Bombay High Court
Oil And Natural Gas Corporation vs Dolphin Drilling Ltd on 20 December, 2014
APPL372/14
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL (L) NO.372 OF 2014
IN
ARBITRATION PETITION NO.952 OF 2013
Oil and Natural Gas Corporation Ltd. ... Appellant
v/s
Dolphin Drilling Ltd. ... Respondent
Mr Pradeep Sancheti, Sr. Counsel with Mr Darshit Jain and Mr Pratik
Gandhi i/b M/s The Law Point for Appellant.
Mr Rahul Narichania, Sr. Counsel with Mr Shardul Thacker, Mr
Sunilkumar V.N. and Ms Pratiksha Avhad i/b M/s Mulla and Mulla and
Craigie Blunt and Caroe for Respondent.
CORAM: MOHIT S. SHAH, C.J. &
B.P. COLABAWALLA, J.
Reserved on : 24th November, 2014
Pronounced on : 20th December, 2014
JUDGMENT [ Per B.P. Colabawalla J. ]:
1. In this Arbitration Appeal under section 37 of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as "the Act"), the Appellant
(ONGC) seeks to challenge the order dated 26th March, 2014 ("impugned
order") passed by the learned Single Judge dismissing the Appellant's
VRD 1 of 101
APPL372/14
Arbitration Petition filed under section 34 of the Act. The Appellant filed
the Petition under section 34 of the Act that took exception to the
Arbitration Award dated 23rd April, 2013 ("impugned Award") passed by
the Arbitral Tribunal under which the Respondents were granted certain
money claims (both in USD as well as INR), interest and costs.
2. Under an Agreement dated 17th October, 2003 ("Agreement")
entered into between the Appellant and the Respondent, the Appellant
agreed to take on charter hire the Respondent's Deep Water Drilling Rig
(Belford Dolphin) alongwith services on an integrated basis. Under the
said Agreement, the Respondent agreed to perform drilling operations for
and on behalf of the Appellant in the offshore waters of India. Though the
Agreement was signed on 17th October 2003, the Agreement became
operative from 1st August, 2003. The primary term of the Agreement was
for a period of three years from the date of commencement but the same
was extended under the provisions of the Agreement upto 10th April, 2007.
3. As disputes arose between the parties in relation to this Agreement,
the same were referred to arbitration. Before the Arbitral Tribunal, the
Respondent herein was the Claimant and the Appellant was the
VRD 2 of 101
APPL372/14
Respondent. The claims made by the Respondent before the Arbitral
Tribunal generally fell under the following heads :-
(1) Claim in respect of equipments "Lost in Hole" (LIH);
(2) Claim in respect of Day Rate and Integrated Services
invoices;
(3) Claim for a wrongful deduction from the invoice for
De-mobilisation fees;
(4) Interest on delayed payments in relation to claims
mentioned in items (1) to (3) above as well as on
invoices that were paid, but belatedly; and
Claim for extension of contract and Quantum Meruit.
4. At the outset it should be mentioned that as far as item 5 is
concerned, i.e. the claim regarding extension of contact and Quantum
Meruit, the Arbitral Tribunal dismissed the same. The Respondent herein
has not challenged the Arbitral Award and in view thereof, no arguments
have been advanced by either party with reference to this claim.
5. Be that as it may, in answer to the aforesaid claims, the Appellant
herein filed its statement of defence. On the basis of the pleadings before
it, the Arbitral Tribunal framed the following issues:-
"A (i) Whether the Claimant is entitled to the claim of US $
3,019,476.25 and Rs.5,48,603.85 on account of Lost in Hole
(LIH) value of its equipments under Clause 16.3 of the
VRD 3 of 101
APPL372/14
Agreement ?
(ii) Whether disputing by the Respondent of the Claimant's LIH
invoices is barred by lapse of time under Clause 7.4 of the
Agreement ?
(iii) Whether the Claimant is entitled to interest amount of US $
15,98,728.92 and Rs.2,93,174.60 ?
(iv) Whether the claim has been rightly rejected by the Respondent
as the invoices related to payments on account of operational
lapse, failure of Contractor's equipments, loss or damage by
normal wear and tear and loss due to negligence of the Claimant
?
(v) Whether the Respondent has rightly refused the payments under
Clause 16.3 of the Agreement ?
(vi) Whether the claims on account of LIH are barred by limitation
as having been preferred beyond three years of the cause of
action ?
B(i) Whether the Claimant is entitled to US $ 3,27,902 on account of
Demobilisation Fee being the amount short-paid by the
Respondent ?
(ii) Whether the Claimant is entitled to interest @ 12 % per annum
from 12-05-2007 (the date falling 30 days after the receipt by the
Respondent of the invoice) ?
(iii) Whether the Respondent has rightly made the recovery of US $
3,27,901.58 from the Claimant's Demobilisation Fee Invoices on
account of Non-operating Day Rate (NODR) from Equipment
Breakdown rate (EBDR) ?
C(i) Whether the Claimant is entitled to US $ 8,566,761.29 on
account of Day Rate ?
(ii) Whether under Clause 7.4 of the Agreement, the Respondent's
right to question part of Day rate Invoices is barred by time ?
(iii) Whether the Claimant is entitled to payment of US $
15,538,411.26 on the principle of quantum meruit for the
services rendered (performance of the Rig) between 13-02-2007
and 10-4-2007 ?
VRD 4 of 101
APPL372/14
(iv) Whether the Claimant is entitled to interest (for the period upto
16-06-2010) amounting to US $ 5,895,125.36 ?
(v) Whether the Agreement was automatically extended under
Clause 1.3 of the Agreement and the extended period was added
to the primary term of the Agreement ?
(vi) Whether the extended period falls within the duration of the
Agreement ?
(vii) Whether the Claimant is entitled to payment only at the Contract
Rate for such extended period ?
(viii) Whether the Claims are barred by limitation as having been
preferred beyond three years of the accrual of cause of action ?
D(i) Whether the Respondent was obliged to settle the Claimant's
invoices within 15 days under Clause 7.1 of the Agreement ?
(ii) Whether the Respondent has delayed in settling / payment of
Claimant's invoices ?
(iii) Whether the Claimant is entitled to payment of US $
2,557,970.93 and Rs.1,42,94,905.09 on account of interest @ 12
% per annum for delayed payment of invoices under Clause 7.1
read with Clause 16.3 of the Agreement ?
E(i) Whether the Claimant is entitled to an Award of US $
30,010,521.72 and Rs.1,48,43,508.94 as set out in Schedule 7 of
the Statement of Claim ?
(ii) Whether the Claimant is entitled to future interest (from the date
of filing of the Claim) @ 12 % per annum ?
F. Costs ?"
6. The Respondent (Original Claimant) in support of its case, led
evidence of its witnesses who were cross-examined by the Appellant.
Similarly, the Appellant's witness was also examined in support of its case
who, in turn, was cross-examined by the Respondent.
VRD 5 of 101
APPL372/14
7. After hearing the parties and considering the terms of the Agreement
as well as the evidence on record (both documentary and oral), the Arbitral
Tribunal in paragraph 79 of the impugned Award, answered the aforesaid
issues as follows:-
"79. The issues are answered as follows :-
A(i) The Claimants are entitled to US $ 2,955,563.38 and INR
5,48,603.85 together with interest thereon @ 4 % per annum in
respect of each invoice set out in Schedule 1 of the Statement of
Claim which is payable in dollars except invoice 510-058.
Interest shall be paid from 30th day after the date of the invoice
till the date of the award. Interest @ 12 % per annum for the
above period shall be paid on invoices in INRs.
(ii) No.
(iii) Interest shall be calculated as per answer to issue A(i). The same
is payable by the Respondent to the Claimant.
(iii) See the discussion hereinbefore.
(iv) No except for invoice 510-058.
(v) No.
B(i) Yes.
(ii) The Claimant is entitled to interest @ 4 % per annum from
12.05.2007 till the date of the award.
(iii) No.
C(i) The Claimant is entitled to USD 8,565,790.60 as the claim for
USD 970.69 (invoice 510-373) is not pressed.
(ii) No.
(iii) No.
VRD 6 of 101
APPL372/14
(iv) The Claimant is entitled to interest on the amount payable under
each invoice which remained unpaid for the period starting from
30 days after the date of the invoice till payment, @ 4 % per
annum on USD payments and @ 12 % per annum on INR
payments. On the unpaid demobilisation fee, interest will be
paid @ 4 % per annum from 12.05.2007 till the date of the
award. In respect of invoices paid in part or in full before
24.12.2005, the claim for interest is barred by limitation.
(v) Yes.
(vi) Yes.
(vi) Yes.
(vii) No, except for claim for interest on invoices paid / partly paid
prior to 24.02.2005.
D(i) No, for reasons set out earlier. The invoices should have been
settled within a reasonable period of 30 days.
(ii) Yes.
(iii) See the answer to issue C(iv).
E(i) As above.
(ii) The Claimant is entitled to interest from the date of
commencement of arbitration upto the date of the award @ 4 %
on USD claims, and @ 12 % on INR claims. But if the award
amounts are not paid within 3 months of the date of the award,
interest will be paid by the Respondent to the Claimant @ 4 %
per annum on amounts in USD, and @ 12 % per annum on
amounts in INR from the date of the award till payment.
F The Respondent shall pay to the Claimant costs fixed at
Rs.39,63,885 and USD 997,565."
8. After answering the issues as set out above, the Arbitral Tribunal, in
paragraph 80 of the impugned Award directed the payment of certain
amounts as follows:-
VRD 7 of 101
APPL372/14
"80. There will, therefore, be an award in favour of the Claimant and
against the Respondent in the following terms :
i) The Respondent shall pay to the Claimant USD 2,955,563.38
and INR 5,48,603.85.
ii) The Respondent shall pay to the Claimant USD 8,565,790.60.
iii) The Respondent shall pay to the Claimant USD 327,902.
iv) The Respondent shall pay to the Claimant interest on delayed
payments; interest to be determined as per paragraphs 73 to 76
hereinabove.
v) The amounts in (i), (ii) and (iii) above in USD shall be paid with
interest thereon @ 4 % per annum for the period starting from
30 days from the date of each invoice till the date of the award.
For the amount in INR, interest will be paid as aforesaid but at
the rate of 12 % per annum.
vi) If the above amounts in (i), (ii), (iii), (iv) and (v) are not paid
within three months from the date of the award, the same shall
carry interest @ 4 % on USD claims and @ 12 % on INR claims
with effect from the date of the award."
9. In addition to the aforesaid claims, the Arbitral Tribunal further
awarded costs in favour of the Respondent (Original Claimant) quantified
at Rs.39,63,885/- and USD 997,565/-. In terms of INR, the costs awarded
come to approximately Rs.6.5 crores.
10. Being aggrieved by the impugned Award, the Appellant herein
preferred an Arbitration Petition under section 34 of the Act before the
learned Single Judge raising various contentions and prayed for setting
aside the impugned Award. After hearing the parties and going through
VRD 8 of 101
APPL372/14
the record, the learned Single Judge by a very elaborate order and
judgment dated 26th March, 2014 dismissed the Arbitration Petition, save
and except in so far as it related to awarding interest on interest as set out
in paragraph 80 (vi) of the impugned Award. As far as the direction given
in paragraph 80 (vi) of the impugned Award regarding interest is
concerned, the learned Single Judge set aside the said direction in so far as
the impugned Award granted interest on interest. In other words, the
learned Single Judge held that no further interest can be awarded on item
(v) of paragraph 80 of the impugned Award. We may mention here that
there is no challenge to this part of the order of the learned Single Judge by
the Respondent herein and therefore as far as this part of the impugned
order is concerned, the same has now attained finality and the impugned
Award stands modified to that extent. The Appellant (ONGC), being
dissatisfied by a major part of this order in so far as it upheld the impugned
Award, is before us in Appeal under section 37 of the Act.
11. Before dealing with the rival contentions, we have to be mindful of
the fact that this Appeal is from an order of the learned Single Judge
passed under section 34 of the Act substantially upholding the Award
passed by the Arbitral Tribunal. It is now too well settled that a challenge
VRD 9 of 101
APPL372/14
to an Arbitral Award is based on certain limited parameters and the Court
hearing a challenge under section 34 of the Act is not sitting in Appeal
over the Award. The scope of challenge therefore under section 34 of the
Act is limited and the grounds on which an Award can be challenged have
been the subject matter of several judicial pronouncements of the Supreme
Court which we shall now refer to briefly.
12. In the case of Mcdermott International Inc. v/s Burn Standard Co.
Ltd. and others1, the Supreme Court, after relying upon its earlier decision
in the case of ONGC v/s Saw Pipes Ltd2., held thus :-
58. In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp (1)
SCC 644] this Court laid down that the arbitral award can be set aside if it
is contrary to (a) fundamental policy of Indian law; (b) the interests of
India; or (c) justice or morality. A narrower meaning to the expression
"public policy" was given therein by confining judicial review of the
arbitral award only on the aforementioned three grounds. An apparent shift
can, however, be noticed from the decision of this Court in ONGC
Ltd.v. Saw Pipes Ltd. [(2003) 5 SCC 705] (for short "ONGC"). This Court
therein referred to an earlier decision of this Court in Central Inland Water
Transport Corpn. Ltd. v.Brojo Nath Ganguly [(1986) 3 SCC 156 : 1986
SCC (L&S) 429 : (1986) 1 ATC 103] wherein the applicability of the
expression "public policy" on the touchstone of Section 23 of the Indian
Contract Act and Article 14 of the Constitution of India came to be
considered. This Court therein was dealing with unequal bargaining power
of the workmen and the employer and came to the conclusion that any term
of the agreement which is patently arbitrary and/or otherwise arrived at
because of the unequal bargaining power would not only be ultra vires
Article 14 of the Constitution of India but also hit by Section 23 of the
Indian Contract Act. In ONGC [(2003) 5 SCC 705] this Court, apart from
the three grounds stated in Renusagar [1994 Supp (1) SCC 644] , added
another ground thereto for exercise of the court's jurisdiction in setting
1 (2006) 11 SCC 181
2 (2003) 5 SCC 705
VRD 10 of 101
APPL372/14
aside the award if it is patently arbitrary.
59. Such patent illegality, however, must go to the root of the matter. The
public policy violation, indisputably, should be so unfair and unreasonable
as to shock the conscience of the court. Where the arbitrator, however, has
gone contrary to or beyond the expressed law of the contract or granted
relief in the matter not in dispute would come within the purview of Section
34 of the Act. However, we would consider the applicability of the
aforementioned principles while noticing the merits of the matter.
60. What would constitute public policy is a matter dependant upon the
nature of transaction and nature of statute. For the said purpose, the
pleadings of the parties and the materials brought on record would be
relevant to enable the court to judge what is in public good or public
interest, and what would otherwise be injurious to the public good at the
relevant point, as contradistinguished from the policy of a particular
Government. (See State of Rajasthan v. Basant Nahata [(2005) 12 SCC
77].)
61. In ONGC [(2003) 5 SCC 705] this Court observed: (SCC pp. 727-28,
para31)
"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."
62. We are not unmindful that the decision of this Court in ONGC [(2003) 5
SCC 705] had invited considerable adverse comments but the correctness
VRD 11 of 101
APPL372/14
or otherwise of the said decision is not in question before us. It is only for a
larger Bench to consider the correctness or otherwise of the said decision.
The said decision is binding on us. The said decision has been followed in a
large number of cases. (See The Law and Practice of Arbitration and
Conciliation by O.P. Malhotra, 2nd Edn., p. 1174.)
13. In the case of ONGC Ltd. v/s Garware Shipping Corporation Ltd 3.,
the Supreme Court inter alia held that there was no proposition that the
Courts would be slow to interfere with the arbitrators' Award even if the
conclusions were perverse and even when the very basis of the arbitrators'
Award was wrong. Paragraph 30 of the said judgment reads as under :-
"30. There is no proposition that the courts could be slow to interfere with
the arbitrator's award, 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 the Division
Bench."
