SHARVI DUA SYMBIOSIS LAW SCHOOL, HYDERABAD

Oil & Natural Gas Corporation Ltd Vs. Western Geco international Ltd

FIRAC

Oil & Natural Gas Corporation Ltd. Appellant

Versus

Western Geco international Ltd. Respondent

FACTS

It was an appeal to a judicial decision passed by the Bombay High Court in an Arbitration
Petition.

The appellate company deals with drilling and extraction of Natural gases, they invited offers
for technical up-gradation of Seismic Survey vessel for its modernisation, and according to
the tender conditions one of the Vessel (Streamers) fitted with Hydrophones was in need of
up-gradation but failed to mention the national origin of the Hydrophones.
The respondents Company offered a bid to supply Streamers which are equipped with the
Geopoint Hydrophones of U.S Origin. Appellant by the due date and, notably, made an
application for obtaining a licence from the U.S authorities for the sale of US origin
hydrophones only after the due date. but due to regulatory measure after 9/11 the U.S. GECO
intimated ONGC that it would not be possible to provide for the desired U.S. Hydrophones,
by exempting itself under the Force majeure clause. To which ONGC refuted and requested
to deliver the U.S. Hydrophones failing which compatible options were provided to the U.S
Origin Hydrophones. On its inability to stand by its contract after a few months they
proposed to replace the same with Canadian hydrophones. After a few months the Appellant
acceded to the replace them on the condition that the Appellant would deduct liquidated
damages and damages for excess engagement of the vessel. The Appellant accordingly made
deductions from the Respondent’s invoice on account of liquidated damages which the
Respondent contended were inflated.
ONGC filed for a setting aside proceedings in the Bombay High Court. The High Court held
that the award and future interest shall stand deleted.

However the award was partially allowed by the Bombay High Court. ONGC appealed to the
Supreme Court against the award.

ISSUES:

Whether the court has any jurisdiction to set aside an arbitral award being limited to
grounds set out in Section 34 of the Arbitration and Conciliation Act.

RULES:

Section 34 of the Arbitration and Conciliation Act, 1996-

“Application for setting aside arbitral award.:
(1) Recourse to a court against an arbitral award may be made only by an application for
setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the court only if

(a) the party making the application furnishes proof that

(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties
have subjected it or, failing any indication thereon, under the law for the time
being in force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was otherwise
unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration: Provided that, if the
decisions on matters submitted to arbitration can be separated from those not
so submitted, only that part of the arbitral award which contains decisions on
matters not submitted to arbitration may be set aside; or
(v) the composition of the Arbitral Tribunal or the arbitral procedure was not
in accordance with the agreement of the parties, unless such agreement was in
conflict with a provision of this Part from which the parties cannot derogate,
or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that
(i) the subject-matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
 Explanation. without prejudice to the generality of sub-clause (ii), it is hereby
declared, for the avoidance of any doubt, that an award is in conflict with the public
policy of India if the making of the award was induced or affected by fraud or
corruption or was in violation of Section 75 or Section 81.”

ANALYSIS

The Arbitral Tribunal held that ONGC could not validly deduct the damages. ONGC filed for
a setting aside proceedings in the Bombay High Court. After the appeal was set forth before
the Supreme Court the GECO contended that there was no provision under Section 34 which
allowed the court to interfere with the award.

It further contended that the Court could not sit in appeal on the content of an award given by
the Tribunal. The court stated that the phrase public policy of India used in Section 34 is
required to be given a wider meaning and scope to absorb the complexity and dynamic
interpretation of the phrase. It was stated that the concept of public policy brings about
matters which are concerned with public good and the public interest, But the fact is that
what is good for the public and what is not has had varied definitions and interpretation in the
past and the meaning of the two will keep changing with time, but the award passed by the
tribunal cannot be said to have been in for public interest on the face of it, and so, an award or
judgement or decision of that nature is only going to negatively impact the administration of
justice.

So, the court views that in spite the fact that a narrow definition or meaning is given to the
ambit of Public Policy it is very important that an out be given to set aside if any award is us
patently illegal. Further the court stated as to when the court can interfere and set aside an
award.

An award could be set aside if it is contrary to:

(a) Fundamental policy of Indian law; or

(b) The interest of India; or

(c) Justice or morality, or

(d) In addition, if it is patently illegal.

Illegality must go to the root of the matter and if it is of an insignificant nature it cannot be
held that award is against the public policy.
Award could also be set aside if it is so unfair and or unreasonable that it shocks the
conscience of the court. Such award is opposed to public policy and is considered Void.

The Court further elaborated on the fundamental juristic principles that must necessarily be
understood as a part and parcel of the Fundamental Policy of Indian law.

The Court stated that the Saw Pipes decision had included fundamental policy of India and
that in the opinion of the Court without conferring an exhaustive meaning, fundamental
policy to determination whether by a Court or other authority that affects the rights of a
citizen or leads to any civil consequences, by adopting a ‘judicial approach’ which involves
the application of judicial mind by the authority. This is done so that the Court, Tribunal or
the authority exercising powers stand under the right umbrella and does not affect the rights
or obligations of the parties and cannot act in an arbitrary, capricious or whimsical manner.
Judicial approach ensures that the authority acts bonafide and deals with the subject matter in
hand in fair reasonable and objective manner and is not actuated by any irrelevant
consideration.

The court in the above context made an observation of the case of , Ridge v Baldwin, which
stated “Wherever, any body, of persons having legal authority to determine questions
affecting the rights of subjects, and having the duty to act judicially, act in excess of their
legal authority, they are subject to the controlling jurisdiction of the Kings Bench Division
exercised in these writs”.

Second, adhering to the principles of natural justice, hearing the other side the basic principle
of Natural justice need be in adherence along with the sense that that the Court/authority
deciding the matter must apply its mind to the attendant facts and circumstances while taking
a view one way or the other Application of mind is best demonstrated by disclosure of the
mind and disclosure of mind is best done by recording reasons in support of the decision
which the Court or authority is taking and so,

Third, that a decision which is perverse or so irrational that no reasonable person would have
arrived at the same will not be sustained in a Court of law.
Thus the Court held that if the arbitrators failed to make an inference which should have been
made, or have made a prima facie wrong inference, and have committed an error resulting in
miscarriage of justice apart from the fact that they failed to appreciate and draw inferences
that logically flow from such proved facts.

CONCLUSION

Applying the above mentioned principle of Public Policy, the court rejected GECOs
contention of non-interference of the Court with the award and went on to modify the
damages awarded to ONGC. It ‘overturned’ the arbitral award and allowed for ONGC
to deduct liquidated damages.

It is concluded that the effect of this judgement will gives rise to an interpretation of what is
interference of Public Policy and what isn’t, this judgement is contrary to the current practice
under the International Arbitration and also in contradiction to the Act itself. Although giving
the court this power the court can face extreme uncertainty and unpredictability. It marks a
regressive step in the non-interference trend. This case has opened many opportunities to
review the domestic Arbitral awards on merits by introducing established judicial principles
with a long line of precedents in common law, into the ambit of ‘fundamental policy’ of
Law.