Mcdermott International Inc. Vs. Burn Standard Co. Ltd. & Ors [2006] Insc 316 (12 May 2006)
B.P. Singh & S.B. Sinha
I.A. NOS.2-3 IN CIVIL APPEAL NO. 4492 OF 1998 S.B. SINHA, J :
INTRODUCTION
Oil was discovered in the Bombay High Region in 1974 whereupon a plan of rapid development of off-shore oil and gas production was embarked by the Government of India through Oil and Natural Gas Commission (ONGC). With a view to achieve exploration of production programme, ONGC appointed contractors to fulfill substantial portions of its off-shore construction requirements. Burn Standard Company Limited (for short "BSCL") was interested in the second stage of platform construction of ONGC, i.e., structural and progress fabrication and material procurement.
Four contracts were thereafter awarded in favour of BSCL for fabrication, transportation and installation of six platforms bearing No. ED, EE, WI-8, WI-9, WI-10 and N3 and associated pipelines. They were to be installed in ONGC's Bombay High Sea.
CONTRACT
The said contracts covered:
Material procurement and fabrication of the ED and EE jackets, piles and decks.
Transportation and installation of the ED and EE jackets, piles and decks.
Material Procurement and fabrication of the WI-8, WI-9, WI-10 and N-3 Jackets, piles, temporary decks and decks (the "Four Platform Fabrication Main Contract") and (iv) Transportation and installation of the WI-8, WI-9, WI-10 and N-3 jackets, piles, temporary decks and decks, and installation of four pipelines and eight risers (the "Four Platform Installation Main Contract").
The said contracts contained arbitration agreements.
BSCL and Mcdermott International Inc. (for short "MII") entered into Technical Collaboration Agreement on 25th September, 1984 in terms whereof the latter agreed to transfer technology to the former with regard to design, construction and operation of a fabrication yard. The said agreement contains a separate arbitration clause between the parties.
However, with regard to the fabrication and installation of off-shore platforms, BSCL decided to give a sub-contract of the work to MII on a project by project basis. BSCL while retained the job of fabrication of the ED and EE decks, six helidecks and procurement of materials for the overall project other than pipeline materials and some process equipment which was issued by ONGC sub-contracted the remaining work.
In terms of a letter of intent dated 14th September, 1984 a contract was entered into by and between BSCL and ONGC for fabrication and installation of offshore platforms ED, EE, WI-8, WI-9, WI-10 and N-3 and laying of WI-8 to WI-9, WI-9 to WI-10, WI-9 to WIS and N-3 to NO pipelines and 8 associated risers as well as WI-7 to WI-8, WI-9 to SD, WI- 10 to SV, EB to SC1, EC to SHP, ED to SHP, EE to SHP pipelines and 11 associated risers. A part of the said contract work was assigned to MII in respect of fabrication, transporation and installation of structures, modules, platforms and pipeline components on or about 1st January, 1986. The work under the said agreement was to be completed within 24 months but in all respects it was completed in early 1989.
TERMS OF THE CONTRACT
The relevant covenants between the parties contained in the said agreement are as under:
"Article 2
MII shall unless inconsistent with the provisions of this Sub-contract perform fulfill and observe all the obligations, covenants and agreements required on the part of BSCL to be performed, fulfilled and observed in terms of the Main Contracts to the extent these obligations, covenants and agreements relate to the Sub- contract Work including such obligations, agreements and covenants as may in future be added, modified or provided in the Main Contracts between the Buyer and BSCL with concurrence of MII to the extent thereof. These obligations, covenants and agreements, as have been agreed to be performed, fulfilled and observed by MII shall include the performance of the Sub-contract work in the manner and to the specifications as provided in the respective Main Contracts.
Article 3
3.1 MII shall be bound to BSCL by the terms of this Sub-contract Agreement and to the extent that the provisions of the respective Main Contract between Buyer and BSCL apply to the relevant Sub-Contract work of MII as defined in this Sub- contract Agreement, MII shall assume towards BSCL all the obligations and responsibilities which BSCL, by such Main Contract, assumes to Buyer and shall have the benefit of all rights, remedies and redresses against BSCL which BSCL, by such Main Contract, has against Buyer, insofar as applicable to this sub-contract Agreement, provided that when any provision of the respective Main Contract between Buyer and BSCL is inconsistent with this Sub-contract Agreement, this Sub-contract Agreement shall govern and prevail over the Main Contract.
3.2 BSCL shall be bound to MII by the terms of this Sub-Contract Agreement and to the extent that the provisions of the respective Main Contracts between Buyer and BSCL apply to the relevant Sub-contract work of MII as defined in this Sub- contract Agreement, BSCL shall assume towards MII all the obligations and responsibilities that Buyer, by such Main Contracts, assumes towards BSCL, and shall have the benefit of all rights, remedies and redress against MII which Buyer, by such Main Contracts, has against BSCL insofar as applicable to this sub-contract Agreement provided that when any provisions of the Main Contract between Buyer and BSCL is inconsistent with any provisions of this Sub-contract Agreement, this Sub-contract Agreement shall govern and prevail over the Main Contract.
Article 5
5.1 Except as otherwise provided herein, all claims made by Buyer against BSCL shall be the responsibility of MII when such claims arise or are derived from MII's Sub-contract Scope of Work; similarly, all claims made by Buyer that arise or derive from BSCL's Scope of Work shall be the responsibility of BSCL. To the extent that BSCL, as Main Contractor vis-`-vis Buyer, would be liable for any claims that arise or are derived from MII's Sub-contract Scope of Work, MII shall hold harmless and keep indemnified BSCL from any such claims to the extent analogous with MII's Sub-contract.
