: March 10, 2011 |
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ONGC v Saw Pipes
This case arose out of a challenge to an arbitral award rendered with regard to a dispute relating to supply of equipment for off shore oil exploration by the respondent. The case was heard by M.B Shah and Arun Kumar JJ. The judgment was written by Shah J.
Oil and Natural Gas Commission had placed an order on Saw Pipes for supply of equipment for off shore exploration, to be procured from approved European manufacturers. The delivery was delayed due to general strike of steel mill workers in Europe. Timely delivery was the essence of the contract. ONGC granted extension of time, but it invoked the clause for recovery of Liquidated Damages by withholding the amount from the payment to the supplier. ONGC deducted from the payment $3,04,970.20 and Rs 15,75,557 towards customs duty, sales tax and freight charges. Saw pipes disputed the deduction and matter was referred to arbitration. While the arbitral tribunal rejected Saw Pipe’s defence of force majure, it required ONGC to lead evidence to establish the loss suffered by breach and proceed to hold, in absence of evidence of financial losses, that the deduction of Liquidated damages was wrongful. The award was challenged by ONGC; inter alia as being opposed to public policy ONGC’s case was that the arbitral tribunal failed to decide the dispute by not applying the prevailing substantive law, ignoring the terms of the contract and customary practices of usage of trade in such transactions. ONGC challenged the award as being patently illegal. The single judge and division bench of Bombay High Court dismissed the challenge. The Supreme Court set aside an arbitration award directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages retained by it while making payment to the company.
1) Whether ONGC had the right to Liquidated Damages.
2) Whether Patent illegality could be used as a ground to assail the award under section 34.
Decision Of The Supreme Court
The Hon’ble Court first extensively discussed the court’s jurisdiction to set aside an award under Section 34 of the Arbitration and Concilliation Act 1996 and the various grounds on which interference was permissible.
Passing over to the question of damages, the Hon’ble Court opined that when the words of the contracts are clear, there is nothing that the court can do about it. If the parties had agreed upon a sum as being pre- estimated genuine liquidated damages there was no reason for the tribunal to ask the purchaser to prove his loss.
It further opined that when the court concludes that stipulation for damages is by way of penalty, it can grant reasonable compensation upon proof of damage. However, where an agreement has been executed by experts in the field, the court should be slow to construe a clause providing for liquidated damages as penalty. At paragraph 49, citing Maula Bux v Union of India (the court concludes that this is especially true where the court is unable o assess compensation or such assessment is fraught with difficulties. In such cases the burden of proof would be on party who contends that the stipulation amount is not reasonable. There was no such contention raised in the instant case.
As regards forfeiture, after considering its decision in Union of India v Rampur Distellery the court states the forfeiture clause can be construed either as liquidated damages or as a penalty, depending on the reasonableness of the amount to be forfeited.
Therefore, as regards Liquidated Damages and penalties, the primary conclusion of the court appears to be that Liquidated Damages should be regarded as reasonable compensation, while penalties should not. Further, it also appears to have concluded in case of penalty damages will have to be proved. The Hon’ble Court reaffirms that no compensation at all be awarded if the court concludes that no loss is likely to occur because of the breach.
The 2 errors of great magnitude in this case were:-
While reviewing the merits of the ONGC case the court failed to consider the labour strike in entire European continent, something which was neither under the control nor could be predicted by Saw Pipes. This particular aspect has been overlooked by the court.
The decision of the two judges Bench in ONGC has bypassed the ruling of the three judges Bench of Supreme Court in the Renusagar case. That shows both judicial indiscipline and violation of the binding precedent of a larger Bench. While the Bench in Renusagar case held that the term ‘public policy of India’ was to be interpreted in a narrow sense, the Division Bench went ahead unmindful of the prior precedent and expanded the same to such an extent that arbitral awards could now be reviewed on their merits. This is a huge step backwards in laws relating to alternate dispute resolution in the era of globalization.
Mr Fali. S. Nariman, one of the greatest lawyers of our generation, remarks on the judgments as having ‘virtually set at naught the entire Arbitration and Concillation Act of 1996….To have introduced by judicial innovation – a fresh ground of challenge and placed it under the head of public policy was first contrary to the established doctrine of precedent. The division of 3 judge bench binding on a bench of 2 judges. It was also contrary to the plain intent of the 1996 the new need of finality in alternative method of dispute resolution without court interference.
