1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. APPEAL NO. 1220 OF 1996 IN ARBITRATION PETITION NO.12 OF 1996 IN AWARD NO.220 OF 1995 Oil & Natural Gas Corporation Ltd., a corporation established under the Oil and Natural Gas Commission Act, 1959 and having its Principal Office at Tal Bhavan, Dehradun, U.P. and its Off-Shore Project office at 15th Floor, Maker Tower, "E" Cuffe Parade, Colaba, Bombay-400 005...Appellant (Orig.Respondent) v/s. Off-Shore Enterprises Inc. a Corporation incorporated under the Laws of Liberia, having their Registered office at 80, Broad Street, City of Monrovia, Country of Monteserrado, Republic of Liberia. .. Respondent (Orig.Petitioner) Mr. D.R. Zaiwala, senior counsel with Mr. P.A.Savant i/by M/s. Vyas & Bhalwal for appellant. Mr.S.H.Doctor, senior counsel with Ms. Anjali Chandurkar i/by M/s. B. Munim & Co. for respondent. CORAM : R.M.LODHA AND J.P.DEVADHAR, JJ. DATED : 27/28th July, 2004 ORAL JUDGMENT (Per R.M.Lodha, J.) An award dated 18th September, 1995 in the sum of Rs.36,38,50,000/- was passed in favour of the appellant by the Arbitrators. The respondent filed 2 petition for setting aside the said award as being null and void. The respondent succeeded before the learned Single Judge and the award dated 18th September, 1995 was set aside vide judgment dated 2/3rd September, 1996. That is how the appellant is in appeal before us. 2. For the sake of convenience, we shall refer the respondent as ‘contractor B’ and the appellant as ‘the purchaser’ since they have been referred as such in the agreement dated 14th July, 1981 (for short ‘the contract’). By the contract entered into between the parties, the contractor B agreed to supply equipment, engineering drawings, project management and construction supervision to one Paul Lindenau GMBH (referred to as ‘contractor A’ in the separate contract of the even date between the purchaser and Lindenau) in respect of the Drillship agreed to be purchased from the Paul Lindenau and to assist with the design, supply, building, launching and equipment the said drillship for the purchaser on the terms and conditions contained therein. The said Drillship later on known as ‘Sagar Prabhat’ was mobilised and arrived off Bombay on 4th June, 1982 and was taken over by the purchaser on 5th June, 1982. The disputes arose between contractor B and the purchaser under the said contract. For resolution of the said dispute as per the arbitration clause under the contract, 3 the contractor B appointed Mr. K.H.Bhabha, the senior advocate, High Court, Bombay as one of the arbitrators vide their letter dated 7th July, 1982. Initially, the purchaser appointed Mr. S.B.Kabra as the other arbitrator but there was dispute about his appointment and ultimately, by an order of this court passed on 6th April, 1983, in place of Mr. S.B.Kabra, Vice Admiral Mr. N.P.Datta was appointed as co-arbitrator alongwith Mr.K.H.Bhabha. The said arbitrators entered upon the reference in the arbitration of 24th August, 1983. The contractor B filed its claim before the said arbitrators on 7th October, 1983 and the purchaser is said to have filed its written statement and counter-claim before the said arbitrators on 10th February, 1984. It appears that before the said arbitrators in the proceedings held in the month of March, 1986, the purchaser referred to stability of the said drillship. During the course of their arguments and on 5th July, 1986 at the meeting before the said arbitrators, the purchaser sought to tender compilation containing stability calculations of the drillship. The contractor B objected to the said course. In the meeting held on 7th July, 1986 before the said arbitrators it appears to have transpired that fresh reference may be made after formalities are completed for referring the dispute pertaining to the stability of the said drillship. Accordingly, the said 4 arbitrators did not accept the compilation tendered by the purchaser on 5th July, 1986. By the letter dated 1st August, 1986, the contractor B through its advocates in the context of the purchaser having challenged the stability of the drillship wrote to the purchaser that the dispute had arisen between the parties with regard to the deficiency in the stability of the drillship and that it was desirous of referring the dispute in accordance with the provisions of Article 13.2 of the said contract. By the said letter, contractor B appointed Mr. K.H.Bhabha, senior advocate as one of the arbitrators and the purchaser was requested to appoint another arbitrator within 15 days from the date of the said letter failing which it was stated that Mr. K.H.Bhabha would be appointed as sole arbitrator in the matter. The purchaser appointed Vice Admiral N.P.Datta as the other arbitrator on 14th August, 