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CASE NO.:

Appeal (civil) 7419 2001

of 518

PETITIONER:

Oil & Natural Gas Corporation Ltd.

RESPONDENT:

SAW Pipes Ltd.

DATE OF JUDGMENT: 17/04/2003

BENCH:

M.B. SHAH & ARUN KUMAR.

JUDGMENT:

J U D G M E N T

Shah, J.

COURT'S JURISDICTION UNDER SECTION 34 OF THE

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

Sections 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 arbitral award -

(1) 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

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that-

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under

the law to which the parties have subjected it

or, failing any indication thereon, under the

law for the time being in force; or

(iii) the party making the application was not

given proper notice of the appointment of an

arbitrator or of the arbitral proceedings or

was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not

contemplated by or not falling within the

terms of the submission to arbitration, or it

contains decisions on matters beyond the

scope of the submission to arbitration;

Provided that, if the decisions on matters submitted

to arbitration can be separated from those not so

submitted, only that part of the arbitral award which

contains decisions on matters not submitted to arbitration

may be set aside; or

(v) the composition of the arbitral tribunal or

the arbitral procedure was not in

accordance with the agreement of the

parties, unless such agreement was in

conflict with a provision of this Part from

which the parties cannot derogate, or, failing

such agreement, was not in accordance with

this Part; or

(b) the court finds that-

(i) the subject-matter of the dispute is not

capable of settlement by arbitration under

the law for the time being in force, or

(ii) the arbitral award is in conflict with the

public policy of India.

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 fraud 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 sub-section 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 term

'Arbitral Procedure'.

'ARBITRAL PROCEDURE'

The ingredients of clause (v) are as under:-

1) The Court may set aside the award:-

(i) (a) if the composition of the arbitral

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Tribunal was not in accordance with

the agreement of the parties,

(b) failing such agreement, the

composition of the arbitral tribunal

was not in accordance with Part-I of

the Act.

(ii) if the arbitral procedure was not in

accordance with:-

a) the agreement of the parties, or

b) failing such agreement, the arbitral

procedure was not in accordance with

Part-I of the Act.

However, exception for setting aside the award on the ground

of composition of arbitral tribunal or illegality of arbitral procedure is

that the agreement should not be in conflict with the provisions of

Part-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. Sections 2 to 43. At the same

time, agreement for composition of arbitral 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 of Civil Procedure, 1908 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 materiality and weight of any evidence.

Sections 20, 21 and 22 deal with place of arbitration, commencement

of arbitral proceedings and language respectively. Thereafter,

Sections 23, 24 and 25 deal with statements of claim 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- (1) 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

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advance notice of any 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 of arbitral award and

termination of proceedings. Relevant Sections which require

consideration are Sections 28 and 31. Sections 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 for 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 parties as

applicable to the substance of the

dispute;

(ii) 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;

(iii) 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

bono 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 of arbitral award- (1) An

arbitral award shall be made in writing and shall be

signed by the members of the arbitral tribunal.

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(2) For the purposes of sub-section (1), 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

terms under section 30.

(4) The arbitral award shall state its date and the

place of arbitration as determined in accordance with

section 20 and the award shall be deemed to have been

made at that place.

(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 of the 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,-

(i) 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

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(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 People 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 respect 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 de 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

provisions of the Act.

The question, therefore, which requires consideration is -

whether the award could be set aside, if the arbitral tribunal has not

followed the mandatory procedure prescribed under Sections 24, 28 or

31(3), which affects the rights of the parties? Under sub-section (1)(a)

of Section 28 there is a mandate to the arbitral tribunal to decide the

dispute in accordance with the substantive law for 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 tribunal 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

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arbitral tribunal has not followed the mandatory procedure prescribed

under the Act, it would mean that it has acted beyond its jurisdiction

and thereby the award would be patently illegal which could be set

aside under Section 34.

The aforesaid interpretation of the clause (v) would be in

conformity with the settled principle of law that the procedural law

cannot fail to provide relief when substantive law gives the right.

Principle is - there cannot be any wrong without a remedy. In M.V.

Elisabeth and others v. Harwan Investment & Trading Pvt. Ltd.

[1993 Supp. (2) SCC 433] this Court observed that where substantive

law demands justice for the party aggrieved and the statute has not

provided the remedy, it is the duty of the Court to devise procedure by

drawing analogy from other systems of law and practice. Similarly, in

Dhanna Lal v. Kalawatibai and others [(2002) 6 SCC 16] this Court

observed that wrong must not be left unredeemed and right not left

unenforced.

Result is - if the award is contrary to the substantive

provisions of law or the provisions of the Act or against the terms of

the contract, it would be patently illegal, which could be interfered

under Section 34. However, such failure of procedure should be

patent affecting the rights of the parties.

WHAT MEANING COULD BE ASSIGNED TO THE PHRASE

'PUBLIC POLICY OF INDIA'?

The next clause which requires interpretation is clause (ii) of

sub-section 2(b) of Section 34 which inter alia provides that the Court

may set aside arbitral award if it is in conflict with the 'Public Policy

of India'. The phrase 'Public Policy of India' is not defined under the

Act. Hence, the said term is required 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 and

principles underlying the Arbitration Act, Contract Act and

Constitutional provisions.

For this purpose, we would refer to few decisions referred to by

the learned counsel for the parties. While dealing with the concept of

'public policy, this Court in Central Inland Water Transport

Corporation Limited and another v. Brojo Nath Ganguly and

another [(1986) 3 SCC 156] has observed thus: -

"92. The Indian Contract Act does not define the

expression "public policy" or "opposed to public policy".

From the very nature of things, the expressions "public

policy", "opposed to public policy", or "contrary to

public policy" are incapable of precise definition. Public

policy, however, is not the policy of a particular

government. It connotes some matter which concerns the

public good and the public interest. The concept of what

is for the public good or in the public interest or what

would be injurious or harmful to the public good or the

public interest has varied from time to time. As new

concepts take the place of old, transactions which were

once considered against public policy are now being

upheld by the courts and similarly where there has been a

well recognized head of public policy, the courts have

not shirked from extending it to the new transactions and

changed circumstances and have at times not even

flinched from inventing a new head of public policy.

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There are two schools of thought- "the narrow view"

school and "the broad view" school. According to the

former, courts cannot create new heads of public policy

whereas the latter countenances judicial law-making in

this area. The adherents of "the narrow view" school

would not invalidate a contract on the ground of public

policy unless that particular ground had been well-

established by authorities. Hardly ever has the voice of

the timorous spoken more clearly and loudly than in

these words of Lord Davey in Janson v. Driefontein

Consolidated Gold Mines Ltd. [(1902) AC 484, 500] :

"Public Policy is always an unsafe and treacherous

ground for legal decision". That was in the year 1902.

Seventy-eight years earlier, Burrough, J., in Richardson

v. Mellish [(1824) 2 Bing 229, 252] described public

policy as "a very unruly horse, and when once you get

astride it you never know where it will carry you." The

Master of the Rolls, Lord Denning, however, was not a

man to shy away from unmanageable horses and in

words which conjure up before our eyes the picture of the

young Alexander the Great taming Bucephalus, he said in

Enderby Town Football Club Ltd. v. Football Assn. Ltd.

[(1971) Ch. 591, 606]; "With a good man in the saddle,

the unruly horse can be kept in control. It can jump over

obstacles". Had the timorous always held the field, not

only the doctrine of public policy but even the Common

Law or the principles of Equity would never have

evolved. Sir William Holdsworth in his "History of

English Law", Volume III, page 55, has said:

In fact, a body of law like the

common law, which has grown up gradually

with the growth of the nation, necessarily

acquires some fixed principles, and if it is to

maintain these principles it must be able, on

the ground of public policy or some other

like ground, to suppress practices which,

under ever new disguises, seek to weaken or

negative them.

