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       REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3415 OF 2007

Oil & Natural Gas Corporation Ltd. …Appellant

Versus

Western Geco international Ltd. …Respondent

J U D G M E N T

T.S. THAKUR, J.

1. This appeal arises out of an order dated 10th February,  

2006  passed  by  a  Division  Bench  of  the  High  Court  of  

Judicature at Bombay whereby OSA No.24 of 2006 filed by  

the appellant-Corporation has been partly allowed and the  

order  passed  by  a  single  bench  of  the  High  Court  in  

Arbitration  Petition  No.203  of  2005  affirmed  with  the  

modification that award of pendente lite and future interest  

by the Arbitral Tribunal shall stand deleted.

2. The appellant-Corporation is engaged in the business of  

drilling  and  exploration  of  oil  and  natural  gases.   In  

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November,  1999, the appellant  invited offers for technical  

upgradation of Seismic Survey Vessel, M.V. Sagar Sandhani  

(hereinafter  referred  to  as  the  “Vessel”)  with  a  view  to  

modernising the same. According to the tender conditions,  

one of the main items of equipment required for upgradation  

of the Vessel was “Streamers” fitted with hydrophones. The  

specifications, however, did not stipulate the national origin  

of such hydrophones.

3. In  response  to  the  tender  notice  respondent-M/s  

Western Geco International Ltd., submitted a bid offering to  

supply  Nessie  4  streamers  equipped  with  “Geopoint”  

Hydrophones of U.S. origin. The appellant’s case is that the  

term  relating  to  supply  of  such  Geopoint  Hydrophones  

formed a material part of the offer made by the respondent-

company  in  whose  favour  the  appellant-Corporation  

eventually awarded a contract in terms of its letter  dated  

10th October, 2000 duly accepted by the respondent on 25th  

October, 2000.  The Vessel was resultantly handed over to  

the  respondent  on  10th  April,  2001  for  carrying  on  the  

proposed  modernisation  and  upgradation  work.  A  formal  

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contract was in due course executed between the parties on  

18th June, 2001.   

4. It is common ground that “Geopoint” Hydrophones of  

U.S. origin were in terms of the contract fitted in the vessel  

and test trials of the same conducted. Even so the vessel  

could  not  be  delivered  back  to  the  appellant  on  9th July,  

2001,  the  due  date  for  that  purpose,  because  of  some  

problem  which  the  respondent  encountered  in  obtaining  

licence  from  the  U.S.  authorities  for  sale  of  such  

hydrophones.  The  appellant-Corporation  asserts  that  the  

respondent had for the first time made an application to the  

U.S. authorities for issuance of a licence as late as on 1st  

August,  2001 i.e.  nearly  a  month  after  the  due  date  for  

delivery of  the vessel  back to the Corporation.  No formal  

rejection of the request for a license was according to the  

Corporation communicated to it as the matter appeared to  

be under some kind of negotiations between the respondent  

and the authorities in U.S.

5. The respondent’s case per contra is that it continued its  

efforts to obtain a licence only to be informed by its sources  

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in the US that the latter was likely to impose certain onerous  

conditions one of which could be that US made hydrophones  

can be used only on loan basis that too for a short duration  

of  24 months only.   Respondent’s  further case is  that its  

source in US had informed it that the US authorities were  

not likely to grant a licence to sell hydrophones to India.  Be  

that  as  it  may  while  the  matter  was  pending  with  the  

Defence  Department,  a  massive  terrorist  attack  on  11th  

September, 2001 shook America. The respondent’s hope of  

getting a licence for sale of US made hydrophones receded  

further with this unexpected development. The respondent  

accordingly  informed  the  appellant-Corporation  about  the  

new  development  and  pleading  force  majeure  the  

respondent  informed  the  appellant-Corporation  of  the  

former’s  inability  to  equip  the  vessel  with  U.S.  made  

hydrophones.  The  appellant-Corporation  refuted  the  

invocation  of  force  Majeure  by  its  letter  dated  20th  

September,  2001 and informed the respondent that  since  

the field season was starting shortly any further delay in the  

delivery of the vessel would adversely affect its operation.  

The respondent on its part started looking for and offering  

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alternatives to the U.S. made hydrophones and argued with  

the  appellant-Corporation  that  since  origin  of  the  

hydrophones was not indicated in the bid documents it was  

testing replacement by M-2 US Geo Spectrum Hydrophones  

made  in  Canada  at  its  Norway  facilities  to  check  their  

suitability which exercise the respondent hoped to complete  

by  27th September,  2001.  The  respondent  informed  the  

appellant-Corporation that  if  the Corporation accepted the  

replacement, those hydrophones could be substituted for the  

US hydrophones within a short time.   