Article 6 - Arbitration
6.1 Should there by any dispute or difference between BSCL and Buyer in regard to any matter connected with BSCL relating to or arising out of the Main Contract (s), which may involve MII's performance or affect MII's interest under the subcontract, BSCL shall keep MII informed and shall act in consultation and coordination with MII to ascertain the facts and agree on the appropriate action to be taken. MII shall render all assistance and cooperation that BSCL may require in this regard. If it is determined that the dispute or difference does not involve MII's performance or affect MII's interests, MII shall render such reasonable assistance and cooperation as BSCL may require; provided, however, that MII shall be entitled to reimbursement of costs, if any, incurred therefor with the prior approval of BSCL.
6.2 If any dispute or difference arising between BSCL and Buyer under or in respect of or relating to the Main Contract insofar as it relates to the work to be carried out by MII is referred to arbitration and any award/ judgment/ decree/ order is passed, or a settlement is otherwise reached with MII's consent, MII shall be bound to accept the same and bear all MII's liability resulting therefrom. MII shall, however, be assisted at all stages by BSCL with such arbitration proceedings and MII shall bear all expenses of such arbitration/ litigation and/ or negotiated settlement, if any.
However, expenses incurred by BSCL in deputing their officials to attend such arbitration/ proceeding/ litigation would be to BSCL/s accounts.
6.3 All disputes and differences in respect of any matter relating to or arising out of or in connection with the execution or construction of this subcontract document, if the same cannot be and/ or is not the subject matter of dispute between BSCL and the Buyer under the Main Contracts and is not settled mutually by negotiation, shall be referred to arbitration under the Indian Arbitration Act, 1940, as amended from time to time, by appointing some agency acceptable to both the parties as Arbitrators and if no agency is found acceptable to both the parties, then by constituting a Board of Arbitration consisting of three Arbitrators, one to be nominated/ appointed by each party and the third to be appointed by the two Arbitrators as Umpire. The arbitration proceeding shall be held at New Delhi and the decision of the Arbitrators or the Umpire as the case may be shall be final and binding on both parties hereto. The arbitrators or the umpire, as the case may be, shall record their reasons for passing awards, copies of which shall be sent to the parties.
Article -10
10.1 Any amendment and/ or modification of this Sub-contract shall be valid only if it is in writing and signed by both the parties.
All other terms and conditions not specified in this sub-contract shall be as stipulated in the Main Contracts.
10.2 This Sub-Contract Agreement shall be governed by the Laws of the Republic of India." DISPUTES Disputes and differences having arisen between the parties, MII invoked the arbitration clause by a legal notice dated 10th April, 1989.
Several proceedings as regards invocation of arbitration clause were initiated by the parties before the Calcutta High Court. The said proceedings ultimately ended in favour of MII leading to appointment of two arbitrators for determination of the disputes and differences between the parties. The arbitrators who were earlier appointed were removed and Mr. Justice A.N. Sen, a retired Judge of this Court was appointed as a sole arbitrator. It is stated that Mr. Justice A.N. Sen declined to act as an Arbitrator and by an order dated 28th August, 1998, Mr. Justice R.S. Pathak was appointed by this Court as a sole arbitrator. The Arbitrator was to continue with the proceedings from the stage it had reached. The said order is in the following terms:
"Mr. Justice R.S. Pathak, retired Chief Justice of India is appointed as the sole Arbitrator. In the case to resolve the disputes and differences which had been raised by the parties and were the subject matter of the arbitration proceedings before the arbitrators earlier appointed;
That the Learned Arbitrator shall enter upon the reference within three weeks from the date of service of this order upon him.
That the arbitration proceedings shall be held at New Delhi. However, in the event the learned Arbitrator considers it necessary to hold any sitting at any other place, he may do so with the consent of the parties;
The learned Arbitrator shall continue with the proceedings from the stage where the proceedings of the arbitration were on 8.5.1998, when the impugned order came to be made by the Calcutta High Court;
All the proceedings held till 8.5.1998 shall be treated as the arbitration proceedings held before the learned sole Arbitrator now appointed;
It shall be in the discretion of the learned Arbitrator to take or not to take oral evidence or to take oral evidence by way of affidavits. The learned arbitrator would be at liberty to adopt summary proceedings for concluding arbitration proceedings.
That the learned Arbitrator shall publish his Award, as far as possible, within a period of one year from the date of entering upon the reference;
That the fees of the Arbitrator (which may be fixed by him) and all expenses of arbitration proceedings shall be shared equally by the parties;
The learned Arbitrator shall file the Award in this Court.
Any application which may become necessary to be filed during or after the conclusion of arbitration proceedings, shall be filed only in this Court." CLAIM OF MII Before the learned Arbitrator, MII raised the following claims:
For Fabrication of jackets, Temporary Decks and Main Decks US$ 1,182,817.94
For Transportation and Installation of jackets and Decks US$ 4,351,062.68
For Installation of Pipelines and Risers US$ 840,064.23
For Structural Material Procurement US$ 5,301,534.13 For Bulk Material Procurement US$ 84,919.14 UKL 262,296.43 S$ 680,764.29
For Transportation of Pipe US$ 1,231,415.00
For Reimbursables US$ 377,309.30
For Change Orders and Extra Work US$ 7,423,741.95
For Delays & Disruptions US$ 13,233,343.00
8.A For exchange Entitlements US$ 2,881,195.03
For Interest upto 21 August, 1989 US$ 10,909,772.19 UKL 148,254.14 S$ 521,102.56 Total US$47,817,174.59 UKL 410,550.57 S$ 1,201,866.85"
Before the Arbitrator, apart from the aforementioned amount, interest on the outstanding amount was also claimed at the rate of 15% per annum on all claims for which invoices were not paid until the award, as well as interest from 21st August, 1989 and future interest at the rate of fifteen per cent.
BSCL filed counter statements as also counter-claims before the learned Arbitrator.