It is thus clear that the principles governing public

policy must be and are capable, on proper occasion, of

expansion or modification. Practices which were

considered perfectly normal at one time have today

become obnoxious and oppressive to public conscience.

If there is no head of public policy which covers a case,

then the court must in consonance with public conscience

and in keeping with public good and public interest

declare such practice to be opposed to public policy.

Above all, in deciding any case which may not be

covered by authority our courts have before them the

beacon light of the Preamble to the Constitution.

Lacking precedent, the court can always be guided by

that light and the principles underlying the Fundamental

Rights and the Directive Principles enshrined in our

Constitution.

93. The normal rule of Common Law has been

that a party who seeks to enforce an agreement which is

opposed to public policy will be non-suited. The case of

A. Schroeder Music Public Co. Ltd. v. Macaulay [(1974)

1 WLR 1308], however, establishes that where a contract

is vitiated as being contrary to public policy, the party

adversely affected by it can sue to have it declared void.

The case may be different where the purpose of the

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contract is illegal or immoral. In Kedar Nath Motani v.

Prahlad Rai [(1960) 1 SCR 861], reversing the High

Court and restoring the decree passed by the trial court

declaring the appellants' title to the lands in suit and

directing the respondents who were the appellants'

benamidars to restore possession, this Court, after

discussing the English and Indian law on the subject, said

(at page 873):

The correct position in law, in our

opinion, is that what one has to see is

whether the illegality goes so much to the

root of the matter that the plaintiff cannot

bring his action without relying upon the

illegal transaction into which he had entered.

If the illegality be trivial or venial, as stated

by Williston and the plaintiff is not required

to rest his case upon that illegality, then

public policy demands that the defendant

should not be allowed to take advantage of

the position. A strict view, of course, must

be taken of the plaintiff's conduct, and he

should not be allowed to circumvent the

illegality by resorting to some subterfuge or

by misstating the facts. If, however, the

matter is clear and the illegality is not

required to be pleaded or proved as part of

the cause of action and the plaintiff recanted

before the illegal purpose was achieved,

then, unless it be of such a gross nature as to

outrage the conscience of the court, the plea

of the defendant should not prevail.

The types of contracts to which the principle formulated

by us above applies are not contracts which are tainted

with illegality but are contracts which contain terms

which are so unfair and unreasonable that they shock the

conscience of the court. They are opposed to public

policy and require to be adjudged void."

Further, in Renusagar Power Co. Ltd. v. General Electric Co.

[1994 Supp. (1) SCC 644], this Court considered Section 7(1) of the

Arbitration (Protocol and Convention) Act, 1937 which inter alia

provided that a foreign award may not be enforced under the said Act,

if the Court dealing with the case is satisfied that the enforcement of

the award will be contrary to the Public Policy. After elaborate

discussion, the Court arrived at the conclusion that Public Policy

comprehended in Section 7(1)(b)(ii) of the Foreign Awards

(Recognition and Enforcement) Act, 1961 is the 'Public Policy of

India' and does not cover the public policy of any other country. For

giving meaning to the term 'Public Policy', the Court observed

thus:-

"66. Article V(2)(b) of the New York Convention of

1958 and Section 7(1)(b)(ii) of the Foreign Awards Act

do not postulate refusal of recognition and enforcement

of a foreign award on the ground that it is contrary to the

law of the country of enforcement and the ground of

challenge is confined to the recognition and enforcement

being contrary to the public policy of the country in

which the award is set to be enforced. There is nothing

to indicate that the expression "public policy" in Article

V(2)(b) of the New York Convention and Section

7(1)(b)(ii) of the Foreign Awards Act is not used in the

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same sense in which it was used in Article I(c) of the

Geneva Convention of 1927 and Section 7(1) of the

Protocol and Convention Act of 1937. This would mean

that "public policy" in Section 7(1)(b)(ii) has been used

in a narrower sense and in order to attract to bar of

public policy the enforcement of the award must invoke

something more than the violation of the law of India.

Since the Foreign Awards Act is concerned with

recognition and enforcement of foreign awards which are

governed by the principles of private international law,

the expression "public policy" in Section 7(1)(b)(ii) of

the Foreign Awards Act must necessarily be construed in

the sense the doctrine of public policy is applied in the

field of private international law. Applying the said

criteria it must be held that the enforcement of a

foreign award would be refused on the ground that it is

contrary to public policy if such enforcement would be

contrary to (i) fundamental policy of Indian law; or (ii)

the interests of India; or (iii) justice or morality."

The Court finally held that:-

"76. Keeping in view the aforesaid objects underlying

FERA and the principles governing enforcement of

exchange control laws followed in other countries, we are

of the view that the provisions contained in FERA have

been enacted to safeguard the economic interests of India

and any violation of the said provisions would be

contrary to the public policy of India as envisaged in

Section 7(1)(b)(ii) of the Act."

This Court in Murlidhar Agarwal and another v. State of U.P.

and others [1974 (2) SCC 472] while dealing with the concept of

'public policy' observed thus:-

"31. Public policy does not remain static in any

given community. It may vary from generation to

generation and even in the same generation. Public

policy would be almost useless if it were to remain in

fixed moulds for all time.

32. ... The difficulty of discovering what public

policy is at any given moment certainly does not absolve

the Judges from the duty of doing so. In conducting an

enquiry, as already stated, Judges are not hide-bound by

precedent. The Judges must look beyond the narrow

field of past precedents, though this still leaves open the

question, in which direction they must cast their gaze.

The Judges are to base their decision on the opinions of

men of the world, as distinguished from opinions based

on legal learning. In other words, the Judges will have to

look beyond the jurisprudence and that in so doing, they

must consult not their own personal standards or

predilections but those of the dominant opinion at a given

moment, or what has been termed customary morality.

The Judges must consider the social consequences of the

rule propounded, especially in the light of the factual

evidence available as to its probable results. .... The

point is rather that this power must be lodged somewhere

and under our Constitution and laws, it has been lodged

in the Judges and if they have to fulfil their function as

Judges, it could hardly be lodged elsewhere."

Mr. Desai submitted that the narrow meaning given to the term

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'public policy' in Renusagar's case is in context of the fact that the

question involved in the said matter was with regard to the execution

of the award which had attained finality. It was not a case where

validity of the Award is challenged before a forum prescribed under

the Act. He submitted that the scheme of Section 34 which deals with

setting aside the domestic arbitral award and Section 48 which deals

with enforcement of foreign award are not identical. A foreign award

by definition is subject to double exequatur. This is recognized inter

alia by Section 48 (1) and there is no parallel provision to this clause

in Section 34. For this, he referred to Lord Mustill & Stewart C.

Boyd QC's "Commercial Arbitration" 2001 wherein [at page 90] it is

stated as under:-

"Mutual recognition of awards is the glue which

holds the international arbitrating community together,

and this will only be strong if the enforcing court is

willing to trust, as the convention assumes that they will

trust, the supervising authorities of the chosen venue. It

follows that if, and to the extent that the award has been

struck down in the local court it should be a matter of

theory and practice be treated when enforcement is

sought as if to the extent it did not exist."

He further submitted that in foreign arbitration, the award

would be subject to being set aside or suspended by the competent

authority under the relevant law of that country whereas in the

domestic arbitration the only recourse is to Section 34.

