...

l A

ONGCLTD.

GARWARE SHIPPING CORPN. LTD.

NOVEMBER 14, 2007

[DR. ARIJIT P ASAY AT AND S.H. KAPADIA, JJ.]

Arbitration and Conciliation Act, 1996-Section 34-Contractual dispute-Issue with regard to computation of rates for repair and c maintenance expenses of respondent's offshore vessels chartered to appellant-Reference to arbitrator-Arbitration Award-Interference with-Held: No proposition that Courts would be slow to interfere with arbitrator's award even if the conclusions of arbitrator are perverse, and even when the very basis of arbitrator's award is wrong-On facts, D norms prescribed by arbitrator for mode of calculation as upheld by High Court, not appropriate-Thus, interference under Article 136 called for and norms by Arbitrator set aside-Constitution of India, 1950-Article 136.

E Appellant required offshore vessels (OSV) for supplying material from its onshore bases to its offshore intallations.

Respondent and shipping Corporation oflndia acquired offshore vessels to charter them to the appellant. Appellant took on charter, the OSV ofrespondent and the next year, the OSV ofSCL Contract

F was .entered for first five years. It was extended by another five ; years. Charter was further extended by six years. Dispute arose between appellant and the respondent and others with regard to computation of the rates for repair and maintenance of offshore vessels for 11 to 16 years of their operation. The Committee submitted report with regard to a suitable formula for the charter G rate for the further extended period. Government oflndia accepted the recommendations of the Committee partially. Indian Shipping A Companies and respondent made representations. Thereafter, _ Government oflndia appointed a High Level Working Group which gave its recommendations. The dispute was referred to the H 1154

arbitrator. Arbitrator held the Committee did not recommend that A irrespective of the period ofinduction, years should be calculated as that of SCI; that the respondent did not question the recommendations of High Level Working Group and Committee's Report but merely contended that the mode of implementation thereof was incorrect; that it was not open for him to go behind the B report and the only area of enquiry was whether or not the report was correctly implemented; that neither of the Committees examined whether the entitlement of each OSV was to be determined with reference to the years of actual user or only with reference to the calendar years; that for the computation of repairs C and maintenance expenses, it was necessary to take into consideration the years of operation and not the calendar years; that the 12th year of operation of SCl's OSV s should be equated with the 13th year of operation of respondent's OSV s and so on; and that tile interpretation suggested by appellant would lead to great D injustice.

Appellant filed appeal under section 34 of the Arbitration and Conciliation Act, 1996 challenging the award. Single Judge of High Court dismissed the appeal. Aggrieved, appellant filed appeal.

Division Bench of High Court dismissed the same holding that the E arbitrator had consi<Jered and construed the reports while arriving at his conclusions; that the basis of the calculation adopted by the arbitrator was not only logical but just and fair; that the provisions of the said reports called for a proper interpretation and construction before being applied to the facts of the case and the arbitrator did F so; that even if the mode of calculation as applied by the arbitrator is not very appropriate in its effect, that could not be a ground for exercise of power under s. 34; that the reference did not include the 13th to 16th year to inspect; and that the arbitrator thought it improper to open the same and that a narrow technical reading of G the Award cannot be made. Hence the present appeal.

Appellant contended that the courts below failed to notice that the Award made by the Arbitrator was beyond the reference made; that the arbitrator's view that the corresponding year could be a more H

A . appropriate factor is Without foundation; that the Bench mark of SCI

in a'particuiar yea'r could not be departed from; that there was lio scope for shifting of figures; that he normative fig1ire for third period remained constant; and that though in the Writ Petition there was 'challenge to the period 13 tO 16 years, a bare reading of the writ :B petition shows.that it did not relate to the said period.