14. Once again, the Supreme Court in the case of Delhi Development
Authority v/s R.S. Sharma and Co., New Delhi 4, culled out the grounds on
which the Court can interfere with an Award under section 34 of the Act.
Paragraphs 20 and 21 of the judgement read thus:-
"20. In Hindustan Zinc Ltd. v. Friends Coal Carbonisation [(2006) 4 SCC
445] the following principles laid down in paras 13 and 14 are relevant for
the disposal of the present case: (SCC pp. 450-51)
"13. This Court in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705]
held that an award contrary to substantive provisions of law or the
provisions of the Arbitration and Conciliation Act, 1996 or against
the terms of the contract, would be patently illegal, and if it affects
3 (2007) 13 SCC 434
4 (2008) 13 SCC 80
VRD 12 of 101
APPL372/14
the rights of the parties, open to interference by the court under
Section 34(2) of the Act. This Court observed: (SCC pp. 718 & 727-
28, paras 13 & 31)
'13. The question, therefore, which requires consideration is--
whether the award could be set aside, if the Arbitral Tribunal
has not followed the mandatory procedure prescribed under
Sections 24, 28 or 31(3), which affects the rights of the parties.
Under sub-section (1)(a) of Section 28 there is a mandate to the
Arbitral Tribunal to decide the dispute in accordance with the
substantive law for the time being in force in India. Admittedly,
substantive law would include the Indian Contract Act, the
Transfer of Property Act and other such laws in force. Suppose,
if the award is passed in violation of the provisions of the
Transfer of Property Act or in violation of the Indian Contract
Act, the question would be--whether such award could be set
aside. Similarly, under sub-section (3), the Arbitral Tribunal is
directed to decide the dispute in accordance with the terms of
the contract and also after taking into account the usage of the
trade applicable to the transaction. If the Arbitral Tribunal
ignores the terms of the contract or usage of the trade
applicable to the transaction, whether the said award could be
interfered. Similarly, if the award is a non-speaking one and is
in violation of Section 31(3), can such award be set aside? In
our view, reading Section 34 conjointly with other provisions of
the Act, it appears that the legislative intent could not be that if
the award is in contravention of the provisions of the Act, still
however, it couldn't be set aside by the court. If it is held that
such award could not be interfered, it would be contrary to the
basic concept of justice. If the Arbitral Tribunal has not
followed the mandatory procedure prescribed under the Act, it
would mean that it has acted beyond its jurisdiction and
thereby the award would be patently illegal which could be set
aside under Section 34.
***
31. ... 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
VRD 13 of 101
APPL372/14
our view in addition to narrower meaning given to the term
"public policy" in Renusagar case [Renusagar Power Co.
Ltd. v. General Electric Co., 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.'
14. The High Court did not have the benefit of the principles laid
down in Saw Pipes [(2003) 5 SCC 705] , and had proceeded on the
assumption that award cannot be interfered with even if it was
contrary to the terms of the contract. It went to the extent of holding
that contract terms cannot even be looked into for examining the
correctness of the award. This Court in Saw Pipes [(2003) 5 SCC
705] has made it clear that it is open to the court to consider whether
the award is against the specific terms of contract and if so, interfere
with it on the ground that it is patently illegal and opposed to the
public policy of India."
21. From the above decisions, the following principles emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or
(ii) the provisions of the Arbitration and Conciliation Act, 1996; or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
(v) prejudicial to the rights of the parties;
is open to interference by the court under Section 34(2) of the Act.
(b) The 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.
(c) The award could also be set aside if it is so unfair and unreasonable
VRD 14 of 101
APPL372/14
that it shocks the conscience of the court.
(d) It is open to the court to consider whether the award is against the
specific terms of contract and if so, interfere with it on the ground that it is
patently illegal and opposed to the public policy of India.
With these principles and statutory provisions, particularly, Section 34(2)
of the Act, let us consider whether the arbitrator as well as the Division
Bench of the High Court were justified in granting the award in respect of
Claims 1 to 3 and Additional Claims 1 to 3 of the claimant or the appellant
DDA has made out a case for setting aside the award in respect of those
claims with reference to the terms of the agreement duly executed by both
parties."
15. In view of the above judicial pronouncements, one thing is clear.
Interference by the Court under section 34 of the Act is limited and it is
only in certain circumstances that the Court can interfere with the Award
passed by the Arbitral Tribunal. If an Award is contrary to the substantive
provisions of law or the provisions of the Arbitration and Conciliation Act,
1996 or against the terms of the Contract, the same would be patently
illegal and open to interference by the Court under section 34 of the Act.
For instance, if the Arbitral Tribunal has not followed the mandatory
provisions prescribed under sections 24, 28 or 31(3) which affects the
rights of the parties, such an Award would be liable to be interfered with
by the Court under section 34 of the Act. If the Arbitral Tribunal has not
followed the mandatory procedure prescribed under the Act, it would mean
that it has acted beyond its jurisdiction and therefore the Award is patently
illegal which could be set aside under section 34 of the Act. The principles
VRD 15 of 101
APPL372/14
on which an Award can be interfered with, have been very eloquently set
out in paragraph 21 of the judgement of the Supreme Court in the case of
Delhi Development Authority v/s R.S. Sharma and Co., New Delhi,
(supra)4 and therefore we see no need to reproduce the same again in this
judgement.
16. We may hasten to add that the question of interpretation of the
contract is within the scope and jurisdiction of the Arbitral Tribunal and
the Court will not interfere with the Award merely because in its opinion,
the interpretation that is sought to be put on a particular clause of the
Contract was incorrect. If the interpretation is a plausible one, then the
Courts will not interfere with the Award under section 34 of the Act. It is
only when the Award is contrary to the terms of the contract, will the court
interfere with the same. In other words, if only one interpretation is
possible, then the court would be justified in interfering with the Award on
the ground that it is contrary to the terms of the contract, and not otherwise.
17. Keeping these principles in mind, we shall now proceed to examine
the challenge to the impugned Award in so far as the Arbitral Tribunal
4 (2008) 13 SCC 80
VRD 16 of 101
APPL372/14
granted the claims of the Respondent in respect of various invoices and
which have been upheld by the learned Single Judge in the impugned
order.
CLAIM IN RESPECT OF EQUIPMENTS "LOST IN
HOLE" (LIH) :-
18. The first claim before the Arbitral Tribunal was in respect of
equipments Lost in Hole (LIH).
ig Before dealing with the individual
invoices under this claim, it would be necessary to set out the clauses in the
Agreement in relation thereto. Clause 16 provides for loss or damage to
the equipment or the Hole. It is common ground before us that for the
purposes of this claim, clauses 16.1 and 16.3 are relevant and read thus :-
"16.1 LOSS OF CONTRACTOR'S DRILLING UNIT
Except as otherwise specifically provided in this Agreement, any
damage to or loss of the Drilling Unit (which, for the purpose of this
Article 16.1 shall be deemed to include all Contractor's and its sub-
contractors equipment) and regardless of the cause or reason for said
loss, shall be the loss of the Contractor, its underwriters or insurers and
Contractor indemnifies Operator, its co-licensees and its and their
affiliate companies, agents, employees, invitees, servants, their
underwriters or insurers (other than Contractor's) and their employees
against any claim whatsoever or responsibility for any damage to or
loss of the Drilling Unit or any other equipment or property of
Contractor or Contractor's sub-contractors furnished or intended for
use in the operations hereunder undertaken.
16.3 LOSS OR DAMAGE TO CONTRACTOR'S DOWN HOLE
EQUIPMENT :-
VRD 17 of 101
APPL372/14
Operator shall reimburse Contractor for loss of or damage to
Contractor's down hole equipment, as under, provided that such loss or
damage is not occasioned by normal wear and tear or negligence on the
part of the Contractor.
(a) In the case of Contractor's down hole equipment being damaged,
Operator shall reimburse Contractor such repair cost, provided
however, that Operator shall not be required to reimburse
Contractor any amount greater than that which would have been
due had such equipment been lost and, therefore, calculated
under sub-section (b) herein below :-
(b) In the case of Contractor's down hole equipment being lost,
Operator will reimburse Contractor an amount limited to the
original cost (FOB nearest port) reduced by depreciation at the
rate of 10 % per year to be proportioned for each completed
month from the date of purchase of the lost equipment / tool
subject to maximum depreciation of 50%. The contractor should
declare the cost alongwith the date of purchase of each
equipment Unit with documentary evidence prior to mobilization
of the Drilling unit. The above declared cost and date of
purchase shall be taken for working out their claim for Lost in
hole of their equipment."
19. Clause 16.1 inter alia provides that except as otherwise specifically
provided in this Agreement, any damage to or loss of the Drilling Unit
(which for the purpose of Article 6.1 shall be deemed to include all the
Contractor's and its sub-contractors' equipment) would be to the account of
the Contractor. This would be regardless of the cause or reason for the
said loss or damage. The exception as mentioned in clause 16.1 is inter
alia set out in clause 16.3 which deals with loss or damage to the
Contractor's Down Hole Equipment. The said clause inter alia stipulates
that loss or damage to the Contractor's Down Hole Equipment would be
VRD 18 of 101
APPL372/14
reimbursed by the Operator (ONGC) provided such loss or damage was
not occasioned by normal wear and tear or negligence on the part of the
Contractor. In other words, if any Down Hole Equipment was lost or
damaged during drilling operations, then the Contractor was entitled to be
reimbursed for the same by the Operator (ONGC), unless of course, the
loss or damage was occasioned either due to (1) wear and tear of the
equipment or (2) negligence on the part of the Contractor.
20.
Under clause 16 of the Agreement, the Respondent herein (claimant)
made a claim under 14 invoices, the details of which are given at page 10
of the impugned Award. The Arbitral Tribunal allowed the claim with
reference to 13 invoices and rejected the claim with reference to one
invoice (Invoice No.510-058). The rejection of this invoice has not been
called into question before the learned Single Judge and therefore the
findings with reference to the same by the Arbitral Tribunal have attained
finality. With reference to the claim for equipments Lost in Hole, Mr
Sancheti, the learned Sr. Counsel appearing on behalf of the Appellant,
called into question before us only 10 invoices, the details of which are as
follows :-
VRD 19 of 101
APPL372/14
Sr.No. Invoice No. Date Unpaid amount of the Total amount of the
invoice invoice
1 510-208 22/08/05 USD 297,525.30 USD 297,525.30
2 510-214 14/09/05 USD 584,129.03 USD 584,120.03
3 510-215 14/09/05 INR 178,996.00 INR 178,996.00
4 510-217 26/09/05 USD 395,341.15 USD 395,341.15
5 510-220 27/09/05 USD 966,702.81 USD 966,702.81
6 510-221 27/09/05 INR 204,005.00 INR 205,005.00
7 510-222 27/09/05 INR 49,101.00 INR 49,101.00
8 510-364 28/12/06 USD 40,356.88 USD 40,356.88
9 510-375 03/06/07 USD 607,249.59 USD 607,249.59
10 510-376 03/08/07 INR 77,308.83 INR 77,308.83
It would therefore be necessary to look at each of these invoices and
the findings given by the Arbitral Tribunal in relation thereto to ascertain
whether the Arbitral Tribunal had misdirected itself in granting the
amounts as mentioned in the aforesaid invoices based on the parameters
pronounced by the Supreme Court elaborated earlier.
INVOICE NO.510-208 (Sr No.1)
21. At the outset, Mr Narichania, the learned senior counsel appearing
on behalf of the Respondent submitted that there was no challenge to this
invoice in the Arbitration Petition filed before the learned Single Judge
under section 34 of the Act. He therefore submitted that the Appellant
cannot be allowed to challenge the claim under this invoice now in appeal
VRD 20 of 101
APPL372/14
before us. On perusing the Arbitration Petition, we find this submission of
Mr Narichania to be well founded. Despite several invoices being
specifically challenged in the Arbitration Petition, there is no specific
challenge to the amounts granted under this invoice. However, since the
learned Single Judge has taken into consideration the challenge to this
invoice, we too shall examine the same to see if the conclusions reached by
the Arbitral Tribunal in relation to grant of the claim under this invoice,
suffers from any perversity or patent illegality which would entitle this
Court to interfere with the Arbitral Award.
22. This invoice relates to an incident which took place on 29th March
2004 during the drilling operations, when the drills' string got stuck and
could not be released. The string was sheered at free point resulting in the
loss of equipment below the free point in the Well. An item-wise list of
the equipments Lost in Hole was filed before the Arbitral Tribunal and
there is no dispute either with reference to the list of equipments lost or the
value thereof. The Appellant attributed the loss due to the Respondent's
negligence in proper planning and designing of the Well, which according
to the Appellant, was the reason why the string got stuck and could not be
released. According to the Respondent, as per the Agreement, the design
VRD 21 of 101
APPL372/14
of the Well was the responsibility of the Appellant and the Respondent's
role in that regard was purely advisory in nature. After considering the
relevant clauses of the Agreement as well as the evidence led by the
respective parties in this regard, the Arbitral Tribunal came to the
conclusion that no particulars of negligence were disclosed by the
Appellant in its evidence. In view thereof, the Arbitral Tribunal held that
the Respondent herein was entitled to the amounts mentioned in the said
invoice under clause 16.3 of the Agreement. The learned Single Judge,
after hearing the parties and perusing the impugned Award, came to the
conclusion that the Arbitral Tribunal has given its findings on the basis of
appreciation of evidence led by the parties before it. This essentially being
a matter of appreciation of evidence and the conclusions drawn by the
Arbitral Tribunal on the basis of the reasoning indicated in the impugned
Award, do not appear to suffer from any infirmity, was the finding of the
learned Single Judge.
23. Mr Sancheti, the learned Senior Counsel appearing on behalf of the
Appellant, submitted that the Arbitral Tribunal as well as the learned
Single Judge were in grave error in shifting the burden of proof on the
Appellant to establish negligence on the part of the Respondent. Mr
VRD 22 of 101
APPL372/14
Sancheti submitted that the reasoning given by the Arbitral Tribunal whilst
rejecting invoice No.510-058, ought to have been the reasoning given for
rejecting this invoice also, as well as all other invoices with reference to
the claims made for equipments "Lost in Hole". He submitted that the
Aribtral Tribunal having held that "there was no satisfactory evidence as
to unususal and unanticipated circumstances intervening to speed up the
setting of cement" in relation to invoice No.510-058 (which claim was
rejected by the Arbitral Tribunal), failed to apply the same test whilst
granting the claim under this invoice as well as all other invoices under this
claim. The Arbitral Tribunal committed a patent error in not asking and
answering this crucial question which resulted in patent contradictions in
the Award, was the submission.
24. We do not agree. Invoice No.510-058 related to operations of
cementing down a Well. After cementing was completed, the drills' string
was required to be pulled out of the Hole before the cement set. Whilst
doing the actual cementing, the cement hardened faster than anticipated
and the string could not be pulled out and had to be cut leaving 17 strands
inside the Hole. The Arbitral Tribunal held that there was no clear
evidence about the reason and/or the cause for which the cement hardened
VRD 23 of 101
APPL372/14
faster than anticipated and neither was there any satisfactory evidence as to
any unusual or unanticipated circumstances that caused the speeding up of
the setting of the cement. Taking into consideration the evidence before it,
the Arbitral Tribunal held that it was reasonable to conclude that the faster
setting of the cement was on account of a mistake in either making the
cement mix or the down hole temperature and/or other conditions,
especially in view of the fact that it was the responsibility of the
Respondent for preparing the cement mix and the failure of the cement to
set faster than anticipated, would have to be attributed to the Respondent.
It is therefore clear that the reasoning given by the Arbitral Tribunal for
rejecting the claim under Invoice No.510-058 was due to the Respondent's
mistake and/or negligence. This was a finding of fact given by the Arbitral
Tribunal in relation to this invoice. We therefore cannot agree with the
submission of Mr Sancheti that this reasoning ought to have been adopted
by the Arbitral Tribunal with reference to all other invoices in relation to
claims for equipments "Lost in Hole". Whether a particular equipment
was Lost in Hole and for what reason would necessarily depend upon the
facts and circumstances prevalent at the time of loss or damage. We
therefore find no substance in this argument.