6. The appellant-Corporation was, however, in no mood to  

accept a substitute for the contracted hydrophones.  It was  

on the contrary keen to have US made hydrophones fitted  

on  the  vessel.   The  Corporation,  therefore,  required  the  

respondent to continue its efforts to secure a licence from  

the  US  Government  in  which  direction  the  appellant-

Corporation  on  its  own  moved  the  concerned  Ministry  in  

Government of India to secure a licence. Further information  

and  details  in  respect  of  the  proposed  Canadian  

hydrophones was all the same called for by the Corporation  

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from the respondent. Since, however, the efforts to secure a  

licence from US Government were making no progress, the  

respondent sought approval of the appellant-Corporation to  

remove the US hydrophones from the vessel  and transfer  

them  to  their  repair  facility  in  Singapore  to  facilitate  

replacement  by  the  Canadian  made  hydrophones.  The  

respondent also wrote a detailed letter dated 10th October,  

2001 to the appellant-Corporation informing the latter that  

the US government was not likely to grant a licence and that  

it had withdrawn the application made for that purpose to  

prevent a denial. What is important is that by letter dated  

16th October, 2001 the respondent clearly stated that it was  

not  in  a  position  to  deliver  the  vessel  with  streamers  

containing  the  Geopoint  Hydrophones  of  US  make.  This  

letter  was  followed  by  letter  dated  21st October,  2001  

addressed  to  the  appellant-Corporation  with  a  request  to  

permit  removal  of  US  hydrophones  and  replacement  of  

Canadian hydrophones which had been extensively  tested  

1999 in  connection  with  supply  of  Seismic  Survey  Vessel  

delivered to NOIC for the Iran project.  Further information  

required by the appellant-Corporation was also supplied by  

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the respondent by its letter dated 24th October, 2001 with a  

request  to  the  Corporation  to  approve  the  proposed  

replacement. The respondent also agreed to give additional  

warranty  of  one  year  for  the  replaced  hydrophones.  By  

another letter  dated 13th November,  2001 the respondent  

assured the appellant-Corporation that if the latter agreed to  

the  replacement  proposal  there  would  be  no  financial  

implications  and the  additional  cost  involved in  fixing  the  

Canadian  hydrophones  would  also  be  borne  by  the  

respondent.   

7. It was only on 23rd March, 2002 that the respondent  

conditionally agreed to the proposed replacement of the US  

made hydrophones by those made in Canada. One of the  

conditions  imposed  for  the replacement  by  the appellant-

Corporation was the right to recover liquidated damages as  

per Clause 16 and for excess engagement of vessel as per  

Clause  14  of  the  subject  contract.  The  replacement  

accordingly took place and the Vessel eventually delivered  

back to the Corporation with Canadian hydrophones on 6th  

May, 2002. On 24th May, 2002, a formal amendment to the  

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contract was also effected to record the substitution of the  

US hydrophones by those made in Canada.

8. With  the  upgradation  and  modernisation  work  

completed  as  per  the  amended  contract,  the  respondent  

raised invoices for payment due to it but realised that the  

appellant-Corporation had deducted from its dues a sum of  

US $ 5,114,300.98 towards excess engagement charges in  

terms of Clause 14 of the contract.  By another letter dated  

20th August,  2002,  the  appellant-Corporation  further  

deducted a sum of US $ 410,641.20 based on a change in  

tax law applicable at 4.8% followed by a deduction of a sum  

of  US $  80,530.10 based on correction  for  price  charges  

inclusive of income tax at 4.8%. These deductions gave rise  

to  disputes  which  were  referred  for  adjudication  to  an  

arbitral  tribunal  comprising  three  former  Chief  Justices  of  

India before whom the respondent claimed a sum of US $  

7,327,610.68 towards principal dues plus US $1,205,564.13  

by way of interest for the period from 20th August, 2003 to  

15th November,  2003  totalling  US  $  8,533,174,81  with  

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interest pendent lite at 12% p.a. from the date of the filing  

of the claim till the award at the same rate.