Respondent contended that as tWo views are possible, High Court's view should not have been interfered; that arbifrator had accepted one view whiCh is possible and was iiot de hors the C Coniniittee's report; and that interference under Article 1:36 oftbe

Constitution was not called for as substantive justice had been done; even though the order lllay.be wrong on some parts~

Partly allowing the appeai, the Court

HELD: 1. There is no proposition that the courts could be slow D to interfere with the arbitrator's Award, even if the conClusions are perverse, and even wheii the vefy basis of tiie Arbitrator's award is wr<mg. In the ilistaiit case, interference is warrantid and th.e norms

prescribetlb.y the Arbitrator a~ upheld by the Single Judge and die DivisiOri Bench are set aside. [Para 28) [1166~B, CJ E 2.1. Higli Level Working Group concluded that repair and niaiittenarice expenses were to be acttiaiized with effect from the ii th year of operation. The Committee was seized Of the anomaly ofiower rates being paid to those Owners who exercised greater F management effectiveness by eiistifihg lower capital co.sts, fower interest rates arid lower debt equity ratiOs. Therefore; High Level Working G roiip, felt that though it was now not possible to correct any anomalies tliat may have crept iri auring the first 12 years; at least for the last term of four years the formula should reflect; as G fat as practicable, the prindple of equal pay for equal work. [Para 18 and 19J [1163-A, B, C, DJ

2.2. Operating costs are to be calculated Ori the basis of actual expenditure incurred by SCI in operating SCl's OSVs for full (first) one year period. [Para 22) [1164-E, F)

2.3. The concept of reimbursement is the measure fixed, the A . year of operation is immaterial. The year of operation can vary is an irrelevant factor. The Committee recommended the normative R&M expenses of OSV of 5400 BHP for the year 1988-89 to 1993- 94 to be same as given in the JS&F A Committee report. The R&M expenses for the subsequent years were recommended at the rate B of9.5% escalation per annum on the expense of the year 1993-94 upto 1998-99 and the ainotii1t for of subsequent years @ 9.5% escalation pet anliuin. The difference between the recommended normative amount given and the actual R&M expense of SCI; s OSVs of 5400 BHP (Audited statements) were to be reimbursed on c year to year basis after receipt of the audited statement from SCI additional reimbursement of corresponding overhead expenses in the ratio of15:85 of the differential amount will also be made. The differential amounts for other OSVs were recommended to be calculated pro rata basis of the BHP of the respective OSVs w.r.t. D above differential amountforOSVs ofS400 BHP.

[Paras 24 and 25] (1165-B, C, D, E]

2.4. Though there was some controversy as to whether the year referred to is the financial year as reimbursement was on year to year basis after receipt of the auditor's statement from SCI the E norms obviously i"clate to financial year. The claiin was for 11th and 12th years and Hie award also covered from 13th to 16th year. The HL WG referred to certain anomalies. But they related to the previous years. The "Bench Mark" is the figure of SCI of particular year. So when entry to business was made is irrelevant.

F [Para 26 and 27) [1165-F; 1166-AJ

CIVIL APPELLATE JURJSDICTION : Civil Appeal No. 5210 of 2007.

From the Judgment and final Order dated 1.3.2005 of the High CoUlt G of Judicature at Bombay in Appeal No. 57/2005 in A.P. No. 329/2004.

Ashok Desai, Gopal Jain, Vipin Nair, P.B. Suresh and Mridul (for Temple Law Fim1) for the Appellant.

R.F. Nariman, Mukul Rohatgi, Biren Saraf, Santosh Paul, Abhishek H

A K. Rao, Praji K.J. and M.J. Paul for the Respondent. r I The Judgment of the Court was delivered by

DR. ARIJIT PASAYAT, J. 1. Leave granted.

2. Challenge in this appeal is to the judgment rendered by a Division Bench of the Bombay IDgh Court dealing with an appeal questioning the t correctness of the order passed by a learned Single Judge who dismissed the appellant's appeal mder Section 34 of the Arbitration and Conciliati~~ 11 Act, 1996 (in short the 'Act') questioning the Arbitrator's award. ; I c

3. The controversy lies within a very narrow compass. I

4. Tue.factual backgromd is almost undisputed and is essentially*; :I follows: I

•' The appellant required off shore vessels (in short 'OSVs') inter, r.

D alia, for supplying material from its onshore bases to its offshore installations. After initially meeting its requirements by chartering foreign .....

OSVs, the appellant decided to develop a fleet of Indian Flag vessels. Various Indian companies including the respondent and the Shipping . .

Corporation oflndia (in short 'SCI') acquired OSVs, with a view to E chartering them to the appellant. The respondent acquired five vessels- (named Garware I to Garware V) which were handed over to th~ appellant in the months of November and December, 1983 and January . ' ' I and March, 1984.