The learned arbitrator took up for his consideration the following claims for his consideration:
Fabrication of Jackets, Temporary Decks and Main Decks
Transportation and Installation of Jackets, Decks (Permanent & Temporary) and Helidecks
Pipelines and Risers Installation
Structural Material and Rolling
Bulk Material
Transportation of Pipes
Reimbursables
Change Orders and Extra Works
Delays and Disruptions
9.A Whether MII is entitled to an exchange loss as claimed in paragraphs 4.74 to 4.78 of the Statement of Claims? If so, in what amount?
Interest
Jurisdiction
Did MII commit breach of the contract?
Is the Claim of MII barred by limitation?
Counter Claim
General It was agreed to by and between the learned counsel for the parties that the 1996 Act in stead and in place of 1940 Act shall apply.
PARTIAL AWARD
The learned arbitrator having heard the parties inter alia on jurisdictional question initially passed a partial award on 9th June, 2003 determining the same in favour of MII. The decision on points Nos. 6, 8 and 9 were deferred for a period of four months by the learned Arbitrator so as to enable BSCL to dispose of all claims raised by MII in the meanwhile which had arisen before reference to the arbitration. The said claims were rejected.
A detailed reasoned statement by ONGC/BSCL referring to each individual document relied upon were filed in the arbitral proceedings. However, by reason of the said partial award, as regards points Nos. 1 to 5, 7 and 9A, MII became entitled to payment from BSCL the following amounts:
"On Point No. 1 US$ 1,182,817.69
On Point No. 2 US$ US$ 3,133,612.40 & 28,400.00
On Point No. 3 US$ US$ 665,039.41 & 54,000.00
On Point No. 4 US$ US$ 2,809,100.54 & 2,300,200.00
On Point No. 5 US$ UK Pound Singapore$ 65,207.39 232,604.40 & 548,271.81
On Point No. 7 US$ 322,351.87 US$ 52,422.51 US$ 1,573,466.00 US$ 512,187.16
On Point No. 9A US$ 3,330,790.94" PROCEEDINGS RE: ADDITIONAL AWARD
On point No. 10, MII was held to be entitled to interest on the amount awarded at the rate of 10% per annum from the date on which the amount fell due for payment till the date of the partial award and the awarded amount together with interest was directed to bear interest at the same rate from the date of the award to the date of payment.
The parties thereafter filed applications under Section 33 of the Arbitration and Conciliation Act, 1996 alleging that certain claims made by them had not been dealt with and/ or were omitted from consideration by the learned arbitrator in his partial award.
MII in its application contended:
" While deciding Point No. 4 regarding Structural Material and Rolling, MII's claim for US$ 128,000.00 as contended in paragraph 4.29 of the Statement of Claim has not been dealt with and has been omitted from the Award.
While deciding Point No. 7 regarding Corporate Income Tax, MII's claim that BSCL should be liable to the tax authorities for all further liabilities for Indian Corporate Income Tax as may be assessed in respect of the income received by MII under the Sub-contract as also for all tax liabilities that may be assessed in respect of any Award in favour of MII in the present arbitration proceedings as contained in paragraph 4.84 of the Statement of Claim has not been dealt with and has been omitted from the Award.
In deciding Point No. 7 regarding Corporate Income Tax, MII has claimed two amounts one of US$ 804,789.36 being interest @15% per annum up to 29 February, 1992 paid by MII in respect of Corporate Income Tax liability to the Tax authority, and the other on account of principal amount of tax payment of US$ 1,623,048.00. In paragraphs 18.17 and 18.18 of the Award, the learned Arbitrator has in respect of the principal claim allowed an amount of US$ 1,573,466.00 on account of Corporate Income Tax and an amount of US$ 512,187.16 by way of interest. MII has also claimed interest on these two amounts from 29 February 1992 till payment. This claim for interest has not been dealt with in the Award and has been omitted from the Award.
While deciding Point No. 10 relating to interest, MII's claim for interest on amounts paid but paid late as contained in paragraphs 5.1 and 5.2 has not been dealt with and has been omitted from the Award." BSCL raised a preliminary objection in regard to the MII's claim under Section 33 of the Act contending that there exists no provision for making a partial award.
ADDITIONAL AWARD
By reason of the additional award dated 29th September, 2003, the learned Arbitrator, however, held:
"MII's claim in respect of US$ 128,000.00 is not accepted.
MII's claim for a declaration that BSCL is liable to the tax authorities for all further liabilities for Indian Corporate Income-tax as may be assessed in future in respect of income received by MII under the Sub-Contract is allowed only insofar as it related to MII's liability, if any, to Corporate Income-tax, on the amounts awarded to it by a Partial Award, an Additional Award and a Final Award.
MII is entitled to interest at 10% per annum for the period from 1 March 1992 to the date of payment in respect of the principal amount of US$ 1,573,466.00 on account of Corporate Income-tax and the interest amount of US$ 512,187.16 calculated up to 29 February, 1992.
MII is entitled to interest at 10% per annum for the period of delay in BSCL making payment of MII's invoices, that if, for the period from due date of payment to the date of actual payment. Such amount will carry interest at 10% per annum from the date of the Partial Award to the date of its payment." The learned Arbitrator rejected the BSCL's objection in regard to the maintainability of the said proceeding stating that the same can be a subject matter for determination of jurisdictional question in a proceeding under Section 33 of the 1996 Act.
BSCL filed an application under Section 34 of the Act questioning the said partial award dated 9th June, 2003 as also the additional award dated 29th September, 2003.
FINAL AWARD
The learned Arbitrator thereafter took up the left over matters for his consideration, viz., points Nos. 6, 8 and 9 observing that ONGC in the meantime had expressed no interest in participating in the decision making process at the inter-party level and, thus, arrived at an inference that the machinery set up under the sub-contract has broken down and it would be for him to determine the same.
