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PROJECT REPORT ON

Oil & Natural Gas Corporation Limited v. Saw Pipes:


An Analysis

SUBMITTED TO:
Ms. Tulika Shree
(Faculty Member in Law)
SUBMITTED BY :
Akshay Kr. Mankar
Roll No.: 16 Section C
Semester VI
(B.A., L.L.B (Hons.))

Date of Submission: 15 -02-2016


(2015-2016)

Hidayatullah National Law University


Uparwara Post, Abhanpur, New Raipur 493661 (C.G.)

Declaration

The researcher hereby declares that the project work entitled Oil and Natural Gas
Company v. Saw Pipes: An Analysis submitted to Hidayatullah National Law University,
Raipur, is a record of an original work done by the researcher under the guidance of Ms. Tulika
Shree, faculty member of Law, Hidayatullah National Law University, Raipur.
The research done by the researcher is his own work and wherever excerpts from the
works of different authors have been taken, they have been duly acknowledged.

_____________________
Akshay Kumar Mankar
ROLL NO. 16, Section C
Semester VI

Acknowledgement

First and foremost, I would like to thank my Faculty of Law, Ms. Tulika Shree for offering this
subject, Oil & Natural Gas Company Limited v. Saw Pipes: An Analysis, and for her valuable
guidance and advice. She inspired me greatly to work in this project. She also helped me in
improving the perception regarding to the study of the topic in its vast resources and in a broader
way clearing all the doubts and uncertainty towards this project. Therefore, I want to thank her
for all his efforts and cooperation which she conferred me.

I also owe my gratitude towards University Administration for providing me all kinds of required
facilities with good Library and IT lab which helped me in making the project and completing it.
My special thank to Library Staff and IT staff for equipping me with the necessary data and
websites from the internet.

I would also like to thank my dear colleagues who had helped me a lot creating this project with
their ideas and thoughts over the topic. They act as a motivating and guiding force to me during
the making of this project.

_____________________
Akshay Kumar Mankar
ROLL NO. 16 SECTION: C
Semester VI

Table of Cases

ONGC v Saw Pipes1


Centrotrade Minerals &Metals Inc. vs. Hindustan Copper ltd.2
Shri Lal Mahal Ltd. Vs. Progetto Grano Spa.3

1 AIR 2003 SC 2629


2 2006 (3) Arb LR 201 SC: (2006) 11 SCC 245: [2006] Supp. (2) SCR 146.
3 2013 (3) Arb LR 1: 2013 (8) SCALE 489
4

Contents

Declaration........................................................................................................................................i
Acknowledgement..........................................................................................................................ii
Table of Cases................................................................................................................................iii
Introduction......................................................................................................................................1
Research Methodology....................................................................................................................2

1.
2.
3.
4.

i.
Statement of Problem.....................................................................................................2
ii.
Aims and objectives.......................................................................................................2
iii.
Scope & Limitation.......................................................................................................2
iv.
Hypothesis..................................................................................................................2
v.
Research Questions........................................................................................................3
vi.
Methodology..............................................................................................................3
vii.
Mode of Citation.........................................................................................................3
Understanding the case..............................................................................................................4
Principles Established.............................................................................................................6
Critical Appraisal.....................................................................................................................9
Ramification of Case............................................................................................................11

Conclusion.....................................................................................................................................14
References..................................................................................................................................15

Introduction
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The case ONGC v Saw Pipes4 arose out of a challenge to an arbitral award rendered with regard
to a dispute relating to supply of equipment for off shore oil exploration by the respondent. The
case was heard by M.B Shah and Arun Kumar JJ. The judgment was written by Shah J. The case
involves application of Section 34 of the Arbitration and conciliation Act of 1996 and a very
important issue of the public policy. This issue has been the focus of the case. This case is
considered as a landmark decision.
Though there are many articles available on the internet about the landmark principles
established by this case, and most of the books have mentioned this case, there is unavailability
of a critical analysis done with regards to this case. There is a need of dealing with this case as a
subject of critical analysis and bring forth the explanations regarding the ratio of this case.
Further, the principles established by this case have not been analysed critically.
The lack of satisfactory research and work with respect of this case leaves a big gap in terms of
understanding this case, and getting hold over the concept of principles established. As a result,
there is confusion when it comes to deducing the concept and application of it.
This study aims to not only critically analyse the judgment and the principles established, but
also the critics that rose and the implications of the case in the legal development.