The aforesaid submission of the learned senior counsel requires

to be accepted. From the judgments discussed above, it can be held

that 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, wider meaning is required to be given so

that the 'patently illegal award' passed by the arbitral tribunal could

be set aside. If narrow meaning as contended by the learned senior

counsel Mr. Dave is given, some of the provisions of the Arbitration

Act would become nugatory. Take for illustration a case wherein

there is a specific provision in the contract that for delayed payment of

the amount due and payable, no interest would be payable, still

however, if the Arbitrator has passed an award granting interest, it

would be against the terms of the contract and thereby against the

provision of Section 28(3) of the Act which specifically provides that

"arbitral tribunal shall decide in accordance with the terms of the

contract". Further, where there is a specific usage of the trade that if

the payment is made beyond a period of one month, then the party

would be required to pay the said amount with interest at the rate of

15 per cent. Despite the evidence being produced on record for such

usage, if the arbitrator refuses to grant such interest on the ground of

equity, such award would also be in violation of sub-sections (2) and

(3) of Section 28. Section 28(2) specifically provides that arbitrator

shall decide ex aequo et bono [according to what is just and good]

only if the parties have expressly authorised him to do so. Similarly,

if the award is patently against the statutory provisions of substantive

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law which is in force in India or is passed without giving an

opportunity of hearing to the parties as provided under Section 24 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 all such cases, the award is required to be set aside on

the ground of 'patent illegality'.

The learned senior counsel Mr. Dave submitted that the

Parliament has not made much change while adopting Article 34 of

UNCITRAL Model Law by not providing error of law as a ground of

challenge to the arbitral award under Section 34 of the Act. For this

purpose, he referred to Sections 68, 69 and 70 of the Arbitration Act,

1996 applicable in England and submitted that if the legislature

wanted to give a wider jurisdiction to the Court, it would have done so

by adopting similar provisions.

Section 68 of the law applicable in England provides that the

award can be challenged on the ground of serious irregularities

mentioned therein. Section 68 reads thus: -

"68. Challenging the award: serious irregularity-

(1) A party to arbitral proceedings may (upon notice to

the other parties and to the tribunal) apply to the court

challenging an award in the proceedings on the ground of

serious irregularity affecting the tribunal, the proceedings

or the award.

A party may lose the right to object (see Section 73) and

the right to apply is subject to the restrictions in section

70(2) and (3).

(2) Serious irregularity means an irregularity of one or

more of the following kinds which the court considers

has caused or will cause substantial injustice to the

applicant-

(a) failure by the tribunal to comply with

section 33 (general duty of tribunal);

(b) the tribunal exceeding its powers (otherwise

than by exceeding its substantive

jurisdiction: see section 67);

(c) failure by the tribunal to conduct the

proceedings in accordance with the

procedure agreed by the parties;

(d) failure by the tribunal to deal with all the

issues that were put to it;

(e) any arbitral or other institution or person

vested by the parties with powers in relation

to the proceedings or the award exceeding

its powers;

(f) uncertainty or ambiguity as to the effect of

the award;

(g) the award being obtained by fraud or the

award or the way in which it was procured

being contrary to public policy;

(h) failure to comply with the requirement as to

the form of the award; or

(i) any irregularity in the conduct of the

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proceedings or in the award which is

admitted by the tribunal or by any arbitral or

other institution or person vested by the

parties with powers in relation to the

proceedings or the award.

(3) If there is shown to be serious irregularity affecting

the tribunal, the proceedings or the award, the court

may-

(a) remit the award to the tribunal, in whole or

in part, for reconsideration;

(b) set the award aside in whole or in part, or

(c) declare the award to be of no effect, in

whole or in part.

The Court shall not exercise its power to set aside or to

declare an award to be of no effect, in whole or in part,

unless it is satisfied that it would be inappropriate to

remit the matters in question to the tribunal for

reconsideration.

(4) The leave of the Court is required for any appeal

from a decision of the court under this section."

Similarly, Section 69 provides that appeal on point of law

would be maintainable and the procedure thereof is also provided.

Section 70 provides supplementary provisions.

It is true that Legislature has not incorporated exhaustive

grounds for challenging the award passed by the arbitral tribunal or

the ground on which appeal against the order of the Court would be

maintainable.

On this aspect, eminent Jurist & Senior Advocate Late Mr.

Nani Palkhivala while giving his opinion to 'Law of Arbitration and

Conciliation' by Justice Dr. B.P. Saraf and Justice S.M.

Jhunjhunuwala, noted thus:-

"I am extremely impressed by your analytical

approach in dealing with the complex subject of

arbitration which is emerging rapidly as an alternate

mechanism for resolution of commercial disputes. The

new arbitration law has been brought in parity with

statutes in other countries, though I wish that the Indian

law had a provision similar to section 68 of the English

Arbitration Act, 1996 which gives power to the Court to

correct errors of law in the award.

I welcome your view on the need for giving the

doctrine of "public policy" its full amplitude. I

particularly endorse your comment that Courts of law

may intervene to permit challenge to an arbitral award

which is based on an irregularity of a kind which has

caused substantial injustice.

If the arbitral tribunal does not dispense justice, it

cannot truly be reflective of an alternate dispute

resolution mechanism. Hence, if the award has resulted

in an injustice, a Court would be well within its right in

upholding the challenge to the award on the ground

that it is in conflict with the public policy of India."

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From this discussion it would be clear that the phrase 'public

policy of India' is not required to be given a narrower meaning. As

stated earlier, the said term is susceptible of narrower or wider

meaning depending upon the object and purpose of the legislation.

Hence, the award which is passed in contravention of Sections 24, 28

or 31 could be set aside. In addition to Section 34, Section 13(5) of

the Act also provides that constitution of the arbitral tribunal could

also be challenged by a party. Similarly, Section 16 provides that a

party aggrieved by the decision of the arbitral tribunal with regard to

its jurisdiction could challenge such arbitral award under Section 34.

In any case, it is for the Parliament to provide for limited or wider

jurisdiction to the Court in case where award is challenged. But in

such cases, there is no reason to give narrower meaning to the term

'public policy of India' as contended by learned senior counsel Mr.

Dave. In our view, wider meaning is required to be given so as to

prevent frustration of legislation and justice. This Court in Rattan

Chand Hira Chand v. Askar Nawaz Jung (Dead) By LRs and others

[(1991) 3 SCC 67], this Court observed thus:-

"17. .. It cannot be disputed that a contract which

has a tendency to injure public interests or public

welfare is one against public policy. What constitutes

an injury to public interests or welfare would depend

upon the times and climes. ... The legislature often fails

to keep pace with the changing needs and values nor as

it realistic to expect that it will have provided for all

contingencies and eventualities. It is, therefore, not only

necessary but obligatory on the courts to step in to fill

the lacuna. When courts perform this function

undoubtedly they legislate judicially. But that is a kind

of legislation which stands implicitly delegated to them

to further the object of the legislation and to promote the

goals of the society. Or to put it negatively, to prevent

the frustration of the legislation or perversion of the

goals and values of the society."

Learned senior counsel Mr. Dave submitted that the purpose of

giving limited jurisdiction to the Court is obvious and is to see that the

disputes are resolved at the earliest by giving finality to the award

passed by the forum chosen by the parties. As against this, learned

senior counsel Mr. Desai submitted that in the present system even the

arbitral proceedings are delayed on one or the other ground including

the ground that the arbitrator is not free and the matters are not

disposed of for months together. He submitted that the legislature has

not provided any time limit for passing of the award and this indicates

that the contention raised by the learned counsel for the respondent

has no bearing in interpreting Section 34.