VRD 24 of 101
APPL372/14
25. On going through the findings of the Arbitral Tribunal in relation to
invoice No.510-208 as well as the impugned order, we are of the firm
opinion that the findings of the Arbitral Tribunal were based on the
evidence on record and therefore the learned Single Judge rightly declined
in interfering with the Award as it would have been an exercise of re-
appreciating the evidence that was led before the Arbitral Tribunal. It is
pertinent to note that in relation to this invoice, it was not the case of the
Appellant that the equipments Lost in Hole, were due to any wear and tear.
It was the specific case of the Appellant that the equipments that form the
subject matter of this invoice, were Lost in Hole due to the negligence of
the Respondent (Contractor). In such circumstances, to deny the claim of
the Respondent herein and to take it out of the purview of clause 16.3 of
the Agreement, it was for the Appellant to establish before the Arbitral
Tribunal that the Respondent was negligent, due to which the equipments
were Lost in Hole. As noted by the Arbitral Tribunal, the Appellant gave
absolutely no particulars of the negligence and it was in view thereof that
the Arbitral Tribunal granted the amounts claimed under this invoice. We
do not think that the approach of the Arbitral Tribunal or that of the learned
Single Judge can be faulted in this regard. We therefore find no infirmity
in the impugned order in upholding the Award in relation to this invoice.
VRD 25 of 101
APPL372/14
INVOICE NOS.510-214 AND 510-215 (Sr Nos.2 & 3)
26. These invoices deal with a part of the string being left in the Hole
and the equipment being lost. In respect of this loss, under invoice
No.510-214, the claimant made a claim of USD 584,149.03 and under
invoice No.510-215 made a claim for Rs.1,78,996. The claim under
invoice No.510-215 was in INR as it was for equipments that were locally
sourced. On 11th May, 2004 while the rig was engaged in drilling at a depth
of 4647 mtrs., the drill string torqued up on the bottom, the pressure pump
increased and the Hole backed off. The rig resorted to jarring operations
for 4 ½ Hrs to free the string without any success. At this point, the
hydraulic hose used to operate the elevator on the rig derrick burst, and had
to be repaired before string could be pulled out of the Hole. The string was
thereafter put into slips, i.e. it was fixed on another piece of equipment
which prevented the drill string falling free and down the Hole. After the
hose was replaced, the string was put back on the elevator. When the
string was pulled out, it was found that a part of the string was left in the
Hole and the equipment was lost.
27. Before the Arbitral Tribunal it was the case of the Appellant that the
VRD 26 of 101
APPL372/14
setting the string in slips in a floating vessel during stuck condition was an
operational lapse which resulted in the pipe twisting off and hence these
two invoices were not payable. In other words, the Appellant once again
attributed negligence on the part of the Respondent to deny the claim under
these invoices. Both the parties led evidence in this behalf. The
Respondent sought to explain in its evidence the reason for torquing up of
the string and the rig resorting to the operation of jarring which was an
aggressive action necessarily putting the string at risk. The Respondent
explained in evidence that this operation was the only possible response to
the situation at hand and that the parting of the string was not occasioned
by any negligence on the part of the Respondent. On the other hand, the
Appellant's witness gave his own reasons for parting of the string and
explained alternative ways in which operations could have been carried
out. After perusing the evidence led by the parties, the Arbitral Tribunal
came to a finding that it was difficult to accept this part of the testimony of
the Appellant considering the contradictory answers he had given in this
connection in the cross-examination. The Arbitral Tribunal also found that
no such case of alternative methods was put by the Appellant to the
Respondent and that the explanation given by the Respondent in its
affidavit of evidence was not challenged in cross-examination. In view
VRD 27 of 101
APPL372/14
thereof, the Arbitral Tribunal, as a matter of fact, found that this loss was
not on account of the Respondent's negligence. Once again even in
relation to these invoices, we find that the claims therein have been granted
purely on the basis of the facts of the case and the appreciation of evidence
by the Arbitral Tribunal. The Arbitral Tribunal, after considering all the
relevant material before it, including the evidence led by the parties
granted the claim under these 2 invoices. We do not find that the
conclusions reached by the Arbitral Tribunal suffer from any perversity or
patent illegality that would enable us to interfere. In view thereof, we do
not find any infirmity either in the impugned Award or the order of the
learned Single Judge in relation to these invoices. The learned Single
Judge was therefore fully justified in upholding the Award in relation to
these invoices.
INVOICE NOS.510-217 AND 510-222 (Sr. No.4 & 7)
28. Both these invoices are in relation to an incident that took place on
17th July 2004 whilst drilling operations were on in the Well GSDW-2A.
Invoice No.510-217 was for USD 3,95,341.15 and Invoice No.510-222
was for INR 49,101. The Claim under Invoice No.510-222 was in INR as it
related to locally sourced material/equipments. This incident is in relation
VRD 28 of 101
APPL372/14
to the string parting at the saver sub-pin and a portion thereof that fell to
the bottom. Exactly how the incident took place has been set out in detail
by the Arbitral Tribunal in paragraph 28 of the impugned Award. It was
the case of the Respondent that the string had stalled out and stopped
turning as the resistance reached, exceeded the maximum torque of the
string. The string was then pulled up and in the course of this exercise, the
sub-pin broke. The reason given by the Respondent's witness for the sub-
pin breaking, was due to excess torque having been applied because the
toque is always set at 75% on the weakest part of the string as a safety
factor. The Respondent further deposed that the sub-pin did not break on
account of any defect because it was so certified and was also tested after
the incident and the remaining part of the material was found to be sound.
On the other hand, the Appellant suggested in its affidavit of evidence that
the failure was due to wear and tear of the equipment and therefore the
cause of the equipment Lost in Hole was not considered reimbursable. It
was on this ground that the Appellant refused to pay the amounts under the
aforesaid invoices. The Arbitrators, after appreciating the evidence led by
the parties, came to a finding that there was no material to support the
Appellant's submission that all parts of the sub-pin suffered from wear and
tear. They came to this conclusion on the basis that there was no material
VRD 29 of 101
APPL372/14
to show how long this equipment had been used after its manufacture in
order to establish wear and tear. Whilst dealing with the claim under these
invoices, the learned Single Judge held that the Arbitral Tribunal, on the
appreciation of evidence led by the parties, allowed the claim and that the
same appeared to be perfectly in order.
29. Mr Sancheti however submitted that the Arbitrators had committed a
patent illegality inasmuch they had inverted the burden of proof on the
Appellant. According to Mr Sancheti, this was concluded case of wear and
tear and therefore, the Appellant was fully justified in denying the claim
under these invoices. We do not find any substance in the submission of
Mr Sancheti that the Arbitrators had committed any patent illegality by
inverting the burden of proof as sought to be suggested by him. Under
clause 16.3,the Respondent was entitled to be reimbursed by the Appellant,
the value of any equipment that was Lost in Hole save and except on
account of (i) wear and tear or (ii) the negligence of the Respondent. In
relation to these invoices, it was the specific case of the Appellant that the
equipments were Lost in Hole due to wear and tear. Despite this specific
case, the Appellant was unable to establish the same with evidence. If the
Appellant denied the claim of the Respondent on the basis of wear and
VRD 30 of 101
APPL372/14
tear, it was for the Appellant to establish the same by leading appropriate
evidence. Admittedly, they failed to do so as has been held by the Arbitral
Tribunal. We therefore cannot agree with the submission of Mr Sancheti
that the Arbitral Tribunal had committed any illegality by requiring the
Appellant to prove the wear and tear on the equipment before the claim
could be denied. We find that the Arbitral Tribunal in fact was correct in
its approach and had asked and answered the correct question in coming to
the conclusion that it did. The Award therefore does not suffer from any
perversity and / or illegality (patent or otherwise) that would entitle us to
interfere with the same. Therefore, in our view, no fault can be found in
the order of the learned Single Judge upholding the Award in relation to
these invoices.
INVOICE NOS.510-220 AND 510-221 (Sr.5 & 6)
30. These two invoices deal with an incident that took place on 9th
February 2005. During drilling operations, a section of a 5" drill pipe
parted at 3448 mtrs and the equipment was Lost in Hole. Invoice No.510-
220 was in the sum of USD 966,702 and Invoice No.510-221 was for INR
4,02,005 which was in respect of locally sourced equipment that was lost
in the same incident. The facts and the evidence in relation to this incident
VRD 31 of 101
APPL372/14
have been set out in detail by the Arbitral Tribunal in paragraph 29 of the
impugned Award. The reason for the equipment being Lost in Hole was
due to the string failure at the weld between the 5" pipe body and the box
connection. The Arbitral Tribunal noted that the documentation in this
regard showed that this was a very clean break along the line of the weld.
The Respondent's witness in its deposition attributed this loss probably to a
latent defect in the pipe and this was a manufacturing fault and not visible
on inspection. The Respondent's witness was not questioned on this
evidence. The Appellant, on the other hand, contended that the failure of
the drill pipe joint at the weld occurred on account of the joint becoming
weaker due to wear and tear. Hence once again, the Appellant denied the
claim of the Respondent on account of wear and tear of the equipment. The
Arbitral Tribunal, after perusing the evidence of both the parties as well as
the documentation in this regard, including the metallurgical report of the
test that was done on the pipe, came to the conclusion that there was no
material to show how long the equipment was in service and which was a
sine qua non for establishing wear and tear. The Arbitral Tribunal therefore
held that the denial of the claim on account of wear and tear was not
supported by evidence and had to be rejected.
VRD 32 of 101
APPL372/14
31. Mr Sancheti submitted that admittedly the equipment was Lost in
Hole due to a latent defect in the pipe. This itself amounted to wear and
tear and therefore the Arbitrators could not have granted the claim under
the aforesaid invoice, was the submission. We find this argument wholly
without merit. A latent defect is something which is a defect that cannot
be noticed to the naked eye. It certainly can be even in a brand new
equipment. On the other hand, wear and tear necessarily means that the
equipment has been used for a while and due to its wear and tear has
stopped functioning and / or broken down. It is therefore clear that the
latent defect in the pipe can never be equated to its wear and tear, as even
a brand new equipment can break down and / or fail due to a latent defect.
This being the case, we find no substance in the argument that a latent
defect in the pipe amounted to its wear and tear. It is also important to
note that it was not the case of the Appellant before the Arbitral Tribunal
that a latent defect in the pipe amounts to wear and tear. In fact when
specifically questioned in cross-examination with reference to this issue,
the Appellant's witness stated that he could not comment on the statements
of the Respondent's witness to the effect that the weld did not part on
account of wear and tear and that the same was entirely indicative of a
manufacturing fault, obviously not visible on inspection to those on the rig.
VRD 33 of 101
APPL372/14
On this ground also we cannot take countenance of the argument in view
of the fact that the same was never put-forth before the Arbitral Tribunal.
Once again, we find that this is purely a matter of appreciation of evidence
which is entirely in the realm of the Arbitral Tribunal's jurisdiction, and
therefore, interference under section 34 of the Act is neither permitted nor
warranted in the present case.
32. Mr Sancheti next submitted that admittedly there was a defect in the
pipe which caused the incident and therefore the Appellant was justified in
not making payment of the said invoice. In this regard, he placed reliance
on clauses 2.1(b), 3.6(1) and 6.1 of the Agreement. Firstly, we do not find
this argument being canvassed either before the Arbitral Tribunal or before
the learned Single Judge. The gist of the argument of the Appellant before
the Arbitral Tribunal was simply that the equipment was Lost in Hole due
to wear and tear. The Appellant was unable to establish this on evidence
before the Arbitral Tribunal. Not having canvassed this point before the
Arbitral Tribunal or before the learned Single Judge, it would be highly
unfair to the Respondent to allow the Appellant to canvass this point in
appeal before us. Be that as it may, in any event of the matter, we do not
find that the clauses relied upon by Mr Sancheti would carry the case of the
VRD 34 of 101
APPL372/14
Appellant any further. Clause 2.1(b) deals with general conditions
regarding the Drilling Unit. Clause 3.6(1) deals with the Contractor
maintaining its equipment in sound and efficient operating condition. The
said clause further provides that if the services of the Contractor become
unsatisfactory or the general standard of performance of work is materially
reduced because of a defective drilling pipe or by Contractor's negligence,
the Operator (Appellant) shall give the Contractor (Respondent) written
notice specifying the causes of dissatisfaction and to correct the specified
deficiencies within 15 days failing which the Operator would have the
right to terminate the Agreement on the terms and conditions specified in
the said clause. Clause 6.1 on which reliance has been placed, stipulates
that the Contractor was to perform visual inspection in respect of all
materials and appliances furnished by the Operator and invite the attention
of the Operator to any apparent defect observed therein so that the
Operator may replace such defective material or appliances. In fact, the
clause further provided that the Contractor would not be liable for any loss
or damage, resulting from the use of materials or appliances furnished by
the Operator containing latent defects. We fail to see how any of these
clauses come to the aid of the Appellant in refusing to pay the above
invoices. As set out earlier, clause 16.3 clearly provides that the
VRD 35 of 101
APPL372/14
Contractor shall be reimbursed for all its equipments Lost in Hole save and
except in two situations viz. (1) when the equipment was lost due to wear
and tear or (2) due to negligence on the part of the Contractor. There is no
third category that is set out under clause 16.3 that would entitle to the
Appellant to deny the claim of reimbursement. Even on reading the three
clauses relied upon by Mr. Sancheti, we cannot spell out any such third
category which can be read into clause 16.3. In this view of the matter,
this argument too is without any substance and stands rejected. In this
view of the matter, we do not find any infirmity either in the impugned
Award or in the order of the learned Single Judge upholding the Award in
relation to these invoices.
INVOICE NO.510-364 (Sr No.8)
33. This invoice relates to two incidents, one which occurred on 28 th
September, 2004 and the other on 13 th October, 2006. In the incident of
28th September 2004, one motor from the drilling assembly was lost in
Hole whereas in the incident of 13th October 2006, a motor was twisted off
and Lost in Hole due to high torque in the Well. Both the parties led
evidence in relation to these two incidents. The Arbitral Tribunal noted
that the Respondent's witness had explained what could have caused the
VRD 36 of 101
APPL372/14
aforesaid incidents and noted that the Respondent's witness had deposed
that the loss was not occasioned by any wear and tear or negligence. The
Arbitral Tribunal further noted that the Respondent's witness had not been
cross-examined in this regard. On the other hand, there was no evidence at
all from the side of the Appellant to establish either a case of wear and tear
or that of negligence. In fact, the Arbitral Tribunal noted that the period of
service of the piece of equipment which was lost, was not known and
which was a sine qua non to establish a case of wear and tear. In this view
of the matter, after appreciating the evidence led by the parties, the Arbitral
Tribunal granted the claim under the aforesaid invoice.
34. It is trite law that the Arbitral Tribunal is the sole judge of both the
quality and quantity of evidence led before it. This Court under section 34
of the Act cannot sit in appeal and re-appreciate the evidence. We find
that on the basis of the evidence led before the Arbitral Tribunal, the
findings do not suffer from any perversity or patent illegality that would
entitle this Court to interfere with the Award. The findings, being based
purely on appreciation of evidence, cannot be faulted and neither can this
Court interfere with the same under section 34 of the Act. In this view of
the matter, we find that the learned Single Judge did not commit any error
VRD 37 of 101
APPL372/14
in upholding the Award in relation to this invoice.
INVOICE NOS.510-375 AND 510-376 (Sr No.9 & 10)
35. Once again, even in relation these invoices, Mr Narichania, the
learned senior counsel appearing on behalf of the Respondent submitted
that there was no challenge to these invoices in the Arbitration Petition
filed before the learned Single Judge under section 34 of the Act. He
therefore submitted that the Appellant cannot be allowed to challenge these
invoices now in appeal before us. In relation to these invoices also, we
find this submission of Mr Narichania to have considerable merit. Despite
several invoices being specifically challenged in the Arbitration Petition,
there is no specific challenge to the amounts granted under these invoices.
However, here too, since the learned Single Judge has considered the
challenge to these invoices, we too shall examine the same to see if the
conclusions reached by the Arbitral Tribunal in relation thereto, suffer
from any perversity or patent illegality which would entitle this Court to
interfere with the Arbitral Award.
