INTRODUCTION
The Bench of the Supreme Court comprising the Chief Justice of India N.V. Ramana, J. and Surya Kant, J. has in its judgment passed in Welspun Specialty Solutions Ltd. v. ONGC Ltd.[1] (Welspun Specialty Solutions) clarified the interplay between Sections 55 with 73 and 74 of the Contract Act, 1872 (Contract Act) with respect to the performance of time-conditioned obligations and the assessment of the quantum of damages for delay. The judgment has been a subject of judicial discourse and may have cast a shadow on the reliability of a provision for liquidated damages in contracts where it is stipulated that time will be of the essence. The present article will study the judgment of the Supreme Court with respect to its interpretation of the aforesaid sections of the Contract Act.
Facts
Oil and Natural Gas Corporation (ONGC) floated a global tender for the purchase of certain seamless steel casing pipes (pipes). A company known as Remi Metals Gujarat Ltd. which is now known as Welspun Specialty Solutions Ltd. (Remi Metals) was considered the successful bidder and pursuantly was awarded the contract (contract) by ONGC. Subsequently, ONGC issued four purchase orders. These purchase orders laid down that the supply of pipes are subject to the strict adherence of time-conditioned obligations and that delivery must not be later than the dates mentioned therein. It was clearly enunciated that time will be of the essence in view of the principles enshrined under Section 55 of the Contract Act. Moreover, the general terms and conditions of the purchase orders allowed ONGC to levy liquidated damages, if there is a delay in supply of pipes on the part of Remi Metals.
Amidst performance of the obligations under the contract, there were certain delays on the part of Remi Metals in meeting the timely supply of pipes as per the dates mentioned in the purchase orders and owing to that, ONGC granted extension of time on numerous occasions. These extended periods were accepted by Remi Metals and ultimately its obligations stood discharged under the contract. However, owing to the various periods of delay on the part of Remi Metals, ONGC deducted an aggregate amount of USD 8,07,804.03 and INR 1,05,367 as liquidated damages from various invoices that were submitted by Remi Metals. Aggrieved by the high-handed deduction of liquidated damages, Remi Metals invoked arbitral proceedings against ONGC and sought refund of the amounts deducted along with certain other claims.
Award of Arbitral Tribunal
The Arbitral Tribunal framed numerous issues in order to determine whether Remi Metals were rightfully entitled to the refund of liquidated damages that were withheld by ONGC. One of the most critical issues framed by the Arbitral Tribunal was to ascertain whether time was of the essence of contract. The Arbitral Tribunal held that a mere clause in a contract which stipulates that “time is of the essence” would not at all be determinative to safely conclude that the performance of the obligations are strictly time conditioned in view of Section 55 of the Contract Act. It held that in order to conclusively determine whether time is of the essence, an inquiry must be made into the overall nature of the contract by examining the contract as a whole.
Moreover, in the light of the pertinent clauses of the contract, the Arbitral Tribunal held that since the contract contained provisions for extension of time, payment of penalty for delay, levy of liquidated damages that such clauses diluted time being of the essence and rendered the time-conditioned stipulation as nugatory. Resultantly, the Arbitral Tribunal held that with regard to the issue lawful imposition of liquidated damages, that in view of the well-settled legal position that liquidated damages being in the nature of pre-quantified damages could not be granted. The reasoning employed by the Arbitral Tribunal to arrive at this is rather interesting, it held that since it was concluded that time is not of the essence of the contract that there could be no breach of the contract on account of the delay on the part of Remi Metals. Hence, as there is no breach there could be no question of allowing ONGC to withhold the monies deducted as liquidated damages.
Accordingly, the Arbitral Tribunal held that damages, if any, which are payable to ONGC would be those damages which are in the nature of unliquidated damages being actual/tangible damages that require a discharge of a high evidentiary burden. Thereafter, ONGC was constrained to provide an estimation of its tangible losses which were under four categories amounting to an aggregate of USD 3,80,64,830. This estimation was accepted by the Arbitral Tribunal. Although, the Arbitral Tribunal held the opinion that ONGC could not be entitled to claim any damages for those losses that it incurred during the period when time was extended for completion of delivery as they expressly waived the imposition of liquidated damages for that period.
Ultimately, the Arbitral Tribunal passed an award in favour of ONGC entitling them to retain a sum of USD 4,40,610.42 out of the monies already deducted as liquidated damages from the various invoices submitted by Remi Metals.
Setting-aside Proceedings Before High Court of Uttarakhand
Being aggrieved by the arbitral award, ONGC was quick to prefer a petition under Section 34 before the District Court under the Arbitration and Conciliation Act, 1996 (A&C Act) for setting aside of the award contending that the award was not in accordance with the contract. The District Court found no infirmity in the award and refused to interfere with the Arbitral Tribunal’s findings.
