Decided on-: April 17, 2003
Bench-: Hon'ble Justice M.B. Shah & Hon'ble Justice Arun Kumar
FACTS
ONGC issued an order to Saw Pipes for offshore exploration equipment, specifying procurement from approved European manufacturers. Delays, caused by a steel mill worker strike in Europe, led ONGC to withhold Liquidated Damages. Despite an extension, Saw Pipes contested ONGC's deductions, resulting in arbitration. The tribunal rejected Saw Pipe’s force majeure defense but deemed the deduction wrongful without evidence of ONGC's loss. ONGC challenged the award, claiming it violated public policy, failed to apply substantive law, and ignored contractual terms.
The Bombay High Court and division bench dismissed ONGC's challenge. However, the Supreme Court 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
Whether ONGC had the right to claim Liquidated Damages.
Whether patent illegality could be used as grounds to challenge the award under section 34 of the Arbitration and Conciliation Act, 1966.
RULES
Sections 28 to 31, 34 of the 1996 Arbitration and Conciliation Act.
Sections 73 and 74 of the 1872 Indian Contract Act
JUDGMENT
The Court first extensively discussed its authority under Section 34 of the Arbitration and Conciliation Act, 1966, outlining permissible grounds for setting aside an award. Moving to the issue of damages, the Court emphasized that when the contract language is clear, the tribunal must adhere to it. If parties agree on a predetermined sum as genuine liquidated damages, the tribunal shouldn't demand proof of the purchaser's loss.
The Court noted that in cases where the damages stipulation is seen as a penalty, it can award reasonable compensation upon proof of damage. However, caution is advised in construing liquidated damages as a penalty, especially in agreements crafted by field experts, as highlighted in Maula Bux v Union of India. In the present case, there was no challenge to the stipulated amount's reasonableness.
Regarding forfeiture, the Court referred to Union of India v Rampur Distillery, stating that forfeiture clauses can be viewed as either liquidated damages or penalties based on the reasonableness of the amount. The primary conclusion was that Liquidated Damages should be considered reasonable compensation, while penalties should not. Additionally, no compensation should be awarded if the Court determines that no loss is likely due to the breach.
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