9. The appellant-Corporation stoutly contested the claim  

made  against  it  and  alleged  that  hydrophones  being  an  

important component, the respondent had not only offered  

to fit US made hydrophones in the streamer section of the  

Vessel but actually fitted the same. The appellant’s case was  

that  the  claimant  having  contracted  to  supply  US  made  

hydrophones was legally obliged to handover the Vessel duly  

filled with such hydrophones within the stipulated period of  

90  days  which  expired  on  9th July,  2001.  The appellant’s  

further case was that the requirement of a licence was first  

mentioned by the respondent when letter dated July 9, 2001  

was delivered to the appellant’s representative on board the  

vessel  at  Singapore  in  an  attempt  to  explain  the  

respondent’s failure to hand over the vessel on the due date.  

The appellant-Corporation asserted that the respondent had  

not even applied for a licence till then and had simply asked  

for an extension of time. It was only when the appellant-

Corporation asked the respondent to specify on a realistic  

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basis, the period for which extension was being demanded  

that  the  respondent  had  by  letter  dated  26th July,  2001  

stated that according to their understanding the licence will  

be issued towards the first week of September, 2001. Since  

time was the essence of the contract between the parties,  

the respondent’s failure to return the vessel duly upgraded  

within 9 months from the date of Letter of Acceptance or 90  

days from the delivery of the vessel i.e. on or before 9th July,  

2001  was  a  clear  breach  of  its  contractual  obligation  

rendering  the  respondent  liable  to  payment  of  liquidated  

damages and for excess engagement of the vessel, argued  

the appellant-Corporation.

10. The Corporation also disputed the invocation of force  

majeure clause in the fact situation of the case especially  

when securing of a licence for the equipment was not a part  

of  the  contract  between  the  parties,  it  being  the  sole  

responsibility of the respondent to determine the type and  

make  of  hydrophones.  The  terrorist  attack  on  the  twin  

towers was, according to the appellant-Corporation a post-

contractual period issue as the date of the delivery of the  

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vessel under the contract had since long expired by the time  

the attack took place. It was also contended that the delay  

in the completion of the contract was entirely attributable to  

the  respondent  who  when  called  upon  by  the  appellant-

Corporation  to submit  the performance report  of  the M-2  

hydrophones  used  in  Seismic  Survey  Vessel  PEJWAK  

suggested that the appellant-Corporation should obtain the  

same directly from NIOC forcing the appellant-Corporation  

to send a representative to Oslo to verify the parameters of  

the M-2 hydrophones at their own expense. It was asserted  

that once the respondent informed the appellant-Corporation  

that the US department of Commerce had finally rejected  

the  licence,  the  appellant-Corporation  was  left  with  no  

alternative except  to  agree to the replacement  of  the US  

made hydrophones by Canadian M-2 hydrophones resulting  

in the delivery of the vessel back to the Corporation on 6th  

May, 2002 after considerable delay.

11. On the  pleadings  of  the  parties  the  Arbitral  Tribunal  

framed the following issues for determination:

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(1) Was the national  origin  of  hydrophones used in  the Nessie-4   

streamers, a material term of the contact between the parties?   

(2) Was the respondent justified in refusing to allow substitution of   

the  Canadian  M-2  hydrophones  for  the  US  Geopoint   

hydrophones?

(3) Was the claimant’s declaration of force majeure justified under   

the terms of the contract?

(4) Whether there was any delay in the performance of the contact?

(5) If  the  answer  to  point  No.4  is  in  the  affirmative,  who  is   

responsible for such delay?

(6) If the answer to point No.4 is in the affirmative, whether the   

Claimant is entitled to damages?

(7) Whether the respondent was entitled to adjust the sum of US $   

491,000 out of the sum payable, in whole or in part, as alleged  

in para 30 of the statement?

(8) Is respondent entitled to both Liquidated Damages and Excess   

Engagement  charges  for  the  same periods  of  time under  the   

provisions of the Contract?

12. In the award which the Tribunal made and published  

Issue No. 1 was answered in the negative holding that since  

the  choice  of  the  hydrophones  was  left  to  the  bidders  

subject  to  the  equipment  meeting  the  specifications  

prescribed for the purpose and since the stipulations did not  

indicate  the  make  or  the  country  of  origin  of  the  

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hydrophones, the national origin of such hydrophones was  

not a material term of the contract between the parties.   