The final award was thereupon passed.
On point No. 6 which related to transportation of pipes, the learned arbitrator held MII to be entitled to US$ 919,194.32 against BSCL in respect of the nine barge pipes for transporting them from Mangalore to Bombay.
Point No. 8 related to Change Orders and Extra Work. The learned Arbitrator awarded MII US$ 305,840.00 as regards Change Order No. 1. As regards Change Order No. 6, MII was awarded US$72,000.00 against BSCL. Furthermore, in respect of Change Order No. 9, MII was awarded US$ 300,000.00 against BSCL. As regards Extra Work, MII was awarded US$ 4,870,290.96 against BSCL pursuant to the invoices covered under the said point whereas MII's claim for US $637,473.00 was rejected.
Point No. 9 related to delays and disruptions. MII was awarded US$ 574,000.00 against BSCL in respect of Change Order No. 2. MII was further awarded US$1,271,820.00 and US$355,000.00 against BSCL under Change Order Nos. 3 and 7 respectively. As regards increased cost and expenditure incurred by MII, it was awarded US$8,973,031.00.
So far as the claim of interest is concerned, the learned arbitrator made the following order:
"MII is entitled to interest on the amounts awarded under various heads by Final Award. In my opinion, having regard to the circumstances of the case, a rate of interest at 10 percent per annum will be appropriate from the date on which the amount fell due for payment to the date of this Final Award. The awarded amount including interest shall bear the interest at the same rate from the date of this Final Award to the date of the payment by BSCL." The learned arbitrator also awarded US$750,000.00 as costs of the arbitration.
An application was filed by BSCL under Section 34 of the Act praying for setting aside the final award.
SUBMISSIONS:
Mr. Jayanto Mitra, learned senior counsel and Mr. Pallav Sisodia, learned counsel appearing on behalf of BSCL made the following submissions:
The arbitrator had no jurisdiction to make a partial award which is not postulated under the 1996 Act as an award in piecemeal is impermissible in law.
While making the partial award, the learned Arbitrator opined that involvement of ONGC was imperative for determination of point Nos. 6,8 and 9, i.e., claims relating to transportation of pipes, Change Orders and Extra Work and delays and disruptions and, thus, the final award must be held to be bad in law.
As the subcontract provided for a back to back contract, determination of various claims depended upon determination of interpretative application of the main contract by ONGC wherefor directions of ONGC were binding on the parties.
Although US $ 8.8 million has been awarded as regard alleged delay and disruption of work, no reason, far less any cogent or sufficient reason, as was mandatorily required in terms of Section 31 of the Act having been assigned, the impugned award is vitiated in law.
In its award, the learned Arbitrator was bound to determine the actual loss suffered by the parties and as the same was not determined, the award cannot be enforced.
The award as regards loss of profit under various heads is based on no evidence and, thus, wholly unreasonable.
The claims made by MII were not only contrary to the terms of contract but also substantive law of India and were otherwise opposed to public policy.
As the contract did not contain any agreed schedule or any stipulation as to whether the work was required to be finished within a stipulated period, in view of the fact that the contention of the MII was that the time was of the essence of contract, the only remedy available to it in terms of Section 55 of the Indian Contract Act was to revoke the contract upon giving a notice therefor. In absence of such a notice, damages could not be claimed. Reliance Union of India and Another [(1999) 9 SCC 449].
No amount towards extra work was payable to MII having regard to the payment clauses contained in the contract and in particular the minutes of the meeting held by the parties on 9th August, 1984.
In view of the clear terms of the contract, ONGC was a necessary party and the learned Arbitrator committed an error in refusing to implead it in the proceeding.
The learned Arbitrator having rejected the claim of the MII in his partial award dated 9th June, 2003 on the ground that increased overhead decrease of profit and additional management cost had not been raised before reference to arbitration and, thus, was beyond the scope of arbitral reference, could not have determined the self same question in his final award. The objection and the award for US$ 8.8 million had not been taken into consideration and, thus, the same is liable to be set aside.
The learned Arbitrator could not have awarded the said sum solely on the basis of the opinion of one Mr. D.J. Parson who did not have any personal knowledge of the facts of the case, particularly in view of the fact that no evidence was adduced as regards sufferance of actual loss by MII. Mechanical application of Emden Formula was also wholly uncalled for and no award could be made relying on or on the basis thereof.
So far as the claim of extra work is concerned, the learned Arbitrator has wrongly allowed the claim of MII in respect of invoice Nos. 2806470 to 2806475 although due date for payment of the said amount fell after the commencement of reference to arbitration and, thus, as no dues existed on that date, the Arbitrator had no jurisdiction to make an award in relation thereto.
As regards "exchange loss", MII's claim was allowed without any amendment to the statement of claim. Claim of MII was wrongly allowed by the learned Arbitrator for entire value of the invoices without any deduction as delay in making payment by BSCL to MII on account of delay in receiving payment from ONGC has no relevance and in any event was contrary to the terms of the contract.
The learned Arbitrator had also not taken into consideration that in terms of the contract, foreign exchange rate was frozen at the rate of Rs. 100 X 8.575 Dollars as was applicable on 9th August, 1984.
The claim for US$ 2.3 million was outside the scope of reference to arbitration as no demand therefor was made. Such a claim was made for the first time only in the statement of claim.
In terms of Clause 37 of the contract entered into by and between ONGC and BSCL, no award by way of damage was payable.
Similar provision was also contained in the subcontract entered into by and between the parties.
As MII was to compensate for the supply of materials by BSCL subsequently, no award for a sum of US$ 2.3 million could be made.
As no invoice in respect of the claim of US$ 28,400 on account of an additional barge trip to transport the ED Temporary Deck had been raised, the learned Arbitrator had no jurisdiction to decide the same.