4 AIR 2003 SC 2629


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RESEARCH METHODOLOGY

STATEMENT OF PROBLEM
In India, the existing research works fail to have satisfactorily dealt with this case and have
critically analysed the legal principles established by it.
AIMS AND OBJECTIVES
The primary aim of this research work is to critically analyse the judgment given in the case of
ONGC ltd. V. Saw Mills and highlight the developments made in the legal system by the
principles of law established by the Court in this judgment. Also, it is intended by the researcher
to look into its impact on the later judicial decisions on the same matter.
SCOPE AND LIMITATIONS
The center of focus in this case being public policy, the concept of which has developed all over
the world in different legal systems, this study has limited itself to the application of the concept
in the Indian framework only.
OBJECTIVES
1. To study the case and analyse the judgment..
2. To critically analyse analyse the legal principles established in the judgment.
3. To study the criticisms hat arose against the judgment and analyse them.
4. To understand the post- judgment impact, its relevance and importance.

HYPOTHESIS
It is hypothesized by the researcher that the judgment given by the court in this case, though
criticised, but is relevant and established a very important principle in the legal system which has
been followed by the court.

RESEARCH QUESTIONS

1. What is the background of the case and what were the issues rose and the judgment of the
court?
2. What are the legal principles established by this judgment in the Indian legal framework?
3. Who was the judgment viewed by the contemporary jurists and scholars?
4. What is the relevance and importance of the judgment, if any?

METHODOLOGY
Doctrinal (Non-Empirical) Method of Research has been relied upon for conducting the
research. For the purpose of research Encyclopaedias, Books, Case laws etc have been relied
upon.

MODE OF CITATION
A uniform system of NLS citation has been adopted throughout the project.

Chapter1. Understanding the case


Facts
Oil and Natural Gas Commission had placed an order on Saw Pipes for supply of equipment for
off shore exploration, to be procured from approved European manufacturers. The delivery was
delayed due to general strike of steel mill workers in Europe. Timely delivery was the essence of
the contract. ONGC granted extension of time, but it invoked the clause for recovery of
Liquidated Damages by withholding the amount from the payment to the supplier. ONGC
deducted from the payment $3,04,970.20 and Rs 15,75,557 towards customs duty, sales tax and
freight charges. Saw pipes disputed the deduction and matter was referred to arbitration. While
the arbitral tribunal rejected Saw Pipes defence of force majure, it required ONGC to lead
evidence to establish the loss suffered by breach and proceed to hold, in absence of evidence of
financial losses, that the deduction of Liquidated damages was wrongful. The award was
challenged by ONGC; inter alia as being opposed to public policy ONGCs case was that the
arbitral tribunal failed to decide the dispute by not applying the prevailing substantive law,
ignoring the terms of the contract and customary practices of usage of trade in such transactions.
ONGC challenged the award as being patently illegal. The single judge and division bench of
Bombay High Court dismissed the challenge. The Supreme Court set aside an arbitration award
directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages
retained by it while making payment to the company.

Issues Raised
1) Whether ONGC had the right to Liquidated Damages.
2) Whether Patent illegality could be used as a ground to assail the award under section 34.

Decision Of The Supreme Court

The Honble Court first extensively discussed the courts jurisdiction to set aside an award under
Section 34 of the Arbitration and Concilliation Act 1996 and the various grounds on which
interference was permissible. The Honble Court first extensively discussed the courts
jurisdiction to set aside an award under Section 34 of the Arbitration and Concilliation Act 1996
and the various grounds on which interference was permissible. Passing over to the question of
damages, the Honble Court opined that when the words of the contracts are clear, there is
nothing that the court can do about it. If the parties had agreed upon a sum as being preestimated genuine liquidated damages there was no reason for the tribunal to ask the purchaser to
prove his loss.
It further opined that when the court concludes that stipulation for damages is by way of penalty,
it can grant reasonable compensation upon proof of damage. However, where an agreement has
been executed by experts in the field, the court should be slow to construe a clause providing for
liquidated damages as penalty. At paragraph 49, citing Maula Bux v Union of India5 (the court
concludes that this is especially true where the court is unable o assess compensation or such
assessment is fraught with difficulties. In such cases the burden of proof would be on party who
contends that the stipulation amount is not reasonable. There was no such contention raised in
the instant case. As regards forfeiture, after considering its decision in Union of India v Rampur
Distellery the court states the forfeiture clause can be construed either as liquidated damages or
as a penalty, depending on the reasonableness of the amount to be forfeited.
Therefore, as regards Liquidated Damages and penalties, the primary conclusion of the court
appears to be that Liquidated Damages should be regarded as reasonable compensation, while
penalties should not. Further, it also appears to have concluded in case of penalty damages will
have to be proved. The Honble Court reaffirms that no compensation at all be awarded if the
court

concludes

that

no

loss

is

likely

to

occur

because

of

the

breach.