If courts continue to hold that they have the last word on facts and on law not facts and on law not withstanding consensual agreements to refer matters necessarily involving facts and law to adjudication by arbitration the 1996 Act might as well be scrapped if courts continue to hold that the last words on facts and on law not withstanding consensual agreements to refer matters necessarily involving facts and law to adjudication by arbitration the 1996 Act might as well be scrapped. The division bench of 2 judges of the court has altered the entire road map of arbitration law and put the clock back to where we started under the old 1940 Act.”
Ramification Of This Case :-
The Supreme Court in Saw Pipes confined the expansion of public policy to domestic awards as an earlier larger bench decision of the court in case of Renu Sagar Power Co vs General Electricals had construed narrowly this ground as limited to fundamental policy of Indian Law.
The Saw pipes judgment has come in for sharp criticisms from several quarters . Read literally, the judgment sets the clock back to the old position where an award could be challenged on merit and indeed renders the court as a court of appeal.
Some judicial decisions have tried to reign in this effect of Saw Pipes. One instance of this is the Supreme Court decision in case of Mc Demott International vs. Burn Standard Co Ltd. Where the court somewhat read down Saw Pipes. It held that-
“1996 Act makes provision for supervisory roles of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged. In few circumstances only, like in case of fraud or bias by the arbitrators, violation of natural justices etc. The court can not correct the errors of the arbitrators. It can only quash the award leaving the parties to begin the arbitration again if it is desired. So, the scheme of this provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a consciousness decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”
Commenting on Saw Pipes it held – “We are not unmindful that the decision of this court in ONGC had invited considerable adverse comments but the correctness or otherwise of the said decision is not in question before us. It is only for a larger bench to consider the correctness or otherwise of the said decision the said decision is binding on us and has been followed in many cases.
A few High Courts have also sought to narrowly read Saw Pipes on the ground that a literal construction of the judgment would expand judicial review beyond all limitations contained not only under the 1996 Act but even under the old regime. The High Court decisions have (rightly) held that the judgment of the Supreme Court cannot render naught the entire law on the subject.
The High Court of Bombay in the case of Indian Oil Corp v Langkawi Shipping Ltd held that to accept a literal construction on Saw Pipes:-
Would be to radically alter the statutorily and judicially circumscribed limits to the court’s jurisdiction to interfere with arbitration awards. It would indeed confer a first appellate court’s power on a court exercising jurisdiction under s. 34 of the 1996 Act. There is nothing in the 1996 Act which indicates such an intention as the part of the legislature. That the intention is contrary is clear inter alia, from the Arbitration and Conciliation Bill 1995 which preceded 1996 Act which stated as one of its main objectives the need ‘to minimize the supervising role of courts in Arbitral process…’
In the circumstances, the aforesaid principles laid down consistently by the Supreme Court and the various High Courts can not be said to be longer good law in view of the 1996 Act. Nor can it be said that observation of the Supreme Court in Oil and Natural Gas Corporation v Saw Pipes have expressly or impliedly rendered the aforesaid judgment and the principles contained therein no longer good law in view of the 1996 Act. The principles apply with equal force under the 1996 Act.
The High Court of Guwahati followed the above Bombay High Court decision held:-
The observations of the Apex Court in ONGC v Saw Pipes did not necessarily or impliedly render the ratio decidendi on the issue contained in a plethora of judgments and the laid down principles therein non established. On a due consideration of the entire gamut of the provisions of the Act and the precedential law, we unhesitantly subscribe to the view expressed in the IOC supra. The decision in Saw Pipes, supra, does not depart from the judicially evolved precepts bearing on the authority and jurisdiction of an arbitrator in determining a dispute referred to him, the norms and measures to be applied for assessment of damages and the scope of court’s interference . The above decision does not intend according to our construction, to efface the time tested legal propositions and judicial tenets on arbitration and this ought not to be construed away from the well established trend set by a string of decisions preceding the same.