It is true that under the Act, there is no provision similar to

Sections 23 and 28 of the Arbitration Act, 1940, which specifically

provided that the arbitrator shall pass award within reasonable time as

fixed by the Court. It is also true that on occasions, arbitration

proceedings are delayed for one or other reason, but it is for the

parties to take appropriate action of selecting proper arbitrator(s) who

could dispose of the matter within reasonable time fixed by them. It is

for them to indicate the time limit for disposal of the arbitral

proceedings. It is for them to decide whether they should continue

with the arbitrator(s) who cannot dispose of the matter within

reasonable time. 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 cannot be sacrificed. In our

view, giving limited jurisdiction to the Court for having finality to the

award and resolving the dispute by speedier method would be much

more frustrated by permitting patently illegal award to operate.

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Patently illegal award is required to be set at naught, otherwise it

would promote injustice.

Therefore, in our view, the phrase 'Public Policy of India' used

in Section 34 in context is required to be given a wider meaning. It

can be stated that the concept of public policy connotes some matter

which concerns public good and the public interest. What is for

public good or in public interest or what would be injurious or

harmful to the public good or public interest has varied from time to

time. However, the award which is, on the face of it, patently in

violation of statutory provisions cannot be said to be in public interest.

Such award/judgment/decision is likely to adversely affect the

administration of justice. Hence, in our view in addition to narrower

meaning given to the term 'public policy' in Renusagar's case

(supra), it is required to be held that the award could be set aside if it

is patently illegal. Result would be - award could be set aside if it is

contrary to: -

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of

trivial nature it cannot be held that award is against the public policy.

Award could also be set aside if it is so unfair and unreasonable that it

shocks the conscience of the Court. Such award is opposed to public

policy and is required to be adjudged void.

NOW ON FACTS:-

The brief facts of the case are as under:-

Appellant - ONGC which is a Public Sector Undertaking, has

challenged the arbitral award dated 2nd May, 1999 by filing

Arbitration Petition No. 917/1999 before the High Court of Bombay.

Learned Single Judge dismissed the same. Appeal No.256/2000

preferred before the Division Bench of the High Court was also

dismissed. Hence, the present appeal.

It is stated that in response to a tender, respondent-Company

which is engaged in the business of supplying equipment for Offshore

Oil exploration and maintenance by its letter dated 27th December,

1995 on agreed terms and conditions, offered to supply to the

appellants 26" diameter and 30" diameter casing pipes. The appellant

by letter of intent dated 3rd June, 1996 followed by a detailed order

accepted the offer of the respondent-Company. As per terms and

conditions, the goods were required to be supplied on or before 14th

November, 1996.

It was the contention of the respondent that as per clause (18) of

the agreement, the raw materials were required to be procured from

the reputed and proven manufacturers/suppliers approved by the

respondent as listed therein. By letter dated 8th August, 1996,

respondent placed an order for supply of steel plates, that is, the raw

material required for manufacturing the pipes with Liva Laminati,

Piani S.P.A., Italian suppliers stipulating that material must be

shipped latest by the end of September 1996 as timely delivery was of

the essence of the order. It is also their case that all over Europe

including Italy there was a general strike of the steel mill workers

during September/October 1996. Therefore, respondent by its letter

dated 28th October, 1996 conveyed to the appellant that Italian

suppliers had faced labour problems and was unable to deliver the

material as per agreed schedule. Respondent, therefore, requested for

an extension of 45 days time for execution of the order in view of the

reasons beyond its control. By letter dated 4th December, 1996, the

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time for delivery of the pipes was extended with a specific statement

inter alia that the amount equivalent to liquidated damages for delay

in supply of pipes would be recovered from the respondent. It is the

contention of the respondent that the appellant made payment of the

goods supplied after wrongfully deducting an amount of US $

3,04,970.20 and Rs.15,75,559/- as liquidated damages. That

deduction was disputed by the respondent and, therefore, dispute was

referred to the arbitral tribunal. The arbitral tribunal arrived at the

conclusion that strikes affecting the supply of raw material to the

claimant are not within the definition of 'Force Majeure' in the

contract between the parties, and hence, on that ground, it cannot be

said that the amount of liquidated damages was wrongfully withheld

by the appellant. With regard to other contention on the basis of

customs duty also, the arbitral tribunal arrived at the conclusion that it

would not justify the delay in the supply of goods. Thereafter, the

arbitral tribunal considered various decisions of this Court regarding

recovery of liquidated damages and arrived at the conclusion that it

was for the appellant to establish that they had suffered any loss

because of the breach committed by the respondent in not supplying

the goods within the prescribed time limit. The arbitral tribunal

thereafter appreciated the evidence and arrived at the conclusion that

in view of the statement volunteered by Mr. Arumoy Das, it was clear

that shortage of casing pipes was only one of the other reasons which

led to the change in the deployment plan and that it has failed to

establish its case that it has suffered any loss in terms of money

because of delay in supply of goods under the contract. Hence, the

arbitral tribunal held that appellant has wrongfully withheld the

agreed amount of US $ 3,04,970.20 and Rs.15,75,559/- on account of

customs duty, sales tax, freight charges deducted by way of liquidated

damages. The arbitral tribunal further held that the respondent was

entitled to recover the said amount with interest at the rate of 12 per

cent p.a. from 1st April 1997 till the date of the filing of statement of

claim and thereafter having regard to the commercial nature of the

transaction at the rate of 18 per cent per annum pendente lite till

payment is made.

For challenging the said award, learned senior counsel Mr.

Desai submitted that:-

(1) the award is vitiated on the ground that there was delay

on the part of respondent in supplying agreed goods/

pipes and for the delay, appellant was entitled to recover

agreed liquidated damages i.e. a sum equivalent to 1% of

the contract price for whole unit per week of such delay

or part thereof. Thereby, the award was contrary to

Section 28(3) which provides that the arbitral tribunal

shall decide the dispute in accordance with the terms of

the contract;

(2) the award passed by the arbitrator is on the face of it

illegal and erroneous as it arrived at the conclusion that

the appellant was required to prove the loss suffered by it

before recovering the liquidated damages. He submitted

that the arbitral tribunal misinterpreted the law on the

subject;

(3) in any set of circumstances, the award passed by the

arbitrator granting interest on the liquidated damages

deducted by the appellant is, on the face of it, unjustified,

unreasonable and against the specific terms of the

contract, namely clause 34.4 of the agreement, which

provides that on 'disputed claim', no interest would be

payable.

As against this, learned senior counsel Mr. Dave submitted that

it is settled law that for the breach of contract provisions of Section 74

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of the Contract Act would be applicable and compensation / damages

could be awarded only if the loss is suffered because of the breach of

contract. He submitted that this principle is laid down by the Privy

Council as early as in 1929 in Bhai Panna Singh and others v. Bhai

Arjun Singh and others [AIR 1929 PC 179], wherein the Privy

Council observed thus: -

"The effect of S. 74, Contract Act of 1872, is to

disentitle the plaintiffs to recover simplicitor the sum of

Rs.10,000/- whether penalty or liquidated damages. The

plaintiffs must prove the damages they have suffered."

He submitted that this Court has also held that the plaintiff

claiming liquidated damages has to prove the loss suffered by him. In

support of this contention, he referred to and relied upon various

decisions. In any case, it is his contention that even if there is any

error in arriving at the said conclusion, the award cannot be interfered

with under Section 34 of the Act.