F The dispute pertains to the cost of repairs and maintenance of th~ respondent's OSVs for the eleventh to the sixteenth year o( theii; !. operation. Even though there is no dispute regarding the first two 1term~

A..

of five years each, reference to the manner in which the rates for the same were arrived at is necessary. A working group mder the Director General

G of Shipping was constituted by the Ministry of Petroleum to determine the floor day rate in respect of the vessels keeping two objects in mind, i.e. (a) long term availability of the OSV's for the appellant and (b) economic viability to ensure the respondent's swvival in the business. The ). '<(

report was submitted by the working group on 8.3.1984 suggesting the day rate which comprised of two components, i.e. (a) capital recovery

•IH: H ..

~~ ,,. ....

ONGCLTD. v. GARWARESHIPPINGCORPN.LTD. 1159

(PASAYAT, J.]

factor and (b) operating expenses. Contracts were accordingly entered A into for the first five year period beginning from 1983-84. The Government of India by an order dated 18.8.1984 approved the report in certain respects only. There is no dispute between the parties regarding the payments of operating costs for the first five years. The charter was extended by another five years. A committee presided over by Dr. AN. B'

Saxena was formed to review the operating costs payable for the extended term. The Government approved the report of the Committee on 5.8.1993. There is no dispute between the parties in respect of the payments regarding the second five year period also.

5. The present dispute relates to the period beyond ten years so far as relates to the basis for computing the rates for repairs and maintenance. c

By an order dated 29.4.1993 the charter was extended by a further six years. By an order dated 16.3.1995 and as modified by an order dated 14.9.1995, a committee also presided over by Dr. AN. Saxena was D formed to recommend a suitable fonnula for the charter rate for the further extended period.

6. The committee submitted its report on 14.9.1997. This committee made recommendations inter-alia in respect of repair and maintenance expenses. The reference to arbitration was confined only to the payment E of these repairs and maintenance expenses.

7. The Governmentoflndia by a letter dated 15.6.1998 accepted the recommendations of the second Dr. AN. Saxena Committee only partially, Representations were thereafter made by the Indian Shipping Companies including the respondent for reconsideration of the F recommendations. Pursuant thereto, the Government of India appointed a High Level Working Group presided over by Mr. Naresh Narad for considering the otstanding pending issues. The following recommendations of the High Power Committee are relevant:

"Pending Issues.

Detennination of year a) 1 to 5 years as per from which R & M payments already expenses are to be made. Settled cases actualized.

Not to be reopened.

b) , 6 to 10 years as per nonns fixed by Dr.

Saxena Committee of 1995-77.

c) 11 and 12 years to. actualized on the basis of S.C.ls' OSVs as recommended by Dr. Saxena Committee of 1995-77."

8. Disputes and differences arose between the appellant and _interalia the respondent and others regarding the method to the adopted for calculating rates payable with reference to the eleventh to the sixteenth years. The respondent, therefore, filed Writ Petition No. 2788 of2001 D for various reliefs.

9. By an order dated 7.12.2001 aDivisionBenchofthe High Court recorded that the Writ Petition involved certain contual disputes and that both the parties had agreed to refer the disputes raised in the Writ Petition to the sole arbitration of Mr. Justice M.L Pendse (a former Judge E ofthe Bombay High Court and the former Chief JustiGe of the Karnataka

High Court). The order which is a short one, reads as follows:

"This writ petition involves certain contractual disputes relating to repairs and maintenance expenses etc, contract between the parties contain an arbitration clause. Both the_ parties agree to refer the disputes raised in the wnt petition to sole arbitration of Justice M.L.

Pendse (Retd.). Parties further agree that in case Justice Pendse is nqt in a position to take up the arbitration, Justice D.R. Rege (Retd.) shall be the arbitrator for the disputes betWeen the p'arties.

Arbitrator is requested to dispose of the arbitration as expeditiously as possible.