Position In English Law
It is stated in a standard work that specification of damages by the parties does not exclude the rule that damages for loss are expected to compensate for actual loss suffered. Under the English Law the parties to a contract may determine beforehand the amount of compensation payable in the event of breach. According to English law a sum so fixed may fall in any of the following two categories:-
1) Liquidated Damages, or
If the sum fixed represents a genuine pre- estimate of the probable damage that is likely to result from the breach, it is liquidated damages. A sum less than the amount of probable damage is also regarded as Liquidated Damages. The whole of such sum is recoverable.A well known illustration is Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd . The House of Lords held it to be Liquidated Damages. Lord Dunedin stated the effect of cases in following propositions:
The expression used by the parties is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages.
The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre- estimated of damage.
The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach.
To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful or even conclusive such are:-
It will be held to be a penalty if the sum stipulated for is extravagant and conscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
We shall see that there is considerable doubt as to how far this principle extends to the forfeiture of a sum already paid. But in other situations the question is one of fact in each particular case. The purpose of such clauses is to promote certainty especially in commercial contracts, where the parties are able to protect themselves, the Court is likely to take the view that what the parties have agreed should normally be upheld and to take care not to set too stringent standard which could defeat that purpose for economic advancement of such clauses, including avoiding difficulties of measuring loss and the inability of the penalty rule accurately to identify unfairness.
In the case of consumer contracts for the supply of goods or services, the common law rule has to be embodied in a legislative presumption that a term requiring a consumer who fails to fulfill his obligation to pay a disproportionately high sum in compensation is unfair and not binding.
It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.. This though one of the most ancient instances is truly a corollary to the last tests. Whether it had its historical origin in the doctrine of the common law that when ‘A’ promised to pay ‘B’ a sum of money on a certain day and did not do so, ‘B’ could only recover the sum, with in certain cases, interests, but could never recover further damages for non timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable-
In Kemble v Farren the defendant agreed to perform at the Covent Garden Theatre for 4 seasons at 36 pounds a night. The contract provided that if either party fails to fulfill the agreement or any party thereof, such party should pay to the other a sum of 1000 pounds as liquidated Damages. The defendant refused to perform during the 2nd season.
The obligation to pay 1000 pounds might have arisen upon a failure of pay 36 pounds and was therefore quite obviously a penalty. The most obvious example of this presumption is where a borrower of money promises to pay the lender and additional sum if the money is not repaid by fixed day. Such ‘accelerated payment’ clauses are common in sales by installments and leasing arrangements. However, a distinction is drawn between contracts which accelerate an existing liability to pay on default and those which create or increase the liability to pay. The penalty rules do not apply to the former. The distinction is however open to criticism on the ground that it is commercially unrealistic to hold a debt which can only be recovered by installments over a period is to be equated with one which can be recovered immediately and as permitting the circumvention of this rule of constitution by contractual stipulation for discount if payment is made by a given date. But even when the penalty rules apply, the presumption may be rebutted if the increases is in the circumstances, commercially justifiable and the dominant purpose of the provision is not to deter the borrower from breach. Thus, it has been held that a provision increasing by 1% the interest is chargeable on a loan from time a borrower defaulted reflected the increased credit risk of having such a debtor, and was not therefore a penalty.
There is a presumption (but no more) that it is when a single lump sum is made payable way of compensation, on occurrence of one or more or all of the several events, some of which may occasion serious and others but trifling damage.
A single sum as opposed to a sum proportioned to the seriousness of the breach (for e.g. per week for delay or per item for items sold in breach covenant), is presumed to be a penal because one tests it against the least serious breach possible. The presumption does not apply where the sum is payable for breach of a single obligation which can be broken in a number of ways, for e.g.:- non completion of a building contract. Where it is difficult to estimate the loss and it is therefore uncertain that losses from 1 breach would be greater than those from another, a court may be hold that the presumption is rebutted. It may also be rebutted where it is clear that the contractual provision has sought to average out the probable losses from all the breaches provided, however, that the disparity is not too great.
On the other hand, It is no obstacle to the sum stipulated being a genuine pre- estimate of damage, that the consequences of the breach are sure as to make precise pre estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre estimated damage was the true bargain between the parties.