The court took the view that the appellant had rightfully deducted the amount of liquidated
damages from the amount claimed by the respondent, and it was not necessary for the appellant
5 AIR 1970, SC 1955
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to prove the loss suffered by it in view of the provisions in the contract for the payment of
liquidated damages, and the impugned award thus suffered from patent illegality and was,
therefore liable to be set aside on the ground that the patent error of law was included in the
ground of public policy.

Chapter2. Principles Established

Patent Illegality used as a ground to assail the award under section 34.
The court held that the jurisdiction or the power of the arbitral tribunal is prescribed under the
Act and if the award is de hors the said provisions, it would be, on the face of it, illegal. The
legislative intent could not be that if that the award is in contravention of the provision of the
Act, however, the court could still not set it aside. The decision of the tribunal must be within
bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the
tribunal can not act in breach of some provisions of substantive law or the provisions of the Act.
If the tribunal has not followed the mandatory provisions of the Act it would mean that it has
acted beyond its jurisdiction and thereby the award would be patently illegal which could be set
aside under section 34.

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The Honble Court interpreted patent illegality as meaning any violation of the substantive law
in force in India, or as an award opposing the terms of the contract. It also laid down guidelines
to determine reasonable compensation with reference to Section 74 of the Indian Contract Act.
The article also highlights the shift in the interpretation of public policy from the Renusagar to
the Saw Pipes case. In the former, the narrow view of public policy was adopted, requiring
something more than the violation of the law. The wider connotation adopted in the latter, might,
however, flood the courts with challenges to awards suffering from negligible legal defects. The
in definability of the public policy concept makes it all the more likely to be misused.
The court further clarified that an award is patently illegal if the illegality goes to the root of the
matter. The Court restricted its holding to circumstances where the contractual agreement runs
contrary to an explicit and well defined public policy, as demonstrated by the positive statutory
law of India, rather than on general consideration of public interest.

Concept of Public Policy Expanded


The Arbitration and Conciliation Act 1996, was conceived by the compulsions of globalization
leading to adoption of the United Nation Commissions on International Trade Law (UNCTRAL)
model law. This Act is by and large an integrated version of the 1940 Act which governed
domestic arbitration, The Arbitration (protocol and convention) Act, 1937 and the foreign award
(recognition and enforcement) Act, 1961 which governed into arbitral awards. Apparently
chapter I VIII of the UNCTRAL are replicas of Chapter I VII of the Part I of the 1996 Act,
with the difference that in UNCTRAL the provisions are called Article whereas under the act
they are called section. The main objectives set out in the statement of objects and reasons of
1996 Act are- to minimize the supervisory role of courts in arbitral process and to provide that
every final arbitral award is enforced in the same manner as if it were a decree of the court
Public Policy is that principle of law which holds that no subject can do, which has a tendency to
be injurious to the public or against the public good, which may be termed as it sometimes has
been policy of the law or public policy in relation to administration of the law. Public Policy

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connotes some matter which concerns public good and public interest. The concept of Public
Policy varies from time to time.
The judgment expanded the concept of Public Policy to add that the award would be contrary to
public policy if it is patently illegal. An earlier Supreme Court decision of a three judge (larger
bench) bench, in the case of Renu Sagar Power Co v General Electrical Corporation 6 had
construed the ground of public policy narrowly as confined to the fundamental policy of Indian
Law or the interest of India or justice or morality.
While analyzing the ratio of Renusagar case, the court held that it was to be understood in the
context of foreign award. The ratio of Renusagar could not be applied while interpreting section
34(2)(b)(ii) of the 1996 Act, though applicable in case of challenge to foreign awards. It was
observed that section 48(2)(b) was liable to be construed differently having regard to the concept
of double exquator recognized in the context of a challenge to foreign awards.
The Supreme Court specifically stated the phrase public policy of India used in section 34
context is required to be given wider meaning. It can be stated that a 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, and that has varied from time to time. However, the award which is, on the face of it,
patently in violation of statutory provisions cannot to be said to be in public interest. Such
award/judgement/ decision is likely to adversely affect the administration of justice. Hence, in
addition to narrower interpretation given to the term public policy in Renusagars case, which
was in context of a foreign award, it is required to be held that the award could be set aside if its
patently illegal. The award could now be set aside, if it is contrary to:(i)
(ii)
(iii)
(iv)

Fundamental policy of Indian law; or


The interest of India; or
Justice or morality; or
In addition, if it is patently illegal.