1986. The arbitrators entered upon the reference in respect of the disputed claim of the purchaser concerning the deficiency in the stability of the said drillship on 4th September, 1986. The arbitrators held their meeting on 11th September, 1986 and the purchaser was directed to file their statement of claim on/or before 6th November, 1986 and the contractor B was directed to file their reply to the purchaser’s statement of claim on/or before 24th December, 1986. The arbitrators extended the time for filing 5 the statement of claim by 2nd December, 1987 and the contractor B was directed to file their reply within six months therefrom. The statement of claim was filed by the purchaser on 2nd December, 1987 alleging the defects and deficiencies in the stability of the said drillship and in the premises thereof interalia made a claim for the cost required to carry out modifications to the said drillship and rectification of the defects. The purchaser claimed a sum of Rs.3.5 crores to bring about necessary changes and/or alterations and additions to enable operation of the drillship and US$ 1,80,000/- being the damages for non-use. The contractor B in response to the statement of claim filed on 2nd December, 1987 raised diverse objections interalia that the statement of claim filed by the purchaser related to the technical matters as provided in Article 13.1 of the contract and the same was one of the excepted matters under Article 13.2 and thus, the arbitrators lacked jurisdiction to decide the said issue and consequently the claim of the purchaser; that the claim was barred by law of limitation prescribed under Article 55 of the Limitation Act and the claim was also beyond the time prescribed under the contract relying upon Article 9.2.1 of the contract. It appears that on 5th January, 1989, the contractor B made an application, of course without prejudice to their contentions set up in 6 the reply interalia stating that the purchaser’s claim related to the technical matters and the same could not be the subject matter of the decision by the arbitration and such matter is required to be referred to the American Bureau of Shipping (ABS) for technical opinion and the opinion given by ABS is binding on the parties and dispute has to be settled accordingly and in the meeting held on 17/18th January, 1989 the said application was handed in to the arbitrators and taken on record. The purchaser was agreeable to refer to the technical question of stability of the said drillship for opinion of ABS. Both the parties agreed to accept the opinion of the ABS and settle the dispute in accordance therewith. The stability of the drillship, accordingly, was referred to ABS and the ABS submitted the report on 18th May, 1990. The correspondence was exchanged between the parties thereafter and by letter dated 25th August, 1994, the arbitrators fixed the meeting on 31st August, 1994. The contractor B did not attend the said meeting. The matter was thereafter adjourned to 2nd September, 1994. By letter dated 2nd September, 1994, the constituted attorney for the contractor B wrote to the arbitrators that the matter being of technical nature, they have no jurisdiction to arbitrate the same. The arbitrators held the meetings on various dates of which due intimation was given to the contractor B 7 by the advocates for the purchaser but the contractor B did not choose to appear before the arbitrators. The copy of the affidavit of Pramod Seth filed by the purchaser before the arbitrators on 6th April, 1995 was also sent to the contractor B. However, the contractor B did not respond to the said affidavit. The next sitting of the arbitration was fixed on 24th and 25th April, 1995 but the contractor B did not appear. Then the arbitration meeting was held on 5th and 6th September, 1995. The arguments of the senior counsel for the purchaser were commenced and heard by the arbitrators. The contractor B was informed by the advocates of the purchaser that further hearing in the matter would commence on 15th September, 1995 before the arbitrators. On that day also, the contractor B did not appear. The comparative statement summarising the claim was filed by the purchaser on 15.9.1995 and copy thereof was sent to the contractor B on 16.9.1995. On 18.9.1995, the award in the sum of Rs. 36,38,50,000/- came to be passed in favour of the purchaser. 