At this stage, we would refer to the relevant terms of the

contract upon which learned counsel for the appellant has based his

submissions, which are as under: -

"11. Failure and Termination Clause/Liquidated

Damages:-

Time and date of delivery shall be essence of the

contract. If the contractor fails to deliver the stores, or

any installment thereof within the period fixed for such

delivery in the schedule or at any time repudiates the

contract before the expiry of such period, the purchaser

may, without prejudice to any other right or remedy,

available to him to recover damages for breach of the

contract:-

(a) Recovery from the contractor as agreed

liquidated damages are not by way of penalty, a

sum equivalent to 1% (one percent) of the contract

price of the whole unit per week for such delay or

part thereof (this is an agreed, genuine pre-

estimate of damages duly agreed by the parties)

which the contractor has failed to deliver within

the period fixed for delivery in the schedule, where

delivery thereof is accepted after expiry of the

aforesaid period. It may be noted that such

recovery of liquidated damages may be upto 10%

of the contract price of whole unit of stores which

the contractor has failed to deliver within the

period fixed for delivery, or

(e) It may further be noted that clause (a) provides for

recovery of liquidated damages on the cost of

contract price of delayed supplies (whole unit) at

the rate of 1% of the contract price of the whole

unit per week for such delay or part thereof upto a

ceiling of 10% of the contract price of delayed

supplies (whole unit). Liquidated damages for

delay in supplies thus accrued will be recovered

by the paying authorities of the purchaser

specified in the supply order, from the bill for

payment of the cost of material submitted by the

contractor or his foreign principals in accordance

with the terms of supply order or otherwise.

(f) Notwithstanding anything stated above, equipment

and materials will be deemed to have been

delivered only when all its components, parts are

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also delivered. If certain components are not

delivered in time the equipment and material will

be considered as delayed until such time all the

missing parts are also delivered.

12. Levy of liquidated damages (LD) due to delay in

supplies.

LD will be imposed on the total value of the order

unless 75% of the value ordered is supplied within the

stipulate delivery period. Where 75% of the value

ordered has been supplied within stipulated delivery

period. LD will be imposed on the order value of

delayed supply(ies). However, where in judgment of

ONGC, the supply of partial quantity does not fulfill the

operating need, LD will be imposed on full value of the

supply order.

34.4 Delay in Release of Payment: -

In case where payment is to be made on

satisfactory receipt of materials at destination or where

payment is to be made after satisfactory commissioning

of the equipment as per terms of the supply order.

ONGC shall make payment within 60 days of receipt of

invoice / claim complete in all respects. Any delay in

payment on undisputed claim / amount beyond 60 days

of the receipt of invoice / claim will attract interest @ 1%

per month. No interest will be paid on disputed claims.

For interest on delayed payments to small scale and

Ancillary Industrial Undertakings, the provisions of the

"Interest of delayed payments to small scale and

Ancillary Industrial Undertakings Act, 1993 will

govern."

Mr. Desai referred to the decision rendered by this Court in

Delta International Ltd. v. Shyam Sundar Ganeriwalla and another

[(1999) 4 SCC 545] and submitted that for the purpose of construction

of contracts, the intention of the parties is to be gathered from the

words they have used and there is no intention independent of that

meaning.

It cannot be disputed that for construction of the contract, it 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 be

difficult to gather their intention different from the language used in

the agreement. If upon a reading of the document 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. {Re: Modi & Co. v. Union of India

[(1968) 2 SCR 565]}. Further, in construing a contract, the Court

must look at the words used in the contract unless they are such that

one may suspect that they do not convey the intention correctly. If the

words are clear, there is very little the court can do about it. {Re:

Provash Chandra Dalui and another v. Biswanath Banerjee and

another [1989 Supp (1) SCC 487]}.

Therefore, 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.

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Further, in arbitration proceedings, the arbitral tribunal is

required to decide the dispute in accordance with the terms of the

contract. The agreement between the parties specifically provides that

without prejudice to any other right or remedy if the contractor fails

to deliver the stores within the stipulated time, appellant will be

entitled to recover from the contractor, as agreed, liquidated damages

equivalent to 1% of the contract price of the whole unit per week for

such delay. Such recovery of liquidated damage could be at the most

up to 10% of the contract price of whole unit of stores. Not only this,

it was also agreed that:-

(a) liquidated damages for delay in supplies will be

recovered by paying authority from the bill for payment

of cost of material submitted by the contractor;

(b) liquidated damages were not by way of penalty and it

was agreed to be genuine, pre-estimate of damages duly

agreed by the parties;

(c) This pre-estimate of liquidated damages is not assailed

by the respondent as unreasonable assessment of

damages by the parties.

Further, at the time when respondent sought extension of time

for supply of goods, time was extended by letter dated 4.12.1996 with

a specific demand that the clause for liquidated damages would be

invoked and appellant would recover the same for such delay.

Despite this specific letter written by the appellant, respondent had

supplied the goods which would indicate that even at that stage,

respondent was agreeable to pay liquidated damages.

On this issue, learned counsel for the parties referred to the

interpretation given to Sections 73 and 74 of the Indian Contract Act

in Sir Chunilal V. Mehta & Sons Ltd. v. The Century Spinning and

Manufacturing Co. Ltd. [1962 Supp. (3) SCR 549], Fateh Chand v.

Balkishan Das [(1964) 1 SCR 515 at 526], Maula Bux v. Union of

India [(1969) 2 SCC 554] Union of India v. Rampur Distillery and

Chemical Co. Ltd. [(1973) 1 SCC 649] and Union of India v. Raman

Iron Foundry [(1974) 2 SCC 231].

Relevant part of Sections 73 and 74 of Contract Act are as

under:-

"73. Compensation for loss or damage caused by

breach of contract:- When a contract has been broken,

the party who suffers by such breach is entitled to

receive, from the party who has broken the contract,

compensation for any loss or damage caused to him

thereby, which naturally arose in the usual course of

things from such breach, or which the parties knew,

when they made the contract, to be likely to result from

the breach of it.

Such compensation is not to be given for any

remote and indirect loss or damage sustained by reason

of the breach.

74. Compensation for breach of contract

where penalty stipulated for.- 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 the

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

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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.

Explanation.- A stipulation for increased interest

from the date of default may be a stipulation by way of

penalty."

From the aforesaid Sections, 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. These sections further

contemplate that 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 arrives 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 in

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.

In such a case, it is for the party who contends that stipulated amount

is not reasonable compensation, to prove the same.

Now, we would refer to various decisions on the subject. In

Fateh Chand's case (supra), the plaintiff made a claim to forfeit a

sum of Rs.25000/- received by him from the defendant. The sum of

Rs.25000/- consisted of two items - Rs.1000/- received as earnest

money and Rs.24000/- agreed to be paid by the defendant as out of

sale price against the delivery of possession of the property. With

regard to earnest money, the Court held that the plaintiff was entitled

to forfeit the same. With regard to claim of remaining sum of

Rs.24000/-, the Court referred to Section 74 of Indian Contract Act

and observed that Section 74 deals with the measure of damages in

two classes of cases (i) where the contract names a sum to be paid in

case of breach, and (ii) where the contract contains any other

stipulation by way of penalty. The Court observed thus: -

"The measure of damages in the case of breach of

a stipulation by way of penalty is by S. 74 reasonable

compensation not exceeding the penalty stipulated for.

In assessing damages the Court has, subject to the limit

of the penalty stipulated, jurisdiction to award such

compensation as it deems reasonable having regard to all

the circumstances of the case. Jurisdiction of the Court

to award compensation in case of breach of contract is

unqualified except as to the maximum stipulated; but

compensation has to be reasonable, and that imposes

upon the Court duty to award compensation according to

settled principles. The section undoubtedly says that the

aggrieved party is entitled to receive compensation from

the party who has broken the contract, whether or not

actual damage or loss is proved to have been caused by

the breach. Thereby it merely dispenses with proof of

"actual loss or damages"; it does not justify the award

of compensation when in consequence of the breach no

legal injury at all has resulted, because compensation

for breach of contract can be awarded to make good

loss or damage which naturally arose in the usual

course of things, or which the parties knew when they

made the contract, to be likely to result from the breach.

