Award dt. 06.09.

2013 (Pg 2 of OMP/PD)

Summary of the SoC: By ISPAT

Claimants operate a Sponge Iron and Hot Rolled Coil Plant in Dalvi, Raigarh –
Maharashtra.
For Sponge Iron, the basic ingredient of Hot Rolled Coil Plant, the Claimant
required natural gas in large quantity.

Accordingly, Claimant entered into a contract with GAIL for continuous supply of
gas on 10.09.1991.
Gas was to be supplied as per requirement subject to a maximum of 1.00 MSCM
Cl. 5 per day, provided that during the first year of gas supply, the Claimant would give
a quarterly forecast of the quantity of gas required for each one month in advance.

Cl. 4 Clause 4 provided for Transportation Costs (charges)

Subsequently, a supplementary Agreement dt 30.03.1998 was entered into

incorporating fresh provisions especially w.r.t transportation charges and a fixed
cost of Rs. 38,67,600/= p.m. was decided to be paid.

It is a matter of record that the Respondent failed to supply contracted quantity of

gas.

Thereafter for additional quantity of gas, a Tripartite Agreement dt. 21.12.1999

was entered into through which an existing agreement with Kalyani was assigned
to ISPAT, i.e, Claimants herein.

While agreed quantity of gas was not supplied, GAIL has raised invoices for fixed
transportation charges under both the above contracts.
Claimant claims to have made several representations for this including one dt.
05.06.2002 which was given an evasive reply dt. 15.07.2002 by the Respondent.

Claimant submitted that they are entitled to a proportionate reduction of fixed

transportation charges on account of short supply of Gas.

It said that: b/w April 1995 to July 2003, Claimants paid Rs. 58, 70, 22, 196 by
way of Fixed Transportation costs and also that the Respondent had recovered its
cost of laying the pipelines.

Collection of Fixed TC was illegal w/o supply of 1.00 MSCM.

It claimed to be compensated by GAIL.

The Claim thus contained:

 Refund of T.C. in excess of amount payable proportionate to Gas Supply.
 Sum of Rs. 701.60 loss of profit (1.4.1995 to 31.7.2003)
 Sum of 55 Cr. for loss for wrong collection of fixed TC.
 Sum of 40 Cr. for its expansion.

Summary of SoD:
 Claims are barred by limitation and not arbitrable.
 Post signature of Supplementary Agreement (30.03.98) all disputes deemed
to have been waived.
 Supply started in 1994, Claimant raised disputes relating to collection of
excess transportation charges only in 2000 (any claims prior to 3 years if
the date of commencement of arbitration are barred by limitation).
 Parties agreed for fixed transportation charges under the 1998 contract in
place of a variable charge under the 1991 contract, therefore collection of
the same is lawful.
  Claimant entered into the Tripartite Agreement after fully knowing the gas
supply position of India.
 GAIL has made huge investments for construction and maintenance of
pipeline system.

Transportation of HBJ (Hazira – Bijapur – Jagdishpur) pipeline fixed by the

government.
In cases of non-HBJ customers like ISPAT Industries, transportation charges are
worked out by GAIL on the basis of following parameters:
 Cost in laying the pipeline, installation of terminal devices, flow metres etc.
 Cost of safety devices, telecommunication charges etc.
 Projected cost likely to be incurred in maintenance of the infrastructure laid.

Pg. 7 All consumers were conscious of the short supply of gas and entered into contracts
OMP/PD
with negotiations and full knowledge of government control, regulation, and supply
position.

The Economic theory of having a fixed monthly transportation/service charge is

that all the above costs must be paid for even if the pipeline throughout is zero.
They are intended to recoup the transaction cost of gas marketing and facilitate
the maintenance and development of network.

The Claimant entered the first agreement + second agreement within the
knowledge of the claimant that natural gas is a scarce resource, hence gas is
allocated by Gas Linkage Committee (GLC) which allocates gas out of projected
availability.

Claimants are obliged to pay the agreed fixed transportation charges of Rs. 38, 67,
Pg. 8 600 p.m.
OMP/PD
Also, 80% of maximum quantity agreed was always supplied. (Ann A of SOD)

Claimant was not entitled to any refund.

Rejoinder (Not available on record)
Disputes all contentions of the Respondent (Pg. 9 OMP/PD)

(Pg. 9 OMP/PD) ‘16’ issues were framed on 16.04.2004.

Issue 2-3 in favour of GAIL:

2/3 : Whether the Respondent was justified in not supplying contracted qty. of
Gas to the Claimant? If no, to what effect?

Does the Respondent prove that under terms of the Contract, the extent of supply
to the Claimant of gas was dependant upon the availability of gas at the material
time as well as upon direction of the GoI at that point of time.

