IV Year B.A.

LLB (Div- D) – Semester-VIII (2024)

Alternative Dispute Resolution Systems

Internal Assessment II - Case Analysis
ONGC VS. WESTERN GECO INTERNALTIONAL LTD.
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NAME: KESHAV TOMAR

DIVISION: D
PRN: 20010125533
COURSE: BA LL.B. (H)
BATCH: 2020-2025
 MANU/SC/0772/2014
IN THE SUPREME COURT OF INDIA
CIVIL APPEAL NO. 3415 OF 2007
DECIDED ON: 04.0.2014

OIL AND NATURAL GAS CORPORATION LTD…...APPELLANT

VS.
WESTERN GECO INTERNATIONAL LTD…....RESPONDENT

FACTS OF THE CASE

The corporation, appellant was involved in oil and natural gas drilling and exploration sought
technical upgrades for its seismic survey vessel, MV Sagar Sandhini in November 1999 for
modernization of the ship. The conditions of tender did not specify the national origin of the
required hydrophones. The respondent western Geco International Ltd. offered to supply
“Nessie 4” streamers with “Geopoint” Hydrophones of U.S. origin. The appellant eventually
awarded the contract to Western Geco and a formal contract was signed in June 2001.

The contract specified the use of U.S manufactured Geopoint Hydrophones, which were
installed and tested. However, due to difficulties in obtaining a license from U.S. authorities
for their sale, the vessel could not be delivered on agreed date of 9 th July, 2001. While citing
force majeure respondent indicated that unforeseen events, including the terrorist attack of
9/11 had hindered their ability to obtain the necessary license. They proposed a replacement
of the U.S hydrophones with Canadian alternative, which had been tested for a similar
project. The appellant insisted on U.S. manufactured hydrophones, prompting respondent to
seek approval to replace them with Canadian ones. Despite initial resistance, appellant finally
agreed for the replacement and the vessel was delivered with Canadian hydrophones on 6 th
May, 2002.

The dispute between appellant and respondent over the deductions made by the appellant
from payment owed to respondent, including the excess engagement charges and tax related
deductions. The matter was referred to arbitration, wherein respondent claimed principal dues
and interest. The appellant contested the claim by arguing that respondent breached the
contract by failing to deliver the vessel on time with the specified U.S. Hydrophones. They
countered with invocation of force majeure, stating that their failure to obtain the necessary
license was not their responsibility. However the appellant further contended that
respondent’s delays and subsequent replacement of the hydrophones were the primary causes
of the contract’s completion timeline.

ISSUE

This appeal in Hon’ble Supreme Court arises out of a decision dated 10th, February, 2006 by a
Division Bench of the Bombay High court concerning OSA No. 24 of 2006 filed by the
appellant-corporation. The appeal was partly allowed affirming the single bench’s order with
a modification of deleting Arbitral tribunal award of pendente lite and future interest. The
issues framed by the Arbitral Tribunal were-

i. Whether the national origin of the hydrophones was a material term of the
contract.
ii. Whether the respondent was justified in refusing to allow substitution of
Canadian M-2 hydrophones for the U.S. Geopoint hydrophones.
iii. Whether the claimant’s declaration of force majeure was justified.
iv. Whether there was any delay in the performance of the contract.
v. If the claimant is entitled to damages for the delay.
vi. Whether the respondent was entitled to both liquidated damages and
excess engagement charges for the same period.

The tribunal ruled that the national origin of hydrophones was not a material term of the
contract. It held that appellant was entitled to insist on supply of the U.S. Made hydrophones
as per the contract. The tribunal rejected the force majeure claim by the respondent and
determined that the respondent had completed its obligations within the stipulated time-
frame, except for the delay after 21.10.2001, could not be attributed to the respondent. It
found certain deductions made by the appellant towards taxes were unjustified.