For example in Dunlop Tyre case itself, the stipulated sum of 5 pounds could only, at the most, be a very rough and ready estimate of the possible damages which might be suffered if a trader under cut the manufacturer’s listed price. In public works contracts, such as those for construction of roads or tunnels, the nature of the loss may be in part be non- financial and therefore be particularly difficult to evaluate, but in Phillips Hong Kong v Attorney General of Hong Kong it was said that a clause using a formula based on estimates of the loss of return on the capital at a daily rate, the effect of the delay on related contracts, and increased costs, was said to be sensible. But these rules are no more than presumptions as to intention of the parties, they may be rebutted by evidence of a contrary intention, appearing from a consideration of the contract as a whole.
The use of words penalty or Liquidated Damages does not necessary mean that a clause is either a penalty or a Liquidated Damages clause. The court will review the clause in light of the circumstances at the time of entering into contract.
However, even in English law a liquidated damages clause will result in plaintiff recovering stipulated sum without being requested to prove damages and irrespective of any actual damage, even when actual damage is demonstrably smaller than the stipulated sum. It is stated in the Chitty that the purpose of fixing a sum is to facilitate recovery of damage without difficulty and expense of proving actual damage or to avoid the risk under compensation where the rules on remoteness of damage might not cover consequential, indirect or idiosyncratic loss or to give the promise an assurance that he may safely rely on the fulfillment of the promise.
A distinction is drawn between contracts which accelerate an existing liability to pay and those which create or increase a liability to pay. The latter are penal, the former are not. In this context its also relevant to consider contracts which provide for forfeiture of amounts already paid. If the sum paid is penal and is unconscionable for the payee to retain the money, equitable relief may be available. However, the genuine pre-establishment of damages test does not apply in these cases. Nonetheless, courts will take in to account whether the sum to be forfeited is much greater than the damage caused by the breach .
English and Indian Law Difference and Common Grounds
Difference between Indian and English Law
The Indian Contract Act, 1872 has certain advantages over the English system. This section dispenses with the necessity of laying down rules for distinguishing Liquidated Damages from penalty. Further, according to English law, the court must either accept the amount in whole or reject it in whole. In India, the court need not reject the amount. It may either accept the amount or reduce it to what appears reasonable. In the Fateh Chand case the Supreme Court observed as follows-“ Section 74 is clearly an attempt to eliminate the somewhat elaborate refinements made under the English Common Law in distinguishing between stipulations for payment of Liquidated Damages and stipulation in the nature of penalty……The Indian Legislature sought to cut across the web of rules and presumption under the English Common Law by enacting a uniform principle applicable to all stipulations naming the amount to be paid in case of breach and stipulations by way of penalty.”
Similarities between Indian and English Law
The distinction between Liquidated Damages and Penalty is not altogether irrelevant to the section. Its relevance, the first place, arises from the fact that the amount contemplated by the parties will be reduced only if it appears to be by way of penalty. Otherwise the whole of it is recoverable as Liquidated Damages. Secondly. The explanation to the section uses the word ‘penalty’. It provides that “ a stipulation for increased interest from the date of default may be a stipulation by way of penalty” where, for instance, money is borrowed at 12% interest payable six monthly, and the agreement provides that in case of default and interest of 75% shall be payable. This is a stipulation by way of penalty.
Fallouts of the ONGC v Saw Pipes case – An Analysis
Definition Of Liquidated Damages
An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.
If the parties to a contract have properly agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.
. It basically means damages whose parties designate during the formation of a contract for the injured party to collect as compensation upon specific breach.
Liquidated Damages Clause
It is a contractual provision that determines in advance the measure of damages if a party breaches the agreement. Traditionally, courts have held such a clause unless the agreed on sum is deemed a penalty for one of the following reasons:-
The sum grossly exceeds the probable damages on breach.
# The same sum is made payable for any variety of different breaches(some major, some minor).
# A mere delay in payment has been listed among the events of default.
Liquidated Damages under Indian Law
Liquidated damages in Indian Law have been stated under the Indian Contract Act, 1872 section 74. The rule laid down under section 74 is as follows:-
Section 74 states that:-
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if in contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
As per s.74 of Indian Contract Act, 1872 irrespective of whether the stipulation is by way of liquidated damages or penalty, the court is entitled to award reasonable compensation, not exceeding the amount named in the contract.
