1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. APPEAL NO.1202 OF 1997 IN ARBITRATION PETITION NO.79 OF 1997 IN AWARD NO. 32 OF 1997 Oil and Natural Gas Corporation Ltd. incorporated under the Indian Companies Act, 1956 having its Registered Office at Tel Bhavan, Dehra Dun and Branch Office at 5/A, Vasundhara Bhavan, Ali Yawar Jung Marg, Bandra (East), Mumbai-400 051. ...Appellant. Vs. Dai Ichi Karkaria Ltd. a company incorporated under the Indian Companies Act, 1956 having its Registered Office at Liberty Building, Sir Vithaldas Thackersey Marg, Mumbai-400 020. ...Respondent. .... Shri D. R. Zaiwala, Senior Advocate with Shri S. N. Naik i/b. Little & Co. for the Appellant. Shri D. D. Madon, Senior Advocate with Shri Burjess Colabawalla i/b. M/s. Amarchand & Mangaldas & Suresh A. Shroff & Co. for the Respondent. ..... CORAM : R. M. S.KHANDEPARKAR & DR.D.Y.CHANDRACHUD, JJ. February 22, 2007. JUDGMENT (PER DR. D.Y. CHANDRACHUD, J.): 2 I An Arbitration Petition was instituted by the Oil and Natural Gas Corporation Ltd (ONGC) under Section 30 of the Arbitration Act, 1940, in order to challenge an award of a sole Arbitrator. The Arbitration Petition was dismissed by a Learned Single Judge on 1st October 1997. ONGC is in appeal. At the hearing of the appeal, submissions have been confined to four grounds of challenge, these being: (i) The Arbitrator adjudicated upon matters excepted from the arbitration clause and assumed jurisdiction where he had none; (ii) The award is contrary to contractual provisions; (iii) There was an error apparent on the face of the record by the Arbitrator in rejecting the claim for liquidated damages as not proved; and (iv) The award of interest is contrary to the provisions of the contract. Upon hearing Counsel for the parties, our conclusion is that there is no merit in the challenge and the appeal must fail. II 2. ONGC is a Public Sector Undertaking which engages in oil exploration, and in the development, production and treatment 3 of oil and natural gas. The Respondent (DIK) is a Company incorporated under the Companies' Act, 1956 and carries on the business of the manufacture and supply of chemicals. In pursuance of a bid submitted by DIK, in response to global tenders floated by ONGC, an order was placed by ONGC on 2nd April 1988 upon DIK for the supply of 2450 MT of “Daitrolite MNF – 1206”, which is a pour point depressant (“PPD”). PPD is a chemical additive that is used to decrease the viscosity and increase the fluidity of crude oil in order to facilitate the process of pumping oil through a pipeline. The pour point is the lowest temperature at which oil or other liquid will pour, without excessive amounts of wax crystals forming and so preventing the flow. The quantity of PPD for which the order was placed by ONGC upon DIK was to be used by ONGC in its pipeline at Bombay High. The contract. 3. The Supply Order contained the terms and conditions of contract: (i) Under Clause 6 of the order, a quantity between 450 and 500 MT was to be supplied in September 1988 followed by a similar quantity every month so as to complete supplies by 4 February 1989. (ii) Under Clause 8(a), DIK was to effect free delivery in ONGC's Godown at Nhava after sampling/bonding and testing, including loopline testing and acceptance after debonding by ONGC. Under Clause 8(c), the material was to be despatched only after “satisfactory laboratory test and loopline test and approval and debonding by ONGC”. (iii) Clause 10 of the Supply Order provided that the material would be (i) Sampled/bonded by ONGC and a random sample would be drawn (the “reference sample”); (ii) From the reference sample, 50 litres would be tested in ONGC's Laboratory; (iii) From the reference sample, 50 litres would be tested on the loopline at the BHS platform for pour point, plastic viscosity and yield value; and (iv) If the 50 litres' sample met the specifications of the order, the material would be debonded for despatch to the Nhava Godown. (iv) Clause 13 of the Supply Order provided that the PPD is guaranteed to achieve a pour point of 18 degrees centigrade at 5 350 parts per million (“ppm”) at the BHS platform. The other parameters of the specifications were contained in Annexure-A to the order. In the event that the dosage required in the loopline were to exceed 350 ppm to achieve the specified parameters of the order, the supplier was to compensate ONGC for the corresponding excess quantity of PPD required by paying to ONGC the price of such excess quantity of PPD or supplying such excess quantity of PPD. DIK was also required to furnish a performance guarantee amounting to 10% of the value of the order (Rs.8,19,10,850/-) and a Bank Guarantee of 2.5% as security deposit. (v) Clause 17 of the Supply Order contained “Special instructions/conditions” and sub-clause (ii) thereof provided as follows: “(ii) If the material sampled/bonded is found below specifications on test, it will be at the option of ONGC to reject full or part of the material or accept the same at reduced rate. Decision of ONGC in this regard will be final and binding on the Contractor.” By Clause 17(vii), the delivery schedule was inclusive of 17 days' time required for sampling/bonding, testing (including loopline 6 testing), and debonding by ONGC. Time in excess of 17 days for the aforesaid exercise was to be to ONGC's account. (vi) By Clause 20, parties stipulated that in the event of a delay in supply, ONGC would be entitled to recover from DIK “as