Aggrieved by the judgment of District Court, both parties preferred an appeal under Section 37 of the A&C Act before High Court of Uttarakhand. The High Court found that the Arbitral Tribunal and the District Judge erred in the construction of contract and observed that the Arbitral Tribunal committed a gross error by holding that ONGC had to prove loss suffered before recovering damages.
Judgment of Supreme Court
At the time of hearing before the Supreme Court, the learned counsels appearing on behalf of the parties put forth their legal submissions in order to buttress their contentions. The learned Senior Counsel appearing for Welspun reiterated that the view taken by the Arbitral Tribunal was plausible and thus did not warrant any interference. It was contended that as the contract made provisions for extension of time and levy of liquidated damages, that it could not be said that time was of the essence of the contract. Further, emphasis was laid on ONGC’s conduct whereby they waived the imposition of liquidated damages on earlier occasions while granting extension of time. It was submitted that in the light of this waiver, it was not proper that liquidated damages could be imposed for another extension period. Summing up its submissions on interpretation of the contract and corresponding provisions of the Contract Act, Welspun relied on the judgment of the Supreme Court in Associate Builders v. DDA[2] (Associate Builders) where it was laid down that the courts should ordinarily refrain from interfering with arbitral awards under their jurisdiction envisaged by Section 34 of the A&C Act. The celebrated Judge R.F. Nariman, J. laid down in Associate Builders[3], that interference was warranted only in exceptional circumstances i.e. where awards are vitiated by “patent illegalities”.
The learned counsel appearing on behalf of ONGC, vehemently contended that the arbitral award stood vitiated as the Arbitral Tribunal had transgressed the four corners of the contract by making certain extraneous findings. It was contended that the contract stipulated the imposition of liquidated damages and in the light of these pre-estimated damages, the Arbitral Tribunal grossly erred by awarding unliquidated damages in terms of Section 55 r/w Section 73 of the Contract Act. The learned counsel on behalf of ONGC relied on the controversial ruling of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd.[4] (Saw Pipes) to strengthen its contention.
After the conclusion of the oral submissions made by the parties, the Supreme Court at the outset outlined the ambit of its jurisdiction under Section 34 of the A&C Act as it stood before the 2015 amendment of the A&C Act. The Court observed that the term “public policy” in Section 34(2)(b)(ii) has been an exploited ground for the challenge of arbitral awards and has been a subject of judicial controversy for a considerable period of time. The Court observed that “public policy” does not indicate “a catch-all provision” to challenge arbitral awards before an appellate court on infinite grounds. The Court discussed the scope of the term “public policy” from the time of its initial exposition in the seminal dictum of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co.[5] (Renusagar) where the Court propounded a narrow interpretation of the term. Subsequently, the Court discussed the infamous judgments in Saw Pipes[6] and ONGC Ltd. v. Western Geco International Ltd.[7] (Western Geco) which broadened the scope of ambit of the term “public policy” in the context of setting aside arbitral awards under Section 34(2)(b)(ii).
It is in our opinion and evident from the leading judgments and the opinion of experts in the arbitral fraternity, that the judgments of the Supreme Court in Saw Pipes[8] and Western Geco[9] had cast a shadow on the fate of domestic arbitral awards in India. It is true that the legislature had enacted the 2015 amendment of the A&C Act to mitigate the negative repercussions of these controversial rulings and in spite of which, they still continue to cause havoc at the time of setting aside of arbitral awards. After the discussion on the ambit of the interference with arbitral awards on the ground of “public policy”, the Court was posed with the question of whether an arbitral award could be sustained under Section 37 of the A&C Act.
The Court in Welspun Specialty Solutions[10] observed that the substratum of the challenge to the award was whether the imposition of unliquidated damages is sustainable in spite of the fact that the contract expressly contemplated imposition of liquidated damages. After discussing the legal framework of liquidated damages in India with regard to Section 74 of the Contract Act, the Court observed that the finding of the Arbitral Tribunal that time was not of the essence of contract was beyond reproach. The Court concurred with the reasoning employed by the Arbitral Tribunal that the very existence of extension of time provisions together with the stipulation of liquidated damages and the subsequent conduct of ONGC (granting extension of time on earlier occasions) rendered the stipulation of time-conditioned performance as diluted. The Court concurred with the finding of the Arbitral Tribunal that since it was found that time was not of essence, that resultantly the amount stipulated as pre-estimated damages in form of liquidated damages would not be appropriate in order to fairly quantify the actual/tangible loss sustained by ONGC due to the delay. The Court held the opinion that these findings of the Arbitral Tribunal were in accordance with the well-known principles of contractual interpretation and did not suffer from any perversity.