13. Issue No. 2 was, however, answered by the Tribunal in  

the affirmative, who took the view that once the respondent  

had made the choice and contracted to supply hydrophones  

made in the U.S. the appellant-Corporation was entitled to  

insist  on  the  supply  of  the  contracted  equipment.   The  

arbitrators  further  held  that  once  the  respondent  had  

informed  the  appellant  that  the  option  of  U.S.  made  

hydrophones  was  closed,  the  later  was  not  justified  in  

insisting  that  the  request  for  a  license  with  the  U.S.  

authorities should be pursued further.  The arbitral tribunal  

decided Issue No.3 against the respondent holding that none  

of the events mentioned in the contract had taken place and  

since the parties to the contract did not belong to U.S.,  the  

force majeure clause could not have been validly invoked by  

the respondent.   

14. Dealing with the question of delay in the performance  

of the contract and its consequences covered by Issue Nos.  

4 to 8, the Arbitrators held that the respondent-claimant had  

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completed  the  performance  of  the  contractual  obligations  

within the stipulated time frame and would have but for the  

U.S.  licence  requirement  delivered  the  vessel  to  the  

appellant on July 9, 2001 in which event there would have  

been no necessity to invoke the force majeure clause or to  

seek  extension  of  time  or  to  offer  the  Canadian  

hydrophones. Even so the fact remained that the respondent  

had  not  delivered  the  vessel  back  to  the  appellant-

Corporation on time.  The Tribunal then examined whether  

the respondent was responsible for the entire delay between  

July 9, 2001 and 6th May 2002 when the vessel was actually  

returned.  The Tribunal rejected the contention on behalf of  

the respondent  that  extension of  time for  completing  the  

contracted works had the effect of waiving the rights vested  

in the appellant under clause 14 and 16 of the contract.  The  

Tribunal held that waiver ought to be express or the fact  

situation  must  be  necessary  implication  manifest  an  

intention to waive.  Mere extension of time did not signify  

waiver of the rights flowing from clause 15 and 16 of the  

contract, observed the Arbitral Tribunal.  Having said so the  

Tribunal  held  that  since  the  respondent  had  informally  

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intimated  to  the  appellant  Corporation  as  early  as  on  

October 24, 2001 that it did not desire to pursue the request  

for a licence with the U.S. authorities any further and since  

by a letter dated 25th October 2001 the final particulars in  

regard  to  the  Canadian  hydrophones  were  duly  supplied,  

allowing some time to the respondent to take a decision, the  

delay post October 21, 2001 could not be attributed to the  

respondent.   That  finding,  observed the Tribunal,  did  not  

impact  the  amount  deducted  by  the  respondent  towards  

liquidated damages as the capping provision limited to 10%  

was less than the sum payable for the delay upto October  

31,  2001.   As  regards  excess  engagement  charges  the  

Arbitrators  held  that  except  for  the  period  commencing  

November  1,  2001  to  March  22,  2002  the  appellant  

Corporation was justified in making deductions for the rest  

of  the  period  from  the  claim  of  the  respondent.   The  

Arbitrators held that the deductions in relation to the period  

from November 1, 2001 to March 22, 2002 amounting to  

US$  2,445,246.54  were  wrongly  made  by  the  appellant-

Corporation which amount the respondent was entitled to  

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get  from the  appellant  together  with  interest  at  the  rate  

indicated in the award.

15. As regards deductions based on change of tax law or  

non payment of taxes under the Indian Law, the Tribunal  

held that the same were not permissible in the facts and  

circumstances  of  the case  especially  when  the  contracted  

work was to be executed and completed at the ship repair  

unit of the respondent claimant in Singapore and so was the  

handing  over  of  the  completed  vessel  to  the  appellant-

Corporation. No part of the work having been undertaken  

outside Singapore no deduction could be made on account of  

non-payment of any tax.  The Arbitrators held that since no  

taxes were attracted under the Indian Income Tax Act the  

price  could  not  include  the  said  tax  component.  The  

Arbitrators  accordingly  held  that  deductions  made on two  

counts, being of US $ 410,641.20 and US $ 80,530.10 were  

also unjustified and unwarranted by law or contract.   

16. Aggrieved by the award made by the Arbitral Tribunal,  

the appellant Corporation preferred a petition under Section  

34 of the Arbitration and Conciliation Act, 1996 which failed  

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and was dismissed by a Single Judge of the High Court but  

was allowed in part in O.S.A No. 241 of 2006 by the Division  

Bench of the High Court to the extent of deleting pendente  

lite in future interest from the award made by the Tribunal.  

