The Hon'ble Supreme Court in a recent judgment in Welspun Specialty Solutions Ltd. (formerly known as Remi Metals Gujrat Ltd.) v. Oil and Natural Gas Corporation Ltd.1 held that whether time is of the essence in a contract has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract. In this article, we briefly discuss the facts and circumstances which led to the aforementioned judgment of the Hon'ble Supreme Court.

Brief Facts

A global tender was floated by ONGC for purchase of seamless steel casing pipes. Remi Metals Gujrat Ltd., now known as Welspun Specialty Solution Ltd. ("Remi Metals"), emerged as the successful bidder. Remi Metals claimed that it had to bid to supply pipes as a supplier on behalf of Volski Tube Mills, Russia. In the tender, four purchase orders were issued which mentioned that the delivery period would commence within 16 (sixteen) weeks and will be completed in 40 weeks, or earlier from the date of the purchase order. The purchase orders contained certain common conditions. One such condition was that the time and date of delivery was the essence of the supply order and the delivery must be completed not later than the date specified under the purchase orders. The general terms and conditions appended to the purchase orders provided that failure to meet the delivery timelines would enable the purchaser (ONGC) to recover damages for breach of contract.

During the execution of the contract, there were certain delays in meeting the obligation as required under the contract, and various extensions were given by the ONGC to fulfil their obligation. Remi Metals accepted the extensions granted and satisfied the contractual requirement. For the delay caused by Remi Metals, ONGC deducted an aggregate amount of USD 8,07,804.03 and INR 1,05,367 as liquidated damages from various bills submitted by Remi Metals. There were other claims which were disputed by Remi Metals and claimed before a panel of arbitrators.

The arbitral tribunal held that merely having a clause in the contract which provides for time being the essence would not be determinative, rather an overall view having regard to all the terms of underlying contract had to be taken into consideration. Further, the tribunal noted that contracts containing provisions for extension of time or payment of penalty on default would dilute the obligation of timely performance and render the clauses imbuing time as essence of the contract ineffective. Additionally, the arbitral tribunal also observed that generally, under construction contracts, time is not the essence. On the aspect of liquidated damages, the arbitral tribunal held that liquidated damages, which are pre-estimated damages could not be granted as there was no breach of contract since time was not the essence. Accordingly, the arbitral tribunal proceeded to determine the actual damages based on the evidence furnished.

As per ONGC's estimation, there were four categories of tangible losses namely - (i) revenue loss, (ii) loss due to the use of higher ppf/ grade casing, (iii) loss due to intra/inter-regional transportation, and (iv) loss due to foreign exchange fluctuation. In total, such losses were estimated to be to the tune of INR 3,80,64,830. The said estimation was accepted by the arbitral tribunal. However, no claim for damages on account of extended period of delivery was allowed. Accordingly, ONGC was held to be entitled to retain USD 4,40,610.42 out of the total liquidated damages of USD 8,07,804.03 and INR 1,05,367 recovered.

Aggrieved by the award of the arbitral tribunal, ONGC filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") before the district court ("District Court") claiming that the award of the arbitral tribunal was not in tune with the contract which is a justifiable ground for interference. The District Court by its order dated 19 July 2005 held that the arbitral tribunal was correct in holding that time was not the essence of the contract and that only the losses actually suffered could be granted. However, the district judge modified costs of the arbitration from INR 25,00,000 to 9,40,000.

Both parties, aggrieved by the order of the district judge approached the High Court of Uttarakhand ("High Court") under Section 37 of the Arbitration Act. The High Court by the impugned order dated 14 October 2008 held that both the arbitral award and the order of the district judge erred in construction of the contract with respect to whether time was the essence or not. Further, the High Court held that the arbitral tribunal and the District Court had committed gross error in arriving at the conclusion that ONGC had to prove loss suffered before recovering any damages. The matter eventually reached the Supreme Court of India.

Contentions of Remi Metals

Remi Metals argued that the view taken by the arbitral tribunal was reasonable, plausible, and could be sustained. As per Remi Metals, time was not the essence of the contract, as the contract provided for extension of time as well as for liquidated damages. Further, once ONGC waived the liquidated damages in the first two extensions, they could not have claimed liquidated damages for further extensions of delivery date.

Remi Metals referred to the decision in Associate Builders v. Delhi Development Authority2 to contend that the Hon'ble Supreme Court should not set aside the arbitral award in a casual manner. Rather, while setting aside an arbitral award, the Apex Court should come to a clear understanding that the award was patently illegal.

