O. O. C. J v. Dai Ichi Karkaria Ltd

Except where otherwise provided in the supply order/contract all questions and disputes, relating to the meaning of the specifications, and instructions herein before mentioned and also to the quality of workmanship of the item(s) ordered or as to any other question, claim or thing whatsoever, in any way, arising out of or relating to the supply order/contract, specifications, instructions or these conditions or otherwise concerning the materials or the execution or failure to execute the same during stipulated/extended period or after completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by Member of the Commission at the time of the dispute”. 7 (viii) Clause 27 provided for Withholding and Lien in respect of sums claimed. The clause provided that whenever any claim for payment of money arises against DIK, ONGC “shall be entitled to withhold and also have a lien to retain such sum or sums in whole or in part from the security deposit/performance bond, if any, deposited by the Contractor and for the purpose aforesaid, the commission shall be entitled to withhold the said security deposit/performance bond, if any, furnished, as the case may be and also have a lien over the sums pending finalisation or adjudication of any such claim.” The clause provided that the “Contractor will have no claim for interest or damages whatsoever on any account in respect of such withholding or retention under the lien”. (ix) Clause 5 of Annexure-A to the Supply Order as amended, provided the method for the evaluation of performance and for the working out of compensation, if any, for substandard quality. In so far as is material, the clause provided as follows: 8 “In order to establish consistency of quality of product supplied, 1 MT out of the first lot supplied to ONGC against the present order would be retained separately by ONGC at its store as a reference sample.” The performance of subsequent lots was required to be judged by comparing the results achieved by the reference sample on the loopline test. If the comparison showed any deterioration in performance, the compensation leviable was to be based on the difference between the results of the reference sample and the subsequent lot in question, plus compensation, if any, applicable to the reference sample. (x) Clause 6 of Annexure-A stipulated that the reference sample will be prepared by drawing one barrel at random from each batch of the first lot offered for sampling and bonding which will be repacked and separately marked as a reference sample at ONGC's stores. The Dispute:

4. Disputes arose between the parties. DIK says that it has supplied the full quantity of PPD ordered within the time line 9 specified by the Supply Order, but that it was ONGC which failed to debond the material in a timely manner. According to DIK, ONGC failed to conduct a loopline test as specified in the Supply Order. On the other hand, it was ONGC's case that there was a late delivery of the material by DIK and that the material was not in accordance with the specifications and quality agreed upon in the Supply Order. As a result, ONGC asserts that it had to utilise additional amounts of PPD to achieve the same result. ONGC (i) claimed liquidated damages for late delivery of the material; (ii) claimed compensation for the additional PPD that was alleged to have been utilised; and (iii) deducted sums of money from amounts payable to DIK on the ground of liquidated damages and compensation. Additional Bank Guarantees were furnished by DIK against which ONGC released amounts due to DIK under the Supply Order. Arbitration:

5. DIK invoked the arbitration clause by its letter dated 15th November 1990. The disputes between the parties were referred to Mr.Justice B.J. Divan, former Judge of the Gujarat High Court, as Sole Arbitrator. The Arbitrator declared his award on 30th 10 January 1997. By his award, the Arbitrator held that (i) The disputes between the parties were arbitrable and that the claim raised by ONGC did not fall within the excepted matters contained in the Supply Order; (ii) DIK had entered into the contract with full knowledge of the deficiencies, from a scientific point of view, of the loopline test and it was hence not open for DIK to contend that the loopline test was unscientific or incapable of yielding accurate results; (iii) The loopline test carried out by ONGC was not in accordance with the procedure laid down in Supply Order inasmuch as although a reference sample was required to be drawn and maintained, the reference sample was not used for the loopline test; (iv) Despite having stated in response to interrogatories that details of the actual dosage of PPD supplied by DIK and the quantity used on the main line would be made available at the final hearing of the arbitration, ONGC had not led any evidence regarding actual user of the PPD supplied by DIK under the contract; (v) In view of the failure of ONGC to lead evidence regarding the actual dosage of PPD used on the main line, ONGC was not entitled to claim any compensation from DIK for the extra dosage of PPD alleged to have been used. The amount deducted by ONGC as compensation for such alleged 11 additional dosage would have to be paid over; (vi) By implied mutual consent, time for delivery was extended by the parties. The long time taken between the bonding of each lot and debonding was entirely due to the stand taken up by ONGC that the loopline test had to be carried out as provided in the contract and that extra dosage had to be used on the main line because of what was found at the time when the test was conducted on each lot. Since ONGC failed to prove the case that extra dosage had been used in respect of each of the seven lots, the question of late delivery did not survive. Moreover, ONGC failed to establish that it has suffered any loss owing to alleged late delivery and hence it was not entitled to deduct any amount from the outstandings of DIK; (vii) There was no reason for ONGC to avail of the Bank Guarantee and DIK was entitled to claim Bank commission and charges thereon.