36. These invoices relate to the incident that took place on 8 th February,
2007 when a section of the Heavy Weight Drill Pipe (HWDP) sheered off
VRD 38 of 101
APPL372/14
in the middle of the tube 1.5 mtrs above the pin end. This was not at any
weld but in the body of the pipe itself. The explanation given by the
Respondent's witness that there was a latent defect in the pipe section,
which caused the pipe sheer. This evidence was not challenged in the
cross-examination by the Appellant. Instead, the Appellant once again
contended that the break down of the drills' string was due to normal wear
and tear and which caused the pipe to sheer off and hence these invoices
was not payable. On perusing the evidence of both the parties, the Arbitral
Tribunal came to the conclusion that the Appellant's witness had no
personal knowledge of the incident and there was no record in support of
the suggestion that the incident took place due to normal wear and tear. In
this view of the matter, the Arbitral Tribunal allowed the claim and granted
the amounts in the aforesaid invoices. In this case also, we find that the
claim has been granted purely on the basis of the evidence led by the
parties before the Arbitral Tribunal and we do not find that the Award
suffers from any perversity or patent illegality that would entitle us to
interfere with the same. In this view of the matter, we find that the learned
Single Judge was fully justified in upholding the Award in relation to these
invoices.
VRD 39 of 101
APPL372/14
CLAIM IN RESPECT OF DAY RATE AND INTEGRATED
SERVICES INVOICES :-
37. The second claim was in respect of Day Rate invoices and Integrated
Services invoices. Under the Agreement, the Appellant was required to
pay to the Respondent for work performed, services rendered, material and
equipments supplied etc. at the rates specified in clause 3 of the Agreement
read with Exh.D to the said Agreement. The rates contained in clause 3
were based on the Respondent's operations being conducted on a seven day
week and a 24 hour working day. In relation to this claim, the relevant
clauses read thus :-
"3.0 COMPENSATION TO CONTRACTOR
3.1 ----------
3.2 ----------
3.3 ----------
3.4 DAY RATE
Under this Agreement Contractor will be entitled to an applicable day
rate at all times from the time of commencement of Agreement (as per
Article 1.1) till the expiry of the Charter Hire period as per Article 1.2,
except otherwise provided for in this Agreement.
3.4.1 RIG OPERATING DAY RATE (RODR):
Contractor shall be paid a Rig Operating Day Rate (RODR) of USD
191,700 (US Dollars One Ninety One Thousand Seven Hundred only)
from the Commencement Date and at all times during the term of the
Agreement, except when specifically otherwise provided for in this
Agreement.
VRD 40 of 101
APPL372/14
3.4.2 RIG NON-OPERATING DAY RATE (NODR):
Contractor shall be paid an Rig Non-Operating Day Rate (NODR) of
USD 182,115 (US Dollars One Eighty Two Thousand One Hundred
Fifteen only) when the Drilling Unit is not operating either due to
waiting for materials to be provided by Operator / orders / instructions /
programme / waiting for the integrated Services / waiting on weather /
waiting for cement to set or carrying out fishing operations (not due to
Contractor's equipment and tools) except where otherwise provided for
in the Agreement.
3.4.3 -----------
3.4.4 INDIVIDUAL SERVICE DAY RATE (SDR):
Contractor shall be paid individual Service Day Rate (SDR) for all the
services covered under Integrated Services from the Commencement
Date and at all times during the term of the Agreement, except when
specifically otherwise provided to in this Agreement as per the rates
given at Exh.D.
3.4.5 ----------
3.4.6 RIG AND INTEGRATED SERVICES BREAKDOWN
3.4.6.1 RIG BREAKDOWN
During the term of the Agreement, if operations hereunder are
suspended due to breakdown of or need for repairs to Contractor's
equipment of Drilling Unit or due to destabilisation of the Drilling Unit
due to whatever reasons and if such failure results in the operations
being materially affected, Contractor shall be paid at the Rig Equipment
Break Down Rate of USD 182,115 (US Dollars One Eighty Two
Thousand One Hundred Fifteen Only) up to a maximum of 32 hours as
compensation per calendar month. Beyond the said 32 hours daily
compensation shall not be payable to the Contractor until operations
are recommenced at which time the applicable rate shall again come
into force.
In addition Contractor shall be allowed a period of 48 hours per year
which shall be paid at Non Operatiing Day Rate and can be utilized by
the Contractor at any time during the Agreement period at its discretion.
The said period of 48 hours will be allowed to be pro-rated during
automatic extension (spilling beyond the primary term) or during any
VRD 41 of 101
APPL372/14
Agreement extension (as per article 1.3(a) of the Agreement). Beyond
the above-mentioned permissble period, zero rate will be applicable for
Drilling Unit.
3.4.6.2 INTEGRATED SERVICE BREAK DOWN:
If any of the services covered in the integrated Services is / are not
operating as per its intended operations due to which the Drilling unit
can not perform its intended operations then the Service Day Rate
(SDR) quoted for that particular service shall not be paid for such
period."
38. Clause 3.4.1 deals with the Rig Operating Day Rate ("RODR") and
stipulates that this rate (USD 191,700) would be payable at all times (save
as otherwise specifically provided) from the Commencement Date of the
Agreement. In other words, RODR would be applicable/payable unless of
course some other rate was applicable/payable under the Agreement. The
other clauses under clause 3.4 and particularly clauses 3.4.2 and 3.4.6.1
with which we are concerned, are the exceptions to clause 3.4.1 which
provide for different rates to be applicable/payable depending on the
contingencies as set out in the said clauses. Clause 3.4.2 (being one of the
exceptions) on the other hand deals with the Rig Non-Operating Day Rate
("NODR") and specifies that the Respondent shall be paid the NODR of
USD 182,115 when the Drilling Unit is not operating either due to waiting
for materials to be provided by Operator / orders / instructions /
programme / waiting for the Integrated Services / waiting on weather /
VRD 42 of 101
APPL372/14
waiting on cement to set or carrying out fishing operations (not on account
of the Contractor's equipments and tools), except where otherwise provided
for in the Agreement. In other words, if the Drilling Unit was not
operating due to any of the conditions mentioned in clause 3.4.2, then the
Respondent would be paid the NODR. Clause 3.4.4 deals with Individual
Service Day Rate ("SDR") which was for services covered under the
Integrated Services, from the commencement date and at all times during
the term of the Agreement, except when specifically otherwise provided
for in the Agreement, as per the rates given at Exh.D to the Agreement.
Clause 3.4.6.1 deals with Rig and Integrated Services Break Down rate
("EBDR") and inter alia provides that if the operations are suspended due
to break down or need for repairs to Contractor's equipment of the Drilling
Unit or due to destabilization of the Drilling Unit due to whatever reasons,
and if such failure results in the operations being materially affected, the
Contractor shall be paid at the EBDR of USD 182,115 upto a maximum of
32 hours as compensation, per calendar month. Beyond the said 32 hours,
no compensation would be payable to the Contractor until operations are
recommenced, at which time the applicable rate shall again come into
force. In other words, if the operations were suspended due to break down
of or need for repairs to the Contractor's equipment of the Drilling Unit or
VRD 43 of 101
APPL372/14
due to destabilization of the Drilling Unit, then the Respondent would be
paid the same rate as the NODR except that it would be capped to a
maximum of 32 hours per calendar month. Beyond a period of 32 hours,
the Respondent would be paid no compensation. Clause 3.4.6.2 inter alia
provides that if any of the services covered under the Integrated Services
are not operating as per its intended operations, the Service Day Rate
(SDR) for that service (as set out in Ex.D to the Agreement) would not be
paid for such period. Exh.D to the Agreement specifies different types of
Integrated Services and the rate at which each of these services have to be
paid for.
39. Having noted the relevant clauses in the Agreement, we shall now
examine the individual invoices under which claims were made by the
Respondent before the Arbitral Tribunal. According to the Respondent, it
raised several invoices upon the Appellant for the work done at the rates
applicable under clause 3. According to the Respondent, the Appellant
wrongly withheld and/or deducted certain amounts payable under these
invoices and therefore, a claim with reference to the same was made before
the Arbitral Tribunal. In relation to these invoices, Mr Sancheti, the
learned Senior Counsel appearing on behalf of the Appellant, submitted a
VRD 44 of 101
APPL372/14
chart in relation to the invoices that were really called in question before
us. The details of these invoices are as follows:-
Sr.No. Invoice No. Invoice Date Invoice Amount Unpaid Amount of
invoice
1 510-204 08/04/05 USD 6,196,042.77 USD 264,784.94
2 510-205 08/04/05 USD 3,878,528.17 USD 90,260.00
3 510-212 09/05/05 USD 3,865,394.96 USD 72,208.00
510-344
510-350
13/10/06
11/06/06
USD 5,677,911.54
USD 4,678.035.00
USD1,590,101.59
USD2,306,790.00
6 510-351 11/06/06 USD3,731.685.25 USD116,728.50
7 510-357 12/01/06 USD5,152,497.81 USD1,551,771.56
8 510-377 03/12/07 USD5,126,685.94 USD1,447,934.00
9 510-378 03/12/07 USD3,441,008.09 USD809,627.24
10 510-398 05/03/07 USD1,865,469.69 USD292,795.00
Before dealing with these invoices individually, it would be relevant
to also note the provisions of clause 7 of the Agreement which reads thus :-
"7.0 PAYMENT
7.1 TIME OF PAYMENT
Operator shall make payment under this Agreement within 15
(fifteen) working days from the date of receipt of an invoice
VRD 45 of 101
APPL372/14
from Contractor, subject always to Operator's right to require
Contractor to furnish it with satisfactory evidence of the
validity and prior payment by Contractor of all labour and
materials incurred by Contractor and charged to Operator.
Should Operator withhold any payment out of the invoice
claim, it shall give reasons for withholding of such amount
from the invoice.
The amount not in dispute is to be paid within the above 15
working days period.
7.2 INVOICE PRESENTATION :
Invoices, accompanied by copies of the original vouchers,
records, receipts or other supporting evidence for the work
performed or the expenses incurred during each month, shall
be presented to Operator's office on or before the tenth (10th)
of each succeeding month or soon thereafter."
40. Clause 7 inter alia provides that the Appellant is to make payment
under the Agreement within 15 working days from the receipt of the
invoice from the Respondent subject always to the Appellant's right to
require the Respondent to furnish with it satisfactory evidence of the
validity and prior payment by the Respondent of all labour and materials
incurred by the Respondent and charged to the Appellant. The clause
further provides that should the Appellant withhold any payment out of the
invoices claimed, it shall give reasons for withholding such amount from
the invoice. This clause is of some importance as will be seen later in the
VRD 46 of 101
APPL372/14
judgment whilst dealing with each individual invoice. Having noted the
relevant clauses in the Agreement, we shall now deal with individual
invoices with reference to the Day Rate and Integrated Services Claim.
INVOICE NO. 510-204 (Sr No.1) :-
41. This invoice relates to the work done by the Respondent in the
month of July 2005. The claim with reference to this invoice is really with
reference to the payment of Bonus under the Agreement. During this
month at various times the auxiliary derrick was undergoing maintenance.
Under Clause 3.10.2, if the Non Productive Time (NPT) in a period of one
calendar month, excluding Rig Move Time, was less than 2%, the
Contractor was entitled to receive bonus payment as set out in the said
clause. If the NPT was more than 2%, no bonus was payable. Clause
3.10.2 reads thus :-
"3.10.2 BONUS - PENALTY :-
The Bonus-Penalty shall be applicable as per "Non Productive Time
(NPT)" of the contract. This NPT shall be the accumulated duration
due to equipment break down of Rig, due to defective well materials
supplied by Contractor that prevents normal operations from
continuing, if the operation is waiting on materials to be supplied by
Contractor, if the delay in operation is due to a fault or omission of the
Contractor, due to break down of any of the Integrated Services
provided by the Contractor.
If NPT < 2 % in a period of one calendar month excluding Rig Move
Time, Contractor to receive bonus payment upto maximum of USD
500,000 on pro-rata basis. If NPT is more than 2 %, no bonus is
VRD 47 of 101
APPL372/14
payable.
............
............
............
............"
42. As per the provisions of the aforesaid clause, in this invoice, the
Respondent claimed a sum of USD 264,784.94 as bonus on the basis that
the NPT during the month of July 2005 was less than 2%. The
Respondent, however, treated a period of 14.5 hours in this month as
being on account of Rig break down (clause 3.4.6.1). As the total period of
break down in the month came to less than 32 hours, this change of
calculations by the Appellant had no effect on the Day Rate payable to the
Respondent for this month. However, by booking 14.5 hours as break
down, the NPT increased to 2.89 % and therefore the Appellant denied to
the Respondent its claim for bonus. This 14.5 hours were treated by the
Appellant as being on account of Rig break down because during this
period, the auxiliary derrick was undergoing maintenance. The Arbitral
Tribunal in paragraphs 39 and 40 of the impugned Award noted the
evidence led by the parties. Firstly, the Arbitral Tribunal noted that the
auxiliary derrick was offered by the Respondent to the Appellant, but the
VRD 48 of 101
APPL372/14
Appellant did not avail of this facility and did not agree to pay any amount
for the same. It was for this reason that in the technical specifications the
auxiliary derrick was not included in the list of equipments to be provided
by the Respondent. The Tribunal further noted that the said witness had
deposed that this was the auxillary derrick where the string, or parts of it,
would be prepared in advance or where the string could be dismantled
post-use in the main derrick. There was no cross-examination of the first
witness of the Respondent on this point. On the other hand, the witness of
the Appellant contended that the Rig had a double derrick capacity (a main
derrick and an auxiliary derrick). In July 2005, the auxiliary derrick was
not working for 14.5 hours during which period the main derrick was
working in place of the auxiliary derrick. However, in his cross-
examination, the witness of the Appellant had agreed that there was no
reference to the auxiliary derrick in the Rig specifications. Though the
witness claimed that in respect of the main derrick, critical path activities
were suspended when the auxiliary derrick was not operational, he based
this claim only on the basis of the Daily Drilling Reports (DDRs) which
were neither disclosed nor produced before the Arbitral Tribunal. On the
other hand, the second witness of the Respondent had deposed that the
critical path activities were not suspended during the said 14.5 hours in
VRD 49 of 101
APPL372/14
July 2005. After considering the evidence of the parties, the Arbitrators
came to a finding that there was no evidence available which would
indicate that the Rig's normal critical path activities were affected in any
way during the period when the maintenance operations of the auxiliary
derrick were in progress. The Arbitral Tribunal also came to a finding that
the auxiliary derrick was excluded from the set of equipments that the
Respondent had contracted to provide and therefore the time taken on the
maintenance of the auxiliary derrick could not have any impact on the
payment of bonus. In this light, the Arbitral Tribunal allowed the claim
under this invoice.
43. Mr Sancheti, the learned Senior Counsel appearing on behalf of the
Appellant, submitted that the Arbitral Tribunal had gravely erred coming
to a finding that there was no data available which would indicate that the
Rig's normal critical path activities were affected in any way during the
period when the maintenance operations of the auxiliary derrick were in
progress. In this regard, he invited our attention to a letter dated 6 th
November 2006 addressed by the Appellant to the Respondent. We find
that that the reliance placed on this letter is wholly misplaced and has
nothing to do with the Rig's critical path activities. The said letter has been
VRD 50 of 101
APPL372/14
written for the purposes of extension of contract. For the month of July
2005, the annexure to the said letter shows 21.5 hours under the column
"Repair". This letter in no way throws light on the fact that there was any
data available which would indicate the Rig's normal critical path activities
were affected in any way during the period when maintenance operations
of the auxiliary derrick were in progress. It is pertinent to note that these
21.5 hours have not been taken into consideration for the purposes of the
extension of the contract. This was the admitted position before us. It is
further important to note that to substantiate the claim of the Appellant that
the Rig's normal critical path activities were affected, the Appellant's
witness based his claim solely on the DDRs, which were neither produced
nor disclosed. It was not the case of the witness of the Appellant before
the Arbitral Tribunal that the letter dated 6 th November 2006 together with
its annexures in any way reflected that the Rig's normal critical part
activities were affected in the month of July 2005. It is in these facts that
the Arbitral Tribunal came to the conclusion that there was no data
available which would indicate that the Rig's normal critical path activities
were affected in any way during the period when the maintenance
operations of the auxiliary derrick were in progress. The said letter
alongwith the annexures have in fact been considered by the Arbitral
VRD 51 of 101
APPL372/14
Tribunal whilst rejecting the claim of the Respondent in respect of
extension of contract and Quantum Meruit (paragraphs 9 to 18 of the
Award). We therefore find that the reliance placed on the aforesaid letter
to assail the Award is wholly misplaced and without any merit.
