OIL & NATUIRAL GAS CORP. LTD. VS. SAW PIPES LTD-(public policy & patent illegality)

CASE DETAILS

Bench M.B. SHAH J. ARUN KUMAR J.

Case no. (2003) 5 SCC 705

Acts/law Arbitration Act 1996

INTRODUCTION

ONGC vs. Saw Pipes is a landmark judgment in the arbitration law where the supreme court has dealt with an issue concerning patent illegality and act against the public policy as one of the ground for setting aside of award under section 34 of the Arbitration Act.

ISSUES BEFORE APEX COURT
i.  Jurisdiction of court under section 34 of Arbitration & conciliation Act 1996?
ii. Whether court have the jurisdiction to set aside the award which is patently illegal as against the A & C Act, or any other substantive law, or against the terms of the contract?

RATIO OF JUDGMENT:

Issue no. 1 while deciding the jurisdiction and power of the court for setting aside any arbitral award based on the grounds mentioned under section 34 court viewed that section 34 (2) (a) (i) to (iv) need no discussion, however clause (v) requires consideration to ascertain the jurisdiction of the court.

Section 34 (2) (a) (v) is as under:-

• The Court may set aside an award:
• If arbitral tribunal is not in accordance with agreement of the parties or the Part I of the A & C Act,
•  If the arbitral procedure was not in accordance with agreement of the parties or Part I of the A & C Act

Court emphasized that award should not be in derogation with arbitration agreement or if no such agreement exist award should not be in contravention to the Part I of  A & C Act. At the same time the agreement should also be valid and not in conflict with the Act.

Court further paid attention to section 28 of the Act to ascertain the procedure and power of the tribunal which provides as under:

Section 28: Rules applicable to the substance of dispute:

1. Where the place of the arbitration is in India- Substantive law for the time being in force in India,
2. Where the place of arbitration is outside India- Law designated by the parties and failing any designation tribunal shall decide the law

The court opined that the decision of the tribunal should be within the jurisdiction as conferred under the substantive law or as conferred under the contract. The question further arises is that “if the arbitral tribunal transcends the jurisdiction inferred from the Act and the contract whether court could intervene and set aside such award.

In paragraph no. 13 court held that if such award will not be interfered it will be against the concept of justice. Since the tribunal surpassed its jurisdiction, it would be considered as patently illegal thereby same could be set aside under section 34 of the Act.

In paragraph no. 15 court observed that:

If the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, which could be interfered under Section 34. However, such failure of procedure should be patent affecting the rights of the parties.

What is public “policy of India” under section 34 (2) (b) (ii)?

Section 34 (2) (b) (ii) inter alia provides the power of the court to set aside the arbitral award however the Act nowhere defines “public policy of India”. The same is to be construed in terms of the scheme of the act and purpose of the section.

To infer the meaning of the same the court relied on the Renusagar power co. ltd. Vs. General Electric Co [i] where in the court opined that it will be contrary to the public policy if such enforcement would be contrary to:

1. Fundamental policy of India;
2. The interest of India;
3. Justice or morality;

It was contended by the appellant against the aforesaid judgment that narrow meaning was given to phrase “public policy of India” as in the said judgment was concerning the execution of the award that has attained finality. The scheme under section 34 deals with setting aside of an award whereas section 48 is for the enforcement of foreign awards so the award under section 48 has attained finality. However, in case of domestic award only recourse is section 34.

The apex court considered the said contention thereafter held that “public policy of India” should be construed in the context of the jurisdiction of the court where validity of the award has been challenged and not based on the court before which execution of the award has been sought as the jurisdiction in case of execution is limited. The court further held that when the validity of the award is assailed, narrow meaning should not be interoperated of the term “public policy of India” wider meaning should be given so that “patently illegal” award could be set aside.  

In para no. 31 court scrutinized that:  

31. Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term “public policy” in Renusagar case [1994 Supp (1) SCC 644] it is required to be held that the award could be set aside if it is patently illegal. The result would be — award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

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.

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In paragraph no. 74 the court concluded as follows:

A(1) The court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration.

(2) The court may set aside the award:

(i)(a) if the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties,

(b) failing such agreement, the composition of the Arbitral Tribunal was not in accordance with Part I of the Act.

(ii) if the arbitral procedure was not in accordance with:

(a) the agreement of the parties, or

(b) failing such agreement, the arbitral procedure was not in accordance with Part I of the Act.

However, exception for setting aside the award on the ground of composition of Arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part I of the Act from which parties cannot derogate.

(c) If the award passed by the Arbitral Tribunal is in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.

(3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:

  (a) fundamental policy of Indian law; or

  (b) the interest of India; or

  (c) justice or morality; or

  (d) if it is patently illegal.

(4) It could be challenged:

(a) as provided under Section 13(5); and

(b) Section 16(6) of the Act.

(B) (1) The impugned award requires to be set aside mainly on the grounds:

(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was of the essence of the contract;

(ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed;

(iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages;

(iv) on the request of the respondent to extend the time-limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered;

(v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care of by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract.

[i] 1994 supp (1) SCC 644