Petition is disposed of." ·

10. The learned arbitrator noted the respondent's submission that H . while calculating the payments due for the 11th to 16th years of the

ONGC LTD. v. GAR WARE SHIPPINGCORPN. LTD. 1161

[PASAYAT, J.]

operation of the OSV s of the respondent, the appellant has overlooked A the important fact that the OSV s of the respondent were taken on charter one year prior to the appellant obtaining the OSV s of the SCI. The respondent, therefore, contended that it was not correct that the corresponding years of SCI should be taken into account while determining aniounts payable to the respondent. The learned arbitrator B rejected the appellant's contention. He held that the committee nowhere recommended that irrespective of the period of induction, the years should be calculated of that of the SCI. He held that the respondent had not -questioned the recommendations made by the High Level Working Group Report and the second Saxena Committee Report but merely contended c that the mode of implementation thereof was incorrect. The arbitrator further observed and accepted that it was not open for him to go behind the report and the only area of enquiry is whether or not the report was correctly implemented. He came to the conclusion that on a close scrutiny of the reports, it was clear that neither of the committees examined whether D the entitlement of each OSV is to be detennined with reference to the years of actual user or only with reference to the calendar years. He also came to the conclusion that for the computation of repairs and maintenance expenses, it was necessary to take into consideration the years of operation and not the calendar years. It was held that the 12th year of E operation of SCI's OSVs should be equated with the 13th year of operation of the OSVs of the respondent and so on. He also held that the interpretation suggested by the appellant would lead to great injustice.

For instance, the OSV of the respondent would complete 11 years of operation while the OSVs of the SCI would have operated only for 10 F years.

11. Appellant questioned con-ectness of learned Arbitrator's conclusion by filing an appeal under Section 34 of the Act. Learned Single Judge dismissed the appeal holding that the conclusion was rational. An appeal filed was also dismissed.

12. According to the Division Bench, the learned arbitrator has considered and construed the reports while arriving at his conclusions.

The entire dispute in the Writ Petition and before the learned arbitrator centered around this issue. The basis of the calculation adopted by the H

A learned arbitrator was, not only logical but just and fair. The provisions of the said reports are not such 11at they required no interpretation and weremerely to be applied without anything more. They called for a proper interpretation and construction before being applied to the facts of the case. The learned arbitrator did so.

l3. The learned Single Judge held that undoubtedly there was no reference so far as the period of 13 to 16 years are concerned to the learned Arbitrator. But the prayers and the writ petitions clearly indicated that even for that period an issue was raised.

14. The Division Bench was of the view that even if the mode of calculation as applied by the arbitrator is not very appropriate in its effect, that could not be a ground for exercise of power under Section 34.

15. It noted that the reference in fact did not include the 13th to the 16th year to inspect that the arbitrator thought it improper to open the D same. The High Court was of the view that a narrow technical reading of the Award cannot be made.

16. In support of the appeal, learned counsel for the appellant submitted that both learned Single Judge and the Division Bench failed to E notice that the A ward made by the Arbitrator was beyond the reference ma:de. The arbitrator's view that the corresponding year could be a more appropriate factor is without foundation. The Bench mark of SCI in a particular year could not be departed from. There was no scope_ for shifting of figures. There is no rule of universal application that the cost of F maintenance would be more when the vehicle becomes older. The normative figure for third period remained constant. The order of operation is the operating order and the financial order is defining. Though in the Writ Petition there was challenge to 13 to 16 years, a bare reading of the writ petition shows that it did not relate to the said period.

17. In response, learned counsel for the respondent submitted that

two views are possible and, therefore, High Court's view should not have interfered. Arbitrator had accepted one view which is possible. No one says that it is de hors the Committee's report. It is a case where no interference is called for under Article 136 of the Constitution oflndia,

[PASAYAT, J.] 1163

1950 (in short the 'Constitution') as substantive justice had been done, A even though the order may be wrong on some parts.

18. Some of relevant parts of the Report of HL WG need to be noted:

"This High Level Working Group therefore, concludes that R&M expenses are to be actualized with effect from the 11th year B of operation."

It was further noted as follows:

"This Committee was seized of the anomaly of lower rates being paid to those Owners who exercised greater management C effectiveness by ensuring lower capital costs, lower interest rates and lower debt equity ratios.

19. The High Level Working Group, therefore, felt that though it is now not possible to correct any anomalies that may have crept in dwing D the first twelve years, at least for the last term of four years the formula should reflect, as far as praticable, the principle of equal pay for equal work.

20. It is to be noted that the anomalies referred to in the subsequent paragraphs relate to the anomaly oflower rates being paid to owners to E exercise greater management effectiveness by ensuring lower capital because oflower interest rate and lower rate equality ratio.

21. The recommendations of the HL WG are as follows: Determination of year from a. 1st to 5th year as per payments F which R&M expenses are to already made. Settled cases not be actualized to be reopened.

b. 6th to 10th year as per norms fixed by the Dr. Saxena Committee 0 of 1995-97.

c. 11th and 12th years to be actualised on the basis of SCI' s OSV s as recommended by the Dr.