44. Mr Sancheti next relied upon the invoice which was produced by the
Appellant before the Arbitral Tribunal (pages 129 and 130 of Volume I of
the paper book). The said document shows handwritten changes made by
the Appellant-ONGC increasing the break down time from 7 hours to 21.5
hours and other consequential changes. In this regard, we must note and it
is an admitted fact that this document with handwritten changes was never
sent by the Appellant to the Respondent. This document was disclosed for
the first time in the statement of defense of the Appellant and there is
nothing on record to show or indicate that this document with the
handwritten changes was admitted by the Respondent. In this view of the
matter, the reliance placed on this document cannot carry the case of the
Appellant any further. We may also note that clause 7.1 of the Agreement
requires that should the Appellant withhold any payment under an invoice,
it would give reasons for withholding of such amount. Thus, the burden
lies on the Appellant to justify the deduction from the invoice and must
VRD 52 of 101
APPL372/14
give supporting reasons for the deduction. Upon receipt of the short
payment, the Respondent had addressed a letter dated 14th September 2005
objecting to the said deduction on the ground that it was wrongfully
deducted. Therefore, far from admitting the invoice with the handwritten
changes (pages 129 - 130 of Volume I of the paper book), there is
evidence on record to show that the said deduction was not accepted by the
Respondent. In this view of the matter, we find that after considering the
evidence led by the parties, the claim under this invoice was granted by the
Arbitral Tribunal. We therefore do not find any infirmity either in the
impugned Award or the impugned order whilst granting / upholding the
claim under this invoice.
INVOICE NOS.510-205 AND 510-212 (Sr Nos.2 & 3):-
45. These two invoices relate to the months of July and August 2005 and
as indicated in the table earlier, short payment was made by the Appellant
to the Respondent. It was the case of the Appellant that certain back up
tools were not available on the Rig during certain periods in the month of
July and August 2005 and hence the deductions were made. In relation to
these invoices, the respective parties led their evidence which was
considered by the Arbitral Tribunal. The Appellant's witness stated that
VRD 53 of 101
APPL372/14
the deduction in relation to Invoice No.510-205 was for damages for
breach of contract. A similar deduction was made from Invoice No.510-
212 on account of non-availability of back up tools from 20 th June 2005 to
28th June 2005. On the other hand, the Respondent's witness deposed that
only one tool was not available and there was no break down on the Rig
due to non-availability of this one tool. After analyzing the provisions of
the Agreement and the evidence led, the Arbitral Tribunal came to the
conclusion that there was nothing in the Agreement which entitled the
Appellant to deny the payment to the Respondent in this manner. If the
deduction was made by way of damages, then if no damage was caused,
there was no question of making any deduction, was the finding. It is
pertinent to note that no evidence was led by the Appellant before the
Arbitral Tribunal establishing their claim for damages and no particulars
thereof were furnished. In this view of the matter, we find that there is no
scope for interference with the impugned Award in so far as it granted the
claim under these invoices to the Respondent and on the same parity of
reasoning, no fault can be found in the order of the learned Single Judge
upholding the Award in this regard. To be fair, we must state that though
Mr. Sancheti did not give up this claim before us, he very fairly, and not to
waste judicial time, did not seriously contest the claim granted under these
VRD 54 of 101
APPL372/14
invoices.
INVOICE NO.510-350 (Sr.No.5)
46. This invoice relates to the month of October 2006. In this invoice,
the Respondent claimed only 78 hours for Rig breakdown in excess of 32
hours. The Appellant, however, claimed 382 hours for Rig breakdown over
32 hours by adding 304 hours relating to the period lost from the time the
first Hole was stopped, up to the time the side-track Hole reached a depth
of 4172 meters, as equipment breakdown time. The details of the incident
have been set out in Paragraphs 43 to 45 of the impugned Award.
47. Briefly stated, on 13th /14th October, 2006 drilling was unable to
proceed beyond the depth of 4172 meters because of high torque. The
Bottom Hole Assembly (BHA) was racked back and it was found that the
Positive Displacement Motor (Mud Motor), the bit sub and bit had been
Lost in Hole. Thereafter efforts were made to fish out the lost material
without any success, and therefore, the fishing operations were abandoned
on 15th October, 2006. It was then decided to cement up the Hole and to
drill a side-track. The cementing operations were carried out from 15 th
VRD 55 of 101
APPL372/14
October to 21st October, 2006. The sidetrack drilling was started
immediately thereafter and some time on 29th October, 2006 the side
drilled Hole reached the same depth of 4172 meters as was reached on 14 th
October, 2006. The Arbitral Tribunal in Paragraph 45 of the Award took
into consideration the evidence that was led by the respective parties. It
took note of the evidence of the Respondent that the Mud Motor was not a
part of the Drilling Unit and was part of the Integrated Services. Hence,
there was no suspension on account of the failure of the Drilling Unit.
According to the Respondent, the Drilling Unit was fully operational. The
witness of the Appellant in cross examination stated that the Daily Drilling
Report (DDRs) had not indicated that there was any suspension of the
operation of the Drilling Unit. Taking this evidence and other documents
into account, the Arbitral Tribunal held that Clause 3.4.6.1 (which capped
the compensation payable to the Respondent at 32 hours in a calendar
month) was not applicable. The Arbitral Tribunal came to a finding that
this was not a case where there was any breakdown of the Contractor's
equipment of the Drilling Unit and the only equipment to which
breakdown could be attributed was the Mud Motor, and which was lost in
the Hole. The Arbitral Tribunal, therefore, held that out of the entire period
of 304 hours for which the Respondent withheld payment, 169 hours (the
VRD 56 of 101
APPL372/14
time spent in fishing for Mud Motor, bit sub and bit lost in the Hole) were
required to be paid for under Clause 3.4.2 at the Non-operative Day Rate
(NODR). In respect of the balance 213 hours for cementing and side
tracking operations, since there was no negligence on the part of the
Respondent, the Arbitral Tribunal held that the Respondent is, therefore,
entitled to the NODR under Clause 3.4.2.
48.
Mr. Sancheti drew our attention to this invoice along with its
Annexures ( Page Nos.671 and 672 Vol-III of the Paper-Book) to contend
that even according to the Respondent, no drilling activities were going on
for the said period of 304 hours. He also drew our attention to the Daily
Drilling Report (DDR) of 14th October, 2006 which showed the drill time
as zero. According to Mr. Sancheti, this important fact had been ignored by
the Arbitrators whilst awarding the claim under this invoice. He further
submitted that the Mud Motor for which the fishing operations were
carried out was the equipment of the Contractor, and therefore, the
amounts could not have been awarded under Clause 3.4.2 of the
Agreement which specifically carved out an exception to fishing
operations of the Contractor's equipments and tools. We find the
submission of Mr. Sancheti to be incorrect in fact as well as in law. The
VRD 57 of 101
APPL372/14
DDR (at page no.1481 of Vol-VII of the paper book) relied upon by Mr.
Sancheti is wholly out of context. It is nobody's case that on 14 th October,
2006 any drilling operations were going on. This is for the simple reason
that from 14th to 15th October, 2006 efforts were made to fish out the lost
material which operations were then abandoned at 1900 hours on 15 th
October, 2006. It is in this context that the Daily Drilling Report of 14 th
October, 2006 showed drill time as '0.0'. The Respondent added 304 hours
relating to the period lost from the time the first Hole was stopped, up to
the time the side-track Hole reached a depth of 4172 meters. In fact, the
DDR of 21st October 2006 and of subsequent dates, clearly indicate that
drilling was going on. We, therefore, find that the reliance placed by Mr.
Sancheti on the aforesaid DDR of 14th October, 2006 is wholly misplaced.
Equally, we find the submission of Mr. Sancheti that the Mud Motor was
the equipment of the Contractor and therefore fell within the exception of
Clause 3.4.2 is also factually incorrect. The Appellant in the Arbitration
Petition filed before the learned Single Judge, in Ground 6(S) stated that
".... 'MUD MOTOR' was a part of the sub-contract in service......". On a
plain reading of Clause 3.4.2, it is clear that if the fishing operations were
carried out due to the Contractor's equipment and tools, then the NODR
would not be payable. In the present case, the Mud Motor does not appear
VRD 58 of 101
APPL372/14
to be the equipment of the Contractor but in fact that of the sub-contractor.
In these circumstances, we do not find the submission of Mr. Sancheti to
be factually correct. We may also note that this argument was never made
either before the Arbitral Tribunal or before the learned Single Judge. This
argument is being made for the first time in Appeal before us. We
therefore, today cannot hold that the Mud Motor was the equipment of the
Contractor, and therefore, the time spent for fishing out the Mud Motor
was not payable under Clause 3.4.2 at the NODR. We, therefore, do not
find any perversity in the Award when the Arbitral Tribunal came to a
finding that for the time spent for fishing operations to recover the MUD
MOTOR, the applicable clause would be 3.4.2.
49. Mr. Sancheti, then, next submitted that the Arbitral Tribunal totally
misdirected itself in granting the claim of the Respondent under clause
3.4.2 even for the balance period of 213 hours which was spent for
cementing and side-tracking operations. He submitted that the Arbitral
Tribunal granted the said claim (with reference to 213 hours) on the basis
that there was no negligence on the part of the Respondent. Clause 3.4.2
does not contemplate any question of negligence on the part of the
Respondent and therefore the findings and conclusions reached by the
VRD 59 of 101
APPL372/14
Arbitral Tribunal on this count were perverse and contrary to the terms of
the contract, was the submission. At first blush though this argument
appears to be attractive, on closer scrutiny, we find this argument also to be
without any merit. As rightly submitted by Mr. Narichania, under Clause
7.1 of the Agreement, if any deduction was made in the invoice presented
by the Respondent, the onus was on the Appellant to give reasons for
making such a deduction. In the evidence led before the Arbitral Tribunal
it was the specific case of the Appellant that the deduction was made
applying Clause 3.4.6.1 which dealt with the Equipment Break Down Rate
(EBDR). After considering the facts and the evidence before it, the Arbitral
Tribunal held that Clause 3.4.6.1 was not applicable. In other words, the
Arbitral Tribunal held that the reasons given by the Appellant for making
the deduction from the invoice were held not to be sustainable. It would
therefore follow, that the Appellant, unable to justify the deduction from
this invoice, would have to pay the same to the Respondent. In view
thereof, the Arbitral Tribunal was justified in granting the claim of the
Respondent. We do not think that merely because the Arbitral Tribunal
has held that there is no evidence of negligence, and which was not
applicable for granting the claim under Clause 3.4.2, would entitle us to
interfere in the impugned Award. Under Clause 7.1 of the
VRD 60 of 101
APPL372/14
Agreement, the burden lay on the Appellant to establish why a particular
deduction was made from the invoice. It would therefore follow that if the
Appellant failed to discharge that burden, the invoice would be payable.
50. In answer to the aforesaid argument of Mr Narichania, Mr Sancheti
submitted that the Arbitral Tribunal has not placed any reliance upon any
particular interpretation of the provisions of clause 7 of the Agreement and
the Arbitral Tribunal has only considered the effect of clauses 3.4.1, 3.4.2
and 3.4.6 in relation to claims for Day Rate and Integrated Services
invoices. He further submitted that even the impugned order of the learned
Single Judge does not make any reference to clause 7. Therefore the
argument of Mr Narichania based on clause 7 to support the Award, were
extraneous to the reasons given either in the impugned Award or in the
order of the learned Single Judge, was the submission. He therefore
submitted that no reliance can be placed on the aforesaid clause for the
purpose of upholding the claims granted in relation to the Day Rate and
Integrated Services invoices. We find this argument only to be partially
correct. Whilst dealing with the claim in relation to the Day Rate and
Integrated Services invoices, the Arbitral Tribunal at paragraph 37, has
referred to clause 7.1 and has noted that these invoices were to be paid
VRD 61 of 101
APPL372/14
within 15 days of presentation. It therefore cannot be said that the
attention of the Arbitral Tribunal was not drawn to the said clause. Though
it is true that the Arbitral Tribunal has not dealt with the said clause in
detail as we have in this judgment, that would not be a ground for
interfering with the impugned Award. On reading and interpreting the said
clause, we find that granting of the claims in relation to the Day Rate and
Integrated Services invoices was fully justified by the Arbitral Tribunal
and merely because the Arbitral Tribunal has not dealt with the said clause
in detail, will not entitle the Appellant to assail the Award on that ground.
If we were to accept the submission of Mr Sancheti, it would lead to
upholding a technicality at the cost of doing justice between the parties.
By taking recourse to clause 7, if the claims granted by the Arbitral
Tribunal can be justified, we do not think that we can turn a blind eye and
let a technicality override the interests of justice. In this view of the matter,
we do not find any substance in this argument and therefore, stands
rejected.
51. We find that even in relation to this invoice, the findings of the
Arbitral Tribunal are purely based on facts and appreciation of evidence,
which by no stretch of the imagination, can either be called perverse or
VRD 62 of 101
APPL372/14
suffering from any patent illegality that would entitle us to interfere with
the same. In this view of the matter, we do not find that the learned Single
Judge committed any error in upholding the Award in relation to the claim
made under this invoice.
INVOICE NO.510-351 (Sr.No.6):-
52. This invoice is with reference to the same incident of October 2006
for which Invoice No.510-350 was raised and which has been dealt with by
us in the preceding paragraphs. This invoice related to non-payment of hire
charges for Integrated Services. Before the Arbitral Tribunal, it was not
seriously disputed that on merits, the outcome of this invoice would be the
same as that of Invoice No.510-350. Despite the same, the Arbitral
Tribunal in paragraphs 46(b) to (d) independently examined the merits of
this invoice and granted the claim thereunder. We have already indicated in
the preceding paragraphs the reasons for upholding the claim made under
Invoice No.510-350 and on the same parity of reasoning, the claim under
this invoice also would have to be upheld.
53. Be that as it may, Mr Sancheti urged before us that the claim under
this invoice pertained to services outsourced to a third party viz.
VRD 63 of 101
APPL372/14
"Schlumberger" and therefore no claim could have been made under this
invoice without first establishing that the Respondent had incurred any
liability towards the said third party. As that was not established before the
Arbitral Tribunal, the Arbitral Tribunal had erred in granting the claim
under this invoice, was the submission. Before the Arbitral Tribunal, the
learned counsel for the Respondent submitted that how the disputes would
be settled between the Respondent and the said third party in terms of the
outsourcing agreement between the two of them, was not a concern of the
Appellant herein. He further submitted that the claim in the aribtration
against the Appellant herein was based on the Agreement between the
Appellant and the Respondent. The Arbitral Tribunal found merit in this
submission and therefore rejected the argument made on behalf of the
Appellant that the Respondent had to establish that they had incurred any
liability towards the third party before the claim could be granted. We find
that the conclusion reached by the Arbitral Tribunal is certainly a plausible
one and in any event cannot be said to be perverse or one that shocks the
conscience of the Court or suffers from any patent illegality that would
entitle us to interfere with the same. We therefore find no merit in the
submission made by Mr. Sancheti and same stands rejected.