The appellant appealed to the High Court of Bombay against Tribunal’s decision under
section 34 of the Arbitration and Conciliation Act, 1996. The single Judge of the High Court
dismissed the petition, but it was partly allowed by the Division Bench. The appellant
contested the tribunal’s finding on the delay and deduction for taxes and the award of
pendente lite with future interest. However, while rejecting the first two contentions, the
division bench agreed to modify the award of pendente lite and interest. The High Court
upheld the tribunal’s finding on the delay and deductions for taxes. It found no grounds to
interfere with the Tribunal’s determination that the delay post 21 st, October, 2001 was not
attributable to the respondent. The High Court maintained the Tribunal's findings on the
delay and deductions for taxes.

The Apex court while hearing this appeal framed the following issues for its consideration:

1. Whether the jurisdiction of the Court to set aside an arbitral award is limited to the
grounds set out in Section 34 of the Arbitration and Conciliation Act, 1996?
2. What is the scope of the term "public policy of India" as a ground for setting aside an
arbitral award under Section 34(2) (b) (ii) of Act?
3. What constitutes the ‘fundamental policy of Indian law’ as ground for setting aside a
contravening award?

RULE

The Apex court in this case had bound itself to provide an interpretation of judicial
interference of courts with the arbitral award. The scope section 34 of Arbitration and
conciliation Act, 1996 is enumerated cautiously with contravening nature of section 5 of the
said act. The legislative intent behind limiting judicial intervention in arbitral proceedings
was explicitly articulated in Section 5 of the Arbitration and Conciliation Act of 1996. This
provision mirrors Article 5 of the UNICIRAL Model Law and is similar to the provisions
found in English arbitration law. Section 5 of the Arbitration and Conciliation Act is
introduced with a non-obstante clause, emphasizing the overriding jurisdiction of the Act of
1996 over other statutes. This distinctive feature of the section 5 underscores its significance
in ensuring a streamlined, efficient, and expeditious resolution of disputes through arbitration,
free from unnecessary complications.

In the context of this case, Section 34 of the act, provides the legal framework for challenging
an arbitral award in India. Section 34 outlines specific grounds on which a party can seek to
set aside an arbitral award made in India. The grounds for setting aside an arbitral award as
per Section 34 are:

1. Incapacity
2. Invalidity of the arbitration agreement

3. Improper notice or inability to present a case

4. Matters beyond the scope of arbitration

5. Composition and procedure

6. Conflict with public policy

The court through section 34 exonerate the concept of public policy, which includes the
fundamental policy of Indian law, the interests of India, justice, morality, and the legality of
the award. An award may be set aside if it is patently illegal or if the illegality goes to the
root of the matter. Additionally, if the award is so unfair and unreasonable that it shocks the
conscience of the court, it may be considered opposed to public policy and thus void.

ANALYSIS

The appellant in the Hon’ble Supreme Court appealed the arbitral award’s enforceability in
the Indian courts invoking section 34(2) (b) (ii) of the Arbitration and conciliation Act, 1996.
This provision allows for the annulment of awards deemed contrary to public policy. The
appellant- ONGC asserted that the award infringed upon fundamental principles of Indian
public policy, particularly highlighting concerns regarding sovereignty, national interest and
contractual freedom. In divergence, respondent contended that the arbitral tribunal
meticulously evaluated the evidence applied relevant legal principles and arrived at a
judicious decision based on the presented facts. They argued that the award should be upheld
for enforcement as it did not run counter to any Indian public policy tenets and aligned with
the standards of international arbitration.

The Supreme Court emphasizes the importance of a judicial approach and adherence to the
principles of natural justice. The court or any authority must apply its mind to the facts and
circumstances of the case and provide reasons for its decision, demonstrating that it has not
acted arbitrarily or whimsically. In addition to the well-known ‘audi alterem partem’
principle entails court to consider facts of both parties relevant for decision making must
carefully consider the relevant facts and circumstances before reaching a conclusion. The
apex court commented that “it is imperative for an adjudicatory body to apply its mind which
is ingrained in the legal system to such an extent that it can be deemed a fundamental tenet of
Indian law”.

