O.N.G.C.Ltd vs Off-Shore Enterprises Inc

Oil and Natural Gas Corporation Ltd. ........Appellant

Versus

Off-Shore Enterprises Inc. ..... Respondent

O R D E R

R. V. Raveendran J.,

Under a contract dated 14.7.1981 between appellant and the

respondent, the respondent agreed to supply the equipment and

engineering drawings and provide the project management and

construction supervision to M/s Paul Lindenau GmbH to assist with the

design, building, equipping and launching of a drillship known as `Sagar

Prabhat' purchased by the appellant. The appellant had simultaneously

entered into an agreement with M/s Paul Nindenau GmbH for purchase of

the said drillship. The said drillship equipped and mobilised by the

respondent reached Bombay on 5.6.1982. American Bureau of Shipping

("ABS" for short) vide certificate dated 25.6.1982 certified that the

machinery of the drillship and the stability of the drillship were in

accordance with its rules and standards. On the basis of the said certificate

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dated 25.6.1982, the appellant took delivery of the Drill-ship on 29.6.1982.

The appellant thereafter found some defects in the drill-ship and therefore

withheld the payment to the respondent. ABS revised its certificate on

18.6.1985, stating that its earlier certificate dated 25.6.1982 was based on

incorrect data supplied by Paul Lindenau GmbH (builder of the drillship)

and the respondent (designer, equipment supplier and construction

supervisor of the drillship).

2. The respondent initiated arbitration proceedings in respect of the

dispute relating to non payment of the balance price. An award was made

against ONGC, in regard to the balance price due to the respondent.

Certain counter claims by ONGC were also allowed. It is stated that

challenge by ONGC to the said award is pending adjudication in court.

During the pendency of the said arbitration, ONGC sought to raise the

issue of defective stability of the Drill-ship. As that issue was beyond the

reference of the ongoing arbitration, it was decided that a separate

reference would be made in regard to dispute relating to the

stability/defects of the drillship.

3. As the respondent disputed the claim of ONGC that the Drill-ship

was defective and the defects affected its stability, it issued a notice dated

1.8.1986 stating that a dispute had arisen in regard to the claim of the

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appellant about the defects/deficiencies in the stability of the Drill-ship.

The said dispute was referred to arbitration by an Arbitral Tribunal with

Shri K.H. Bhabha, Senior Advocate and Vice-Admiral Shri N.P. Datta as

members. The said Arbitral Tribunal entered upon the reference on

4.9.1986.

4. ONGC filed its Statement of Claim on 2.12.1987 in regard to its

claim relating to defects/deficiencies in regard to the stability of the Drill-

ship. Para 27 thereof containing the claim and prayer of the appellant is

extracted below:

"27. The Respondents submit that the consequences arising from

the entire situation aforesaid would be either that the drillship be

directed to be returned to the claimants on the conditions that the

claimants return all the amounts received by them from the

Respondents including US $ 55 million/and interest @ 12% per

annum under the contract dated 14th July, 1981 in addition they pay

adequate damages to the Respondent or that the claimants bring the

drillship to the required state and condition as indicated hereinabove.

The Respondents state and submit that tentatively and on prima facie

considerations the amounts required to bring the drillship to the

desired state and condition would be Rs.3.50 crores which does not

include non-use of the Drillship for the period during which the said

adjustment, alterations or necessary things required to be done to the

Drillship to bring it to the proper state and conditions would involve.

This costs would be calculated at the the rates current when the

modifications are carried out. However, the same is tentatively

estimated as per the current prevailing rate of U.S.$ 20,000/- per

day, So calculated for 90 days the same would work out to U.S.$

1,80,000/-.

The Respondent, therefore, pray:

(a) That the claimants be directed to pay to the Respondent a

sum of US $ 55 Million with further interest thereon at 12% per

annum being the amount paid by the Respondents to the claimants

for the acquisition of the said drillship by the Respondents from the

claimants and that on the said amount being paid or in any manner

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secured to the Respondents the claimants may be directed to take

back the said drillship "SAGAR PRABHAT".