Before  the  Division  Bench,  a  three-fold  submission  was  

urged on behalf of the appellant-Corporation.  Firstly, it was  

contended that the Tribunal had fallen in error in holding  

that the delay between 14th September 2001 and 21st March  

2002  was  not  attributable  to  the  respondent  company.  

Secondly,  it  was contended that the Arbitral  Tribunal  was  

not  right  in  holding  that  the  deductions  made  by  the  

appellant towards taxes was not legally permissible.  Thirdly  

it was contended that the award by the Arbitral Tribunal for  

the pendente lite and future interest was not justified.  While  

the  Division  Bench  rejected  the  first  two  contentions  the  

respondent appears to have made a statement before the  

High Court waiving  pendente lite interest and agreeing to  

the modification of the award to that extent.  The High Court  

held that the Arbitral Tribunal’s findings to the effect that  

the delay between 16th October and 21st March 2002 is not  

attributable  to  the  respondent,  was  based  on  the  

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consideration  of  the  material  placed  before  the  Arbitral  

Tribunal which called for no interference.  So also deductions  

towards  payment  of  taxes  were,  according  to  the  High  

Court, rightly disallowed by the Arbitrators.

17. The present appeal assails the correctness of the Award  

of the Arbitral Tribunal and the orders passed by the High  

Court as noticed in the beginning of this order.  

18. We have heard learned counsel for the parties at length  

who have taken us through the award made by the Arbitral  

Tribunal,  provisions of  the contract  executed between the  

parties and  the  correspondence  exchanged  between  

them.  There is no denying the fact that there was delay in  

the  return  of  the  vessel  to  the  Corporation  after  

upgradation.  In terms of the contractual time schedule the  

vessel ought to have returned to the Corporation by 9th July  

2001 which was instead returned to the Corporation only on  

6th May 2002 i.e. after a delay of 9 months and 28 days.  

Who  is  responsible  for  this  delay  is  the  essence  of  the  

dispute between the parties.   According to  the appellant-

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Corporation  the  delay  is  entirely  attributable  to  the  

respondent while according to the respondent the delay is  

attributable  to  the  appellant.   The  Arbitrators  have  after  

examining  the  material  placed  before  them  recorded  a  

finding to the effect that the delay between 10th July 2001  

and  31st March  2001  was  entirely  attributable  to  the  

respondent.   That  finding  was  not  challenged  by  the  

respondent before the High Court nor is it under challenge  

before us.  The Arbitrators have on the basis of the finding  

recorded  by  them  allowed  to  the  appellant-Corporation  

excess  engagement  charges  under  clause  14  besides  

liquidated  damages  under  clause  16  of  the  Contract  

executed between the parties.  But for the period between  

1st November, 2001 and 22nd March, 2002 which comes to 4  

months and 22 days the Arbitrators have found the delay to  

be  attributable  to  the  appellant-Corporation.  Deduction  

made by the Corporation in regard to this period has been  

faulted  by the arbitrators  and the  amount  directed  to  be  

released in favour of the respondent-Company. The award  

deals with this period and the amount deducted for the same  

in the following words:   

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“In the result we are of the opinion that except for   the period from November 1, 2001 to March 23, 2002  for  which  deduction  has  been  made  from  the  Claimant’s  invoices,  no  exception  can  be taken  for   the rest of the deduction made from the claim of the   Claimant.   The  deduction  in  relation  to  the  period   from November 1, 2001 to March 22, 2002 (4 months  + 22 days) works out to a sum of US $ 2,445,246.53   which  the  Claimant  would  be  entitled  to  from the   Respondent  together  with  interest  at  the  rate  of   indicated hereafter”.

19. The above period of 4 months and 22 days between 1st  

November,  2001  and  22nd March,  2002,  in  our  opinion,  

comprises  four  separate  intervals.  The  first  of  these  four  

intervals is the period between 1st November, 2001 and 26th  

November, 2001 which period was taken by the appellant-

Corporation  to  take  a  final  decision  whether  or  not  an  

application should be made to the U.S authorities  for  the  

issue of a licence.  The second interval comprises time taken  

by the respondent-claimant to make an application between  

27th November,  2001  and  7th January,  2002,  both  days  

inclusive. The application for grant of a license was filed by  

the respondent only on 8th January, 2002. The third interval  

comprises  time  taken  by  the  U.S  Authorities  between  8th  

January, 2002 and 7th March, 2002 to formally decline the  

issue of a license for sale of US made hydrophones to India.  