The award under the said head for a sum of US$ 54,000 on account of additional survey of WIS and WI9 pipeline was not an arbitrable dispute being clearly outside the purview of the arbitration proceedings.
Relying on or on the basis of American Institute of Steel Construction (AISC) Code as a base for measurement being contrary to the contract, the award is liable to be set aside..
Re: Buoyancy Tanks in respect of ED and EE Jackets As BSCL had paid MII for fabrication of the same buoyancy tanks and the buoyancy tanks were the same which were used for W18, W19 and W110 and N3 Platform, claim on the said account once over again was not maintainable ignoring the the evidence of Mr. S.K. Mukherjee (RW-1).
Tie Down and Sea Fastening As Tie Down materials are required for safe transportation of structures allotted on transportation barge, the learned Arbitrator erred in allowing the claim of MII as they are not permanent part of jacket decks of any platform.
Substitution of Materials The learned Arbitrator committed a serious error in not taking into account the material evidence adduced by BSCL to the effect that MII was instructed to substitute the specified materials with available material at no additional cost of fabrication.
In terms of the contract, it was for the MII to procure the materials which were to be reimbursed by BSCL. The claim for US$ 20832.108 was based on fabrication charges on account of increased tonnage for material substitution for W18, W19, W110 and N3 jackets and piles as well as ED and EE jackets and, thus, as the learned Arbitrator had allowed claim only to the extent of fabrication, the amount claimed by MII could not have been allowed in toto.
Mr. Dipankar Gupta, learned senior counsel appearing on behalf of MII, on the other hand, submitted that no case has been made out for setting aside the award of the learned Arbitrator.
In reply to the submissions made on behalf of BSCL, it was urged:
Re. Increased Overhead Decrease of Profit and Additional Management Cost The amount has been awarded on the basis of statement of Mr. D.J. Parsons. The contract clearly provided that W18, W19, W110 and N3 platforms were to be completed by 30th December, 1985 whereas ED and EE platforms were to be commissioned in February, 1986. It is not the case of MII that the time was of the essence of contract and, thus, in terms of Section 55 of the Indian Contract Act , damages were payable. Even in terms of the main contract between BSCL and ONGC, time was not of the essence of the contract. The contract contained clauses for extension of time and liquidated damages which is also indicative of the fact that time was not of the essence of the contract and, thus, damages for delay is permissible in law in view of the decision of this Court in Hind Construction v. State of Maharashtra [(1979) 2 SCC 70] Change Order Nos. 2, 3 and 7 covered compensation under various heads as specified therein. The award of the learned Arbitrator clearly shows that additional costs had been incurred by MII and, thus, the award cannot be faulted. The partial award did not deal with the said claims. The dispute was specifically referred to arbitration in terms of notice dated 10th April, 1998. The quantification of damages being a matter of evidence and proof, no case has been made out for interference with the award particularly in view of the fact that BSCL had never raised any objection as regards the jurisdiction of the Arbitrator.
Reliance on the Emden Formula cannot be said to be against the law prevailing in India as Sections 55 and 73 of the Indian Contract Act provided only for entitlement to compensation and not the mode and manner in which such compensation is to be quantified.
Clause 37 of the Main Contract between ONGC and BSCL has no application as MII's claim is not for any consequential damage but for the direct losses occasioned by BSCL's breach of contractual duty to honour its time bound commitments. The said clause cannot be extended to the obligations towards MII under the sub-contract as ONGC has no role to play in respect of the breach of its obligations towards it by BSCL under the sub- contract.
Re: Partial Award A partial award is in effect and substance an interim award within the meaning of Section 31(6) and 2(c) of the Act and, thus, the validity of the partial award is not open to question.
Re: Exchange Loss Clause 4.0 of contract only relates to payment for transportation and installation and BSCL did not make any payment to MII despite receipt of the whole amount from ONGC except an amount of Rs. 12,70,290/-. In any event, Clause 4.0 has no relevance to the exchange loss dispute. BSCL acted contrary to the agreed terms as it made payment upon applying the fixed exchange rate of Rs. 100 = US$8.575. BSCL was to pay to MII the amount as per the current rate, only on reconciliation MII was to refund the excess amount to BSCL which ensured that exchange loss would be shared by both the parties.
Re: Uninvoiced Claims BSCL never raised any objection before the Arbitrator that the claim for US$ 2,300,200 for procurement of structural material could not be raised in view of the provisions contained in Section 16 of the 1996 Act. Invoice in any event, is merely a basis for claim and such a claim may be raised in correspondences as also in the meetings. The claim for US$ 2,300,200 was not strictly claim for damages, as in terms of the contract BSCL was required to procure the steel and as it being not in a position to do so, MII agreed to procure the same on its behalf if BSCL would agree to pay US$ 2,300,200 to cover MII's cost for accelerated procurement and other costs.
This offer was the subject matter of correspondence between the parties. As no dispute was raised to recover the same amount from BSCL, procurement job was undertaken. The finding arrived at by the learned Arbitrator in this behalf is entirely a finding of fact. Reference to Clause 5 of the Contract was wholly irrelevant. This clause provides that BSCL shall procure suitable steel for "jackets' on replacement basis for MII purchased steel. BSCL did not procure the required amount of steel to replace the structural materials that MII provided from its inventory as an accommodation to BSCL. MII did so on the understanding that the structural material removed from MII's inventory would be promptly replaced by BSCL. BSCL did not replace the material.
