Oil & Natural Gas Corpn.Ltd vs Western Geco International Ltd

2. The appellant-Corporation is engaged in the business of drilling and exploration of oil and natural gases. In November, 1999, the appellant invited offers for technical upgradation of Seismic Survey Vessel, M.V. Sagar Sandhani (hereinafter referred to as the “Vessel”) with a view to modernising the same. According to the tender conditions, one of the main items of equipment required for upgradation of the Vessel was “Streamers” fitted with hydrophones. The specifications, however, did not stipulate the national origin of such hydrophones.

3. In response to the tender notice respondent-M/s Western Geco International Ltd., submitted a bid offering to supply Nessie 4 streamers equipped with “Geopoint” Hydrophones of U.S. origin. The appellant’s case is that the term relating to supply of such Geopoint Hydrophones formed a material part of the offer made by the respondent-company in whose favour the appellant-Corporation eventually awarded a contract in terms of its letter dated 10th October, 2000 duly accepted by the respondent on 25th October, 2000. The Vessel was resultantly handed over to the respondent on 10th April, 2001 for carrying on the proposed modernisation and upgradation work. A formal contract was in due course executed between the parties on 18th June, 2001.

5. The respondent’s case per contra is that it continued its efforts to obtain a licence only to be informed by its sources in the US that the latter was likely to impose certain onerous conditions one of which could be that US made hydrophones can be used only on loan basis that too for a short duration of 24 months only. Respondent’s further case is that its source in US had informed it that the US authorities were not likely to grant a licence to sell hydrophones to India. Be that as it may while the matter was pending with the Defence Department, a massive terrorist attack on 11th September, 2001 shook America. The respondent’s hope of getting a licence for sale of US made hydrophones receded further with this unexpected development. The respondent accordingly informed the appellant- Corporation about the new development and pleading force majeure the respondent informed the appellant-Corporation of the former’s inability to equip the vessel with U.S. made hydrophones. The appellant-Corporation refuted the invocation of force Majeure by its letter dated 20th September, 2001 and informed the respondent that since the field season was starting shortly any further delay in the delivery of the vessel would adversely affect its operation. The respondent on its part started looking for and offering alternatives to the U.S. made hydrophones and argued with the appellant-Corporation that since origin of the hydrophones was not indicated in the bid documents it was testing replacement by M-2 US Geo Spectrum Hydrophones made in Canada at its Norway facilities to check their suitability which exercise the respondent hoped to complete by 27th September, 2001. The respondent informed the appellant-Corporation that if the Corporation accepted the replacement, those hydrophones could be substituted for the US hydrophones within a short time.

6. The appellant-Corporation was, however, in no mood to accept a substitute for the contracted hydrophones. It was on the contrary keen to have US made hydrophones fitted on the vessel. The Corporation, therefore, required the respondent to continue its efforts to secure a licence from the US Government in which direction the appellant-Corporation on its own moved the concerned Ministry in Government of India to secure a licence. Further information and details in respect of the proposed Canadian hydrophones was all the same called for by the Corporation from the respondent. Since, however, the efforts to secure a licence from US Government were making no progress, the respondent sought approval of the appellant-Corporation to remove the US hydrophones from the vessel and transfer them to their repair facility in Singapore to facilitate replacement by the Canadian made hydrophones. The respondent also wrote a detailed letter dated 10th October, 2001 to the appellant-Corporation informing the latter that the US government was not likely to grant a licence and that it had withdrawn the application made for that purpose to prevent a denial. What is important is that by letter dated 16th October, 2001 the respondent clearly stated that it was not in a position to deliver the vessel with streamers containing the Geopoint Hydrophones of US make. This letter was followed by letter dated 21st October, 2001 addressed to the appellant-Corporation with a request to permit removal of US hydrophones and replacement of Canadian hydrophones which had been extensively tested 1999 in connection with supply of Seismic Survey Vessel delivered to NOIC for the Iran project. Further information required by the appellant-Corporation was also supplied by the respondent by its letter dated 24th October, 2001 with a request to the Corporation to approve the proposed replacement. The respondent also agreed to give additional warranty of one year for the replaced hydrophones. By another letter dated 13th November, 2001 the respondent assured the appellant-Corporation that if the latter agreed to the replacement proposal there would be no financial implications and the additional cost involved in fixing the Canadian hydrophones would also be borne by the respondent.