6 AIR 1994 SC 860


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Chapter3. Critical Appraisal


This decision has provoked considerable adverse comments. A common criticism of the Saw
pipe judgment is that it has erroneously expanded the meaning of public policy in India, which
was given a narrow interpretation in the Renusagar case 7, although in a case of foreign award
under the repealed foreign awards (Recognition and Enforcement Act) Act of 1961. The decision
of the two judges Bench in ONGC has bypassed the ruling of the three judges Bench of Supreme
Court in the Renusagar case. It has been criticized for both judicial indiscipline and violation of
the binding precedent of a larger Bench. While the Bench in Renusagar case held that the term
public policy of India was to be interpreted in a narrow sense, the Division Bench went ahead
not considering the prior precedent and expanded the same to such an extent that arbitral awards
could now be reviewed on their merits. This is a huge step backwards in laws relating to alternate
dispute resolution in the era of globalization.
The gravamen of all the comments is that this case has set the clock back to the pre 1996 era,
when parties could challenge arbitral awards on the grounds of error of law apparent on the face
of the award. The purport of UNICITRAL Model Law a priori of the 1996 Act, was to leave that
era behind. The decision of Supreme Court in Renusagar case gave a narrow meaning to the
expression Public Policy of India by confining judicial intervention with an arbitral award only
to the three reasons set forth in it. These reasons hitherto have been treated as exhaustive and
incapable of expansion.
Mr Fali. S. Nariman, one of the greatest lawyers of our generation, remarks8 on the judgments as
having virtually set at naught the entire Arbitration and Concillation Act of 1996.To have
introduced by judicial innovation a fresh ground of challenge and placed it under the head of
public policy was first contrary to the established doctrine of precedent. The division of 3 judge
bench binding on a bench of 2 judges. It was also contrary to the plain intent of the 1996 the new
need of finality in alternative method of dispute resolution without court interference.
7 (1994) Supp 1 SCC 644 at p. 671, para 33.
8 From transcript of speech delivered by Mr. F. S. Nariman at the inaugural session of Legal Reforms in
Infrastructure, New Delhi, 2 May, 2003 quoted in Kachwaha, Sumeet, The Indian Arbitration Law :
Towards a New Jurisprudence, Int. A.L.R. 2007, 10(1), 13-17
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The most common criticism of the ONGC case is that it has widened the scope of judicial
intervention which is contrary to Section 5 which provides that no judicial authority shall
intervene, except where so provided in Part-1.9
The contra view in favour of ONGC is that there is no rational justification to fault ONGC
merely because it had added one more head to thos who set forth in accordance with the
substantive law in force in India, as is explicitly provided in the section 28 (1) (i) of the act.it is
relevant to note here that the three heads set ou in Renusagar were stated by the court for the
first time.10
Before this, the parameters of public policy were not demarcated, by the same logic, there is no
justification to fault ONGC because another bench has added one more head to the three already
existing as required by the situation.

9 O.P.Malhotra. the Law & Practice if Arbitration; Third Edition, 2014. Pp. 1360..
10 The three heads stated in Renusagar were taken from Cheshire and North, Privste International Law,
12th Edition, pp. 131-133.
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Chapter4. Ramification of the Case


The Supreme Court in Saw Pipes confined the expansion of public policy to domestic awards as
an earlier larger bench decision of the court in case of Renusagar Power Co vs General
Electricals11 had construed narrowly this ground as limited to fundamental policy of Indian Law.
The Saw pipes judgment has come in for sharp criticisms from several quarters . Read literally,
the judgment sets the clock back to the old position where an award could be challenged on merit
and indeed renders the court as a court of appeal. the judgement was followed by two judge
bench of the Supreme Court in Centrotrade Minerals &Metals Inc. vs. Hindustan Copper ltd. 12 It
was held that the doctrine of Public Policy must be held to be ground for setting aside as
arbitration agreement and consequently an award.
The judgement of ONGC v. Saw Pipes has now been affirmed by a three judge bench in the case
of Shri Lal Mahal Ltd. Vs. Progetto Grano Spa. 13 In para 26 of this judgement, the court held that
insofar as proceedings for setting aside an award under section 34 is concerned, the principles
laid down in Saw pipes would govern the scope of proceedings foe setting aside an award under
section 34 is concerned, the principles laid down in the Saw Pipes would govern the scope of
proceedings.
It also finds support in comments of two eminent commentators Michael Hwang and Amy Lai in
the following language14:

11 (1994) Supp 1 SCC 644 at p. 671, para 33 :AIR 1994 SC 860: 1994 (2) Arb LR 405 (SC)
12 2006 (3) Arb LR 201 SC: (2006) 11 SCC 245: [2006] Supp. (2) SCR 146.
13 2013 (3) Arb LR 1: 2013 (8) SCALE 489
14 Michael Hwang and Amy Lai, Do Egrigious Errors Amount to a breach of Public Policy? The Journal
of the Chartered Institute of Arbitrators, Vol. 71, (February 2005), pp. 1-24
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Public policy is a ground for challenge has been historically viewed with much skepticism,
often for good reason. While we do not advocate that it be used as catch-all provision to be
applied whenever convenient, it should be available for attacking awards that are fundamentally
flawed. To allow such awards to stand, uncorrected would undermine confidence in the integrity
of the arbitral process. A supervisory or enforcing court should not second- guess a tribunal, and
the risk of arbitral error is inherent in the acceptance of the process. However, parties do not
bargain for a perverse and manifest error that calls out for correction. To ignore suc errors would
be to accept that the arbitral process can condone miscarriage of justice.

Some judicial decisions have tried to reign in this effect of Saw Pipes. One instance of this is the
Supreme Court decision in case of McDermott International vs. Burn Standard Co Ltd. Where
the court somewhat read down Saw Pipes. It held that- 1996 Act makes provision for
supervisory roles of courts, for the review of the arbitral award only to ensure fairness.
Intervention of the court is envisaged. In few circumstances only, like in case of fraud or bias by
the arbitrators, violation of natural justices etc. The court can not correct the errors of the
arbitrators. It can only quash the award leaving the parties to begin the arbitration again if it is
desired. So, the scheme of this provision aims at keeping the supervisory role of the court at
minimum level and this can be justified as parties to the agreement make a consciousness
decision to exclude the courts jurisdiction by opting for arbitration as they prefer the expediency
and finality offered by it.
Commenting on Saw Pipes it held We are not unmindful that the decision of this court in
ONGC had invited considerable adverse comments but the correctness or otherwise of the said
decision is not in question before us. It is only for a larger bench to consider the correctness or
otherwise of the said decision the said decision is binding on us and has been followed in many
cases.

Parliamentary Arbitration and Concilliation (Amendment) Bill, 2003


In light of the criticisms (as mentioned above) the Legislature has introduced in the parliament
Arbitration and Conciliation (amendment) Bill, 2003 in order to clarify that public policy does
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not have extended meaning as given by the Supreme Court in ONGC v Saw Pipes. To remove
doubts, the bill provides an explanation to the words contrary to public policy in section 34 to
mean contrary to :i) Fundamental Policy of India
ii) Interests of India or,
iii) Justice and morality, thus retaining the meaning given by Supreme Court in Renusagar Power
Co Ltd v General Electrical Co.
This can be seen as a positive step in Arbitration law of India for future cases. This Bill was
withdrawn later but again in 2007 it was brought up and its implementation is yet to be done.

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Conclusion

From the above study, it could be fairly understood that the case of ONGC ltd v. Union of India
is quite relevant and important. It basically established the two legal principles. First being the
patent illegality as a ground to assail award under section 34 of the Arbitration and Conciliation
Act 1996 and second being expansion of the ambit of the public policy. As in succeeding judicial
decisions, the judiciary did not deviate from the stand took in this case, and the fact that
Parliamentary Arbitration and Counciliation Bill, 2003 has not being implemented yet leaves us
with the conclusion that the decision of the court is still standing. Thus, the judgment is not only
relevant, but important as well.

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References:
Books:
The Indian Arbitration Law: Towards a New Jurisprudence, Int. A.L.R. 2007
O.P.Malhotra. the Law & Practice if Arbitration; Third Edition, 2014
Cheshire and North, Privste International Law, 12th Edition
Michael Hwang and Amy Lai, Do Egrigious Errors Amount to a breach of Public Policy? The
Journal of the Chartered Institute of Arbitrators, Vol. 71, (February 2005),

Websites:
www.indiakanoon.com
www.legalservices.com
www.jsotre.com

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