VRD 64 of 101
APPL372/14
INVOICE NO.510-357 (Sr.No.7) :-
54. This invoice relates to an incident which occurred in the month of
November 2006. On 10th and 11th November 2006, the Drilling Unit was
engaged in casing and cementing operations. After the cementing
operations were over, the mandrel which is a piece of equipment used in
cementation, was no longer in use. The Drilling Unit then commenced
drilling through the cement on 13th November 2006 when the drilling could
not make any progress. It was suspected that this was due to junk in the
Hole. The entire incident in detail has been set out by the Arbitral Tribunal
in paragraphs 47 and 48 of the impugned Award. The Respondent's invoice
proceeded on the footing that there was no period of rig break down
(EBDR) exceeding 32 hours in the month of November 2006. As against
this, the Appellant however deducted 204.5 hours for rig break down
exceeding 32 hours. Therefore, the total of 236.5 hours was claimed as
break down time by the Appellant in the month of November 2006. The
Arbitral Tribunal in this regard considered the evidence led on behalf of
the Appellant. The Appellant in its second Affidavit of evidence took the
stand that this incident was due to an operational lapse on the part of the
Respondent and therefore denied the claim. The Arbitral Tribunal held
that assuming the same to be the stand of the Appellant, no provision had
VRD 65 of 101
APPL372/14
been shown under which a deduction could be made on the ground of
operational lapse. The Arbitral Tribunal further held that if this refers to the
negligence of the Respondent, there was no evidence of such negligence.
In view thereof, the Arbitral Tribunal awarded the claim of the Respondent
under this invoice.
55. Mr Sancheti once again assailed the Award on the ground that there
was no discussion in the Award at all as to how this activity fell under
clause 3.4.2 and at the rate (viz. NODR) at which the claim was granted to
the Respondent. It is true that there is no real discussion in the Award as to
how the claim under this invoice fell under clause 3.4.2. However, to our
mind, this would not entitle the Appellant to impugn the Award on this
ground. As stated earlier, clause 7.1 of the Agreement enjoined upon the
Appellant to give reasons for withholding of any amount from the invoice
presented by the Respondent. In the present case, it was the Appellant's
specific case that the time spent during the incident which occurred in the
month of November 2006 was due to an operational lapse and therefore no
compensation was payable to the Respondent beyond the period of 32
hours. This contention of the Appellant was negated by the Arbitral
Tribunal. Thus, under the Agreement, the burden lay on the Appellant to
VRD 66 of 101
APPL372/14
justify the deduction from the invoice with supporting reasons. If they
failed to do so, the deduction was unjustified. If this be the case, then we
find no perversity in the impugned Award in granting the claim under this
invoice. In fact, on a conjoint reading of clauses 3.4.1, 3.4.2 and 3.4.6.1, it
is clear that the Respondent was to be paid at the RODR at all times save
and except as otherwise provided in the Agreement. It would therefore
follow that if the Arbitral Tribunal came to a finding on the facts that
clause 3.4.6.1 was not applicable and if we accept the contention of the
Appellant that clause 3.4.2 was not applicable, then necessarily the
Respondent would have been entitled to claim compensation at the RODR
under clause 3.4.1. Merely because the Respondent has claimed a lesser
amount viz. under clause 3.4.2 and which has been granted by the Arbitral
Tribunal, would not justify interference with the impugned Award.
Therefore, we do not find any infirmity either in the impugned Award or in
the order of the learned Single Judge in granting /upholding the claim
under this invoice.
INVOICE NOS.510-377 AND 510-378 (Sr.Nos.8 and 9)
56. Both these invoices relate to an incident which took place on 11 th
January 2007. Whilst invoice No.510-377 deals with payment for Day
VRD 67 of 101
APPL372/14
Rate, invoice No.510-378 dealt with payment of Integrated Services. The
incident that took place on 11th January 2007 has been set out in detail in
paragraphs 51 to 53 of the Award. In the Respondent's invoice for January
2007, 535.5 hours were shown as chargeable at the NODR and 10.5 hours
were shown in excess of 32 hours at the EBDR. On the other hand, the
Appellant by its letter dated 17th May 2007 claimed that 425 hours in
January 2007 were payable at half rate by reason of clause 16.5 of the
Agreement. The Arbitral Tribunal once again noted the evidence led by the
parties and rejected the contention of the Appellant. Here too, the Arbitral
Tribunal came to the finding that there was no negligence on the part of the
Respondent. In this regard, same submissions were advanced by Mr
Sancheti as were advanced in relation to Invoice No.510-350 and 510-357.
We have already dealt with these submissions in the preceding paragraphs
of this judgment and on the same parity of reasoning, we find that the
impugned Award requires no interference in relation to the claim granted
under this invoice.
INVOICE NO.510-398 (Sr.No.10) :-
57. This invoice is for the period April 2007 and was paid by the
Appellant. However, the claim under this invoice relates to payment under
VRD 68 of 101
APPL372/14
Clause 4.5 of the Agreement under which the Contractor has to make
available a minimum of two well-heads at all times to the Drilling Unit.
The cost of the well-heads was to be reimbursed to the Respondent by the
Appellant. Under Clause 4.6, reimbursement for well material was to be as
per the actual consumption. According to the Appellant, by considering the
actual consumption of the well-heads in the Well, the amount of US$
226,410 was paid in excess which was sought to be recovered. The Arbitral
Tribunal, however, found that there was no evidence of such excess
payment, and therefore, granted the claim under this invoice. We find that
the claim granted herein was purely based on appreciation of the evidence
that was before the Arbitral Tribunal and therefoe gives us no scope to
interfere with the impugned Award.
INVOICE NO.510-344 (Sr.No.4)
58. This claim is in respect of the invoice for the month of August 2006.
The details of the incident that took place on 1 st August, 2006 have been
set out by the Arbitral Tribunal in paragraph 57 of the impugned Award.
This invoice submitted by the Respondent for the month of August 2006
showed 17 hours as Rig breakdown exceeding 32 hours. On the other hand,
the Appellant claimed a deduction of 171.5 hours for Rig breakdown
VRD 69 of 101
APPL372/14
exceeding 32 hours. The Appellant made this deduction for the period 1 st
August, 2006 (2100 hours) to 9th August, 2006 (1500 hours) on account of
the well-head H4 connector problem. The joint report signed by the
representative of both the parties dated 30th August, 2006 indicated that
there was successful unlocking and releasing of the H4 connector from the
well-head. Furthermore, the pressure test certificate dated 24th January,
2007 stated that no wear and tear or defects were found in the connector.
Both the parties led evidence before the Arbitral Tribunal in relation to this
incident. The Respondent's witness deposed that there was a problem of
disconnecting the H4 connector from the well-head even when the
equipment was in full working order and there was no mishandling of the
disconnection operation by the rig crew. He suggested some causes for the
same. On the other hand, the witness of the Appellant stated that the failure
of the H4 connector from disconnecting from the well-head was due to the
mal-functioning of the H4 connector. As a finding of fact, the Arbitral
Tribunal came to the conclusion that the H4 connector was functioning
correctly. In the cross examination, only one question was put to the
witness of the Respondent to which he answered that no drilling hours
were lost due to this incident as drilling of the well had already been
completed. After analyzing the evidence before it, the question asked by
VRD 70 of 101
APPL372/14
the Arbitral Tribunal was whether in such a situation Clause 3.4.6.1
dealing with the EBDR would apply. In paragraph 62 of the impugned
Award the Arbitral Tribunal came to a finding that this incident was not
covered by the provisions of Clause 3.4.6.1 and hence the claim under this
invoice was payable by the Appellant to the Respondent.
59. Mr. Sancheti, the learned Senior Counsel appearing on behalf of the
Appellant submitted that the facts narrated by the Arbitral Tribunal in
paragraph 57 to 62 of the impugned Award would indicate that this was an
incident that was covered under Clause 3.4.6.1 and not under Clause 3.4.2.
He submitted that Clause 3.4.2 applied only when the Drilling Unit was not
operating either due to (1) waiting for materials to be provided by the
Operator/Orders/Instructions/Programme/waiting for the integrated
services/waiting on weather/ waiting on cement to set; or (2) carrying out
fishing operations ( not on account of Contractor's equipment and tools);
and not otherwise. According to Mr. Sancheti as per the facts narrated by
the Arbitral Tribunal this incident could never fall under Clause 3.4.2 and
therefore necessarily fell under Clause 3.4.6.1. He further submitted that
there was no discussion in the impugned Award as to how the present
incident fell under Clause 3.4.2.
VRD 71 of 101
APPL372/14
60. We find this submission without any substance. Firstly, as indicated
earlier in the judgment, Clause 3.4.1 deals with the Rig Operating Day
Rate (RODR) and stipulates that this rate will be payable at all times
except as otherwise specifically provided (from the commencement date of
the Agreement). In other words the RODR would be applicable/payable
unless of course some other rate was applicable/payable under the
Agreement. Clauses 3.4.2 and 3.4.6.1 are the exceptions to clause 3.4.1
which provide for different rates to be applicable/payable depending on the
contingencies as set out in the said clauses. We, therefore, do not find any
substance in the argument of Mr. Sancheti that if the incident did not fall
under Clause 3.4.2, it would necessarily fall under Clause 3.4.6.1. In fact,
Clause 3.4.6.1 would be applicable provided the contingencies as set out in
the said Clause, had been attracted. Therefore, it is not correct to say that
merely because the incident did not fall under Clause 3.4.2, it ipso facto
fell under Clause 3.4.6.1. In fact, if the incident did not fall under 3.4.2 and
the Arbitral Tribunal has come to a finding that Clause 3.4.6.1. did not
apply to the incident in question, then the Respondent would have been
entitled to the RODR as mentioned in Clause 3.4.1 which is higher than
what was claimed by the Respondent. In such a scenario, we do not find
that the Arbitral Tribunal had in any way misdirected itself in allowing the
VRD 72 of 101
APPL372/14
claim in this invoice. At the cost of repetition, we must again reiterate that
under Clause 7.1 of the Agreement, the onus lay on the Appellant to
establish any deduction made by it from the invoice presented by the
Respondent. The Respondent failed to discharge that burden and therefore
the claim under the invoice was granted. We, therefore, do not see any
infirmity in the impugned Award or in the order of the learned Single
Judge by granting/upholding the claim under this invoice.
CLAIM FOR MAKING A DEDUCTION FROM THE INVOICE
FOR DEMOBILIZATION FEES.
61. The third claim made before the Arbitral Tribunal was in relation to
a wrongful deduction made by the Appellant from the invoice for payment
of demobilization fees. Under clause 3.3. of the Agreement, the Appellant
was liable to pay to the Respondent within 30 days of the expiry date as
defined in clause 1.2, or within 30 days of the receipt of the invoice,
whichever was later, the demobilization fees amounting US$ 1,800,000. In
the present case, the Appellant released the Drilling Unit on 10 th April,
2007 and the Respondent raised its demobilization invoice on 12 th April,
2007. There is no dispute that the amount mentioned under the invoice was
payable to the Respondent. However, the Respondent paid only a sum of
VRD 73 of 101
APPL372/14
US$ 1,472,098/- leaving a balance of US$ 327,902.00. The aforesaid
deduction was sought to be justified by the Appellant by its letter dated 29th
November, 2007 wherein the Appellant informed the Respondent that it
was holding this balance unpaid amount against the Respondent's invoice
for the month of February 2007 towards 46 hours of fishing. It was the
case of the Appellant that on scrutiny of the "Lost in Hole" claims, it was
found that in February 2007, the parting of a drill pipe had taken place and
was attributable to normal wear and tear. Hence, 46 hours taken for the
fishing operations due to a part of the drill string having been left in the
Hole, were liable to be paid at the EBDR i.e. at zero rate. In the said
invoice of February 2007 (Invoice No.510-394 wrongly mentioned as 510-
384 in the Award), the Respondent had treated these 46 hours as payable at
the NODR. The Appellant had paid this invoice in full but on realizing
their alleged mistake, deducted US$ 327,902 and adjusted it against the
invoice for demobilization fees.
62. The Arbitral Tribunal recorded that it was an accepted fact by both
the parties that in this month (February 2007), 46 hours were spent in
fishing. According to the Appellant, the parting of the drill pipe was on
account of normal wear and tear. The Arbitral Tribunal came to a finding
VRD 74 of 101
APPL372/14
that there was no evidence before it that the string was lost because of any
wear and tear, and therefore, the Appellant had rightly paid the said
invoice. The Arbitral Tribunal further found that the said deduction was
not merely on account of the alleged wrong payment at the NODR but also
on account of penalty. This was not explained by the Appellant, and
therefore, in any event, the Arbitral Tribunal came to a finding that such a
deduction could not be upheld and the Appellant was liable to pay the full
amount of the demobilization fees.
63. We find that the claim granted under this invoice also related purely
on questions of fact and appreciation of evidence. There has been nothing
pointed out to us to show or indicate that the claim granted under this
invoice is either perverse, suffers from any patent illegality, is contrary to
the terms of the contract or one that shock conscious of the Court. In this
view of the matter, we do not find any infirmity either in the Award or in
the order of the learned Single Judge granting/upholding claim under this
invoice.
CLAIM REGARDING INTEREST :-
VRD 75 of 101
APPL372/14
64. That brings us to the question regarding the claim for interest which
was hotly contested by both the parties. For the pre-award period, the
Arbitral Tribunal granted interest on 2 counts. Firstly the Arbitral Tribunal
granted interest on delayed payment i.e. on invoices though paid, but
belatedly. This was granted as per the formula set out in paragraphs 73 to
76 of the impugned Award. Secondly and in addition thereto, the Arbitral
Tribunal also granted interest on the claims for:- (1) equipments "Lost in
Hole"; (2) claims for Day Rate and Integrated Services invoices; (3) claim
for a wrongful deduction made from the invoice of De-mobilisation Fees;
and (4) interest on delayed payment i.e. on invoices though paid, but
belatedly. In other words, as far as item (4) is concerned, the Arbitral
Tribunal granted interest on interest. The interest awarded on the USD
amounts was at 4 % p.a. for the period starting from 30 days from the date
of each invoice till the date of the Award and at the rate of 12 % p.a. on the
amounts awarded in INR. The Arbitral Tribunal also awarded interest for
the post-award period at the same rates on the entire amount under the
Award, with effect from the date thereof.
65. As far as interest being granted upto the date of the Award is
concerned, i.e. for the pre-award period, Mr Sancheti, the learned Senior
VRD 76 of 101
APPL372/14
Counsel appearing on behalf of the Appellant, submitted that by virtue of
clause 28.6 of the Agreement, the grant of interest was completely
prohibited. There was an express clause (clause 28.6) which barred the
granting of interest, was the submission of Mr Sancheti. Mr Sancheti
submitted that in view of this express bar, the Arbitral Tribunal could not
have awarded any interest, and by granting the same, the Arbitral Tribunal
had acted directly contrary to the terms of the contract which opened up the
Award to interference and / or challenge.
66. On the other hand, Mr Narichania, the learned Senior Counsel
appearing on behalf of the Respondents, submitted that the findings of the
Arbitral Tribunal were based purely on the interpretation of clause 28.6.
The interpretation put on the said clause by the Arbitral Tribunal being a
plausible one did not call for any interference under section 34 of the Act.
In these circumstances, Mr Narichania supported the Award and the order
of the learned Single Judge.
67. To understand the controversy, it would be necessary to reproduce
clause 28.6 which reads as under :-
VRD 77 of 101
APPL372/14
"28.6 It is also a term of the Agreement that neither party to this
Agreement shall be entitled to the interest on the amount of award."
68. Interpreting this clause, the Arbitral Tribunal came to a finding that
no interest would be payable from the date of the Award, i.e. for the post-
award period. (paragraph 77 of the Award). The principal submission made
by Mr Sancheti was that the words "on the amount of award" appearing in
clause 28.6 of the Agreement related only to the principal sum awarded
and not the interest. In this regard, heavy reliance was placed on the
judgment of the Supreme Court in the case of State of Haryana and others
v/s S.L. Arora and Co.5, and more particularly paragraphs 17, 18, 24 &
24.1 thereof. The said paragraphs are reproduced hereunder :-
"17. The Arbitration and Conciliation Act, 1996 on the other hand,
contains a specific provision dealing with the power of the Arbitral
Tribunal to award interest. The said provision is incorporated in sub-
section (7) of Section 31 which deals with the form and contents of
arbitral awards. The said sub-section (7) is extracted below:
"31. (7)(a) Unless otherwise agreed by the parties, where and
insofar as an arbitral award is for the payment of money, the
Arbitral Tribunal may include in the sum for which the award is
made interest, at such rate as it deems reasonable, on the whole
or any part of the money, for the whole or any part of the period
between the date on which the cause of action arose and the date
on which the award is made.