7. It was only on 23rd March, 2002 that the respondent conditionally agreed to the proposed replacement of the US made hydrophones by those made in Canada. One of the conditions imposed for the replacement by the appellant-Corporation was the right to recover liquidated damages as per Clause 16 and for excess engagement of vessel as per Clause 14 of the subject contract. The replacement accordingly took place and the Vessel eventually delivered back to the Corporation with Canadian hydrophones on 6th May, 2002. On 24th May, 2002, a formal amendment to the contract was also effected to record the substitution of the US hydrophones by those made in Canada.

10. The Corporation also disputed the invocation of force majeure clause in the fact situation of the case especially when securing of a licence for the equipment was not a part of the contract between the parties, it being the sole responsibility of the respondent to determine the type and make of hydrophones. The terrorist attack on the twin towers was, according to the appellant-Corporation a post-contractual period issue as the date of the delivery of the vessel under the contract had since long expired by the time the attack took place. It was also contended that the delay in the completion of the contract was entirely attributable to the respondent who when called upon by the appellant-Corporation to submit the performance report of the M-2 hydrophones used in Seismic Survey Vessel PEJWAK suggested that the appellant-Corporation should obtain the same directly from NIOC forcing the appellant-Corporation to send a representative to Oslo to verify the parameters of the M-2 hydrophones at their own expense. It was asserted that once the respondent informed the appellant-Corporation that the US department of Commerce had finally rejected the licence, the appellant-Corporation was left with no alternative except to agree to the replacement of the US made hydrophones by Canadian M-2 hydrophones resulting in the delivery of the vessel back to the Corporation on 6th May, 2002 after considerable delay.

13. Issue No. 2 was, however, answered by the Tribunal in the affirmative, who took the view that once the respondent had made the choice and contracted to supply hydrophones made in the U.S. the appellant- Corporation was entitled to insist on the supply of the contracted equipment. The arbitrators further held that once the respondent had informed the appellant that the option of U.S. made hydrophones was closed, the later was not justified in insisting that the request for a license with the U.S. authorities should be pursued further. The arbitral tribunal decided Issue No.3 against the respondent holding that none of the events mentioned in the contract had taken place and since the parties to the contract did not belong to U.S., the force majeure clause could not have been validly invoked by the respondent.

19. The above period of 4 months and 22 days between 1st November, 2001 and 22nd March, 2002, in our opinion, comprises four separate intervals. The first of these four intervals is the period between 1st November, 2001 and 26th November, 2001 which period was taken by the appellant-Corporation to take a final decision whether or not an application should be made to the U.S authorities for the issue of a licence. The second interval comprises time taken by the respondent-claimant to make an application between 27th November, 2001 and 7th January, 2002, both days inclusive. The application for grant of a license was filed by the respondent only on 8th January, 2002. The third interval comprises time taken by the U.S Authorities between 8th January, 2002 and 7th March, 2002 to formally decline the issue of a license for sale of US made hydrophones to India. The fourth interval comprises time taken by the respondent-claimant to convey the decision of the U.S Authorities between 8th March, 2002 and 21st March, 2002. It is common ground that while the U.S Authorities had rejected the request for grant of a license on 8th March, 2002, the said rejection was conveyed to the appellant-corporation only on 22nd March, 2002.

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.”

31. Inasmuch as the arbitrators clubbed the entire period between 16th October, 2001 and 21st March, 2002 for purposes of holding the appellant- Corporation responsible for the delay, they committed an error resulting in miscarriage of justice apart from the fact that they failed to appreciate and draw inferences that logically flow from such proved facts. We have, therefore, no hesitation in rejecting the contention urged on behalf of the respondent that the arbitral award should not despite the infirmities pointed out by us be disturbed.

32. That brings us to the last submission that deduction on account of taxes not paid should have been allowed by the respondent-arbitral tribunal. The Tribunal has, in our opinion, correctly held that no part of the work was undertaken outside Singapore which was to be executed on a turnkey basis for a price that was pre-determined. The arbitrators have, in our opinion, rightly held that no taxes were payable under the Indian Income tax Act so as to entitle the Corporation to deduct any amount on that account by reason of non-payment of such taxes. The challenge to the award to that extent must fail and is, hereby, rejected.

33. In the result, we allow this appeal but only to the extent that out of the period of 4 months and 22 days which the arbitrators have attributed to the appellant-Corporation a period of 56 days comprising 42 days of the first interval and 14 days of the second referred to in the judgment shall be reduced. Resultantly, deductions made by the appellant-Corporation for the said period of 56 days shall stand affirmed and the award made by the arbitrators modified to that extent with a proportionate reduction in the amount payable to the respondent. No costs.