The Court in Welspun Specialty Solutions[11] took the opportunity to exposit and reiterate certain well-known principles at common law with respect to the adherence of time-conditioned obligations that it deemed worthy of import to the principle in Section 55 of the Contract Act. The Court affirmed the general principle at common law, as envisaged by the English Court in Percy Bilton Ltd. v. Greater London Council[12] (Percy Bilton) that the general rule is that the promisor is bound to complete the obligation by the date of competition stated in the contract. In addition, it highlighted an exception to the rule of levy of liquidated damages as carved out in the century-old precedent of the English Court in Holme v. Guppy[13] where it was laid down that the promisee is not entitled to liquidated damages, if by his act or omission he has prevented the promisor from completing the work by the completion date.
After a substantial discussion on the applicable jurisprudence, the Court found that in order to ascertain whether time was of the essence of the contract, one must read the entire contract as a whole and on a holistic basis and not by examining singular clauses in isolation.
This doctrine was laid down in 1979 by the Full Bench of the Supreme Court in Hind Construction Contractors v. State of Maharashtra[14] (Hind Construction Contractors). However, it is surprising to note that the judgment in Welspun Specialty Solutions[15] has no mention of the judgment of the Full Bench in Hind Construction Contractors[16].
An in-depth factual analysis was undertaken by the Supreme Court, as it further interpreted Clause 9(i) of the contract wherein it was clearly enunciated that “subject to extension granted without prejudicing the right of ONGC to recover damages”. It was held that the ‘‘damages’’ contemplated by this provision meant unliquidated damages within the meaning of the 2nd paragraph of Section 55 and not pre-estimated/liquidated damages as envisaged under Section 74 of the Contract Act. The Court upheld the findings of the Arbitral Tribunal that said term “damages” in Clause 9(i) of the contract meant actual/tangible loss and not pre-estimated loss.
It is our opinion that the finding of Arbitral Tribunal that damages would be granted under Section 55 read with the principles enshrined in Section 73 in place of the pre-estimated sum stipulated under Section 74 of the Contract Act is not entirely correct. It is our opinion that once it is found that time is not of the essence, the delay in completion would still attract the provisions for liquidated damages. It is pertinent to note that the Court has concurred with these findings without sufficient examination of the interplay of the various sections of the Contract Act and the underlying rationale of liquidated damages under Section 74.
The Court rejected ONGC’s reliance on the judgment in Saw Pipes[17] by observing that in Saw Pipes[18] no waiver was granted for levying liquidated damages on earlier occasions amidst performance as in the present case. On this basis it held that ONGC was not entitled to benefit from the exceptions carved out in Saw Pipes[19]. The Court observed that in the present case it was undisputed that ONGC had waived liquidated damages on numerous earlier occasions while granting time extensions for completion of the obligations. The Court concurred with the finding of the Arbitral Tribunal that as liquidated damages were waived on earlier occasions, subsequent impositions could not be imposed unless agreed upon by the parties. This finding was upheld and recognised as the autonomy of a party to engage in contract terms and one which requires a clear intention.
Ultimately, the Court in Welspun Specialty Solutions[20] in view of its limited jurisdiction refused to interfere with any of the findings of the Arbitral Tribunal and upheld the award, while setting aside the judgments passed by the High Court of Uttarakhand.
Conclusion
It is our opinion that the judgment of the Supreme Court in Welspun Specialty Solutions[21] has drastically changed the perspective of the employers with respect to the reliability of a provision for liquidated damages, more particularly one which caters to recompense for delay in performance of time-conditioned obligations. It also remains uncertain that even when the contract stipulates that time will be of the essence, that whether such a stipulation will prevail after the arbitral tribunals/courts examine the contract as a whole.
It is true that the decision in Welspun Specialty Solutions[22] is welcome step with respect to judicial non-interference with arbitral awards, but at the same time has cast a shadow of doubt on the efficacy of a clause for liquidated damages in contract where the performance of obligations is strictly time conditioned. It is our opinion that such an undesirable situation, nonetheless warrants cognizance by the Supreme Court at the earliest possible opportunity to clarify the essence of the underlying rationale of liquidated damages in Section 74 of the Contract Act.
† Founder and Chairman, Advani Law LLP.
†† Partner, Advani Law LLP.
†††Associate, Advani Law LLP.
[12](1982) 1 WLR 794.
[13](1838) 3 M & W 387 : 150 ER 1195