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The fourth interval comprises time taken by the respondent-

claimant  to  convey  the  decision  of  the  U.S  Authorities  

between 8th March, 2002 and 21st March, 2002. It is common  

ground  that  while  the  U.S  Authorities  had  rejected  the  

request for grant of a license on 8th March, 2002, the said  

rejection was conveyed to the appellant-corporation only on  

22nd March, 2002.   

20. From  the  findings  of  the  fact  recorded  by  the  

arbitrators  with  which  we  see  no  reason  to  interfere  or  

disagree,  it  is  evident,  that  the appellant-corporation  was  

solely responsible for the delay in taking a decision in the  

matter  between  24th October,  2001  and  26th November,  

2001.   The  arbitrators  have  found  and,  in  our  opinion,  

rightly  so  that  the  respondent-claimant  had  by  its  letter  

dated 24th October, 2001 clearly informed the appellant that  

there  was  no  use  pursuing  the  matter  with  the  U.S.  

Authorities any further. Even particulars regarding Canadian  

hydrophones were supplied to the appellant in terms of a  

letter  dated 25th October, 2001. The arbitrators have held  

that delay in taking a decision whether or not any formal  

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application should be made and a formal rejection obtained  

by the respondent was attributable only to the appellant-  

Corporation. There is, in our opinion, no legal flaw, infirmity  

or  perversity  in  that  finding  which  we  hereby  affirm.  

Deduction made by the appellant-Corporation for the First  

interval that comprises period between 1st November, 2001  

and  25th November,  2001,  both  days  inclusive,  cannot,  

therefore, be sustained and the arbitral award to that extent  

cannot be faulted.   

21. That brings us to the second interval comprising period  

between 26th November, 2001-the date when the appellant-

Corporation  issued  instructions  for  making  of  a  formal  

application for the grant of a license and 8th January, 2002-

when  such  an  application  was  actually  made  by  the  

respondent-company.  This  period  reckoned  from  27th  

November, 2001 to 7th January, 2002 works out to 42 (Forty  

two)  days  which  must  be  attributed  to  the  respondent-

claimant,  who  could  and  indeed  ought  to  have  acted  

diligently  and  with  reasonable  despatch  in  the  matter  

instead  of  taking  the  same easy,  and  if  we  may  say  so  

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somewhat reluctantly. We cannot help saying with utmost  

respect at our command for the eminence and erudition of  

the distinguished jurists comprising the Arbitral Tribunal that  

the tribunal failed to appreciate this aspect hence fell in a  

palpable  error  leading  to  miscarriage  of  justice.  The  test  

adopted  by  the  Tribunal  for  holding  the  appellant-

Corporation responsible for delay ought to have been applied  

to the respondent as well for its failure to take action in the  

right earnest instead of sitting over the matter leading to  

detention  of  the vessel  for  a period more than what was  

absolutely necessary.

22. The period between 8th January, 2002 and 8th March,  

2002  comprising  the  third  interval  during  which  the  U.S.  

authorities decided the application for the grant of a license  

has been rightly counted against the appellant-Corporation  

as it was at the instance of the Corporation that a formal  

application  was  made.  The  time  spent  by  the  U.S.  

authorities for disposal of the request could not in the facts  

and circumstances be attributed to or counted against the  

respondent-claimant who had advised the appellant against  

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any such move.  The arbitral Tribunal, therefore rightly held  

that deduction for this period was not justified.   

23. That  leaves  us  with  the  fourth  and  the  last  interval  

comprising  the  period  between  8th March,  2002  and  22nd  

March,  2002  when  the  rejection  of  the  application  was  

conveyed  to  the  appellant-Corporation.  There  is,  in  our  

opinion,  no  valid  reason  why  this  period  should  not  be  

counted  against  the  respondent,  who  could  and  indeed  

should  have  conveyed  the  rejection  to  the  appellant-

Corporation forthwith, instead of taking nearly two weeks to  

do so. To sum up; the period of 4 months and 22 days which  

the arbitrators have attributed to the appellant-Corporation  

shall  have to be reduced by 42 days comprising the first  

interval and 14 days comprising the fourth making a total of  

56  days.  Resultantly,  deduction  made  by  the  appellant-

Corporation  for  56  days  referred  to  above deserve  to  be  

affirmed, and the award made by the arbitrators modified to  

that  extent.  It  follows  that  the  amount  awarded  to  the  

respondent-Company shall  on a proportionate basis,  stand  

reduced.