The Hon’ble Supreme Court has held that if the parties regard a sum as reasonable, the court should not reduce its discretion. Where the clause is one for liquidated damages, there is no question of ascertaining such damages and such a clause excludes the right to claim unascertained damages. A stipulation for payment of 1.5% per day on the value of goods in case of delay has been held to be a penalty however, additional charge of 1% per month in case on payment of bills was held not to be a penalty.
Reversal of Burden Of proof
The concept of Liquidated Damages is that the parties agree to a pre-estimated genuine amount to be recovered in case of breach of contract. This principle of pre-estimation is clearly contrary to the requirement of quantification of loss and damages.
Sections 73 and 74 of the Indian Contract Act, which deals with breach of contract and consequent compensation, has to be read in this context. Section 73 provides that a person who suffers from breach of contract is entitled to receive compensation for any loss arising from the breach. However, the parties are free to agree for payment in case of anticipation of a particular loss arising from a given breach
In the aforesaid case of Oil and Natural Gas Corporation v Saw Pipes although the delay on the part of Saw Pipes was due to unforeseeable labor strike in Europe but as per the contract timely delivery was the essence of the contract. Therefore, as agreed upon by both the parties at the time of signing of the contract ONGC had the right to recover Liquidated Damages due to delay on the part of the supplier.
The Tribunal required ONGC to prove damages incurred in order to recover Liquidated Damages by virtue of which it had deducted from the payment to Saw Pipes $ 3,04,970.20 and Rs 15.76 lakhs towards customs duty, sales tax and freight charges.
· Section 74 of the Indian Contract Act, 1872 clearly states that –“ When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if contract contains any other stipulation by way of penalty, the party complaining of breach is entitled, whether or not actual damage or loss is proven to have been caused thereby, to receive from the party who has broken the contract compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”
· The section specifies that “the party complaining of breach is entitled, whether or not damage or loss is proven to have been caused thereby” therefore the arbitral tribunal demanding that ONGC would have to prove its damages before claiming Liquidated Damages again is against the language of the section and rejecting claim to Liquidated Damages on the grounds of having to prove damages incurred by the company is erroneous.
· Section 13 (5) of the Act provides that when the tribunal overrules a challenge and proceeds with the arbitration, the party challenging the arbitrator may make an application for setting aside the arbitral awards under section 34 of the Act. Section 34 (2) of the act has laid down the conditions when the case is referred to the court and they are as follows :-
The party making the application furnishes proof that :-
# Party was under some incapacity.
# 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
# The party making the application was not given proper notice of the appointment of an arbitrator of the arbitral proceedings or was otherwise unable to present his case ; or
# The arbitral award deals with a dispute not contemplated by not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, or it contains decisions on matters beyond the scope of 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 in matters not submitted to arbitration may be set aside; or
# 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 party from which the parties can not derogate or failing such agreement, was not in accordance with this part.
The Court finds that :-
v The subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
v The arbitral award is in conflict with the public policy in India. Explanation – without prejudice to the generality of sub- clause (ii) it is hereby declared, for the avoidance of if any doubt that an award is in conflict with public policy of India. If the making of the award was induced or affected by fraud or corruption.
The limited grounds of challenge provided for under Section 34 are universally recognized. It is well accepted the courts have no power to get into the merits of the dispute. In this case the award was challenged on the ground that the arbitral tribunal had incorrectly applied the law of the land in rejecting a claim for Liquidated Damages.