(b) A sum directed to be paid by an arbitral award shall, unless
the award otherwise directs, carry interest at the rate of eighteen
per centum per annum from the date of the award to the date of
payment."
5 (2010) 3 SCC 690
VRD 78 of 101
APPL372/14
18. Section 31(7) makes no reference to payment of compound interest
or payment of interest upon interest. Nor does it require the interest
which accrues till the date of the award, to be treated as part of the
principal from the date of award for calculating the post-award interest.
The use of the words "where and insofar as an arbitral award is for the
payment of money" and use of the words "the Arbitral Tribunal may
include in the sum for which the award is made, interest ... on the
whole or any part of the money" in clause (a) and use of the words "a
sum directed to be paid by an arbitral award shall ... carry interest" in
clause (b) of sub-section (7) of Section 31 clearly indicate that the
section contemplates award of only simple interest and not compound
interest or interest upon interest. "A sum directed to be paid by an
arbitral award" refers to the award of sums on the substantive claims
and does not refer to interest awarded on the "sum directed to be paid
by the award". In the absence of any provision for interest upon interest
in the contract, the Arbitral Tribunals do not have the power to award
interest upon interest, or compound interest, either for the pre-award
period or for the post-award period.
24. As there is some confusion as to what Section 31(7) authorises and
what it does not authorise, we will attempt to set out the legal position
regarding award of interest by the Arbitral Tribunals, as emerging from
Section 31(7) of the Act.
24.1 The provision for interest in the Act is contained in Section 31
dealing with the form and contents of arbitral award. It employs two
significant expressions "where the arbitral award is for payment of
money" and "the Arbitral Tribunal may include in the sum for which
the award is made, interest ... on the whole or any part of the money".
(emphasis supplied) The legislature has thus made it clear that award of
interest under sub-section (7) of Section 31 [and award of costs under
sub-section (8) of Section 31 of the Act] are ancillary matters to be
provided for by the award, when the Arbitral Tribunal decides the
substantive disputes between the parties. The words "sum for which the
award is made" and "a sum directed to be paid by an arbitral award"
contextually refer to award on the substantive claims and not ancillary
or consequential directions relating to interest and costs."
69. Relying on the aforesaid paragraphs, it was the submission of Mr.
Sancheti that the words "sum for which the award is made" and "a sum
VRD 79 of 101
APPL372/14
directed to be paid by an arbitral award" contextually refer to award on
the substantive claims and not ancillary or consequential directions relating
to interest and costs. The learned counsel therefore submitted that even
under clause 28.6, the words "on the amount of award" would have to be
interpreted only to mean the substantive claims (the principal sum
awarded, and not the interest). If the words are so interpreted, then it was
clear from the said clause that no interest could be awarded on the
principal sum, was the submission of Mr. Sancheti.
70. To our mind, everything would depend on what meaning is to be
given to the word "award" appearing in clause 28.6 of the Agreement. If
the word "award" in clause 28.6 was to be interpreted to mean only the
substantive claims, then the submission of Mr Sancheti is well founded and
the Arbitral Tribunal would be barred on awarding any interest on the
substantive claims. On the other hand, if the word "award" appearing in
clause 28.6 included not only the principal sum (substantive claims), but
also interest thereon, then clearly what would be barred under clause 28.6
would be the post-award interest as interpreted by the Arbitral Tribunal.
VRD 80 of 101
APPL372/14
71. It is true that in S.L. Arora's case (supra), the Supreme Court has in
no uncertain terms held that the words "a sum directed to be paid by
Arbitral Tribunal" refers to the award of sums on the substantive claims
and does not refer to interest awarded on the "sum directed to be paid by
the Award". The Supreme Court came to the aforesaid finding after
analyzing the provisions of sections 31(7)(a) and (b) of the Act, which
speicifically empower the Arbitral Tribunal to award/grant interest in
certain situations. However, the matter does not rest here. It was brought to
our notice that the correctness of this judgment was called into question
before the Supreme Court in the case of Hyder Consulting (UK) Ltd., v/s
Governor, State of Orissa, through Chief Engineer 6. In the aforesaid case,
the Supreme Court doubted the correctness of ratio laid down in S.L.
Arora's case (supra) and therefore referred the matter to a three Judge
Bench for consideration. Paragraphs 3 to 6 of the said judgment reads
thus:-
"3. Mr C.A. Sundaram, learned Senior Counsel for the petitioners,
submits that the observations in S.L. Arora and Co. [(2010) 3 SCC
690 : (2010) 1 SCC (Civ) 823] that the decisions of this Court
in McDermott International Inc. v. Burn Standard Co. Ltd. [(2006) 11
SCC 181], and U.P. Coop. Federation Ltd. v. Three Circles [(2009) 10
SCC 374 : (2009) 4 SCC (Civ) 212] were passed on inadvertent
erroneous assumption and these judgments are per incuriam in holding
that interest awarded on the principal amount up to the date of award
becomes the principal amount and, therefore, award of future interest
6 (2013) 2 SCC 719
VRD 81 of 101
APPL372/14
thereon does not amount to award of interest on interest are not
justified.
4. Mr C.A. Sundaram, learned Senior Counsel, referred to the
decisions of this Court in Oil & Natural Gas Commission v. M.C.
Clelland Engineers S.A. [(1999) 4 SCC 327] and Central Bank of
India v. Ravindra [(2002) 1 SCC 367] in support of his argument that
the view taken by this Court in S.L. Arora and Co. [(2010) 3 SCC 690 :
(2010) 1 SCC (Civ) 823] that Section 31(7) of the Arbitration and
Conciliation Act, 1996 (for short "the Act") does not authorise and
enable the Arbitral Tribunals to award interest on interest from the date
of the award is not the correct view.
5. The learned Senior Counsel for the appellants also submitted that
the view taken by this Court in S.L. Arora and Co. [(2010) 3 SCC 690 :
(2010) 1 SCC (Civ) 823] that the award of interest on cost was not
permissible under Section 31(7) of the Act is inconsistent with the
decision of this Court in Three Circles [(2009) 10 SCC 374 : (2009) 4
SCC (Civ) 212] .
6. Having regard to the above submissions, we are of the view that it
would be appropriate if these appeals are heard by a Bench of three
Judges."
72. After the judgment was reserved in this Appeal, the Respondent
moved this court to place this Appeal on board for directions when it was
pointed out to us that in the case of M/s Hyder Consulting (UK) Ltd. v/s
Governor, State of Orissa, through Chief Engineer 7 a three Judge Bench
of the Supreme Court had the occasion to consider the correctness of the
ratio laid down in S.L. Arora's case (supra) and by a majority view of 2:1
held that S.L. Arora's case (supra) does not lay down the correct law. The
majority view of the Hon'ble Mr Justice S. A. Bobde and the Hon'ble Mr
7 Civil Appeal No.3148 of 2012 decided on 25th November, 2014.
VRD 82 of 101
APPL372/14
Justice Abhay M. Sapre held that S.L. Arora's case (supra) was wrongly
decided. The Hon'ble Mr Justice S. A. Bobde held thus:-
"2. It is not possible to agree with the conclusion in S.L Arora's case
that Section 31(7) of the Act does not require that interest, which
accrues till the date of the Award, be included in the "sum" from the
date of Award for calculating the post-award interest. In my humble
view, this conclusion does not seem to be in consonance with the clear
language of Section 31(7) of the Act.
3. Sub-section (7) of Section 31 of the Act, which deals with the power
of the Arbitral Tribunal to award interest, reads as follows:
"Sub-section (7)
(a) Unless otherwise agreed by the parties, where and in so far
as an arbitral award is for the payment of money, the Arbitral
Tribunal may include in the sum for which the award is made
interest, at such rate as it deems reasonable, on the whole or any
part of the money, for the whole or any part of the period
between the date on which the cause of action arose and the date
on which the award is made.
(b) A sum directed to be paid by an arbitral award shall, unless
the award otherwise directs, carry interest at the rate of eighteen
per centum per annum from the date of the award to the date of
payment."
4. Clause (a) of sub-section (7) provides that where an Award is made
for the payment of money, the Arbitral Tribunal may include interest in
the sum for which the Award is made. In plain terms, this provision
confers a power upon the Arbitral Tribunal while making an Award for
payment of money, to include interest in the sum for which the Award is
made on either the whole or any part of the money and for the whole or
any part of the period for the entire pre-award period between the date
on which the cause of action arose and the date on which the Award is
made. To put it differently, sub-section (7)(a) contemplates that an
Award, inclusive of interest for the pre-award period on the entire
amount directed to be paid or part thereof, may be passed. The "sum"
awarded may be principal amount and such interest as the Arbitral
Tribunal deems fit. If no interest is awarded, the "sum" comprises only
the principal. The significant words occurring in clause (a) of sub-
section (7) of Section 31 of the Act are "the sum for which the award is
made." On a plain reading, this expression refers to the total amount or
sum for the payment for which the Award is made. Parliament has not
added a qualification like "principal" to the word "sum," and
therefore, the word "sum" here simply means "a particular amount of
VRD 83 of 101
APPL372/14
money." In Section 31(7), this particular amount of money may include
interest from the date of cause of action to the date of the award.
10. In this view of the matter, it is clear that the interest, the sum
directed to be paid by the Arbitral Award under clause (b) of sub-
section (7) of Section 31 of the Act is inclusive of interest pendent lite.
13. Thus, it is apparent that vide clause (a) of sub-section (7) of Section
31 of the Act, Parliament intended that an award for payment of money
may be inclusive of interest, and the "sum" of the principal amount plus
interest may be directed to be paid by the Arbitral Tribunal for the pre-
award period. Thereupon, the Arbitral Tribunal may direct interest to be
paid on such "sum" for the post-award period vide clause (b) of sub-
section (7) of Section 31 of the Act, at which stage the amount would be
the sum arrived at after the merging of interest with the principal; the
two components having lost their separate identities.
15. In the result, I am of the view that S.L Arora's case is wrongly
decided in that it holds that a sum directed to be paid by an Arbitral
Tribunal and the reference to the Award on the substantive claim does
not refer to interest pendente lite awarded on the "sum directed to be
paid upon Award" and that in the absence of any provision of interest
upon interest in the contract, the Arbitral Tribunal does not have the
power to award interest upon interest, or compound interest either for
the pre-award period or for the post-award period. Parliament has the
undoubted power to legislate on the subject and provide that the
Arbitral Tribunal may award interest on the sum directed to be paid by
the Award, meaning a sum inclusive of principal sum adjudged and the
interest, and this has been done by Parliament in plain language."
(emphasis supplied)
73. Thus the Hon'ble Mr. Justice S A Bobde has in no uncertain terms
held that S.L. Arora's case (supra) is wrongly decided. It is further held by
The Hon'ble Mr. Justice S A Bobde that the Arbitral Tribunal may award
interest on the sum directed to be paid by the Award, meaning a sum
inclusive of the principal sum adjudged and the interest. As laid down in
the said judgment, we must also not lose sight of the intention of enacting
this provision, viz. to encourage early payment of the awarded sum and to
VRD 84 of 101
APPL372/14
discourage the unusual delay, which accompanies the execution of the
Award in the same manner as if it were decree of the Court under section
36 of the Act.
74. The Hon'ble Mr Justice A.M. Sapre whilst entirely agreeing with the
judgment and reasoning of the Hon'ble Mr. Justice S A Bobde, gave certain
further reasons in his concurring judgment. The Hon'ble Mr Justice A.M.
Sapre, after analyzing the provisions of section 31(7)(a) and (b) held thus:-
5. Section 31(7)(a) of the Act deals with grant of pre-award interest
while sub-clause (b) of Section 31(7) of the Act deals with grant of post-
award interest. Pre-award interest is to ensure that arbitral proceedings
are concluded without unnecessary delay. Longer the proceedings,
would be the period attracting interest. Similarly, post-award interest is
to ensure speedy payment in compliance of the award. Pre-award
interest is at the discretion of Arbitral Tribunal, while the post-award
interest on the awarded sum is mandate of statute - the only difference
being that of rate of interest to be awarded by the Arbitral Tribunal. In
other words, if the Arbitral Tribunal has awarded post-award interest
payable from the date of award to the date of payment at a particular
rate in its discretion then it will prevail else the party will be entitled to
claim post-award interest on the awarded sum at the statutory rate
specified in clause (b) of Section 31(7) of the Act, i.e, 18%. Thus, there
is a clear distinction in time period and the intended purpose of grant of
interest.
6. Section 31(7)(a) employs the words "...the arbitral tribunal may
include in the sum for which the award is made interest...". The words
"include in the sum" are of utmost importance. This would mean that
pre-award interest is not independent of the "sum" awarded. If in case,
the Arbitral Tribunal decides to award interest at the time of making the
award, the interest component will not be awarded separately but it
shall become part and parcel of the award. An award is thus made in
respect of a "sum" which includes within the "sum" component of
interest, if awarded.
VRD 85 of 101
APPL372/14
7. Therefore, for the purposes of an award, there is no distinction
between a "sum" with interest, and a "sum" without interest. Once the
interest is "included in the sum" for which the award is made, the
original sum and the interest component cannot be segregated and be
seen independent of each other. The interest component then looses its
character of an "interest" and takes the colour of "sum" for which the
award is made.
8. There may arise a situation where, the Arbitral Tribunal may not
award any amount towards principal claim but award only "interest".
This award of interest would itself then become the "sum" for which an
award is made under Section 31(7)(a) of the Act. Thus, in a pre-award
stage, the legislation seeks to make no distinction between the sum
award and the interest component in it.
9. Therefore, I am inclined to hold that the amount award under Section
31(7)(a) of the Act, whether with interest or without interest, constitutes
a "sum" for which the award is made."
ig (emphasis supplied)
75. It is thus clear that the majority view of the Supreme Court in the
case of Hyder Consulting (UK) Ltd. (supra), has now clearly laid down
that S.L. Arora's case was wrongly decided and the words ".........the sum
for which the award is made......." appearing in section 31(7)(a) of the
Act does not only relate to substantive claims (principal sum) but also the
interest awarded.
76. If we were to apply this interpretation to the word "award" in
clause 28.6 of the Agreement, then it is clear that what is barred under the
said clause is only interest for the post-award period and not for the period
from the date when the cause of action arose till the date of the award.
VRD 86 of 101
APPL372/14
There is yet another reason for this. If we were to interpret the words "A
sum directed to be paid by an arbitral award" in section 31(7)(b), to mean
only the award of sums on substantive claims as sought to be contended by
Mr Sancheti, it could lead to startling results. For instance, in a given
case, there may be no claim before the Arbitral Tribunal for the principal
sum (substantive claims) but a claim only for interest. If the words "A sum
directed to be paid by an arbitral award" were to be interpreted only to
mean the "principal sum" (substantive claims and not the interest
component), then the Arbitral Tribunal would not be able to award any
sum whatsoever to the Contractor even though the contract was silent on
the issue of payment of interest on delayed payments. We do not think
that the Legislature contemplated such an absurd result whilst enacting the
provisions of section 31(7)(a) and (b) of the Act. Keeping this proposition
in mind as well as the ratio of the majority view of the Supreme Court in
the case of Hyder Consulting (UK) Ltd. (supra), if one was to read
clause 28.6 of the Agreement, the intention is clear. What was sought to be
barred under the Agreement was the post-award interest. In this view of
the matter, we do not find that the impugned Award suffers from any
infirmity in awarding to the Contractor viz. Dolphin Drilling Ltd. interest
either (i) on the invoices though paid but belatedly; or (ii) on the
VRD 87 of 101
APPL372/14
invoices that were unpaid, and for which a claim was made, and allowed
by the Arbitral Tribunal. The Arbitrators construed the clause of the
contract and in our view, rightly, before awarding interest. In any event,
the interpretatino put on clause 28.6 by the Arbitral Tribunal is cetainly a
plausible one which requires no interference. We therefore do not find any
force in the submission of Mr Sancheti that the word "award" appearing in
clause 28.6 is to be construed as "principal sum" and not "principal sum
plus interest".