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The Court further observed as under: -

.... Duty not to enforce the penalty clause but only

to award reasonable compensation is statutorily imposed

upon courts by S. 74. In all cases, therefore, where there

is a stipulation in the nature of penalty for forfeiture of an

amount deposited pursuant to the terms of contract

which expressly provides for forfeiture, the court has

jurisdiction to award such sum only as it considers

reasonable, but not exceeding the amount specified in the

contract as liable to forfeiture."

From the aforesaid decision, it is clear that the Court was not

dealing with a case where contract named a sum to be paid in case of

breach but with a case where the contract contained stipulation by

way of penalty.

The aforesaid case and other cases were referred to by three

Judge Bench in Maula Bux's case (supra) wherein the Court held

thus: -

"... It is true that in every case of breach of contract the

person aggrieved by the breach is not required to prove

actual loss or damage suffered by him before he can

claim a decree, and the Court is competent to award

reasonable compensation in case of breach even if no

actual damage is proved to have been suffered in

consequence of the breach of contract. But the

expression "whether or not actual damage or loss is

proved to have been caused thereby" is intended to cover

different classes of contracts which come before the

Courts. In case of breach of some contracts it may be

impossible for the Court to assess compensation arising

from breach, while in other cases compensation can be

calculated in accordance with established rules. Where

the Court is unable to assess the compensation, the sum

named by the parties if it be regarded as a genuine pre-

estimate may be taken into consideration as the measure

of reasonable compensation, but not if the sum named is

in the nature of a penalty. Where loss in terms of money

can be determined, the party claiming compensation must

prove the loss suffered by him."

In Rampur Distillery and Chemical Co. Ltd.'s (supra) also,

two Judge Bench of this Court referred to Maula Bux's case and

observed thus: -

" ... It was held by this Court that forfeiture of

earnest money under a contract for sale of property does

not fall within Section 70 of the Contract Act, if the

amount is reasonable, because the forfeiture of a

reasonable sum paid as earnest money does not amount

to the imposition of a penalty. But, "where under the

terms of the contract the party in breach has undertaken

to pay a sum of money or to forfeit a sum of money

which he has already paid to the party complaining of a

breach of contract, the undertaking is of the nature of a

penalty."

In Raman Iron Foundry's case (supra), this Court considered

clause 18 of the Contract between the parties and arrived at the

conclusion that it applied only where the purchaser has a claim for a

sum presently due and payable by the contractor. Thereafter, the

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Court observed thus: -

"11. Having discussed the proper interpretation of

Clause 18, we may now turn to consider what is the real

nature of the claim for recovery of which the appellant is

seeking to appropriate the sums due to the respondent

under other contracts. The claim is admittedly one for

damages for breach of the contract between the parties.

Now, it is true that the damages which are claimed are

liquidated damages under Clause 14, but so far as the law

in India is concerned, there is no qualitative difference in

the nature of the claim whether it be for liquidated

damages or for unliquidated damages. Section 74 of the

Indian Contract Act eliminates the somewhat elaborate

refinements made under the English common law in

distinguishing between stipulations providing for

payment of liquidated damages and stipulations in the

nature of penalty. Under the common law a genuine pre-

estimate of damages by mutual agreement is regarded as

a stipulation naming liquidated damages and binding

between the parties : a stipulation in a contract in

terrorem is a penalty and the Court refuses to enforce it,

awarding to the aggrieved party only reasonable

compensation. The Indian Legislature has sought to cut

across the web of rules and presumptions under the

English common law, by enacting a uniform principle

applicable to all stipulations naming amounts to be paid

in case of breach, and stipulations by way of penalty, and

according to this principle, even if there is a stipulation

by way of liquidated damages, a party complaining of

breach of contract can recover only reasonable

compensation for the injury sustained by him, the

stipulated amount being merely the outside limit. It,

therefore, makes no difference in the present case that the

claim of the appellant is for liquidated damages. It stands

on the same footing as a claim for unliquidated damages.

Now the law is well settled that a claim for unliquidated

damages does not give rise to a debt until the liability is

adjudicated and damages assessed by a decree or order of

a Court or other adjudicatory authority. When there is a

breach of contract, the party who commits the breach

does not eo instanti incur any pecuniary obligation, nor

does the party complaining of the breach becomes

entitled to a debt due from the other party. The only right

which the party aggrieved by the breach of the contract

has is the right to sue for damages."

Firstly, it is to be stated that in the aforesaid case Court has not

referred to earlier decision rendered by the five Judge Bench in Fateh

Chand's case or the decision rendered by the three Judge Bench in

Maula Bux's case. Further, in M/s H.M. Kamaluddin Ansari and

Co. v. Union of India and others [(1983) 4 SCC 417], three Judge

Bench of this Court has over-ruled the decision in Raman Iron

Foundry's case (supra) and the Court while interpreting similar term

of the contract observed that it gives wider power to Union of India to

recover the amount claimed by appropriating any sum then due or

which at any time may become due to the contractors under other

contracts and the Court observed that clause 18 of the Standard

Contract confers ample powers on the Union of India to withhold the

amount and no injunction order could be passed restraining the Union

of India from withholding the amount.

In the light of the aforesaid decisions, in our view, there is

much force in the contention raised by the learned counsel for the

appellant. However, the learned senior counsel Mr. Dave submitted

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that even if the award passed by the arbitral tribunal is erroneous, it is

settled law that when two views are possible with regard to

interpretation of statutory provisions and or facts, the Court would

refuse to interfere with such award.

It is true that if the arbitral tribunal has committed mere error 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.

In the facts of the case, it cannot be disputed that 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 of the contract and

thereby it violates Section 28(3) of the Act. Undisputedly, reference

to the arbitral tribunal was not 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.

Dealing with the similar question, this Court in M/s Alopi

Parshad & Sons Ltd. v. The Union of India [(1960) 2 SCR 793]

observed that the extent of jurisdiction of the Court to set aside the

award on the ground of an error in making the award is well defined

and held thus:-

"The award of an arbitrator may be set aside on the

ground of an error on the face thereof only when in the

award or in any document incorporated with it, as for

instance, a note appended by the arbitrators, stating the

reasons for his decision, there is found some legal

proposition which is the basis of the award and which is

erroneous-Champsey Bhara and Company v. Jivaraj

Balloo Spinning and Weaving Company Limited [L.R. 50

IA 324]. If however, a specific question is submitted to

the arbitrator and he answers it, the fact that the answer

involves an erroneous decision in point of law, does not

make the award bad on its face so as to permit of its

being set aside-In the matter of an arbitration between

King and Duveen and others [LR (1913) 2 KBD 32] and

Government of Kelantan v. Duff Development Company

Limited [LR 1923 AC 395].

Thereafter, the Court held that if there was a general reference and not

a specific reference on any question of law then the award can be set

aside if it demonstrated to be erroneous on the face of it. The Court,

in that case, considering Section 56 of the Indian Contract Act held

that the Indian Contract Act does not enable a party to a contract to

ignore the express provisions thereof and to claim payment of

consideration for performance of the contract at rates different from

the stipulated rates, on some vague plea of equity and that the

arbitrators were not justified in ignoring the expressed terms of the

contract prescribing the remuneration payable to the agents. The

aforesaid law has been followed continuously. {Re. Rajasthan State

Mines & Minerals Ltd. v. Eastern Engineering Enterprises and

another [(1999) 9 SCC 283], Sikkim Subba Associates v. State of

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Sikkim [(2001) 5 SCC 629] and G.M., Northern Railway and

another v. Sarvesh Chopra [(2002) 4 SCC 45]}.