Patent Illegality used as a ground to assail the award under section 34
The court held that the jurisdiction or the power of the arbitral tribunal is prescribed under the Act and if the award is de hors the said provisions, it would be, on the face of it, illegal. The legislative intent could not be that if that the award is in contravention of the provision of the Act, however, the court could still not set it aside. The decision of the tribunal must be within bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the tribunal can not act in breach of some provisions of substantive law or the provisions of the Act. If the tribunal has not followed the mandatory provisions of 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 Hon’ble Court interpreted patent illegality as meaning any violation of the substantive law in force in India, or as an award opposing the terms of the contract. It also laid down guidelines to determine ‘reasonable compensation’ with reference to Section 74 of the Indian Contract Act. The article also highlights the shift in the interpretation of public policy from the Renusagar to the Saw Pipes case. In the former, the narrow view of public policy was adopted, requiring something more than the violation of the law. The wider connotation adopted in the latter, might, however, flood the courts with challenges to awards suffering from negligible legal defects. The in definability of the ‘public policy’ concept makes it all the more likely to be misused.
Concept of Public Policy Expanded
The Arbitration and Conciliation Act 1996, was conceived by the compulsions of globalization leading to adoption of the United Nation Commissions on International Trade Law (UNCTRAL) model law. This Act is by and large an integrated version of the 1940 Act which governed domestic arbitration, The Arbitration (protocol and convention) Act, 1937 and the foreign award (recognition and enforcement) Act, 1961 which governed into arbitral awards. Apparently chapter I – VIII of the UNCTRAL are replicas of Chapter I – VII of the Part I of the 1996 Act, with the difference that in UNCTRAL the provisions are called ‘Article’ whereas under the act they are called ‘section’. The main objectives set out in the statement of objects and reasons of 1996 Act are- “to minimize the supervisory role of courts in arbitral process and “ to provide that every final arbitral award is enforced in the same manner as if it were a decree of the court”
Public Policy is that principle of law which holds that no subject can do, which has a tendency to be injurious to the public or against the public good, which may be termed as it sometimes has been policy of the law or public policy in relation to administration of the law. Public Policy connotes some matter which concerns public good and public interest. The concept of Public Policy varies from time to time.
The judgment expanded the concept of Public Policy to add that the award would be contrary to public policy if it is “patently illegal”. An earlier Supreme Court decision of a three judge (larger bench) bench, in the case of Renu Sagar Power Co v General Electrical Corporation had construed the ground of public policy narrowly as confined to the “fundamental policy of Indian Law or the interest of India or justice or morality.” This was a clear violation of doctrine of precedents i. e the Supreme court bench of 2 judges did not
follow the decision of the 3 judges bench of Renu Sagar case and foreign arbitration was given as a reason..
Defence Of Saw Pipes – A valid one.
In this case Saw pipes gave the defence of force majure which was acceptable but the arbitral Tribunal rejected this defence.
The Force Majeure clause in a contract excuses a party from not performing its contractual obligations due to unforeseen events beyond its control. These events include natural disasters such as floods, earthquakes, and other "acts of God," as well as uncontrollable events such as war and terrorist attacks. Force Majeure clauses are meant to excuse a party provided the failure to perform could not be avoided by the exercise of due diligence and care. However, it does not cover failures resulting from a party's financial condition or negligence.
Force Majeure literally means "greater force." When used in a contract, the Force Majeure clause is one of several boilerplate clauses, which are clauses normally written using standard, universal language. The intention of the Force Majeure clause is to excuse liability of a party because of uncontrollable outside events. It generally includes:-
Human events, such as wars, riots, or other major upheavals, floods, earthquake etc.
Performance failures outside the control of the contracting party, such as disruptions in telephone service attributable to the telephone company; labor disputes other than those of the contractual parties; government restrictions (denial or cancellation of a necessary license); or supplier problems (product unavailable).
Generally, the events that the Force Majeure clause does not cover include:
# Computer failures
# Software glitches
# Distributor troubles
# Internal labor disputes
# Credit problems
The arbitral tribunal rejecting this defence was erroneous in a way because it neglected the overall labour strike in European continent which was completely unforeseeable by Saw Pipes and the company definitely did not have any control over the strike therefore it was quite an acceptable defence. The Arbitral Tribunal made an error in rejecting it
Failure of the purpose of Arbitration and Conciliation Act
· The Arbitrary and Conciliation Act, 1996 gave its statement of objective –“ to minimize the supervise role of contracts in the arbitral process and to provide that every final arbitral award is enforceable in same manner as it were a decree of the court”
The main intent of this act was speedy justice to the parties of a contract and to prevent any further delay in such cases. If these cases would be heard in the court then it would involve lots of formalities which would give rise to delays and many cases would remain pending and the Indian legal system is riddled with delays and much has been written on this subject. There are almost 3.4 million cases pending between the 21 High Courts of India out of which 0.65 million have been pending for over 10 years. Over 23 million other cases are pending in other courts. There are only 10.5 judges per million persons in India and the corresponding figures in United Kingdom is 50.9, Australia 57.7, Canada 75.2 and United States 107.