(b) That as an alternative to prayer (a) hereinabove, the

claimants be directed to pay to the Respondents (i) a sum of Rs.3.5

crores converted to U.S. Dollars at the convertible rate prevailing on

or about the date of the award to enable the Respondent to bring

about necessary changes and/or alterations and additions in drillship

in order that it may be put to enable the Respondent to operate the

same as held out in the agreement between the parties hereto dated

14th July, 1981: and (ii) a further sum of U.S. Dollars 1,80,000/-

being the amount of damages for non-use of the drillship at the rate

of U.S. Dollars 20,000/- per day for 90 days required to set the

drillship right.

xxx xxx xxx

5. The respondent participated in the initial stages of the second

arbitration and filed a reply dated 29.11.1988 denying the claim and

arbitrability on four grounds: (i) the claim was beyond the scope of

arbitration agreement contained in Article 13.2 of the agreement dated

14.7.1981; (ii) the claim related to a technical matter falling under

clause 13.1 of the contract, and therefore to be concluded only by the

decision of ABS. (iii) the claim having been made beyond the warranty

period of twelve months prescribed in clause 9.2.1 of the contract, was

deemed to have been waived and not maintainable; and (iv) the claim was

barred by limitation as it was made beyond three years from the date of

taking over the drillship.

6. At the meeting of Arbitrators on 17th & 18th January, 1989 the

respondent raised a preliminary objection that the dispute related to a

technical matter and therefore was an excepted matter beyond

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the scope of the Arbitration Agreement. ONGC submitted that the

technical question of stability of the drillship be referred to ABS, New

York for its opinion and it was willing to accept its opinion as evidence.

Respondent submitted that it will settle the dispute in accordance with

such opinion of ABS. The Arbitral Tribunal referred the dispute relating to

stability of the drillship to the opinion of the ABS, Bombay which gave its

report dated 18.5.1990. According to respondent, the parties to the

arbitration had agreed that the claim should be referred to ABS, New York,

for its opinion as provided by Article 13.1 of the contract, but instead, the

matter was referred to ABS, Bombay. However thereafter the respondent

did not participate in the arbitration proceeding. In the arbitration

proceedings, Mr. Pramod Seth, Dy. General Manager of ONGC filed an

affidavit dated 6.4.1995 as the evidence on behalf of ONGC. As the

respondent was not contesting the proceedings, the Arbitrators themselves

examined Mr. Pramod Seth in detail. Thereafter on 15.9.1995, the

concluding date of the arguments, ONGC submitted a comparative

statement explaining its claim, giving various alternative calculations.

7. On 18.9.1995 the Arbitrators made an Award for Rs.36,38,50,000/-

(Rupees Thirty six crores thirty eight lakhs fifty thousand) in favour of

ONGC, with interest at the rate of 12% per annum on the said sum from

the date of award. The award set out the contentions of ONGC and the

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respondent in brief and then proceeded to direct respondent to pay the

following amounts (being the break up of Rs.36.385 crores) by a non-

speaking award:

Rs. In lakhs

(a) For Cost of Anchors 225.00

(b) For Cost of Anchor chains 938.00

(c) For procuring & fitting new

motion Compensator 900.00

(d) For additional sponsons 700.00

(e) For Lay up charges 870.00

(f) Cost of Arbitration 13.50

----------------

Total Rs.3638.50 Lakhs

========

8. The said award was challenged by the respondent. A learned Single

Judge of the Bombay High Court by judgment dated 2/3-9-1996 set aside

the said award. The learned Single Judge inter alia held that the issue being

a technical matter, the same was not arbitrable and that the Arbitral

Tribunal exceeded its jurisdiction in deciding a issue which related to the

report of the American Bureau of Shipping. Feeling aggrieved, ONGC

filed an appeal. A Division Bench of the High Court by judgment dated

28.7.2004 dismissed the appeal confirming the final decision of the learned

Single Judge. It however, set aside the finding of the learned Single Judge

on the issue of jurisdiction. The Division Bench was of the view that the

award could not be sustained for the following reasons:

(a) ONGC had made only a claim for Rs.3,50,00,000/- (Three crore fifty

lakhs) plus US $ 1,80,000 in the claims statement. It did not reserve

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the right to add or alter the claim. Therefore it could not make any

higher claim.

(b) The claim was sought to be increased by ONGC without amending

the pleadings, that is its claim statement. The claim was also not

supported by any evidence.