3. The award dated 18.9.1995 made and published by the arbitrators and filed before this court on 19.10.1995 was challenged by the contractor B and prayer was made for setting aside the said award. The award was challenged interalia on the grounds; 8 (i) that the dispute pertaining to the technical matters covered under Article 13.1 of the contract has to be resolved between the parties by referring the same to the ABS for its opinion and Article 13.2 excludes the determination of such dispute by the arbitrators and therefore, the arbitrators did not have jurisdiction to decide the dispute as it was not arbitrable; (ii) that the claim of the purchaser was barred by law of limitation under Article 55 of the Limitation Act and also beyond the warranty period provided under Article 9.2.1 and 9.2.2 and (iii) that the award passed by the arbitrators is beyond the statement of claim filed by the purchaser and is grossly disproportionate to the amount claimed therein. The purchaser, however, justified the award and set up that no case for setting aside the award is made under section 30 of Arbitration Act, 1940. 4. The learned Single Judge inter alia held: (i) that the arbitrators had no jurisdiction to determine the issue of technical nature as the same was not arbitrable and beyond the scope of the agreement for arbitration; (ii) that the arbitrators were not authorised to interpret the ABS report and they did not have jurisdiction to determine the issue pertaining to technical matters (iii) that the arbitrators acted beyond their jurisdiction or the scope of reference of claim and 9 thereby legally misconducted themselves by making the award and (iv) that the arbitrators awarded the amount which was highly inflated and disproportionately high and there was no basis for award being passed for such amount. The learned Single Judge accordingly, by her judgment dated September 2/3, 1996 set aside the award. 5. We heard Mr.D.R. Zaiwalla, the learned senior counsel for the purchaser and Mr. S.H.Doctor, the learned senior counsel for the contractor B extensively and at length. 6. Article 13 of the contract provides for arbitration. It reads thus- "13. ARBITRATION This contract is based upon mutual confidence and friendly co-operation. In case any dispute or difference shall arise, it shall be settled as far as possible by means of negotiations between the parties hereto. 13.1 THE DISPUTES AND DIFFERENCE ON TECHNICAL MATTERS. Any dispute or difference of opinion between the parties hereto relating to this Contract regarding the Construction of the Drillship or on the material used for the construction of the Drillship or on the equipment incorporated in the Drillship, or in relation to the prescribed Specification or relating to any other technical matters, may at the discretion of the parties be referred to ABS for its technical opinion and the opinion given by the ABS shall be accepted by the parties and the disputes shall be settled accordingly. 10 13.2 DISPUTES AND DIFFERENCES IN ALL MATTERS. In case of any difference or dispute arises under this contract or in connection with, under or any way touching or concerning this Contract whatsoever, or the construction thereof or relating to the rights, duties or obligations of any party hereunder, or as to any other matter in any way arising out of or relating to, or concerned with the subject matter hereof (except as to any of the matters the determination of which is specifically provided for by this contract) including whether the delay on account of arbitration shall be considered as a permissible delay or not, the same shall be referred to Arbitration under the Indian Arbitration Act. One Arbitrator to be nominated by each party and the third being a chairman/Umpire to be appointed by the two Arbitrators before proceeding with the arbitration, failing which by the Chief Justice of India. The decision of such arbitrators or in the event of difference of opinion amongst them, the decision of the majority, as the case may be, shall be final and binding on the parties. The place of arbitration shall be in India and arbitration proceedings shall be conducted in English language." 7. Article 13 provides the whole process and mechanism for resolution of disputes and differences between the parties under the contract. In the event of any dispute or difference of opinion between the parties relating to technical matters, Article 13.1 provides for reference to ABS for its technical opinion. The opinion given by ABS is binding on the parties and the dispute is agreed to be settled accordingly. Article 13.2 provides for resolution of disputes and differences between the parties in all matters. It is agreed 11 by the parties that in case of any difference or dispute arising between them under the contract, the same shall be referred to the arbitration under the Indian Arbitration Act; one arbitrator to be nominated by each party and the third being chairman/umpire to be appointed by two arbitrators before proceeding with the arbitration. This clause excepts determination of the matters specifically provided in 13.1. The question that falls for consideration immediately before us is whether the claim made by the purchaser is excepted under Article 13.2 of the contract and, thus, not arbitrable by the arbitrators. 