In light of the above mentioned legal conditions in India this Act was introduced however, the intervention of court in this case is contrary to the intent of the 1996 Act and spirit of law. In this case the purpose of establishing Arbitration Tribunals for fast settlement of cases is defeated and as an exemplary case most of the companies prefer to have the venue of Arbitration outside India because in India it is vulnerable to judicial review..
Parliamentary Arbitration and Concilliation (Amendment) Bill, 2003
In light of the criticisms (as mentioned above) the Legislature has introduced in the parliament Arbitration and Conciliation (amendment) Bill, 2003 in order to clarify that public policy does not have extended meaning as given by the Supreme Court in ONGC v Saw Pipes. To remove doubts, the bill provides an explanation to the words contrary to public policy in section 34 to mean contrary to :-
i) Fundamental Policy of India
ii) Interests of India or,
iii) Justice and morality, thus retaining the meaning given by Supreme Court in Renusagar Power Co Ltd v General Electrical Co.
This can be seen as a positive step in Arbitration law of India for future cases. This Bill was withdrawn later but again in 2007 it was brought up and its implementation is yet to be done
# ONGC v Saw Pipes Ltd AIR 2003 SC 2629
# Maula bux v Union of India , AIR 1970, SC 1955
# Union of India v Rampur Distellery, AIR 1973, SC 1098
# Renusagar Power Plant Ltd v Gen Electric Co., AIR 1994 SC 860
# From transcript of speech delivered by Mr. F. S. Nariman at the inaugural session of “Legal Reforms in Infrastructure”, New Delhi, 2 May, 2003 – quoted in Kachwaha, Sumeet, ‘The Indian Arbitration Law : Towards a New Jurisprudence’, Int. A.L.R. 2007, 10(1), 13-17
# 1994 SCC (1) SCC 644
# For instance chapter entitled Judicial Supervision and intervention by Mr Fali S. Nariman in Asia’s leading arbitrator’s guide to international arbitration Juris net, LLC 2007 at page 353
# 2006(11) SCC 181 at 208
# Arbitration and Concillation Act 1996
# 2004(3) Arb LR 568
# Cellulose Acetate Silk Co v Widnes Foundry (1925) Ltd, (1933) AC 20
# (1915) AC 79 : (1914-15) All ER Rep 739, HL
# Clydebank Engineering & Shipbuilding Co v Don Jose Ramos Yzquierdoy Castaneda, (1905) AC 6.
# Public Works commission v Hills (1906) AC 368 and Webster v Bosanquet (1912) AC 394
# Illustration by Lord Halsbury in Cydebank Case (1905) AC 6
# Phillips Hong Kong Ltd v Att Gen of Hong Kong (1993) 61 Build L.R 41 (PC)
# Kemble v Farren 6 Bing 141
# (1829) 6 Bing. 141
# Protector Loan Co v Grice (1880) 5 Q B.D
# Lord Watson in Lord Elphinstone v Monkland Iron and Coal and co 11 App Cas 332
# Law v Local board of Red Ditch (1892) Q.B 127
# (1993) 61 Build L.R 41 (P.C)
# Fateh Chand v Balkrishna Das, AIR 1963, SC 1405
# Mallavarapu v buddaraju, AIR 1982, Ker 281
# Black’s Law Dictionary 395, 8th edition
# Vikrant Tyres Ltd v Export Foreign Trade Co Ltd, 2005(3) RAJ 612 (Ker)
# Para 4(v) and (vii) of the statements of objects and reasons of the Arbitration and Conciliation Act, 1996
# Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly, AIR 1986 S.C 1571
# Figures published by the Ministry of Law in Parliament
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