition and before the learned arbitrator centered around this issue. The basis ofthe calculation adopted by the A· learned arbitrator was, not only logical but just and fair. The provisions ofthe said reports are not such 11at they required no interpretation and were·merely to be applied without anything more. They called for a proper interpretation and construction before being applied to the facts ofthe case. The learned arbitrator did so. l3. The learned Single Judge held that undoubtedly there was no reference so far as the period of 13 to 16 years are concerned to the learned Arbitrator. But the prayers and the writ petitions clearly indicated that even for that period an issue was raised. 14.

The Division Bench was ofthe view that even ifthe mode of calculation as applied by the arbitrator is not very appropriate in its effect, that could not be a ground for exercise ofpower under Section 34. 15. It noted that the reference in fact did not include the 13th to the 16th year to inspect that the arbitrator thought it improper to open the same. The High Court was ofthe view that a narrow technical reading of the Award cannot be made. 16. In support of the appeal, learned counsel for the appellant submitted that both learned Single Judge and the Division Bench failed to notice that the Award made by the Arbitrator was beyond the reference ma:de. The arbitrator's view that the corresponding year could be a more appropriate factor is without foundation. The Bench mark of SCI in a particular year could not be departed from. There was no scope_for shifting of figures.

There is no rule of universal application that the cost of ·maintenance would be more when the vehicle becomes older. The normative figure for third period remained constant. The order ofoperation is the operating order and the financial order is defining. Though in the Writ Petition there was challenge to 13 to 16 years, a bare reading ofthe writ petition shows that it did not relate to the said period. 17. In response, learned counsel for the respondent submitted that two views are possible and, therefore, High Court's view should not have interfered. Arbitrator had accepted one view which is possible. No one says that it is de hors the Committee's report. It is a case where no interference is called for under Article 136 ofthe Constitution oflndia, ONGCLTD. v. GARWARESHIPPINGCORPN. LTD. 1950 (in short the 'Constitution') as substantive justice had been done, even though the order may be wrong on some parts. 18.

Some ofrelevant parts ofthe Report ofHLWG need to be noted: "This High Level Working Group therefore, concludes that R&M expenses are to be actualized with effect from the 11thyear ofoperation. " It was further noted as follows: "This Committee was seized ofthe anomaly oflower rates being paid to those Owners who exercised greater management C effectiveness by ensuring lower capital costs, lower interest rates and lower debt equity ratios. 19. The High Level Working Group, therefore, felt that though it is now not possible to correct any anomalies that may have crept in dwing the first twelve years, at least for the last term offour years the formula should reflect, as far as pra~ticable, the principle ofequal pay for equal work. 20.

It is to be noted that the anomalies referred to in the subsequent paragraphs relate to the anomaly oflower rates being paid to owners to exercise greater management effectiveness by ensuring lower capital because oflower interest rate and lower rate equality ratio. 21. The recommendations ofthe HLWG are as follows: 1. Determination ofyear from a. 1st to 5th year as per payments which R&M expenses are to already made. Settled cases not be actualized to be reopened. b. 6th to 10th year as per norms fixed by the Dr. Saxena Committee 0 of 1995-97. c. 11th and 12th years to be actualised on the basis of SCI's OSVs as recommended by the Dr. . ;- Saxena Committee of 1995-97~ 5. Ceiling rates for'~A" type a. From 1st to 5th year ceiling Vessels only pertaining to rates as already paid by ONGC. the period beyond 12 years ofoperation b. From 6th to l0t4 year floor rates to be paid by ONG<;. c. For the 11th and 12thyears ceiling rates to be paid by ONGC 6. Compensation in lieu ofCRF a.

The Operating Expenses (including Crew Salary & Wages covering agreements between INSA and MUI/ NUSI) as determined on the last day of the 12th year of operation for each vessel, (as per recommendations ofthe Dr. Saxena Committee and further modified b)' this Working Group) to be fixed and made applicable for the next four year i. e. from the 13th to the 16th year. 22. Operating costs are to be calculated on the basis of actual ~xpenditure incUITed by SCI in operating SCI's OSVs for full (first) one year period. · I 23. The committee observed that the actual expenses of SCI have not followed any uniform pattern. The scale to be suggested by the icommittee needed to be based on some normative amount for a base ryear over which an escalation of9. 5% per annum may be considered for :a block offive years and for subsequent block offive year the base may .

be changed in the same pattern as that ofvictualling cost The c0mmittee 'observed that the total cost of repair and maintenance for the block of five years, that is, 1988-89 to 1992-93 of SCI's OSVs is Rs. 106. 482 lacs per OSV as against·the recommended amount ofRs. 97. 618 lacs given in the JS & FA committee report. The committee considered that the SCI's audited statement of R&M expenses may be considered as appropriate amount for reimbursement to Shipowners. The difference between SCI's audited R&M expenses and the normative amount was to be reimbursed to the Shipowners on receipt of SCI's audit statement from time to time in proportion to the BHP ofthe respective OSVs. 24. As the concept ofreimbursement is the measure fixed, the year ofoperation can vary is an irrelevant factor. The repair and maintenance expenses have also been dealt by the Committee. 25. In accordance with the deliberation ofthe Committee on this at para 3. 5.

5, the committee recommended the normative R&M expenses of OSV of 5400 BHP for the year 1988-89 to 1993-94 to be same as given in the JS&FA Committee report. The R&M expenses for the subsequent years were recommended at the rate of9. 5% escalation per annum on the expense ofthe year 1993-94 upto 1998-99 and the amount for of subsequent years @9. 5% escalation per annum. The difference between the recommended normative amount given and the actual R&M expense of SCI's OSVs of 5400 BHP (Audited statements) were to be reimbursed on year to year basis after receipt ofthe audited statement from SCI additional reimbursement ofcorresponding overhead expenses in the ratio of 15:85 of the differential amount will also be made. The differential amounts for other OSVs were recommended to be calculated pro rata basis ofthe BHP ofthe respective OSVs w. r. t. above differential amount for OSVs of 5400 BHP. 26.

Though there was some controversy as to whether the year referred to is the financial year as reimbursement was on year to year basis after receipt ofthe auditor's statement from SCI the norms obviously relate to financial year. 27. A few factual aspects need to be noted. So far as Essar is concerned, the year is same as SCI. In case ofBann, there was one time settlement and it is only JESCO which challenged the report. SCI's first year of operation was 1984-85. The figures for that year provide some material for rationalization. It is to be noted that stress is on reimbursement. Thus the measure is fixed and, therefore, year ofoperation is immaterial. It needs no reiteration that claim was for 11th and 12th years and the award also covered from 13th to 16th year. It is also to be noted that the HLWG referred to certain anomalies. But they related to the previous years. The "Bench Mark" is the figure ofSCI ofparticular year. So when entry to business was made is irrelevant. 28.

There is no proposition that the courts could be slow to interfere with the arbitrator's Award, even ifthe conclusions are perverse, and even when the very basis ofthe Arbitrator's award is wrong. In any case this is case where interference is warranted and we set aside the norms prescribed by the Arbitrator as upheld by the learned Single Judge and the Division Bench. 29. The appeal is allowed to the aforesaid extent with no order as to costs. N. J. Appeal partly allowed. (... ;