ONGC vs Saw Pipes [Oil & Natural Gas Corporation Ltd. vs Saw Pipes Ltd.]

ONGC vs Saw Pipes matter stems from a dispute challenging an arbitral award concerning the supply of equipment for offshore oil exploration by the respondent. The case was adjudicated by M.B Shah and Arun Kumar JJ, with the written judgment authored by Shah J.

Facts of ONGC vs Saw Pipes

The Oil and Natural Gas Commission (ONGC) issued an order to Saw Pipes for the supply of equipment for offshore exploration, specifying procurement from approved European manufacturers. Delivery delays occurred due to a general strike by steel mill workers in Europe and timely delivery was a crucial aspect of the contract. Despite ONGC granting an extension of time, it exercised the right to recover Liquidated Damages by withholding the amount from the payment to Saw Pipes.

ONGC deducted $3,04,970.20 and Rs 15,75,557 for customs duty, sales tax and freight charges. Saw Pipes contested the deductions, leading to arbitration. The arbitral tribunal rejected Saw Pipe’s force majeure defence but required ONGC to provide evidence of loss due to the breach. In the absence of such evidence, the tribunal deemed the deduction of Liquidated Damages as wrongful. ONGC challenged the award, arguing that it was against public policy, asserting a failure to apply the substantive law and ignoring contractual terms and trade practices.

The Bombay High Court, both at the single judge and division bench levels, dismissed the challenge. The Supreme Court ultimately set aside the arbitration award, directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs, the liquidated damages retained during payment.

Issues Raised

The issues raised in ONGC vs Saw Pipes were:

• Whether ONGC possessed the right to claim Liquidated Damages.
• Whether patent illegality could serve as grounds to challenge the award under section 34.

ONGC vs Saw Pipes Judgment

The Hon’ble Court in ONGC vs Saw Pipes initiated its analysis by extensively deliberating on the court’s authority to set aside an award under Section 34 of the Arbitration and Conciliation Act 1996, enumerating the various grounds for permissible interference. Transitioning to the issue of damages, the Court asserted that when the contract’s language is unambiguous, the court is bound by it. If the parties have mutually agreed upon a predetermined sum as genuine liquidated damages, there is no rationale for the tribunal to demand proof of the purchaser’s loss.

The Court in ONGC vs Saw Pipes further stated that, in cases where the court deems the damages stipulation as a penalty, it can award reasonable compensation upon proof of damage. However, in agreements crafted by field experts, the court should exercise caution in construing a liquidated damages clause as a penalty. Citing Maula Bux v Union of India, the Court emphasised this principle, especially when assessing compensation is challenging. In the present case, there was no contention challenging the reasonableness of the stipulated amount.

Concerning forfeiture, relying on Union of India v Rampur Distillery, the court expressed that the forfeiture clause can be construed either as liquidated damages or a penalty, depending on the reasonableness of the amount. The Court’s primary conclusion was that Liquidated Damages should be considered reasonable compensation, while penalties should not. Additionally, the Court asserted that no compensation should be awarded if it determines that no loss is likely to occur due to the breach.

Critical Appraisal of Judgement

Two significant errors in ONGC vs Saw Pipes are apparent:

The Court overlooked the impact of the labor strike across the entire European continent while assessing the merits of the ONGC case. This aspect, beyond Saw Pipes’ control and predictability, was disregarded by the Court.

The judgment by the two-judge Bench in ONGC contradicted the decision of the three-judge Bench in Renusagar Power Plant Ltd v Gen Electric Co. This deviation reflects judicial indiscipline and a violation of the binding precedent of a larger Bench. While the Renusagar case narrowly interpreted the term ‘public policy of India,’ the Division Bench expanded it to the extent that arbitral awards could now be reviewed on their merits, representing a regressive step in laws related to alternative dispute resolution amid globalisation.

Mr. Fali S. Nariman, a distinguished lawyer, criticised the judgments as virtually nullifying the entire Arbitration and Conciliation Act of 1996. He argued that introducing a fresh ground of challenge under the head of public policy contradicted established precedent and the intent of the 1996 Act for finality in alternative dispute resolution without undue court interference. The two-judge Division Bench, in altering the roadmap of arbitration law, seemingly reverted to the old 1940 Act.

ONGC vs Saw Pipes Case Summary

The 2003 case Oil & Natural Gas Corporation Ltd. vs Saw Pipes Ltd. is a notable legal case in India that established a new era of transnational commercial arbitration. The case also interpreted the terms “arbitral procedure” and “Public Policy of India”.

In ONGC vs Saw Pipes, the Oil and Natural Gas Corporation (ONGC) issued a tender for casing pipe supply. SAW Pipes Ltd., a company that supplies equipment for offshore oil exploration and maintenance, responded to the tender request in 1995.

The arbitral tribunal ruled in favour of SAW Pipes Ltd., directing the defendant to pay the amount not paid by the defendant. ONGC then filed an application with the High Court against the tribunal’s decision.

The Supreme Court in ONGC vs Saw Pipes set aside an arbitration award directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages. The court held that the deduction of liquidated damages was wrongful due to a lack of evidence of financial losses.