6. Under the arbitral award, DIK was held to be entitled to the following amounts from ONGC: (a) Rs.59,40,718/- wrongfully deducted on account of PPD; (b) Rs.32,82,680/- deducted as liquidated damages for alleged late delivery; (c) Rs.7,81,153/- towards Bank commission and charges for the Bank Guarantee; 12 (d) interest computed at the rate of 18% p.a. on the aforesaid amount; and (e) Rs.67,175/- being 75% of the costs of the Arbitrator in the arbitration. The Arbitration Petition: the Judgment of the Single Judge:

7. In an Arbitration Petition filed under Section 30 of the Arbitration Act, 1940, ONGC challenged the award before this Court. By a judgment dated 1st October 1997, the Learned Single Judge upheld the award and accordingly a decree was drawn up in terms of the award on 27th October 1997. By an order dated 13th February 1998, a Division Bench while admitting the appeal, granted a stay on the execution of the decree conditional on ONGC depositing an amount of Rs. 2.30 crores. DIK was permitted to withdraw the amount on furnishing a Bank Guarantee. DIK has withdrawn the decretal amount and the Court has been informed that a Bank Guarantee had been furnished as directed by the Court, pending the hearing and final disposal of the appeal. III The Challenge :

8. The challenge by ONGC has, in the course of the 13 submissions urged at the hearing of the appeal, been confined to the following four grounds: (i) The Arbitrator, it has been urged, erred in assuming jurisdiction on matters which were excepted from the scope of the arbitration clause. ONGC's submission is that the finality provided under clause 17(ii) of the Special Conditions will extend to the question as to whether the material that was sampled/bonded is below the specifications on test as well as in regard to the option of ONGC to reject in full or in part, the material supplied or to accept the material at a reduced rate. Alternatively, ONGC urges that during the course of the contract, DIK had asked for joint testing in respect of the PPD that was supplied and agreed to be bound by the results of the joint test. Following this, it was submitted that DIK had quantified the loss suffered on account of dosage variation at Rs.35 lakhs; (ii) The award of the Arbitrator is contrary to the terms of the contract which would necessitate the interference of the Court on the ground of an error apparent on the face of the record; (iii) The Arbitrator erred in rejecting the deduction of liquidated damages on the ground that it was not proved. Parties, it was urged, provided in clause 20 of the Contract, a genuine pre-estimate of damages and the principles 14 enunciated by the Supreme Court in the judgment in Oil & Natural Gas Corporation vs. Saw Pipes 1 will apply; and (iv) The award of interest is contrary to the provisions of Clause 27 of the Contract.

9. On behalf of DIK, it has been submitted that (i) A Petition under Section 30 of the Arbitration Act, 1940 is neither an appeal on facts, nor on law and the jurisdiction of the Court extends to determine whether the Arbitrator had committed an error apparent on the face of the record; (ii) In the exercise of the jurisdiction, it is neither open to the Court to reappreciate the evidence nor to reappreciate the material on record before the Arbitrator, the Arbitrator being the sole Judge of the quality and the quantity of the evidence before him; (iii) Clause 17(ii) of the Special Conditions does not enunciate a blanket ban to a challenge against any decision by ONGC. Under the clause, it is only the decision of ONGC to reject in full or part, the PPD supplied or to accept the same at a reduced rate that is rendered final. In other words, the decision of ONGC in regard to the exercise of the aforesaid option is final, but not on the question as to whether the material passed 1 2003 (5) SCC 705 15 the contractual specifications after the loopline test; (iv) The Arbitrator has entered a finding of fact on an appreciation of evidence that the loopline test was not correctly carried out in accordance with the terms of the contract. This finding cannot be assailed either in the petition or in appeal and as a matter of fact, no such challenge was advanced in the Arbitration Petition; (v) On the issue of liquidated damages, the requirement of Clause 20 is that there should be a delay in supplies. However, in the present case, the finding of fact is that delivery was effected within time since time for making delivery was extended by mutual consent. This is a matter of appreciation of evidence and as a matter of fact, there is no challenge to the finding of the Arbitrator in the Arbitration Petition. There being no late delivery, there could be no question of damages; (vi) Though ONGC stated before the Arbitrator that it had in its possession evidence to prove extra dosage of PPD required, the relevant material was neither produced nor proved. The finding of the Arbitrator that ONGC failed to lead evidence on the actual extra dosage of PPD used is correct and does not warrant interference; (vii) The Arbitrator has correctly followed the decision of the Supreme Court in Maula 16 Bux v. Union of India 2 and the decision in Saw Pipes (supra) would not lead to a different conclusion; and (viii) On the question of interest, the Learned Single Judge was justified in coming to the conclusion that the challenge could not be entertained in the absence of even a ground in the Arbitration Petition. IV Parameters of the challenge under Section Arbitration Act, 1940: 30 of the

10. The Learned Single Judge was dealing with a challenge to an arbitral award under Section 30 of the Arbitration Act, 1940. Under Section 30, an award could not be set aside except on one or more of the following grounds, namely, that (i) The Arbitrator has misconducted himself or the proceedings; (ii) The award has been made after the issuance of an order by the Court superseding the arbitration or after proceedings had become invalid under Section 35; and (iii) The award has been improperly procured or is otherwise invalid. An arbitral award is a decision of a domestic Tribunal chosen by the parties to facilitate arbitration. In the Union of India vs. Rallia Ram,3 the Supreme Court held that the