In this case, the court has, for the first time defined non-exhaustively, the term “fundamental
policy of Indian Law” which is an ingredient of “public policy” under section 34 and 48 of
the act. It is curious that the court has not tested the award in the present case on the grounds
of patent illegality but has chosen to give a broad interpretation to ‘fundamental policy of
Indian law’. In the present case, the court allowed the challenge to the award on the following
basis:

 The arbitral tribunal failed to consistently apply the tests for determination of a
dispute to both the parties.
 The inference drawn by the tribunal from the proven facts was untenable resulting in
miscarriage of justice.

The court examined, if the award was in conflict with “public policy of India” under Section
34 (2) (b) (ii) of the Act. The court relied upon on the judgement of ONGC vs. Saw pipes
Ltd. Therefore, while interpreting the phrase “public of policy of India” the court held that an
arbitral award should be set aside if it is contrary to:

i. Fundamental policy of Indian law

ii. The interest of India
iii. Justice or morality
iv. Patently illegal.

The court held that that traditionally refraining from scrutinizing the inferences drawn by
arbitral tribunals to upholds the independence of the arbitration process. However, a modern
indication by the court suggest a shift towards detailed scrutiny, potentially equating the
court’s powers under section 34 and 48 of the Arbitration and Conciliation Act to an appeal.
The Saw pipes case outlined four facets of the public policy of India under section 34 but
only the test of “patent illegality” does not apply to the challenges in foreign awards under
section 48 of the Act.

The court appears to have implied that an award could be scrutinized within the scope of the
“fundamental policy of Indian Law” based on aforementioned premise. It is commendable
that these principles have been proposed to ensure that awards are not rendered without
proper consideration of the facts and circumstances of each case and without equitable
treatment of both parties. Therefore, the principles outlined in this case, constituting a part of
the “fundamental policy of Indian Law” are relevant applicable to both domestic and foreign
awards.

The court reviewed the arbitral award with a focus on appellant’s claim of public policy
violation. It clarified that an award being unfavourable to the state or its perception of public
interest does not automatically make it contrary to public policy. The court highlighted
India’s international commitments and its support for foreign investments and arbitration
awards. Consequently, the court declined to set aside the award, finding no substantial
evidence of Indian public policy breach that would justify nullifying the arbitral decision.

CONCLUSION

This case sets a notable precedent in Indian arbitration law, shedding light on how courts
evaluate challenges to arbitral awards based on Public policy. It offers a pertinent example
for analysing the scope and constraints of public policy grounds for annulling arbitral awards
in India. The case has raised concerns of understanding the application of public policy in
India with qualitative comparison with global standards. While the concept of public policy is
acknowledged in various arbitration system worldwide, different countries interpret and
apply it differently. In contrast to certain jurisdictions, Indian courts have taken a more
cautious approach in using public policy as basis for annulling awards. Unlike some countries
where courts may delve into the merits of an awards under the guise of public policy, Indian
courts have consistently maintained that public policy shouldn’t be used to re-evaluate the
merits of the case.

The case has significantly influenced the undertaking of public policy as a basis for
dissolving arbitral awards in India. The Supreme Court’s ruling reiterated the narrow scope of
public policy, emphasizing that an award can only be invalidated if it violates fundamental
Indian legal principles, national interest or justice and morality. This limited interpretation
reflects India’s pro-arbitration stance, aiming to reduce to reduce judicial interference in
arbitral awards.

Furthermore, the case has enhanced the consistency and predictability of annulment decisions
in Indian Arbitration. By clearly defining the boundaries of public policy grounds for
annulment, parties now have a more predictable framework for challenging arbitral awards.
The key observations from this case include:
  Narrow Interpretation of Public Policy: The case reaffirmed the principle of a narrow
scope for public policy grounds for annulment. Courts emphasized that public policy
should only be invoked in exceptional circumstances where the award violates
fundamental principles of justice and morality.
 Consistency in Judicial Decisions: Indian courts have consistently interpreted and
applied public policy grounds for annulment, prioritizing the finality and
enforceability of arbitral awards while safeguarding public interests.

The ruling serves as a clear message to the global arbitration community, indicating that
Indian courts prioritize the enforcement of arbitral awards and upholds dignity of arbitration
system.