(c) The claim of ONGC as originally made and as altered in the

affidavit were both barred by limitation.

(d) The claim made beyond the warranty period of twelve months, was

contrary to Article 9.2.1 of the contract (warranty clause) and was

prohibited by the contract.

(e) That the Award was arbitrary, capricious, irrational and beyond the

claim of ONGC.

The said judgment is challenged by the appellant ONGC in this appeal.

On the contentions urged, the only question that arises for consideration is

whether the interference with the award by the High Court is justified. On

a careful consideration of the award with reference to the claim, we are of

the view that the learned Arbitrators have acted beyond the reference and

exceeded their jurisdiction in awarding Rs.36,38,50,000/-.

9. In Rajasthan State Mines & Minerals Ltd. vs. Eastern Engineering

Enterprises - (1999) 9 SCC 283, this Court summarized the principles

relating to interference with arbitral awards under Arbitration Act, 1940.

Paras (e) to (i) which are relevant are extracted below : 8

"(e) In a case of non-speaking award, the jurisdiction of the Court is

limited. The award can be set aside if the arbitrator acts beyond his

jurisdiction.

(f) To find out whether the arbitrator has travelled beyond his juris-

diction, it would be necessary to consider the agreement between the

parties containing the arbitration clause. Arbitrator acting beyond his

jurisdiction--Is a different ground from the error apparent on the face

of the award.

(g) In order to determine whether arbitrator has acted in excess of his

jurisdiction what has to be seen is whether the claimant could raise a

particular claim before the arbitrator. If there is a specific term in the

contract or the law which does not permit or give the arbitrator the

power to decide the dispute raised by the claimant or there is a spe-

cific bar in the contract to the raising of the particular claim, then the

award passed by the arbitrator in respect thereof would be in excess

of jurisdiction.

(h) The award made by the Arbitrator disregarding the terms of the

reference or the arbitration agreement or the terms of the contract

would be a jurisdictional error which requires ultimately to be decid-

ed by the Court. He cannot award an amount which is ruled out or

prohibited by the terms of the agreement. Because of specific bar

stipulated by the parties in the agreement, that claim could not be

raised. Even if it is raised and referred to arbitration because of

wider arbitration clause such claim amount cannot be awarded as

agreement is binding between the parties and the arbitrator has to ad-

judicate as per the agreement. This aspect is absolutely made clear in

Continental Construction Co. Ltd. (supra) by relying upon the fol-

lowing passage from M/s. Alopi Parshad v. Union of India :

[1988]3SCR103 which is to the following effect:

There it was observed that a contract is not frustrated

merely because the circumstances in which the

contract was made, altered. The Contract Act does not

enable a party to a contract to ignore the express

covenants thereof, and to claim payment of

consideration for performance of the contract at rates

different from the stipulated rates, on some vague plea

of equity. The parties to an executory contract are

often faced, in the course of carrying it out, with a turn

of event which they did not at all anticipate, a wholly

abnormal rise or fall in prices, a sudden depreciation

of currency, an unexpected obstacle to execution, or

the like. There is no general liberty reserved to the

courts to absolve a party from liability to perform his

part of the contract merely because on account of an

uncontemplated turn of events, the performance of the

contract may become onerous.

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(i) The arbitrator could not act arbitrarily, irrationally, capriciously

or independently of the contract. A deliberate departure or conscious

disregard of the contract not only manifests the disregard of his au-

thority or misconduct on his part but it may tantamount to mala fide

action."

10. Clause 9.2.1 and 9.2.2 of the agreement dated 14.7.1981 between

ONGC and respondent relating to warranty are extracted below :

9.2.1 Warranty of material and workmanship : Subject to the

provisions hereinafter set forth in this Article Contractor `B `

undertakes to remedy free of charge to the purchaser any defect in

the Drill ship which is due to defective design, material or

workmanship or poor or underrated performance/efficiency of

operation. Provided that such defects are discovered within a period

of twelve months after the date of arrival of Bombay and a notice

thereof is duly given to contractor `B' as hereinafter provided. Any

defect caused by normal wear and tear of operation of equipment

beyond the manufacturer's prescribed limit in manuals will not

apply for this cause.