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24. We may at this stage deal with the contention urged on  

behalf of the respondent that the jurisdiction of the Court to  

set aside an arbitral award being limited to grounds set out  

in Section 34 of the Arbitration and Conciliation Act, 1996,  

this  Court  ought  not  to  interfere  with  the same.   It  was  

contended that  none of  the grounds on which  a Court  is  

authorised to interfere with an arbitral award are present in  

the case at hand. Alternatively, it was contended that even if  

a contrary view is possible on the facts proved before the  

Arbitral Tribunal,  the Court cannot, in the absence of any  

compelling  reason,  interfere  with  the  view  taken  by  the  

Arbitrators as if it was sitting in appeal over the award made  

by  the  Tribunal.  Section  34  of  the  Arbitration  and  

Conciliation Act, 1996 reads :

“34. 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   

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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.”

25. It is true that none of the grounds enumerated under  

Section 34(2)(a) were set up before the High Court to assail  

the arbitral award.  What was all the same urged before the  

High Court and so also before us was that the award made  

by the arbitrators was in conflict with the “public policy of  

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India”  a  ground  recognised  under  Section  34(2)(b)(ii)  

(supra). The  expression  “Public  Policy  of  India”  fell  for  

interpretation before this Court in ONGC Ltd. v. Saw Pipes  

Ltd. (2003) 5 SCC 705 and was, after a comprehensive  

review of the case law on the subject, explained in para 31  

of the decision in the following words:

“31. 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: (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 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.”

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26. What then would constitute the ‘Fundamental policy of  

Indian Law’ is the question.  The decision in Saw Pipes Ltd.  

(supra) does  not  elaborate  that  aspect.  Even  so,  the  

expression  must,  in  our  opinion,  include  all  such  

fundamental  principles  as  providing  a  basis  for  

administration  of  justice  and  enforcement  of  law  in  this  

country.  Without meaning to exhaustively enumerate the  

purport  of  the  expression  “Fundamental  Policy  of  Indian  

Law”, we may refer to three distinct and fundamental juristic  

principles that must necessarily be understood as a part and  

parcel of the Fundamental  Policy of Indian law.  The  first  

and foremost  is  the  principle  that  in  every  determination  

whether by a Court or other authority that affects the rights  

of a citizen or leads to any civil consequences, the Court or  

authority  concerned  is  bound  to  adopt  what  is  in  legal  

parlance called a ‘judicial approach’ in the matter. The duty  

to adopt a judicial approach arises from the very nature of  

the power exercised by the Court or the authority does not  

have to be separately or additionally enjoined upon the fora  

concerned.   What  must  be  remembered  is  that  the  

importance of Judicial approach in judicial and quasi judicial  

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determination lies in the fact so long as the Court, Tribunal  

or the authority exercising powers that affect the rights or  

obligations  of  the  parties  before  them  shows  fidelity  to  

judicial approach, they cannot act in an arbitrary, capricious  

or  whimsical  manner.  Judicial  approach  ensures  that  the  

authority acts bonafide and deals with the subject in a fair,  

reasonable and objective manner and that its decision is not  

actuated by any extraneous consideration.  Judicial approach  

in that sense acts as a check against flaws and faults that  

can render  the  decision  of  a  Court,  Tribunal  or  Authority  

vulnerable to challenge.  In Ridge v. Baldwin [1963 2 All   

ER 66],  the House of Lords was considering the question  

whether a Watch Committee in exercising its authority under  

Section  191 of  the  Municipal  Corporations  Act,  1882 was  

required to act judicially. The majority decision was that it  

had to act judicially  and since the order of dismissal  was  

passed without furnishing to the appellant a specific charge,  

it was a nullity. Dealing with the appellant’s contention that  

the Watch Committee had to act judicially, Lord Reid relied  

upon the following observations made by Atkin L.J. in [1924]  

1 KB at pp. 206,207:

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“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  King’s  Bench  Division   exercised in these writs.”

27. The  view  taken  by  Lord  Reid  was  relied  upon  by  a  

Constitution Bench of this Court in A.C. Companies Ltd vs.   