agreed, liquidated damages and not by way of penalty, a sum equivalent to ½% of the price” of any stores which the contractor has failed to deliver within the period fixed for each week or part thereof during which the delivery of such stores may be in arrears “upto a ceiling of 5% of the cost of any stores”. (vii) Clause 26 provided for arbitration and in so far as is material, was to the following effect: “26. Arbitration: Except where otherwise provided in the supply order/contract all questions and disputes, relating to the meaning of the specifications, and instructions herein before mentioned and also to the quality of workmanship of the item(s) ordered or as to any other question, claim or thing whatsoever, in any way, arising out of or relating to the supply order/contract, specifications, instructions or these conditions or otherwise concerning the materials or the execution or failure to execute the same during stipulated/extended period or after completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by Member of the Commission at the time of the dispute”. 7 (viii) Clause 27 provided for Withholding and Lien in respect of sums claimed. The clause provided that whenever any claim for payment of money arises against DIK, ONGC “shall be entitled to withhold and also have a lien to retain such sum or sums in whole or in part from the security deposit/performance bond, if any, deposited by the Contractor and for the purpose aforesaid, the commission shall be entitled to withhold the said security deposit/performance bond, if any, furnished, as the case may be and also have a lien over the sums pending finalisation or adjudication of any such claim.” The clause provided that the “Contractor will have no claim for interest or damages whatsoever on any account in respect of such withholding or retention under the lien”. (ix) Clause 5 of Annexure-A to the Supply Order as amended, provided the method for the evaluation of performance and for the working out of compensation, if any, for substandard quality. In so far as is material, the clause provided as follows: 8 “In order to establish consistency of quality of product supplied, 1 MT out of the first lot supplied to ONGC against the present order would be retained separately by ONGC at its store as a reference sample.” The performance of subsequent lots was required to be judged by comparing the results achieved by the reference sample on the loopline test. If the comparison showed any deterioration in performance, the compensation leviable was to be based on the difference between the results of the reference sample and the subsequent lot in question, plus compensation, if any, applicable to the reference sample. (x) Clause 6 of Annexure-A stipulated that the reference sample will be prepared by drawing one barrel at random from each batch of the first lot offered for sampling and bonding which will be repacked and separately marked as a reference sample at ONGC's stores. The Dispute: 4. Disputes arose between the parties. DIK says that it has supplied the full quantity of PPD ordered within the time line 9 specified by the Supply Order, but that it was ONGC which failed to debond the material in a timely manner. According to DIK, ONGC failed to conduct a loopline test as specified in the Supply Order. On the other hand, it was ONGC's case that there was a late delivery of the material by DIK and that the material was not in accordance with the specifications and quality agreed upon in the Supply Order. As a result, ONGC asserts that it had to utilise additional amounts of PPD to achieve the same result. ONGC (i) claimed liquidated damages for late delivery of the material; (ii) claimed compensation for the additional PPD that was alleged to have been utilised; and (iii) deducted sums of money from amounts payable to DIK on the ground of liquidated damages and compensation. Additional Bank Guarantees were furnished by DIK against which ONGC released amounts due to DIK under the Supply Order. Arbitration: 5. DIK invoked the arbitration clause by its letter dated 15th November 1990. The disputes between the parties were referred to Mr.Justice B.J. Divan, former Judge of the Gujarat High Court, as Sole Arbitrator. The Arbitrator declared his award on 30th 10 January 1997. By his award, the Arbitrator held that (i) The disputes between the parties were arbitrable and that the claim raised by ONGC did not fall within the excepted matters contained in the Supply Order; (ii) DIK had entered into the contract with full knowledge of the deficiencies, from a scientific point of view, of the loopline test and it was hence not open for DIK to contend that the loopline test was unscientific or incapable of yielding accurate results; (iii) The loopline test carried out by ONGC was not in accordance with the procedure laid down in Supply Order inasmuch as although a reference sample was required to be drawn and maintained, the reference sample was not used for the loopline test; (iv) Despite having stated in response to interrogatories that details of the actual dosage of PPD supplied by DIK and the quantity used on the main line would be made available at the final hearing of the arbitration, ONGC had not led any evidence regarding actual user of the PPD supplied by DIK under the contract; (v) In view of the failure of ONGC to lead evidence regarding the actual dosage of PPD used on the main line, ONGC was not entitled to claim any compensation from DIK for the