9.2.2 The Purchaser shall notify contractor `B' in writing within

seven working days after discovery of any defect for which claim is

made under this warranty. The purchaser's written notice shall

describe the nature of defect and the extent of damage caused or

likely to be caused thereby. Cable/telex advice within seven working

days that the claim is forthcoming will be sufficient to comply with

the requirements as to time."

[Note : `Contractor B' refers to respondent]

11. As noticed above, the drillship arrived at (off) Bombay on 5.6.1982

ONGC took delivery of the ship on 29.6.1982. Having regard to clause

9.2.1 of the contract, the warranty period of 12 months expired on

29.6.1983. Clause 9.2.1 of the contract barred any claim made beyond 12

months. The High Court after exhaustive consideration rightly held that

the claim made on 2.12.1987, beyond the warranty period of one year, was

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barred by clause 9.2.1 of the contract and therefore Arbitral tribunal

committed a jurisdictional error in awarding the cost repairs/replacement

by accepting such a claim. ONGC contends that its claim was not based

upon breach of warranty, but on total failure of consideration. This

contention has no merit. The claim of the appellant, as noticed above was

for payment of US $ 55 millions with interest at 12% per annum being cost

of acquisition of the drill ship or alternatively for payment of Rs.3.5 crores

towards the cost of alteration in the drill ship and US $ 1,80,000 as

damages for non use of the drill ship during a period of 90 days required

for repairing the drill ship. The appellant did not pursue its main claim for

US $ 55 million being the acquisition cost. This is apparently due to the

fact that in the first round of arbitration, the Arbitrators had already made

an award for the payment of the cost of the ship by the appellant to the

respondent. (It is stated that the appellant is contesting the said claim. Be

that as it may.) The claim for the cost of acquisition of the drill ship,

ceased to be the subject matter of the arbitration and what was considered

and decided by the arbitrators was the claim for making additions and

alterations in the drill ship to make it operatable. Therefore clause 9.2.1

was clearly attracted.

12. We have extracted the reliefs sought by ONGC in arbitration, in para

(4) above and it is evident therefrom that what was claimed was final and

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not intended to be varied. The appellant stated that the claim for bringing

the drillship to the desired state and condition, would be Rs.3.5 crores. The

appellant used the word `tentatively' with reference to the said claim, not

with any reservation to change the claim as and when the actual cost was

ascertained, but to show that it was not based on actuals, and was an

estimate with reference to the prevailing rates/costs. Similarly the claim for

US$ 1,80,000/- as compensation towards `non-use' of the drillship during

the `repair period' was also final, though it was an estimate and therefore

described as `tentative'. The appellant did not reserve the liberty to modify

the claim of Rs.3.5 crores plus US $ 1,80,000. Further, the appellant did

not amend the claim before the Arbitral Tribunal nor did they seek to

amend the claim. The claim continued to be Rs.3.5 crores plus US$

1,80,000. Therefore, any award by the Arbitrators in excess of 3.5 crores

plus U $ 1,80,000 was wholly without jurisdiction as not being the subject

matter of reference to the Arbitral tribunal and being an award beyond the

pleadings.

13. The learned counsel for the appellant however contended that the

claim was not on imaginary figures, and that ONGC had obtained

quotations for the various items and on that basis calculated the claims. By

way of illustration, we may refer to how the claim in regard to one of the

items (motion compensator) was made. According to the appellant it

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obtained a quotation for the item from a US manufacturer in January 1993.

The quotation was for US$ 19,50,000. When freight and insurance were

added to it, the landing cost would have been US$ 19,94,508. By applying

an exchange rate of Rs.33 per US$, the rupee equivalent was Rs.658.19

lakhs. By adding customs duties and clearing and forwarding charges and

other miscellaneous expenses, the cost became Rs.888.39 lakhs. When the

cost of the item was to be calculated with reference to the year 1995, 12%

per annum was added for two years, to arrive at the value as Rs.1114.40

lakhs. The value of the item in the year 1982 and in the year 1986 was

arrived at as Rs.255.89 lakhs and Rs.401.86 lakhs respectively, by

discounting the 1993 cost of Rs.888.39 lakhs at the rate of 12% per annum.