Ceiling rates for'~A" type Vessels only pertaining to the period beyond 12

Saxena Committee of 1995-97 ~

a. From 1st to 5th year ceiling rates as already paid by ONGC.

B years of operation

b. From 6th to l0t4 year floor rates to be paid by ONG<;.

c. For the 11th and 12th years ceiling rates to be paid by ONGC

6. Compensation in lieu of CRF a. The Operating Expenses (including Crew Salary & Wages covering agreements between INSA and MUI/ NUSI) as determined on D the last day of the 12th year of operation for each vessel, (as per recommendations of the Dr. Saxena Committee and further modified b)' this Working Group) to be fixed and E made applicable for the next four year i.e. from the 13th to the 16th year.

22. Operating costs are to be calculated on the basis of actual

xpenditure incUITed by SCI in operating SCI's OSVs for full (first) one F year period. ·

23. The committee observed that the actual expenses of SCI have not followed any uniform pattern. The scale to be suggested by the icommittee needed to be based on some normative amount for a base G ryear over which an escalation of 9.5% per annum may be considered for

:a block of five years and for subsequent block of five year the base may . be changed in the same pattern as that of victualling cost The c0mmittee 'observed that the total cost of repair and maintenance for the block of five years, that is, 1988-89 to 1992-93 of SCI' s OSV s is Rs.106.482 H lacs per OSV as againstthe recommended amount ofRs.97.618 lacs

. ;-

ONGCLTD. v. GARWARESHIPPINGCORPN.LTD. 1165

[PASAYAT, J.]

given in the JS & FA committee report. The committee considered that A the SCI' s audited statement of R&M expenses may be considered as appropriate amount for reimbursement to Shipowners. The difference between SCI's audited R&M expenses and the normative amount was to be reimbursed to the Shipowners on receipt of SCI's audit statement from time to time in proportion to the BHP of the respective OSVs.

24. As the concept of reimbursement is the measure fixed, the year of operation can vary is an irrelevant factor. The repair and maintenance expenses have also been dealt by the Committee.

25. In accordance with the deliberation of the Committee on this at c para 3.5.5, the committee recommended the normative R&M expenses of OSV of 5400 BHP for the year 1988-89 to 1993-94 to be same as given in the JS&F A Committee report. The R&M expenses for the subsequent years were recommended at the rate of 9.5% escalation per annum on the expense of the year 1993-94 upto 1998-99 and the amount D for of subsequent years @ 9 .5% escalation per annum. The difference between the recommended normative amount given and the actual R&M expense of SCI' s OSV s of 5400 BHP (Audited statements) were to be reimbursed on year to year basis after receipt of the audited statement from SCI additional reimbursement of corresponding overhead expenses E in the ratio of 15:85 of the differential amount will also be made. The differential amounts for other OSV s were recommended to be calculated pro rata basis of the BHP of the respective OSV s w.r.t. above differential amount for OSV s of 5400 BHP.

26. Though there was some controversy as to whether the year F referred to is the financial year as reimbursement was on year to year basis after receipt of the auditor's statement from SCI the norms obviously relate to financial year.

27. A few factual aspects need to be noted. So far as Essar is G concerned, the year is same as SCI. In case of Bann, there was one time settlement and it is only JESCO which challenged the report. SCI' s first year of operation was 1984-85. The figures for that year provide some material for rationalization. It is to be noted that stress is on reimbursement. Thus the measure is fixed and, therefore, year of operation H

A is immaterial. It needs no reiteration that claim was for 11th and 12th years and the award also covered from 13th to 16th year. It is also to be noted that the HL WG referred to certain anomalies. But they related to the previous years. The "Bench Mark" is the figure of SCI of particular year.

So when entry to business was made is irrelevant.

28. There is no proposition that the courts could be slow to interfere with the arbitrator's A ward, even if the conclusions are perverse, and even when the very basis of the Arbitrator's award is wrong. In any case this is a case where interference is warranted and we set aside the norms prescribed by the Arbitrator as upheld by the learned Single Judge and C the Division Bench.

29. The appeal is allowed to the aforesaid extent with no order as to costs.

N.J.

Appeal partly allowed.

( ... ;