77. Notwithstanding the aforesaid, Mr Sancheti submitted that this was
an Agreement that was entered into between two parties who were well
versed with the law and had the advantage of legal assistance before
drafting and entering into the aforesaid Agreement. He submitted that the
interpretation put on clause 28.6 of the Agreement by the Arbitral Tribunal
would effectively render the said clause invalid and / or otiose inasmuch as
under section 31(7)(b) of the Act, the parties cannot contract out of the said
provision. In other words, Mr Sancheti submitted that the discretion
granted to the Arbitrators to award interest for the post-award period was
entirely in the realm of the Arbitral Tribunal and the same could not be
negated by a contract to the contrary. He therefore submitted that this
being the position in law, on the principles of interpretation of contract, the
VRD 88 of 101
APPL372/14
clause ought to be interpreted in such a way so as to save the clause rather
than to render it invalid. In this regard, Mr Sancheti placed reliance on the
following judgments of the Supreme Court :-
(1) The Union of India v/s M/s D.N. Revri and Co. and others8;
(2) Owners and Parties interested in the Vessel M.V. Baltic
Confidence and anr., v/s State Trading Corporation of India
Ltd. And anr.9;
(3) CITIBANK, N.A. v/s TLC Marketing PLC and anr.10; and
(4) LIC of India v/s Dharam Vir Anand.11
78. As far as the first three judgments are concerned, they all relate to
the arbitration clause in the contract. It is in this context that the Supreme
Court has held that a contract is a commercial document between the
parties and it must be interpreted in such a manner so as to give efficacy to
the contract rather than to invalidate it. There is no quarrel with the
aforesaid proposition. However, we do not find in these judgements a
proposition that if a clause in the contract is unambiguous and on a plain
reading can afford only one construction, yet one has to strain and labour
on interpreation to save the said clause from invalidation. The Court cannot
supply words into the contract, which would change the meaning thereof,
8 AIR 1976 SC 2257
9 AIR 2001 SC 3381
10 (2008) 1 SCC 481
11 (1998) 7 SCC 348
VRD 89 of 101
APPL372/14
under the guise of interpretation. If the clause is clear and unambiguous
and would be void as it stands, so be it. There is no question of trying to
interpret the said clause in a different way merely to ensure that the same is
not rendered invalid and / or otiose. To our mind, on a plain reading of
clause 28.6, what the clause bars is post-award interest. As rightly
submitted by Mr Sancheti himself, the said clause would be void as the
parties cannot contract out of the provisions of section 31(7)(b). Therefore,
despite this clause, the Arbitral Tribunal would be empowered to grant
interest for the post-award period and which in fact the Arbitral Tribunal
has done in the impugned Award. In fact, on the basis of the three judge
bench judgment of the Supreme Court in M/s Hyder Consulting (UK)
Ltd.'s case (supra) even the direction given by the Arbitral Tribunal in
paragraph 80(vi) of the Award, in so far as it granted interest on interest,
could not be called into question. However, the learned Single Judge set
aside the the direction given in paragraph 80 (vi) of the Award only in so
far it sought to award interest on interest. Though on the basis of M/s
Hyder Consulting (UK) Ltd.'s case (supra), the aforesaid finding of the
learned Single Judge may not be correct, we decline to interfere with the
same on the ground that the Respondent before us has not challenged the
order of the learned Single Judge. In this view of the matter, we find that
VRD 90 of 101
APPL372/14
the granting of interest by the Arbitral Tribunal and as partially modified
by the learned Single Judge in the impugned order, does not require any
interference in appeal.
CHALLENGE TO THE AWARD OF COSTS :-
79. The last challenge to the impugned Award was on the costs awarded
by the Arbitral Tribunal in favour of the Respondent. The Arbitral Tribunal
at paragraph 78 of the Award recorded that the Respondent had
substantially succeeded in its claims and that the defenses raised by the
Appellant were found by and large to be unsustainable. The rule that
"costs should follow the event" would apply, was the finding of the
Arbitral Tribunal and therefore it held that the Respondent was entitled to
costs from the Appellant.
80. Before the Arbitral Tribunal, the Respondent filed its statement of
costs, the details of which are as under :-
Statement Particulars INR* USD**
A Arbitrators Fee and Expenses 33,47,500/-- --
B Travel and stay expenses of 1,84,930/- --
Arbitrator R.C. Lahoti J.
VRD 91 of 101
APPL372/14
C Expenses on venue and steno 4,31,455/- --
D Solicitor and Counsel fees 940490
E Travelling and stay expenses of 57075
witnesses
Consultancy fees 27,197
F Expenses of Claimant's 308041
representative for attending
Arbitral meetings including
consultancy
*Rounded upto nearest Rupee
**Rounded upto nearest Dollar
81.
Out of the total costs claimed by the Respondent, the Arbitral
Tribunal disallowed the amount of USD 27,197 shown as consultancy fees
in Statement E above. Similarly, the Arbitral Tribunal disallowed the
expenses in the sum of USD 308,041 incurred on account of the
Respondent's representatives attending the Arbitral meetings, and as
reflected in Statement F above. Subject to the above, the Arbitral Tribunal
allowed costs in favour of the Respondent quantified at Rs.39,63,885 and
USD 997,565 respectively.
82. Mr Sancheti submitted that out of the total claims made before the
Arbitral Tribunal, claims of about USD 12 million were allowed and one
claim of USD 15.5 million (for extension of contract and claim on the basis
VRD 92 of 101
APPL372/14
of Quantum Meruit) was rejected. Despite the Arbitral Tribunal dismissing
more than half the total claim (in monetary terms) of the Respondent, the
entire costs were saddled on the Appellant, was the submission of Mr
Sancheti. According to him, this is despite the fact that the Arbitral
Tribunal held that"costs shall follow the event". He submitted that though
the principle had been mentioned in the impugned Award, the same had
not been followed by the Arbitral Tribunal. The Arbitral Tribunal had
undertaken no exercise to apportion the costs, especially in view of the fact
that more than half the claim had been rejected and therefore the Award of
costs was one which shocked conscience of the Court. On the issue of
costs, Mr Sancheti relied upon the judgment of the Supreme Court in the
case of State of Jammu and Kashmir and another v/s Dev Dutt Pandit 12,
and more particularly paragraph 23 thereof, which reads thus:-
"23. .......... When claims are inflated out of all proportions not only
that heavy cost should be awarded to the other party but the party
making such inflated claims should be deprived of the cost. We,
therefore, set aside the award of cost of Rs 7500 given in favour of the
contractor and against the State of Jammu and Kashmir."
83. In the facts of the present case, Mr Sancheti submitted that looking
to the fact that more than 50% of the claim was rejected by the Arbitral
Tribunal (which was for approximately USD 15.5 million), it can be easily
12 (1999) 7 SCC 339
VRD 93 of 101
APPL372/14
inferred the same was highly inflated and therefore no costs ought to have
been awarded in favour of the Respondent.
84. Mr Sancheti then relied upon the judgment of the Supreme Court in
the case of Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust 13.
Mr Sancheti laid stress on paragraphs 23 and 38 of the judgment which
read thus :-
"23. There is one more aspect which requires serious consideration.
What is the meaning of the words "actual realistic costs" assuming that
costs could be awarded on such basis? Whether it can be said that Rs
45,28,000 said to have been incurred (made up of Rs 29,73,000 paid to
Mr S, Senior Advocate; Rs 14,41,000 paid to Mr G, Senior Advocate; Rs
85,500 paid to Mr M, Advocate; Rs 16,750 paid to Mr V, Advocate and
Rs 11,750 incurred as miscellaneous expenses) was the "actual realistic
cost" of an appeal against an interim order in a suit for injunction? The
actual realistic cost should have a correlation to costs which are
realistic and practical. It cannot obviously refer to fanciful and
whimsical expenditure by parties who have the luxury of engaging a
battery of high-charging lawyers. If the logic adopted by the High Court
is to be accepted, then the losing party should pay the costs, not with
reference to the subject-matter of the suit, but with reference to the fee
paying capacity of the other side.
38. Clause (a) of Section 31(8) of the Arbitration and Conciliation Act,
1996 ("the Act", for short) deals with costs. It provides that unless
otherwise agreed by the parties, the costs of an arbitration shall be
fixed by the Arbitral Tribunal. The Explanation to sub-section (8) of
Section 31 makes it clear that "costs" means reasonable costs relating
to (i) the fees and expenses of the arbitrators and witnesses, (ii) legal
fees and expenses, (iii) any administration fees of the institution
supervising the arbitration, and (iv) any other expenses incurred in
connection with the arbitral proceedings and the arbitral award. Clause
(b) of Section 31(8) of the Act provides that unless otherwise agreed to
by the parties, the Arbitral Tribunal shall specify (i) the party entitled to
costs, (ii) the party who shall pay the costs, (iii) the amount of costs or
13 (2012) 1 SCC 455
VRD 94 of 101
APPL372/14
method of determining the amount, and (iv) the manner in which the
costs shall be paid. This shows that what is awardable is not "actual"
expenditure but "reasonable" costs."
85. Relying on the aforesaid judgment, Mr Sancheti submitted that in
any event of the matter, the costs awarded have to be realistic and
reasonable. In the present case, according to Mr Sancheti, the costs alone
come to a whopping figure of approximately Rs.6.5 crores (if taken at
today's exchange rate of the US Dollar) which itself is a figure that was
unreasonable and that should shock the conscience of the Court. This is
more so when half the claim is disallowed by the Arbitral Tribunal, was the
submission of Mr Sancheti.
86. On the other hand, Mr Narichania, the learned Senior Counsel
appearing on behalf of the Respondent submitted that awarding of costs
was entirely within discretion of the Arbitral Tribunal and unless it is
established that the discretion has been exercised perversely, the Court
would not interfere with the same. In the facts of the present case, the
learned Single Judge did not find the discretion exercised by the Arbitral
Tribunal in granting costs to be perverse. In these circumstances, no
interference was called for in this Appeal, was the submission. On the issue
of dismissal of the claim of the Respondent regarding Quantum Meruit, Mr
VRD 95 of 101
APPL372/14
Narichania submitted that merely because one claim was rejected
(irrespective of its quantum), did not mandate the lowering of the costs
being granted to the Respondent. He submitted that the claim for Quantum
Meruit was jut one out of 29 claims made before the Arbitral Tribunal.
Considering the amount of time spent to prove these 29 claims / invoices
and the quantum of evidence led by the Respondent's witness which also
encompassed the claim for Qantum Meruit, the award of costs was not
disproportionate. He submitted that as far as the claim of Quantum Meruit
was concerned, the arguments and evidence in relation to this claim hardly
took one hour of hearing whereas substantial time was expended whilst
granting the other claims of the Respondent. According to Mr Narichania,
it is also an admitted fact that when the bill of costs was submitted by the
Respondent to the Arbitral Tribunal, the quantum thereof was never
objected to by the Appellant or their Advocates. In this view of the matter,
Mr Narichania submitted that the award of costs to the Respondent was
well within the discretion of the Arbitral Tribunal which by no stretch of
the imagination can be called perverse. For all the aforesaid reasons, Mr
Narichania submitted that no interference was called for in the impugned
Award in so far as it granted costs in favour of the Respondent.
VRD 96 of 101
APPL372/14
87. On going through the impugned Award in so far as it awarded costs
in favour of the Respondent as well as the impugned order of the learned
Single Judge, we indeed find that the costs awarded are a very large sum.
The costs in Statements A, B, C and D were awarded in full and a part of
the costs claimed in Statement E were also awarded (to the extent of USD
57,075). Despite the fact that the Arbitral Tribunal noted that "costs shall
follow the event", we find no apportionment of the costs in the Arbitral
Award. In fact, as noted earlier, the costs claimed in Statements A, B,
and D have been awarded in full by the Arbitral Tribunal despite the fact
that more than half the claim of the Respondent before the Arbitral
Tribunal was rejected. This being the position, we do not think that it was
fair to the Appellant to saddle it with the entire costs as was sought to be
done in the impugned Award. Indeed the figure awarded as and by way of
costs comes to a whopping figure of approximately 6.5 crores (taking into
consideration today's exchange rate of the US Dollar). This figure is
indeed one that would shock the conscience of the Court and unless there
was proper reasoning for awarding such heavy costs, we are unable to
uphold the Award to this extent. Considering that half the claim of the
Respondent was rejected by the Arbitral Tribunal, and the ratio of the
judgement of the Supreme Court in the case of Sanjay K. Jain (supra)
VRD 97 of 101
APPL372/14
wherein the Supreme Court has held that the actual realistic costs should
have a co-relation to the costs which are realistic and practical, and cannot
be a fanciful and whimsical expenditure by parties who have the luxury of
engaging a battery of high charging lawyers, we are of the view that the
costs awarded by the Arbitral Tribunal ought to be reduced to 2/3 rd of what
has been granted in the impugned Award. We think that this formula
would meet the ends of justice looking to the facts and circumstances of
the present case. In fact, the Supreme Court in the very same judgement
has further held that the costs means the reasonable costs relating to (1) the
fees and expenses of the Arbitrators and witnesses; (2) legal fees and
expenses; (3) any administrative fees of the institution supervising the
arbitration and (4) any other expenses incurred in connection with the
arbitral proceedings and the arbitral award. This shows that what is
awardable is not the actual expenditure but reasonable costs. We therefore
find that in the facts and circumstances of the present case, it would be just
and reasonable if the costs awarded by the Arbitral Tribunal are reduced to
2/3rd of what has been granted in the impugned Award. In other words, the
Respondent would be entitled to costs of Rs.26,42,564/- and USD 665,037.
To this extent, the impugned award stands modified by this judgment.
VRD 98 of 101
APPL372/14
88. To sum up therefore, the challenge to the impugned Award as
modified by the order of the learned Single Judge, fails on all counts with
the exception of the costs being awarded by the Arbitral Tribunal which
stands reduced to 2/3rd of the costs granted in the impugned Award. The
appeal is disposed of in the aforesaid terms. In the facts and circumstances
of the case, there shall be no order as to costs.
ig CHIEF JUSTICE
B.P. COLABAWALLA J.
89. After the judgment is pronounced, the learned counsel for the
Appellant prays for continuance of the interim stay which was granted
when the appeal was admitted.
90. The learned counsel for the Respondent - claimant opposes
the prayer and submits that the Appellant having lost before the Arbitral
Tribunal, in Arbitration Petition filed under section 34 of the Arbitration
and Conciliation Act, 1996 and thereafter in Appeal before this Court
VRD 99 of 101
APPL372/14
under section 37 of the said Act, if this Court is inclined to grant stay, it
should be on condition of depositing the full amount as per the Arbitral
Award together with interest and costs as modified by this Court.
91. At the time of admitting the Appeal, we had granted interim
stay on condition that the Appellant deposits 50 % of the award amount
together with interest and we had permitted the Respondent-claimant to
withdraw USD 1 million in view of the fact that the certain invoices were
not contested as recorded in the order of the learned Single Judge. For the
balance amount deposited, we had allowed the Respondent - claimant to
withdraw the amount on furnishing securtity to the satisfaction of the
Prothonotary and Sr. Master of this Court. The same was not withdrawn at
that time by the Respondent.
92. Even though the appeal is dismissed, at the request of Mr.
Sancheti, we continue the interim stay against execution of the award for
period of eight weeks from today. However, since the Respondent has
succeeded, we permit the Respondent-claimant to withdraw the balance
amount deposited in this Court, without furnishing security but on giving
an undertaking to this Court that if directed, the Respondent - claimant
VRD 100 of 101
APPL372/14
will redeposit the amount with interest at such rate as directed by the
Supreme Court.
CHIEF JUSTICE
B.P. COLABAWALLA J.
VRD 101 of 101