Similar method was adopted for assessing the cost of other items. The

claim based on such a method, to say the least, is casual, strange and

untenable. If the defect was noticed in 1985 and if the claim statement was

made in the year 1987, it is ununderstandable how any claim for

compensation for cost of repairs to set right the drillship, could be claimed

at the rates prevailing in 1995 or with reference to the prices in 1993 by

discounting it by 12% to arrive at the price in 1982 and 1986. The

appropriate course would be to place evidence of the actual cost in the year

1982 or in the year 1985 with reference to then prevailing rates. In fact,

that was done by ONGC itself in the year 1987. It calculated the cost of

repairing/replacing the Anchors, Anchor Chains, Motion compensator and

13

sponsons to be Rs.3.5 crores in all, which was claimed in its pleading.

14. In para 27 of the Statement of Claim, the appellant stated that the

claim for Rs.3.5 crores was tentative as that was a prima facie calculation

of the amount required to bring the drill-ship to the desired state and

condition. But significantly, the appellant did not make any

alteration/additions to the drill-ship to bring it to the desired state and

condition as alleged. Therefore, if the sum of Rs.3.5 crores is to be

substituted by any higher figure, that would also be a tentative amount and

not an actual amount. When the appellant, on the basis of the rates

prevailing, calculated the cost for addition and altering the drillship at the

relevant time (1987), obviously the same cannot be changed with reference

to some other tentative figures or hypothetical figures with reference to

prices prevailing on a future date in 1995 when matter was argued before

the Arbitral Tribunal. Therefore the award of Rs.27.63 crores (aggregate of

items (a) to (d) extracted in para 7 above) as against the claim of Rs.3.5

crores is unsustainable.

15. The award of Rs.8.7 crores (item (e) extracted in para 7 above)

towards "lay up" charges (the loss on account of non-use of the drillship

during the period of repair) is equally unsustainable. In its claim statement,

the claim of ONGC was for US$ 1,80,000 for a period of 90 days which

was estimated to be the period required for repairs. In the claim statement

14

it was alleged that the lay up charges was US$ 20,000 per day. If that is so,

for 90 days, the claim ought to have been US$ 18,00,000. But the specific

claim was only for US$ 1,80,000. This itself showed that the figures were

not based on any acceptable basis and were imaginery. Further though the

claim was for 90 days, at the time of arguments before Arbitrators, the

claim was increased to Rs.1306.80 lakhs for 180 days which works out to

7.26 lakhs per day. There is absolutely no basis for such a claim. Further it

should be remembered that the drillship was never got repaired and the

claim which was an estimates was increased by several times on `guess-

estimates' at the time of arguments before the Arbitrators. We have

referred to this aspect just to show that the claims were increased by

ONGC without basis and accepted and awarded by the arbitral tribunal in a

casual manner, which amounts to legal misconduct.

16. The award proceeds on a legal principle which cannot be supported.

It is not disputed that alterations and additions were never carried out to

the ship. The affidavit filed on behalf of ONGC before the Arbitral

Tribunal and the award of the Tribunal clearly show that what was being

claimed and what was being awarded were not the actual cost of additions

and alterations, but an estimate of the cost of alterations and additions. If

the ship was delivered in the year 1982 and the appellant had found out

that the ship was defective either in the year 1982 or in the year 1985,

15

the claim should have been based on the cost of repairing it in the year

1985 or immediately thereafter. If in 1987 the appellant had assessed such

cost with reference to the then prevailing rates as Rs.3.5 crores, it is un-

understandable how without actually carrying out alterations and

additions, the appellant could substitute the said tentative cost with

reference to the alleged prices or cost in the year 1995. The very fact that

Arbitrators have accepted the 1995 figures as the basis, shows that the

Arbitrators have proceeding on an untenable premises that in regard to

1982 or 1985 repair, the rates prevailing in 1995 could be the basis.