Contentions of ONGC

ONGC argued that the imposition of liquidated damages was already upheld under similar circumstances in an earlier judgment in ONGC Ltd. v. Saw Pipes Ltd.3 ONGC submitted that the award could not be sustained as in a contract having provision for liquidated damages, unliquidated damages could not be awarded. It was argued that a reading of the contract made it clear that the time was of the essence, which was also signified in every extension given. As per ONGC, the award interpreted the contractual clauses in a manner which was not reasonable and plausible.

Held

The Hon'ble Supreme Court, at the outset, ascertained the scope of Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") before the 2015 amendment. The Apex Court observed that the purpose of Section 34 is to strike a balance between the appellate powers of Courts and integrity of the arbitral process. The Hon'ble Supreme Court referred to the decision in Renusagar Power Co. Ltd. v. General Electric Co.4 which held that a foreign award may not be enforced under the Arbitration Act, if it is contrary to public policy of India. The Apex Court then referred to the decision in ONGC Ltd. v. Saw Pipes Ltd.5 which expanded the scope of intervention under Section 34 to include patent illegality which went to the root of the matter. Reliance was also placed on the decision in ONGC Ltd. v. Western Geco International Limited6 which held that the illegality in an arbitral award must go to the root of the matter and illegality of a trivial nature could not be held to be violate of the public policy.

In view of the above decisions, the Hon'ble Supreme Court observed that it was required to examine whether the award in the present matter could be sustained under Section 37 of the Arbitration Act. The Apex Court opined that the finding of the arbitral tribunal that 'time was not the essence of the contract' was beyond reproach. On the relevancy of time conditioned obligations, the Hon'ble Supreme Court noted certain basic principles as below:

  1. Subject to the nature and terms of the contract, the general rule is that the promisor is bound to complete the obligation by the date stated in the contract.7
  2. The promisee is not entitled to liquidated damages, if by his act or omissions he prevented the promisor from completing the work by the completion date.8

The Apex Court observed that 'whether time is of the essence in a contract', had to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract. The Apex Court noted that, in the instant matter, time was the essence of the contract subject to the extension granted without prejudicing the right of ONGC to recover damages. These damages, by reasonable interpretation, could be read as damages based on actual loss.

On waiver, the Hon'ble Supreme Court noted that ONGC waived liquidated damages twice before giving extension with pre-estimated damages. The approach of the arbitral tribunal on waiver was to hold that once liquidated damages were waived in the first extension, subsequent extension could not be coupled with liquidated damages unless a clear intention flowed from the contract. The Apex Court observed that this interpretation of the arbitral tribunal could not be faulted as being perverse.

Accordingly, the Hon'ble Supreme Court held that it could not interfere with the arbitral award for, interalia, the following reasons:

  1. The arbitral tribunal's interpretation of contractual clauses having extension procedure and imposition of liquidated damages, were good indicators that 'time was not the essence of the contract'.
  2. The arbitral tribunal's view to impose damages accrued on actual loss basis could be sustained in view of the waiver of liquidated damages.
  3. The High Court and District Court strayed beyond the limitation under Section 34 and 37 of the Arbitration Act.

Based on the above conclusion, the Apex Court set aside the orders of the High Court as well as the District Court and upheld the arbitral award passed in the instant case.

Comments

The instant case highlights the importance of reconciling conflicting stipulations under a contract dealing with the same subject. The Hon'ble Supreme Court has rightly held that merely inserting an explicit clause stating that time is the essence of the contract will not be determinative of whether time was actually of essence. The intention of the parties to make time the essence of the contract is to be gathered from a reading of the entire contract and the circumstances which are sufficiently strong to indicate the same. In the present matter, since ONGC initially allowed an extension of time that too by waiving its right to levy liquidated damages, it would be deemed that the parties did not intend time to be of essence in their transactions.

Footnotes

1. Welspun Specialty Solutions Ltd. (formerly known as Remi Metals Gujrat Ltd.) v. Oil and Natural Gas Corporation Ltd., Civil Appeal Nos. 2826-2827 of 2016.

2. Associate Builders v. Delhi Development Authority, 2015 3 SCC 49.

3. ONGC Ltd. v. Saw Pipes Ltd., 2003 5 SCC 705.

4. Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644.

5. ONGC Ltd. v. Saw Pipes Ltd., 2003 5 SCC 705.

6. ONGC Ltd. v. Western Geco International Limited, (2014) 9 SCC 263.

7. Percy Bilton Ltd. v. Greater London Council, 1982 1 WLR 794.

8. Holme v. Guppy, (1838) 3 M & W 387.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.