8. In the statement of claim, the purchaser set out the detailed data, facts and figures that the drillship delivered by the contractor B to the purchaser was of a poor and substandard quality and not upto the mark to carry out normal drilling operations as stipulated by the contract and as a consequence thereof prayed for; (i) return of all the amounts received towards consideration of the said drillship; (ii) the sum of Rs.3,50,00,000/- for rectification of the defects and deficiencies in the drillship and (iii) the amount of us$ 1,80,000/- being the amount of damages for non-use of the drillship at the rate of US$ 20,000 per day for 90 days required to set the drillship right. Pertinent it is to notice here that in the meeting 12 held by the arbitrators on 17/18th January, 1989, the parties agreed that the technical question of stability of drillship be referred for the opinion of the ABS; contractor B agreed to accept the opinion of the ABS and settle the dispute in accordance therewith and the purchaser expressed willingness to accept the opinion of ABS as evidence. Accordingly the stability aspect was referred to ABS for technical opinion. 9. The dispute between the parties on the aspect of technical matter for which the matter was referred to ABS has not been arbitrated upon by the arbitrators; it was referred to the ABS for its technical opinion. The reference of the matter on technical matter to ABS was not by way of quasi-judicial adjudication nor it could be in the scheme of Article 13.1 of the contract. What ABS was required to do was to render its technical opinion on the dispute and difference on the technical matter between the parties having been referred to but the opinion by ABS under 13.1 is not the adjudication. One of the essential ingredients of the submission of the arbitration is that the parties should agree that the dispute intended to be referred should be determined in a quasi-judicial manner. Reference of the dispute and difference on technical matter to ABS was not intended to be determined in quasi-judicial manner. 13 When it is not so, Article 13.1 does not amount to submission to arbitration and ABS therefore, cannot be said to be deciding the dispute and difference on technical matter referred under Article 13.1 as an arbitrator. The distinction between the agreement for submission to an arbitration and an agreement to accept the technical opinion is apparent from the plain language of such Article 13.1 which provides that the technical opinion given by the ABS shall be accepted by the parties and the dispute shall be settled accordingly. The expression, "and the dispute shall be settled accordingly" signifies eloquently that the dispute and difference pursuant to the technical opinion of ABS has to be resolved either mutually or through the mechanism provided under Article 13.2. Article 13.2 indicates that all disputes and differences arising on the contract shall be decided by way of arbitration save and except the matters, the determination of which are specifically provided under Article 13.1. The technical opinion received from the ABS being binding on the parties cannot be reopened or redetermined by the arbitrators under Article 13.2 but the consequences flowing therefrom, if the parties are not able to settle the dispute upon receipt of the technical opinion on their own, has to be resolved through the mechanism of arbitration provided under Article 13.2. The purchaser in its claim raised the issue 14 of stability that the contractor B delivered the drillship of a very poor and substandard quality and not upto the mark and consequent thereupon inter alia claimed for an amount in the sum of Rs.3.5 crores to bring the drillship to desired state and condition. The issue of stability was referred to ABS by the Arbitrators and consequential money claim cannot be said to be beyond the jurisdiction of the Arbitrators. We are unable to accept the submission of the learned senior counsel appearing for the contractor-B that the statement of claim only deals with the technical dispute which is an excepted matter under Article 13.2. Mr.S.H. Doctor is not right when he contends that under Article 13.1, the parties had agreed on technical matter that opinion of ABS would be accepted by the parties and the dispute shall be settled accordingly, and therefore, the dispute is not arbitrable at all under Article 13.2. The fallacy of this contention is founded on erroneous premise as if there is no monetary claim by the purchaser based on the alleged deficiency in the stability of the subject drillship. While dealing with dispute on technical matter, ABS could not deal with the monetary claim and, therefore, such claim is not excepted. 