extra dosage of PPD alleged to have been used. The amount deducted by ONGC as compensation for such alleged 11 additional dosage would have to be paid over; (vi) By implied mutual consent, time for delivery was extended by the parties. The long time taken between the bonding of each lot and debonding was entirely due to the stand taken up by ONGC that the loopline test had to be carried out as provided in the contract and that extra dosage had to be used on the main line because of what was found at the time when the test was conducted on each lot. Since ONGC failed to prove the case that extra dosage had been used in respect of each of the seven lots, the question of late delivery did not survive. Moreover, ONGC failed to establish that it has suffered any loss owing to alleged late delivery and hence it was not entitled to deduct any amount from the outstandings of DIK; (vii) There was no reason for ONGC to avail of the Bank Guarantee and DIK was entitled to claim Bank commission and charges thereon. 6. Under the arbitral award, DIK was held to be entitled to the following amounts from ONGC: (a) Rs.59,40,718/- wrongfully deducted on account of PPD; (b) Rs.32,82,680/- deducted as liquidated damages for alleged late delivery; (c) Rs.7,81,153/- towards Bank commission and charges for the Bank Guarantee; 12 (d) interest computed at the rate of 18% p.a. on the aforesaid amount; and (e) Rs.67,175/- being 75% of the costs of the Arbitrator in the arbitration. The Arbitration Petition: the Judgment of the Single Judge: 7. In an Arbitration Petition filed under Section 30 of the Arbitration Act, 1940, ONGC challenged the award before this Court. By a judgment dated 1st October 1997, the Learned Single Judge upheld the award and accordingly a decree was drawn up in terms of the award on 27th October 1997. By an order dated 13th February 1998, a Division Bench while admitting the appeal, granted a stay on the execution of the decree conditional on ONGC depositing an amount of Rs. 2.30 crores. DIK was permitted to withdraw the amount on furnishing a Bank Guarantee. DIK has withdrawn the decretal amount and the Court has been informed that a Bank Guarantee had been furnished as directed by the Court, pending the hearing and final disposal of the appeal. III The Challenge : 8. The challenge by ONGC has, in the course of the 13 submissions urged at the hearing of the appeal, been confined to the following four grounds: (i) The Arbitrator, it has been urged, erred in assuming jurisdiction on matters which were excepted from the scope of the arbitration clause. ONGC's submission is that the finality provided under clause 17(ii) of the Special Conditions will extend to the question as to whether the material that was sampled/bonded is below the specifications on test as well as in regard to the option of ONGC to reject in full or in part, the material supplied or to accept the material at a reduced rate. Alternatively, ONGC urges that during the course of the contract, DIK had asked for joint testing in respect of the PPD that was supplied and agreed to be bound by the results of the joint test. Following this, it was submitted that DIK had quantified the loss suffered on account of dosage variation at Rs.35 lakhs; (ii) The award of the Arbitrator is contrary to the terms of the contract which would necessitate the interference of the Court on the ground of an error apparent on the face of the record; (iii) The Arbitrator erred in rejecting the deduction of liquidated damages on the ground that it was not proved. Parties, it was urged, provided in clause 20 of the Contract, a genuine pre-estimate of damages and the principles 14 enunciated by the Supreme Court in the judgment in Oil & Natural Gas Corporation vs. Saw Pipes 1 will apply; and (iv) The award of interest is contrary to the provisions of Clause 27 of the Contract. 9. On behalf of DIK, it has been submitted that (i) A Petition under Section 30 of the Arbitration Act, 1940 is neither an appeal on facts, nor on law and the jurisdiction of the Court extends to determine whether the Arbitrator had committed an error apparent on the face of the record; (ii) In the exercise of the jurisdiction, it is neither open to the Court to reappreciate the evidence nor to reappreciate the material on record before the Arbitrator, the Arbitrator being the sole Judge of the quality and the quantity of the evidence before him; (iii) Clause 17(ii) of the Special Conditions does not enunciate a blanket ban to a challenge against any decision by ONGC. Under the clause, it is only the decision of ONGC to reject in full or part, the PPD supplied or to accept the same at a reduced rate that is rendered final. In other words, the decision of ONGC in regard to the exercise of the aforesaid option is final, but not on the question as to whether the material passed 1 2003 (5) SCC 705 15 the contractual specifications after the loopline test; (iv) The Arbitrator has entered a finding of fact on an appreciation of evidence that the loopline test was not correctly carried out in accordance with the terms of the contract. This finding cannot be assailed either in the petition or in appeal and as a matter of fact, no such challenge was advanced in the Arbitration Petition; (v) On the issue of liquidated damages, the requirement of Clause 20 is that there should be a delay in supplies. However, in the present case, the finding of fact is that delivery was effected within time since time for making