Issue no 4 AGAINST GAIL

“Is the Resp. entitled to claim transportation charges from the Claimant even
during the period of short supply or no supply?”

Issue no 5 AGAINST GAIL

Does the Respondent prove that the Claimant raises the objection in regard to
transportation charges for the first time in the year 2000? If yes, what is the effect

Issue no. 6 AGAINST GAIL

Does the Respondent prove that on execution of the supply agreement dated
30.03.1998 all the claims prior thereto stand extinguished?

Issue 11 AGAINST GAIL

Does the Respondent prove that the Claimant is stopped from complaining about
the levy of transportation charges because throughout the contract period and
even upto date and even post tri-partite agreement right upto 2000 they never
disputed charges recovered/levied by the Respondent.

Discussion on all issues in detail from Pg. 10 -74 OMP/PD

OMP challenges the award dt. 06.09.2013
Sum awarded: 14.67 Crores with pendente lite interest @6% p.a. from
29.12.2000 till date.
If petitioner fails to satisfy the award within 3 months interest @18% from
the date of award.

Contentions in the award:

Award is self contrary, inconsistent and strikingly contrary to the agreement
entered into b/w the parties.

Issues 2&3 were decided in favour of GAIL on the basis that in view of the
Government’s policy, GAIL was justified in not supplying the contracted quantity
of gas to the Claimant.

The force majeure clause was also attracted in favour of the respondent.

However,
Issues no. 4&5 where decided against GAIL by ordering refund of fixed
transportation charges on account of short supply of gas.

Three judgments have wrongly been distinguished:

1. The Amalgamated Electricity Co limited v/S The Jalgaon Borough Municipality
1975 (2) SCC 508
2. Bihar State Electricity Board Patna v/s Green Rubber Industries (1990) 1 SCC
731
3. Andhra Steel Corporation Limited v/s Andhra Pradesh Electricity Board 1991
(3) SCC 263

The arbitral tribunal further found that Article 10 does not exempt the claimant
from its performance.
However interpreted article 4.03 (available at page 98 of OMP/PD) contrary to its
plain language on ‘business efficacy’ and ‘partial failure of consideration.’

Rule of business efficacy cannot be pressed into service to rewrite the clauses of a
contract.

The theory of Partial failure of consideration has also been invoked without any
basis.

*** ‘Para M’ ‘Page 13 OMP’

GAIL is supplying bundled gas i.e. gas together with gathering, transportation,
and delivery services. The buyer will thus have to pay for the entitlement bundle =
gas (commodity) + transportation & services.

Fixed monthly transportation/service charge is that all the costs above must be
paid for even if pipeline throughout is zero. The transportation charges and
monthly service charges are intended to recoup the transaction cost.

Respondent after having used the supplied gas for 10 years being aware of the gas
market in India, has allegedly raised the issue of fixed transportation costs
charged.

16 issues framed. Pg. 14-16 OMP

Issues 4,5,7,8 against GAIL.
(Pg.17-18 OMP)
On 4&5: Held that GAIL cannot claim full transportation/service charge from the
claimant during period of short supply.

Refund: 14.67 crores owing to reduction in supply of gas and its proportionate
impact on transportation/service charges.
Issue 6: claimant not estopped from claiming a proportionate reduction in the
transportation costs for short supply during the period between June 1994 to Jan
2003.

Issue 7: Claims not barred by time since the invoices continued to be provisional.

Issue 8: Invoices not final, thus claim was within time.

Grounds of challenge (Page 19-26 OMP)
 Claim barred by limitation.
 Any claim more than three years prior to the date of commencement of
arbitration barred.
 Invoices are not provisional.
Invoices were to be paid within two days of presentation and as per article
12.03 of the 1991 agreement, which permitted dispute to be raised within
14 days, resolution within 30. This implied after 45 days no bill remains
provisional. In any event they become final at the end of the financial year.
 Claimant having signed three agreements cannot link the same to supply of
gas.
 Not possible to segregate and pinpoint amounts recovered towards each
component.
 Claimant Estopped from raising disputes prior to 30.03.1998 Since
transportation charges were fixed with retrospective effect and a credit note
was issued for a sum of rupees 4, 22, 33, 753.00,
 80% of quantity had been supplied.
 contract does not contemplate downward revision of transportation/ service
charge.
 Payment of fixed monthly transportation charges not linked to actual
supply of gas.
 Three cases wrongly distinguished.
 Even in applying 2 alternative methods of determining issues.
 Business efficacy cannot be pressed into service to rewrite the contractual
clauses.
 Arbitral tribunal has rewritten the contract.