Re: Method of Measurement Clause 23.1.1 (a) & (c) of the Main Contract between BSCL and ONGC has no application as the same covers payment for 'structural material' which is an altogether different claim being Claim No. 4. The claim was towards labour charges for fabrication of structures, labour charges and not claim for cost of material. AISC Code applied in relation to the fabrication job is as under:
"The scheme of the Contract provides in relation to Fabrication and the application of AISC Code is explained below:
the sub-contract provides total estimated tonnage of 18, 178 ST with following break-up:
ED?EE Platforms 6078 ST (page 166 I.A. no.2 Vol.2) WI8, WI9, WI10 and N3 platforms 12,100 ST/ 18, 178 ST (page 371 I.A. no.2 vol.2)" Re: Buoyancy Tanks for ED and EE Jackets MII's claim is for labour cost at the rate of US$ 1067 per ST involved for fabrication work in the refurbishment of the Buoyancy Tanks. The finding of the Arbitrator is a finding of fact inter alia based on the admission of the witness, namely, Shri S.K. Mukherjee, who was examined on behalf of BSCL Re: Tie Down and Sea Fastening In offshore construction, jackets and decks are fabricated onshore and then they are transported on barges to the offshore location for installation.
Jobs pertaining to Tie Down and Sea Fastening required substantial fabrication work and no claim has been made towards costs of welding the Tie Downs and Sea Fasteners to the deck.
Clause 2 of the Contract would have no application to the instant case as it provides only for a stage payment on milestone basis. But, clause 2.1(a)(i) which substantially covers sea fastening job as part of the fabrication contract would be applicable. BSCL had not been able to show that the fabrication of Tie Down and Sea Fastening materials were included within the scope of transportation and not as a separate item under the head 'fabrication'.
Re: Substitution It was for BSCL in terms of the sub-contract to procure and supply all materials but as it was not in a position to do so, MII on instructions of BSCL used available materials which was having larger thickness and weight vis-a-vis those specified in the ONGC's specifications. The same having been approved both by the Engineer and ONGC, MII was entitled to compensation towards the labour charges at the rate of US$ 1067 per ST.
Re: Extra Work Invoice Nos. 2806470 to 2806475 The invoices which were contained in Annexure 9 to MII's statement of claims were substituted by new documents in terms whereof the due date of invoice was corrected to 9th March, 1989 and, thus, fall due for payment prior to the notice dated 10th April, 1989 invoking arbitration. The payment of extra work became due when the work was performed and moreover, the invoices in question did not specify any date for payment.
Re: Interest The ground has been taken only in the supplementary affidavit filed on behalf of BSCL on 21st September, 2004 beyond a period of three months as specified in Section 34 of the Act. The Arbitrator has awarded the principal amount and interest thereon upto the date of award and future interest thereupon which do not amount to award on interest on interest as interest awarded on the principal amount upto the date of award became the principal amount which is permissible in law.
CHALLENGE TO AWARD:
LEGAL SCOPE OF Section 2(1)(b) of the 1996 Act reads as under: "2(1)(b) "arbitration agreement" means an agreement referred to in section 7" In terms of the 1996 Act, a departure was made so far as the jurisdiction of the court to set aside an arbitral award is concerned vis-`-vis the earlier Act. Whereas under Sections 30 and 33 of the 1940 Act, the power of the court was wide, Section 34 of the 1996 Act brings about certain changes envisaged thereunder.
Section 30 of the 1940 Act reads, thus:
"Grounds for setting aside award An award shall not be set aside except on one or more of the following grounds, namely:
That an arbitrator or umpire has misconducted himself or the proceedings;
That an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under Sec 35;
That an award has been improperly procured or is otherwise invalid." The Section did not contain expression "error of law.". The same was added by judicial interpretation. While interpreting Section 30 of the 1940 Act, a question has been raised before the courts as to whether the principle of law applied by the arbitrator was
erroneous or otherwise or
wrong principle was applied. If, however, no dispute existed as on the date of invocation, the question could not have been gone into by the Arbitrator.
CHANGES UNDER THE NEW ACT
The 1996 Act makes a radical departure from the 1940 Act. It has embodied the relevant rules of the modern law but does not contain all the provisions thereof. The 1996 Act, however, is not as extensive as the English Arbitration Act.
Different statutes operated in the field in respect of a domestic award and a foreign award prior to coming into force of the 1996 Act, namely, the 1940 Act, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. All the aforementioned statutes have been repealed by the 1996 Act and make provisions in two different parts, namely, matters relating to domestic award and foreign award respectively. Vis-`-vis Grounds for setting aside the award:
After the 1996 Act came into force, under Section 16 of the Act the party questioning the jurisdiction of the arbitrator has an obligation to raise the said question before the arbitrator. Such a question of jurisdiction could be raised if it is beyond the scope of his authority. It was required to be raised during arbitration proceedings or soon after initiation thereof. The jurisdictional question is required to be determined as a preliminary ground.
A decision taken thereupon by the Arbitrator would be subject matter of challenge under Section 34 of the Act. In the event, the arbitrator opined that he had no jurisdiction in relation thereto an appeal thereagainst was provided for under Section 37 of the Act.
The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.
However, this Court, as would be noticed hereinafter, has the occasion to consider the matter in great detail in some of its decisions.
In Primetrade AG v. Ythan Ltd. [(2006) 1 All ER 367], jurisdictional issue based on interpretation of documents executed by the parties fell for consideration having regard to the provisions of the Carriage of Goods by Sea Act, 1992. It was held that as the appellant therein did not become holder of the bills of lading and alternatively as the conditions laid down in Section 2(2) were not fulfilled, the arbitrator had no jurisdiction to arbitrate in the disputes and differences between the parties.
Vis-`-vis the duty to assign reasons Another important change which has been made by reason of the provisions of the 1996 Act is that unlike the 1940 Act, the Arbitrator is required to assign reasons in support of the award. A question may invariably arise as to what would be meant by a reasoned award.