There is also elaborate discussion on this aspect in Union of

India v. A.L. Rallia Ram [(1964) 3 SCR 164] wherein the Court

succinctly observed as under:-

".. But it is now firmly established that an award is bad

on the ground of error of law on the face of it, when in

the award itself or in a document actually incorporated

in it, there is found some legal proposition which is the

basis of the award and which is erroneous. An error in

law on the face of the award means : "you can find in the

award or a document actually incorporated thereto, as for

instance, a note appended by the arbitrator stating the

reasons for his judgment, some legal proposition which is

the basis of the award and which you can then say is

erroneous. It does not mean that if in a narrative a

'reference is made to a contention of one party, that

opens the door to setting first what that contention is, and

then going to the contract on which the parties' rights

depend to see if that contention is sound" Champsey

Bhara and Company v. Jivraj Balloo Spinning and

Weaving Company Ltd. [(1932) L.R. 50 I.A. 324] But

this rule does not apply where questions of law are

specifically referred to the arbitrator for his decision; the

award of the arbitrator on those questions is binding upon

the parties, for by referring specific questions the parties

desire to have a decision from the arbitrator on those

questions rather than from the Court, and the Court will

not unless it is satisfied that the arbitrator had proceeded

illegally interfere with the decision."

The Court thereafter referred to the decision rendered in Seth

Thawardas Pherumal v. The Union of India [(1955) 2 SCR 48]

wherein Bose, J. delivering the judgment of the Court had observed:

"Therefore, when a question of law is the point at

issue, unless both sides specifically agree to refer it and

agree to be bound by the arbitrator's decision, the

jurisdiction of the Courts to set an arbitration right when

the error is apparent on the face of the award is not

ousted. The mere fact that both parties submit incidental

arguments about point of law in the course of the

proceedings is not enough."

The learned Judge also observed at p. 59 after

referring to F.R. Absalom Ltd. v. Great Western

(London) Garden Village Society [1933] AC 592, 616:

Simply because the matter was referred to

incidentally in the pleadings and arguments

in support of, or against, the general issue

about liability for damages, that is not

enough to clothe the arbitrator with

exclusive jurisdiction on a point of law."

The Court also referred to the test indicated by Lord Russell of

Killowen in F.R. Absalom Ltd. v. Great Western (London) Garden

Village Society Ltd., and observed that the said case adequately brings

out a distinction between a specific reference on a question of law,

and a question of law arising for determination by the arbitrator in the

decision of the dispute. The Court quoted the following observations

with approval: -

" .. it is, I think, essential to keep the case where

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disputes are referred to an arbitrator in the decision of

which a question of law becomes material distinct from

the case in which a specific question of law has been

referred to him for decision. x x x x The authorities

make a clear distinction between these two cases, and, as

they appear to me, they decide that in the former case

the Court can interfere if and when any error of law

appears on the face of the award, but that in the latter

case no such interference is possible upon the ground

that it so appears that the decision upon the question of

law is an erroneous one."

Further, in Maharashtra State Electricity Board v. Sterilite

Industries (India) and Another [(2001) 8 SCC 482], the Court

observed as under:-

"9. The position in law has been noticed by this

Court in Union of India v. A.L. Rallia Ram [AIR 1963

SC 1685] and Madanlal Roshanlal Mahajan v.

Hukumchand Mills Ltd. [(1967) 1 SCR 105] to the

effect that the arbitrator's award both on facts and law is

final that there is no appeal from his verdict; that the

court cannot review his award and correct any mistake in

his adjudication, unless the objection to the legality of the

award is apparent on the face of it. In understanding

what would be an error of law on the face of the award,

the following observations in Champsey Bhara & Co. v.

Jivraj Balloo Spg and Wvg. Co. Ltd, [(1922-23) 50 IA

324] a decision of the Privy Council, are relevant (IA p.

331)

"An error in law on the face of the

award means, in Their Lordship's view,

that you can find in the award on a

document actually incorporated thereto, as

for instance, a note appended by the

arbitrator stating the reasons for his

judgment, some legal proposition which is

the basis of the award and which you can

then say is erroneous."

10. In Arosan Enterprises Ltd. v. Union of India

[1999 (9) SCC 449], this Court again examined this

matter and stated that where the error of finding of fact

having a bearing on the award is patent and is easily

demonstrable without the necessity of carefully weighing

the various possible viewpoints, the interference in the

award based on an erroneous finding of fact is

permissible and similarly, if an award is based by

applying a principle of law which is patently erroneous,

and but for such erroneous application of legal principle,

the award could not have been made, such award is liable

to be set aside by holding that there has been a legal

misconduct on the part of the arbitrator."

Next question is - whether the legal proposition which is the

basis of the award for arriving at the conclusion that ONGC was not

entitled to recover the stipulated liquidated damages as it has failed to

establish that it has suffered any loss is erroneous on the face of it?

The arbitral tribunal after considering the decisions rendered by this

Court in the cases of Fateh Chand, Maula Bux and Rampur

Distillery (supra) arrived at the conclusion that "in view of these three

decisions of the Supreme Court, it is clear that it was for the

respondents to establish that they had suffered any loss because of the

breach committed by the claimant in the supply of goods under the

contract between the parties after 14th November, 1996. In the words

we have emphasized in Maula Bux decision, it is clear that if loss in

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terms of money can be determined, the party claiming the

compensation 'must prove' the loss suffered by him".

Thereafter the arbitral tribunal referred to the evidence and the

following statement made by the witness Das:

"The re-deployment plan was made keeping in mind

several constraints including shortage of casing pipes."

Further, the arbitral tribunal came to the conclusion that under

these circumstances, the shortage of casing pipes of 26" diameter and

30" diameter pipes was not the only reason which led to redeployment

of rig Trident II to Platform B 121. The arbitral tribunal also

appreciated the other evidence and held that the attempt on the part of

the ONGC to show that production of gas on Platform B 121 was

delayed because of the late supply of goods by the claimant failed.

Thereafter, the arbitral tribunal considered the contention raised by the

learned counsel for the ONGC that the amount of 10% which had

been deducted by way of liquidated damages for the late supply of

goods under the contract was not by way of penalty. In response

thereto, it was pointed out that it was not the case of learned counsel

Mr. Setalwad on behalf of the claimants that "these stipulations in the

contract for deduction of liquidated damages was by way of penalty".

Further, the arbitral tribunal observed that in view of the decisions

rendered in Fateh Chand and Maula Bux cases, "all that we are

required to consider is whether the respondents have established their

case of actual loss in money terms because of the delay in the supply

of the Casing Pipes under the contract between the parties". Finally,

the arbitral tribunal held that as the appellant has failed to prove the

loss suffered because of delay in supply of goods as set out in the

contract between the parties, it is required to refund the amount

deducted by way of liquidated damages from the specified amount

payable to the respondent.

It is apparent from the aforesaid reasoning recorded by the

arbitral tribunal that it failed to consider Sections 73 and 74 of the

Indian Contract Act and the ratio laid down in Fateh Chand's case

(supra) 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. Under Section 73, when a contract has been broken, the

party who suffers by such breach is entitled to receive compensation

for any loss caused to him which the parties knew when they made the

contract to be likely to result from the breach of it. This Section is to

be read with Section 74, which deals with penalty stipulated in the

contract, inter alia [relevant for the present case] provides 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, the party complaining of

breach is entitled, whether or not actual 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.