P.N.  Sharma  and  Anr.  (AIR  1965  SC  1595) where  

Gajendragadkar, C.J. speaking for the Court observed :

“In other words, according to Lord Reid’s judgment,   the  necessity  to  follow  judicial  procedure  and  observe the principles of natural justice, flows from  the  nature  of  the  decision  which  the  watch  committee  had  been  authorised  to  reach  under   S.191(4). It would thus be seen that the area where   the principles of natural justice have to be followed  and  judicial  approach  has  to  be  adopted,  has   become wider and consequently, the horizon of writ   jurisdiction  has  been  extended  in  a  corresponding   measure.  In  dealing with  questions  as  to  whether   any impugned orders could be revised under A. 226   of our Constitution, the test prescribed by Lord Reid   in  this  judgment  may  afford  considerable   assistance.”

28. Equally important and indeed fundamental to the policy  

of  Indian law is  the principle  that  a Court  and so also a  

quasi-judicial  authority  must,  while  determining the rights  

and obligations of parties before it, do so in accordance with  

the principles of natural justice. Besides the celebrated ‘audi  

alteram partem’ rule one of the facets of the principles of  

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natural  justice  is  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.  

Non-application  of  mind  is  a  defect  that  is  fatal  to  any  

adjudication.  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.  The  requirement  that  an  

adjudicatory authority must apply its mind is, in that view,  

so  deeply  embedded  in  our  jurisprudence  that  it  can  be  

described as a fundamental policy of Indian Law.

29. No less important is the principle now recognised as a  

salutary  juristic  fundamental  in  administrative  law  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. Perversity or irrationality of decisions is  

tested  on  the  touchstone  of  Wednesbury’s  principle  of  

reasonableness. Decisions that fall short of the standards of  

reasonableness are open to challenge in a Court of law often  

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in  writ  jurisdiction  of  the  Superior  courts  but  no  less  in  

statutory processes where ever the same are available.  

30. It is neither necessary nor proper for us to attempt an  

exhaustive  enumeration  of  what  would  constitute  the  

fundamental policy of Indian law nor is it possible to place  

the expression  in  the straitjacket  of  a  definition.  What  is  

important in the context of the case at hand is that if  on  

facts  proved  before  them the  arbitrators  fail  to  draw  an  

inference which ought to have been drawn or if they have  

drawn an  inference  which  is  on  the  face  of  it,  untenable  

resulting  in  miscarriage  of  justice,  the  adjudication  even  

when made by an arbitral tribunal that enjoys considerable  

latitude and play at the joints in making awards will be open  

to challenge and may be cast away or modified depending  

upon whether the offending part is or is not severable from  

the rest.   

31. Inasmuch as the arbitrators clubbed the entire period  

between  16th October,  2001  and  21st March,  2002  for  

purposes  of  holding  the  appellant-Corporation  responsible  

for  the  delay,  they  committed  an  error  resulting  in  

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miscarriage of justice apart from the fact that they failed to  

appreciate and draw inferences that logically flow from such  

proved facts. We have, therefore, no hesitation in rejecting  

the contention urged on behalf of the respondent that the  

arbitral award should not despite the infirmities pointed out  

by us be disturbed.  

32. That brings us to the last submission that deduction on  

account of taxes not paid should have been allowed by the  

respondent-arbitral  tribunal.  The  Tribunal  has,  in  our  

opinion,  correctly  held  that  no  part  of  the  work  was  

undertaken outside Singapore which was to be executed on  

a turnkey basis  for  a price  that  was pre-determined.  The  

arbitrators have, in our opinion, rightly held that no taxes  

were  payable  under  the  Indian  Income tax  Act  so  as  to  

entitle  the  Corporation  to  deduct  any  amount  on  that  

account  by  reason  of  non-payment  of  such  taxes.  The  

challenge  to  the  award  to  that  extent  must  fail  and  is,  

hereby, rejected.  

33. In  the  result,  we  allow  this  appeal  but  only  to  the  

extent that out of the period of 4 months and 22 days which  

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the arbitrators have attributed to the appellant-Corporation  

a period of 56 days comprising 42 days of the first interval  

and 14 days of the second referred to in the judgment shall  

be reduced.  Resultantly, deductions made by the appellant-

Corporation  for  the  said  period  of  56  days  shall  stand  

affirmed and the award made by the arbitrators modified to  

that  extent  with  a  proportionate  reduction  in  the amount  

payable to the respondent.  No costs.

…......………………………….…..…J.     (T.S. THAKUR)

     .…………………………..……………..J.      (C. NAGAPPAN)

..…………………………..…………….J. (ADARSH KUMAR GOEL)

New Delhi September 4, 2014

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