In Bachawat's Law of Arbitration and Conciliation, Fourth Edition, pages 855-856, it is stated:
"'Reason' is a ground or motive for a belief or a course of action, a statement in justification or explanation of belief or action. It is in this sense that the award must state reasons for the amount awarded.
The rationale of the requirement of reasons is that reasons assure that the arbitrator has not acted capriciously. Reasons reveal the grounds on which the arbitrator reached the conclusion which adversely affects the interests of a party. The contractual stipulation of reasons means, as held in Poyser and Mills' Arbitration In Re, "proper, adequate reasons". Such reasons shall not only be intelligible but shall be a reason connected with the case which the court can see is proper. Contradictory reasons are equal to lack of reasons.
The meaning of the word " reason" was exaplained by the Kerala High Court in the contest of a reasoned award "Reasons are the links between the materials on which certain conclusions are based and the actual conclusions." A mere statement of reasons does not satisfy the requirements of s.31(3) . Reasons must be based upon the materials submitted before the arbitral tribunal. The tribunal has to give its reasons on consideration of the relevant materials while the irrelevant material may be ignored Statement of reasons is mandatory requirement unless dispensed with by the parties or by a statutory provision." In Konkan Railway Corporation Ltd. v. Mehul Construction Company [(2000) 7 SCC 201], this Court emphasized the mandatoriness of giving reasons unless the arbitration agreement provides otherwise.
Public Policy 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
fundamental policy of Indian Law,
the interests of India; or
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 Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (for short 'ONGC')[(2003) 5 SCC 705].
This Court therein referred to an earlier decision of this Court in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC 156] 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 (supra), this Court, apart from the three grounds stated in Renusagar (supra), added another ground thereto for exercise of the court's jurisdiction in setting aside the award if it is patently arbitrary.
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 merit of the matter.
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].
In ONGC (supra), this Court observed:
27.ii "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 case10 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:
fundamental policy of Indian law; or
the interest of India; or
justice or morality, or
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." We are not unmindful that the decision of this Court in ONGC (supra) had invited considerable adverse comments but the correctness 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, Second edition, page 1174.] Before us, the correctness or otherwise of the aforesaid decision of this Court is not in question. The learned counsel for both the parties referred to the said decision in ex tenso.
We, therefore, would proceed on the basis that ONGC (supra) lays down the correct principles of law.
SUPERVISORY JURISDICTION
We may consider the submissions of the learned counsel for the parties on the basis of the broad principles which may be attracted in the instant case, i.e.,
whether the award is contrary to the terms of contract and, therefore, no arbitrable dispute arose between the parties;
whether the award is in any way violative of the public policy;
whether the award is contrary to the substantive law in India, viz., Sections 55 and 73 of the Indian Contract Act ;
whether the reasons are vitiated by perversity in evidence in contract ;
whether adjudication of a claim has been made in respect whereof there was no dispute or difference; or
whether the award is vitiated by internal contradictions.
For the aforementioned purpose, it would be necessary to see as to what law the arbitrator was required to apply.
We may, therefore, consider the legal submissions before adverting to the merit of the matter.
VALIDITY OF THE 'PARTIAL AWARD'
The 1996 Act does not use the expression "partial award". It uses interim award or final award. An award has been defined under Section 2(c) to include an interim award. Sub-section (6) of Section 31 contemplates an interim award. An interim award in terms of the said provision is not one in respect of which a final award can be made, but it may be a final award on the matters covered thereby, but made at an interim stage.
The learned arbitrator evolved the aforementioned procedure so as to enable the parties to address themselves as regard certain disputes at the first instance. As would appear from the partial award of the learned arbitrator, he deferred some claims. He further expressed his hope and trust that in relation to some claims, the parties would arrive at some sort of settlement having regard to the fact that ONGC directly or indirectly was involved therein. While in relation to some of the claims, a finality was attached to the award, certain claims were deferred so as to enable the learned arbitrator to advert thereto at a later stage. If the partial award answers the definition of the award, as envisaged under Section 2(c) of the 1996 Act, for all intent and purport, it would be a final award. In fact, the validity of the said award had also been questioned by BSCL by filing an objection in relation thereto.
We cannot also lose sight of the fact that BSCL did not raise any objection before the arbitrator in relation to the jurisdiction of the Arbitrator.
A ground to that effect has also not been taken in its application under Section 34 of the Act. We, however, even otherwise do not agree with the contention of Mr. Mitra that a partial award is akin to a preliminary decree.
On the other hand, we are of the opinion that it is final in all respects with regard to disputes referred to the arbitrator which are subject matter of such award. We may add that some arbitrators in stead and in place of using the expression "interim award" use the expression "partial award". By reason thereof the nature and character of an award is not changed. As, for example, we may notice that in arbitral proceedings conducted under the Rules of Arbitration of the International Chamber of Commerce, the expression "partial award" is generally used by the arbitrators in place of interim award. In any view of the matter, BSCL is not in any way prejudiced. We may state that both the partial award and the final award are subject matter of challenge under Section 34 of the Act.
Section 33 of the Act empowers the arbitral tribunal to make correction of errors in arbitral award, to give interpretation of a specific point or a part of the arbitral award, and to make an additional award as to claims, though presented in the arbitral proceedings, but omitted from the arbitral award. Subsection (4) empowers the arbitral tribunal to make additional arbitral award in respect of claims already presented to the tribunal in the arbitral proceedings but omitted by the arbitral tribunal provided
There is no contrary agreement between the parties to the reference;
A party to the reference ,with notice to the other party to the reference ,requests the arbitral tribunal to make the additional award;
Such request is made within thirty days from the receipt of the arbitral award;
The arbitral tribunal considers the request so made justified; and
Additional arbitral award is made within sixty days from the receipt of such request by the arbitral tribunal The additional award, in our opinion, is not vitiated in law.