Section 74 emphasizes that in case of breach of contract, the party

complaining of the breach is entitled to receive reasonable

compensation whether or not actual loss is proved to have been

caused by such breach. Therefore, the emphasis is on reasonable

compensation. If the compensation named in the contract 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 by such breach.

Take for illustration: if the parties have agreed to purchase cotton

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bales and the same were only to be kept as a stock-in-trade. Such

bales are not delivered on the due date and thereafter the bales are

delivered beyond the stipulated time, hence there is breach of the

contract. Question which would arise for consideration is - whether

by such breach party has suffered any loss. If the price of cotton bales

fluctuated during that time, loss or gain could easily be proved. But if

cotton bales are to be purchased for manufacturing yarn, consideration

would be different.

In Maula Bux's case (supra), plaintiff - Maula Bux entered

into a contract with the Government of India to supply potatoes at the

Military Head Quarters, U.P. Area and deposited an amount of

Rs.10000/- as security for due performance of the contract. He

entered into another contract with the Government of India to supply

at the same place poultry eggs and fish for one year and deposited an

amount of Rs.8500/- for due performance of the contract. Plaintiff

having made persistent default in making regular and full supplies of

the commodities agreed to be supplied, the Government rescinded the

contracts and forfeited the amounts deposited by the plaintiff, because

under the terms of the agreement, the amounts deposited by the

plaintiff as security for the due performance of the contracts were to

stand forfeited in case plaintiff neglected to perform his part of the

contract. In context of these facts, Court held that it was possible for

the Government of India to lead evidence to prove the rates at which

potatoes, poultry, eggs and fish were purchased by them when the

plaintiff failed to deliver "regularly and fully" the quantities stipulated

under the terms of the contracts and after the contracts were

terminated. They could have proved the rates at which they had to be

purchased and also the other incidental charges incurred by them in

procuring the goods contracted for. But no such attempt was made.

Hence, claim for damages was not granted.

In Maula Bux's case (supra), the Court has specifically held

that it is true that in every case of breach of contract the person

aggrieved by the breach is not required to prove actual loss or damage

suffered by him before he can claim a decree and the Court is

competent to award reasonable compensation in a case of breach even

if no actual damage is proved to have been suffered in consequence of

the breach of contract. The Court has also specifically held that in

case of breach of some contracts it may be impossible for the Court to

assess compensation arising from breach.

Take for illustration construction of a road or a bridge. If there

is delay in completing the construction of road or bridge within

stipulated time, then it would be difficult to prove how much loss is

suffered by the Society / State. Similarly, in the present case, delay

took place in deployment of rigs and on that basis actual production of

gas from platform B-121 had to be changed. It is undoubtedly true

that the witness has stated that redeployment plan was 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 of plan or redeployment of rigs 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 Section 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

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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:-

(1) Terms of the contract are required to be taken into

consideration before arriving at the conclusion whether

the party claiming damages is entitled to the same;

(2) If the terms are clear and unambiguous stipulating the

liquidated damages in case of the breach of the contract

unless it is held that such estimate of

damages/compensation is unreasonable or is by way of

penalty, party who has committed the breach is required

to pay such compensation and that is what is provided in

Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and,

therefore, in every case of breach of contract, the person

aggrieved by the breach is not required to prove actual

loss or damage suffered by him before he can claim a

decree. The Court is competent to award reasonable

compensation in case of breach even if no actual damage

is proved to have been suffered in consequences of the

breach of a contract.

(4) In some contracts, it would be impossible for the Court to

assess the compensation arising from breach and if the

compensation contemplated is not by way of penalty or

unreasonable, Court can award the same if it is genuine

pre-estimate by the parties as the measure of reasonable

compensation.

For the reasons stated above, the impugned award directing the

appellant to refund the amount deducted for the breach as per

contractual terms 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'.

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It is apparent that the claim of the contractor to recover the said

amount was disputed mainly because it was agreed term between the

parties that in case of delay in supply of goods appellant was entitled

to recover damages at the rate as specified in the agreement. It was

also agreed that the said liquidated damages were to be recovered by

paying authorities from the bills for payment of the cost of material

submitted by the contractor. If this agreed amount is deducted and

thereafter contractor claims it back on the ground that the appellant

was not entitled to deduct the same as it has failed to prove loss

suffered by it, the said claim undoubtedly would be a 'disputed

claim'. The arbitrators were required to decide by considering the

facts and the law applicable, whether the deduction was justified or

not? That itself would indicate that the claim of the contractor was

'disputed claim' and not 'undisputed'. The reason recorded by the

arbitrators that as the goods were received and bills are not disputed,

therefore, the claim for recovering the amount of bills cannot be held

to be 'disputed claim' is, on the face of it, unjust, unreasonable,

unsustainable and patently illegal as well as against the expressed

terms of the contract. As quoted above, clause 34.4 in terms provides

that no interest would be payable on 'disputed claim'. It also provides

that in which set of circumstances, interest amount would be paid in

case of delay in payment of undisputed claim. In such case, the

interest rate is also specified at 1% per month on such undisputed

claim amount. Despite this clause, the arbitral tribunal came to the

conclusion that it was undisputed claim and held that in law, appellant

was not entitled to withhold these two payments from the invoice

raised by the respondent and hence directed that the appellant was

liable to pay interest on wrongful deductions at the rate of 12% p.a.

from 1.4.1997 till the date of filing of the statement of claim and

thereafter having regard to the commercial nature of the transaction at

the rate of 18% p.a. pendente lite till payment.

It is to be reiterated that it is the primary duty of the arbitrators

to enforce a promise which the parties have made and to uphold the

sanctity of the contract which forms the basis of the civilized society

and also the jurisdiction of the arbitrators. Hence, this part of the

award passed by the arbitral tribunal granting interest on the amount

deducted by the appellant from the bills payable to the respondent is

against the terms of the contract and is, therefore, violative of Section

28(3) of the Act.

CONCLUSIONS:-

In the result, it is held that:-

A. (1) The Court can set aside the arbitral award under

Section 34(2) of the Act if the party making the

application furnishes proof that:-

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under

the law to which the parties have subjected it

or, failing any indication thereon, under the

law for the time being in force; or

(iii) the party making the application was not

given proper notice of the appointment of an

arbitrator or of the arbitral proceedings or

was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not

contemplated by or not falling within the

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terms of the submission to arbitration, or it

contains decisions on matters beyond the

scope of the submission to arbitration;

2) The Court may set aside the award:-

(i) (a) if the composition of the arbitral tribunal

was not in accordance with the agreement of

the parties,

(b) failing such agreement, the

composition of the arbitral tribunal was not

in accordance with Part-I of the Act.

(ii) if the arbitral procedure was not in

accordance with:-

(a) the agreement of the parties, or

(b) failing such agreement, the arbitral

procedure was not in accordance with

Part-I of the Act.

However, exception for setting aside

the award on the ground of

composition of arbitral tribunal or

illegality of arbitral procedure is that

the agreement should not be in

conflict with the provisions of Part-I

of the Act from which parties cannot

derogate.

(c) If the award passed by the arbitral

tribunal is in contravention of

provisions of the Act or any other

substantive law governing the parties

or is against the terms of the contract.

(3) The award could be set aside if it is against the

public policy of India, that is to say, if it is

contrary to:-

(a) fundamental policy of Indian law;

(b) the interest of India; or

(c) justice or morality, or

(d) if it is patently illegal.

(4) It could be challenged:-

(a) as provided under Section 13(5); and

(b) Section 16(6) of the Act.

B. (1) 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

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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 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.