10. Mr. S.H.Doctor, the learned senior counsel for the contractor B on the interpretation of the 15 excepted clause relied upon the Division Bench judgment of Madhya Pradesh High Court in the case of The Chief Administrator, Dandakaranya Project v. M/s. Prabartak Commercial Corporation Ltd., Calcutta, AIR 1975 Madhya Pradesh 152. The Madhya Pradesh High Court in paragraphs 31 to 39 held thus- "31. Clause 13-A of the agreement, reads- "Clause 13-A: The Engineer-in-charge shall have power to make any alterations in, omissions from, additions to, or substitutions for, the original specifications, drawings, designs and instructions, that may appear to him to be necessary or advisable during the course of supply of the materials and the contractor shall be bound to supply the materials in accordance with any instructions which may be given to him in writing signed by the Engineer-in-charge, and such alterations, omissions, additions or substitutions shall not invalidate the contract and any altered, additional or substituted materials which the contractor may be directed to supply in the manner above specified as part of the work shall be supplied by the contractor on the same conditions in all respect on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. The time for the completion of the supply shall be extended in the proportion that the altered, additional or substituted quantity of materials bears to the original quantity and the certificate of the Engineer-in-charge shall be conclusive as to such proportion. And if the altered, additional or substituted materials include any class of materials, for which no rate is specified in this contract, then such class of materials shall be supplied at the rates entered in the schedule of rates of the D.N.K.Project on which the estimated cost shown on page 2 of the tender is based; and if such class 16 of materials are not entered in the said schedule of rates, then the contractor shall within seven days of the date of his receipt of the order to supply the materials inform the Engineer-in-charge of the rate which it is his intention to charge for such class of materials, and if the Engineer-in-charge does not agree to this rate, he shall by notice in writing be at liberty to cancel his order to supply thereof in such manner as he may consider advisable, provided always that if the contractor shall commence supply or incur any expenditure in regard thereto before the rates shall have been determined as lastly hereinbefore mentioned, then in such case, he shall only be entitled to be paid in respect of the supply made or expenditure incurred by him prior to the date of the determination of the rate as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-charge. In the event of a dispute the decision of the Superintending Engineer of the circle shall be final." 32. Clause 14, which is the arbitration clause, provides- "Clause 14.- Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions hereinbefore mentioned and as to the quality of workmenship, or materials used on the work, or as to any other question, claim, right, matter or thing whatsoever, in any way arising out of, or relating to the contract, designs, drawings, specifications, estimates, instructions, orders or these conditions, or otherwise concerning the work, or the execution, or failure to execute the same, whether arising during the progress of the work, or after the completion or abandonment thereof shall be referred to the sole arbitration of the Chief Engineer/Additional Chief Engineer. Central Public Works Department and if the Chief Engineer/Additional Chief Engineer, is unable or unwilling to act, to the sole arbitration or some other person appointed by the Chief Engineer/Additional Chief Engineer willing to act as such arbitrator. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant that 17 he had to deal with the matters to which this agreement relates and that in the course of his duties as such Government servant, he had expressed views on all (or) any of the matters in dispute or difference. The award of the Arbitrator so appointed shall be final, conclusive and binding on all parties to this contract." 33. It is necessary to consider the precise terms of the finality clause in Clause 13-A and the arbitration clause in Clause 14, and to decide whether the matter falling within the purview of the finality clause are outside the arbitration clauses. Now, the opening words in Clause 14 "Except where otherwise provided in the contract", clearly limit or control the operative part of Clause 14 which otherwise is in comprehensive terms. 34. The general rule that the grammatical and ordinary sense of the words in