17. We may refer to another anomaly. As noticed above, the tentative

cost of alteration and additions stated in the Statement of Claim was Rs.3.5

crores and the loss for lay up of the drillship as US$ 1,80,000. Without

amending the said claim, evidence was let in by filing an affidavit before

the Arbitrators wherein the ONGC claimed Rs.20,49,54,000/- as detailed

below:

(a) New Anchors & Chains Rs.296.40 lakhs at 1982 prices

(b) New motion compensator Rs.256.39 lakhs at 1982 prices

(c) Addition of sponsons Rs.189.95 lakhs at 1982 prices

(d) Loss due to lay up of drillship Rs.1306.80 lakhs at current price

for 180 days -----------------------

Total Rs.2049.54 lakhs

----------------------

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Thus the claim for setting right the drill ship was increased from Rs. 3.5

crores to Rs.742.74 lakhs towards the cost of items to be purchased and

fitted (that is, Anchors & chains, Compensator and sponsons) which

according to ONGC was required for setting the drillship right and

Rs.1306.80 lakhs as lay up charges for six months. The claim on account

of loss due to non-use of the drill-ship during the period when it has to be

repaired was increased from US $ 1,80,000 (claimed in the claim

statement) to Rs.1306.80 lakhs. Obviously there could be no such change

as the ship was not actually repaired. The aforesaid increased claim was

not supported by the pleading.

18. What is, however, surprising is that the award is neither based on the

claim of Rs.3.5 crore plus US $ 180,000/- made in the claim statement or

the claim of Rs.2049.54 lakhs that was made in the affidavit. The

arbitrators referred to the claim of the ONGC as 4329.46 lakhs in para 5 of

the award, and awarded Rs.3638.50 lakhs without any reasons as detailed

below :

SNo. Particulars Claim of ONGC Amount awarded by

(as stated in the Arbitrators

award)

(Rs. in lakhs) (Rs. in lakhs)

(a) Cost of Anchors 238.00 225.00

(b) Cost of Anchor chains 938.97 938.00

(c) Cost of procuring & fitting 1052.88 900.00

new motion Compensator

(d) Cost of additional sponsons 780.11 700.00

(e) Lay up charges for carrying out 1306.00 870.00

the above modifications

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(f) Cost of Arbitration 13.50 13.50

Total 4329.46 3638.50

19. These amounts were far more than what was claimed in the claim

statement or in the affidavit filed on behalf of ONGC by way of evidence.

As the award is a non-reasoned award, it is not possible to ascertain how

the Arbitrators awarded a sum of Rs.3638.50 lakhs which is more than the

claim in the Statement of Claim and the claim in the affidavit evidence.

This is one of the main ground on which the High Court has chosen to

interfere with the arbitral award. It has held that the entire award was

arbitrary, whimsical and beyond the jurisdiction of the Arbitrators.

20. To explain this conduct on the part of the Arbitrators, the learned

counsel for the appellant submitted that the increase was based on a

comparative statement that was filed before the Arbitrators on 15.9.1995 at

the final stages of hearing, where three alternatives were given in regard to

the claim of ONGC. The first option was for a claim for Rs.2473.96 lakhs

based on 1986 prices (arrived at by discounting the 1995 prices). The

second option was for Rs.2049.55 lakhs based on 1982 prices (arrived at

by discounting the 1995 prices). The third option was a claim of 4543.42

lakhs with reference to the 1995 prices. The only constant in all three

options is the claim of Rs.1306.80 lakhs towards the lay up charges for

18

180 days. The Arbitrators have choosen the third option of 1995 cost on

the basis of the claim. It is un-understandable how such alternative claims

could be made during arguments with reference to the alleged cost of

repair/additions/alterations in the years 1982, 1985 and 1995 without

actually repairing the vessel, particularly when ONGC had arrived it as

Rs.3.5 crore plus US $ 1.8 lakhs in the year 1987 based on 1985

prices/rates. This again shows that the claim was casual, imaginary and not

based on any facts, figures or actual rates. In regard to a drillship supplied

in the year 1982 in which defects were allegedly found in 1985 but claim

made in 1987, a hypothetical claim for cost of repairs based of 1995 rates,

cannot be accepted. As the award apparently proceeds on a legal principle

which is wholly erroneous, the award cannot be sustained. The above also

demonstrates that the Arbitrators have exceeded their jurisdiction and gone

beyond the reference.

21. In view of the above, there is no need to examine the other grounds

of attack against the award. We, therefore, dismiss the appeal as having no

merit.

..............................J.

(R V Raveendran)

19

............................J.

(A K Patnaik)

New Delhi

February 23, 2011.