Case study

Corporation vs. M/s WG Inc Ltd

The Corporation is engaged in the business of drilling and exploration of oil and natural
gases. In Nov, 1999, the appellant invited offers for technical upgradation of Seismic Survey
Vessel, (hereinafter 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 without stipulating the national origin of such
hydrophones.
In response to the tender notice respondent-M/s WGInc., 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 M/s WG Inc. in whose favour the appellant-Corporation eventually
awarded a contract via letter dt 10th Oct, 2000 duly accepted by the M/s WG Inc.on 25th
October, 2000. The Vessel was resultantly handed over to M/s WG Inc. on 10th April,
2001 for carrying on the proposed modernisation and upgradation work. A formal contract
was in due course executed between the parties on 18th June, 2001.
“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 (due date for that purpose), because of non-obtaining of licence
from the U.S. authorities for sale of such hydrophones. The appellant-Corporation asserts
that M/s WG Inc. hadapplied to the U.S. authorities for 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.
M/s WG Inc case was that it continued its efforts to obtain a licence but was told of likely
imposition of certain onerous conditions; and its source in US had informed it that the US
authorities were not likely to grant a licence to sell hydrophones to India. Pending
application, the terrorist attack took place on 11th Sep, 2001 and M/s WG Inc.’s hope of
getting a licence for hydrophones receded further. M/s WG Inc. pleadedforce majeureand
informed the Corporation of its inability to equip the vessel with U.S. made hydrophones.
The Corporation refuted the invocation of force Majeure by its letter dated 20th Sep, 2001
and informed M/s WG Inc. that since the field season was starting shortly any further delay
in the delivery of the vessel would adversely affect its operation. M/s WG Inc. on its part
started looking for and offering alternatives to the U.S. made hydrophones and argued with
the 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 M/s WG Inc. hoped to complete
by 27th Sep, 2001. M/s WG Inc. informed the Corporation that if the Corporation accepted
the replacement, those hydrophones could be substituted for the US hydrophones within a
short time.
The Corporation said it could not accept a substitute for the contracted hydrophones and was
keen to have US made hydrophones fitted on the vessel, and asked the respondent to
continue its efforts to secure a licence from the US Government. However, since the efforts
to secure a licence from US Government were making no progress, M/s WG Inc. sought
approval of the 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 vide letter dated 10th Oct, 2001informed the Corporation that
they will not get the licence and that it had withdrawn the application. By letter dated 16th
Oct, 2001M/s WG Inc. clearly stated that it was not in a position to deliver the vessel with

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streamers containing the Geopoint Hydrophones of US make.By letter dated 21st Oct, 2001
addressed to the Corporation with a request to permit removal of US hydrophones and
replacement of Canadian hydrophones. Further information required by the Corporation was
also supplied by the respondent by its letter dated 24th Oct, 2001 with a request to the
Corporation to approve the proposed replacement.M/s WG Inc. also agreed to give
additional warranty of one year for the replaced hydrophones. By another letter dated 13th
November, 2001 the respondent assured the 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.
It was only on 23rd March, 2002 that the Corporation 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 Corporation was the right to recover liquidated damages
(LD) and for excess engagement of vessel. 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 contract was also effected to
record the substitution of the US hydrophones by those made in Canada.
Accordingly, Corporation deducted 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
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 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 interest pendent lite at 12% p.a. from the date of the filing of the claim till
the award at the same rate.
The Corporation contested the claim made against it and alleged that hydrophones being an
important component, M/s WG Inc. 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 M/s WG Inc. 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 Corporation asserted that
M/s WG Inc. had not even applied for a licence till then and had simply asked for an
extension of time. It was only when the Corporation asked M/s WG Inc. to specify on a
realistic 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, M/s WG Inc.’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.
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 M/s WG Inc. to determine the

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 type and make of hydrophones. The terrorist attack on the twin towers was, according to the
Corporation a post-contractual period issue as the date of the delivery of the 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 M/s WG Inc. who
when called upon by the Corporation to submit the performance report of the M-2
hydrophones used in Seismic Survey Vessel PEJWAK suggested that the 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 Corporation that the US department of
Commerce had finally rejected the licence, the 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.
Questions before the Arbitrators:
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. Is Corporation entitled to both Liquidated Damages and Excess Engagement charges for the
same periods of time under the provisions of the Contract?
8. Does an appeal lie in the Court against arbitral awards? If so, can the court modify an
arbitral award?
9. Your views on the judgement.