DELAY AND DISRUPTION
Operative facts According to the applicants, the contract entered into by and between MII and BSCL did not provide for any period of completion. MII, on the other hand, states that at that time when the contract was entered into it was supposed to be performed by 30th December, 1985 as would appear hereinafter:
"For Jackets and Temporary Decks (for platforms WI-8, WI-9, WI-10 and N-3), the completion period is 30 April 1985 and for Decks and Helidecks ( for platforms WI -8, WI-9, WI-10 and N-3) the completion date is 30 December 1985. Clause (ii) in the 'Schedule of Completion of Well Platforms' states: "the completion dates.will be reckoned for purpose of L/d." In terms of the provisions of the contract the jobs in respect of WI-8, WI-9, WI-10 and N-3 were to be performed within the said period.
A stipulation for commissioning of ED and EE platforms within a time frame has also been mentioned, i.e., February, 1986 as would appear from the following:
"The agreed for commissioning of platforms ED & EE is by end of February 1986, subject to the provisions of this Contract." MII served a notice on 10th April, 1998 invoking the arbitration agreement. The same would not mean that it should have repudiated the contract as soon as 20 months schedule fixed by the contract expired. Delay and disruptions might have occurred for various reasons. In the instant case, therefore, the matter would be covered by the second part of Section 55 of the Indian Contract Act providing that where the parties did not intend time to be of the essence of the contract, the contract was not voidable, but the promisee was entitled to compensation for loss occasioned. For the aforementioned purpose, no notice was required to be served. In any event, the contract provided for extension of time, as would appear from clause 27(ii) and the relevant portions of clause 28 which read as under:
27.ii Should be amount of extra work, if any, which Contractor is required to perform under clause 24 to 26 ants, fairly entitled Contractor to extension of time beyond the scheduled date for completion of either the whole or part of the works or for such extra work as the case may be, Company and Contractor shall mutually discuss and decide extensions of time, to be granted to Contractor and the revised schedule for completion of the Works.
28i Subject any requirements in the Contract Specifications as to the completion of any portion of the work before completion of the whole and subject to the other provisions contained in the Contract, the Works shall be completed in accordance with the agreed schedule as indicated in Appendix-II. Company may, if the exigencies of the works or other projects so required amend the completion schedule and/or phase out completion.
28iii No extension in completion shall be permitted unless authorized in writing by Company as a "Variation in completion schedule" or as otherwise specified in the Contract. In any case, no portion of the works shall extend beyond the commencement of the 1986 monsoon." The parties, furthermore, agreed for payment of liquidated damages, as would appear from clause 28(v)(a) which reads as under:
" recovery is its sole and only remedy for delayed completion of work by Contractor, as ascertained and agreed liquidated damages, and not by way of penalty, as sue equivalent to 2.5% of the Contract Price for the item which is delayed, for each month of delay (or prorate thereof for part of a month), beyond the scheduled completion date, subject to a maximum of 7.5 % of the said Contract price. Such liquidated damages shall be loveable after allowing a grace period of 15 days. The monsoon peril requiring which no work can be carried out orders, shall be excluded for the purpose of determining the quantum of delay in completion of work.." Moreover, the contract itself contains provisions for extension of its terms and payment of damages in case of delay in execution of the contract.
The claim for increased overhead and decreased profit and additional project management cost flows out of the same operative facts as the delay and disruption change in respect of Change Order Nos. 2, 3, and 7.
We may at the outset point out that the question as regards the effect of the said claims which were not considered in the first round of the arbitral proceedings shall be dealt with a little later.
So far as the Change Order No. 2 is concerned, the learned arbitrator has accepted the contention of the MII that it had to incur additional cost due to delay in receipt of equipment and materials supplied. In his Final Award, the learned arbitrator noticed:
"It appears that BSCL accepted and acknowledged that MII had incurred additional cost on account of this delay occasioned by BSCL" So far as, Change Order No. 3 is concerned, the learned arbitrator in paragraph 67.2 of the Final award noticed as under:
"This was followed by a meeting on 7-8 October 1986 attended by the representatives of ONGC, EIL, BSCL and MII, during which ONGC advised BSCL that BSCL should absorb one half the mobilization and demobilization costs of MII's marine equipment, since the delay was occasioned by BSCL in completing the helidecks" So far as Change Order No. 7 is concerned, the learned Arbitrator has recorded in paragraph 68.1 of the Final Award as under:
"This Change Order was accepted by BSCL and ONGC but MII has received no payment" It was further recorded in paragraph 68.4 of the Final Award:
"Even after the work was completed, there was a meeting on 16-17 June, 1987 at which ONGC informed that the Change Order was agreed to in principle" So far as the claim of compensation in addition to the said Change Order Nos. 2,3 and 7 is concerned, the statement of claim of MII is as under:
4.65 "The BSCL delays and disruptions required McDermott to alter the fabrication and installation sequence to match deliveries of equipment. This precluded McDermott performing certain activities as planned in the Subcontract. Change order No.2 relates to additional cost incurred by McDermott due to delay in receipt of equipment and material supplied by BSCL.
BSCL's delivery of the equipment was upto seventeen months late. During this period, McDermott continued to fabricate the decks installing material as it became available. The delay resulted in additional costs to McDermott due to change order with cost effect of US$574,000.00. BSCL has failed and neglected to make payment of the invoice for this change order.
4.66 Change order no.3 relates to mobilization and demobilization of Derrick Barge 26 to complete BSCL work in the 1986/1987 construction season. The Subcontract price was based on mobilization and demobilization of a single barge in the 1984/1985 and 1985/1986 construction seasons only and performance of the offshore scope of work in a continuous sequence.
Due to BSCL delays, the WI-8, WI-9, WI-10 and N3 decks and helidecks were not completed for installation during t
