Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd. [Appeal (Civil) 7419 2001 of 518] - Synopsis
Nilanjana Ganguly 10 Mar 2021


The Oil and Natural Gas Commission ordered Saw Pipes to supply off-shore exploration equipment to be procured from licenced European manufacturers. Delivery was postponed due to a general strike by steel mill employees in Europe. Timely delivery was at the core of the contracts. The ONGC granted an extension of time, but relied on the provision for the recovery of liquidated damage by withdrawing the sum from payment to the supplier. The ONGC deducted $3,04,970.20 and Rs 15,75,557 from the collection of customs duty, sales tax and freight charges. Saw pipes have challenged the deduction and the matter has been referred to arbitration. Although Saw Pipe's defence of force majure was dismissed by the arbitral tribunal, it allowed the ONGC to provide evidence of the harm caused by the infringement and to claim, in the absence of evidence of financial losses, that the deduction of liquidated damages was incorrect. The award was contested by the ONGC; inter alia, as opposed to the case of the ONGC public policy, the arbitral tribunal refused to resolve the conflict by failing to enforce the existing substantive rule, ignoring the terms of the contract and the customary practises of the use of trade in such transactions. The ONGC challenged the award as being patently unconstitutional. The High Court of Bombay, a single judge and division, dismissed the appeal. The Supreme Court set aside an arbitration judgement for the repayment of $3,04,970.20 and Rs 15,76 Lakhs for liquidated damages held by the ONGC when paying the business.


·         If the ONGC was entitled to Liquidated Damages. 

·         Whether patent illegality may be used as a basis for the investigation of the award under section.


The Hon'ble Court first addressed thoroughly the power of the court to set aside an award under Section 34 of the Arbitration and Conciliation Act 1996 and the different grounds in which intervention was permissible. Then moving on to the issue of damages, the Hon'ble Court argued that, since the terms of the contracts are transparent, there is nothing the court can do about it. If the parties had settled on the sum as being pre-estimated real liquidated damages, there was no need for the court to order the purchaser to show his loss. It further argued that, when the court determines that the liability for damages is a liability, it may award fair compensation on the basis of proof of damages. However, when an agreement has been reached by experts in the area, the court should be reluctant to read the provision providing for liquidated damages as a punishment. In paragraph 49, referring to Maula Bux v Union of India (the court concludes that this is particularly true where the court is unable to determine the award or where there are problems with such an assessment. In such situations, the burden of proof will be on the party who argues that the amount of the stipulation is not fair. As regards forfeiture, after considering its decision in Union of India v Rampur Distellery, the court notes that the forfeiture clause can be read either as liquidated damages or as a penalty, depending on the reasonableness of the amount to be forfeited. Consequently, with respect to liquidated damages and penalties, the Court's primary finding tends to be that liquidated damages should be treated as a fair award, although penalties should not be applied. In addition, it also seems to have been concluded in the event of penalty damages. The Hon'ble Court reiterates that no reimbursement would be given if the court decides that no damage is likely to occur as a result of the infringement.


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