delivery was extended by mutual consent. This is a matter of appreciation of evidence and as a matter of fact, there is no challenge to the finding of the Arbitrator in the Arbitration Petition. There being no late delivery, there could be no question of damages; (vi) Though ONGC stated before the Arbitrator that it had in its possession evidence to prove extra dosage of PPD required, the relevant material was neither produced nor proved. The finding of the Arbitrator that ONGC failed to lead evidence on the actual extra dosage of PPD used is correct and does not warrant interference; (vii) The Arbitrator has correctly followed the decision of the Supreme Court in Maula 16 Bux v. Union of India 2 and the decision in Saw Pipes (supra) would not lead to a different conclusion; and (viii) On the question of interest, the Learned Single Judge was justified in coming to the conclusion that the challenge could not be entertained in the absence of even a ground in the Arbitration Petition. IV Parameters of the challenge under Section 30 of the Arbitration Act, 1940: 10. The Learned Single Judge was dealing with a challenge to an arbitral award under Section 30 of the Arbitration Act, 1940. Under Section 30, an award could not be set aside except on one or more of the following grounds, namely, that (i) The Arbitrator has misconducted himself or the proceedings; (ii) The award has been made after the issuance of an order by the Court superseding the arbitration or after proceedings had become invalid under Section 35; and (iii) The award has been improperly procured or is otherwise invalid. An arbitral award is a decision of a domestic Tribunal chosen by the parties to facilitate arbitration. In the Union of India vs. Rallia Ram,3 the Supreme Court held that the 2 AIR 1970 SC 1955 3 AIR 1963 SC 1685 17 Civil Courts which are entrusted with the power to facilitate arbitration and to effectuate arbitral awards, cannot exercise appellate powers over the decision. The interference of the Court cannot be justified merely on the ground that the Judge perceives the decision to be wrong, but only where an error of law appears on the face of the award. That test postulates that there is in the award or a document actually incorporated thereto some legal proposition which is the basis of the award and which can then be said to be erroneous: “Wrong or right the decision is binding if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. 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 Co. v. Jivraj Balloo Spinning and Weaving Co., Ltd., 50 Ind App 324 : (AIR 1923 PC 66).” 18 However, where a question of law is specifically referred to the Arbitrator for a decision, the award of the Arbitrator is binding on the parties for, by referring a specific question, the parties evince an intention to have a decision of the Arbitrator rather than from the Court. In such a case, the Court would not interfere unless it is satisfied that the Arbitrator has proceeded illegally. 11. This statement of law governing the ambit of a challenge under Section 30 of the Arbitration Act, 1940 has consistently been followed in subsequent decisions. Later decisions expound upon the doctrine of error apparent and define the ambit of the jurisdiction of a reviewing Court. The propositions of law which emerge from those decisions can now be briefly summarised: (i) A Court while examining the objections taken to an award filed by an Arbitrator is not required to examine the correctness of the claim on merits with reference to the materials produced before the Arbitrator. The Court cannot sit in appeal over the views of the Arbitrator by re-examining and re-assessing the material; 4 4 Puri Construction Pvt. Ltd. v. Union of India, AIR 1989 SC 777 (paras 13 & 14 at pages 782 and 783). 19 (ii) The Arbitrator is constituted by the parties to be a final arbiter of the disputes between them and the award is not open to challenge on the ground merely that the Arbitrator has reached a wrong conclusion or that he has failed to appreciate facts; 5 (iii) If there is no legal proposition either in the award or in any document annexed to the award which is erroneous and which constitutes the basis of the award and the alleged mistakes or errors are only mistakes of fact, the award is not amenable to correction by the Court;6 (iv) Even assuming that there is an error of construction of an agreement, or an error in law in arriving at a conclusion, such an error is not an error which is amenable to correction in a reasoned award. In order to set aside an award, there must be a wrong proposition of law laid down in the award which constitutes the basis of the award;7 5 Hindustan Tea Co. v. K.Shashikant & Co., AIR 1987 SC 81 (para 2 at page 82) 6 Jawaharlal Wadhwa v. Haripada Chakroberty, AIR 1989 SC 606 (para 6 at page 610) 7 U.P. Hotels v. U.P. State Electricity Board, AIR 1989 SC 268 (paras 17 & 19 at pages 274 and 275) 20 (v) The reasonableness of the reasons furnished by the Arbitrator in making his award cannot be challenged. The fact that on the same evidence, a Court might have arrived at a conclusion different from the one arrived at by the Arbitrator is by itself no ground for setting aside the award;8 (vi) The application of the error apparent on the face of the record test does not empower the Court exercising jurisdiction under Section 30 to substitute the scrutiny by the Arbitrator by an evaluation of the Court of the merits of the documents and the materials