Supreme Court Clarifies Liquidated Damages and Time Essence in Contracts: Welspun vs. ONGC (2021)

LEGAL ISSUE: Whether time was of the essence in the contract and the validity of imposing liquidated damages.

CASE TYPE: Contract Law, Arbitration

Case Name: Welspun Specialty Solutions Limited vs. Oil and Natural Gas Corporation Ltd.

Judgment Date: 13 November 2021

Date of the Judgment: 13 November 2021

Citation: Not Available

Judges: N.V. Ramana, CJI and Surya Kant, J.

Can a party impose liquidated damages after initially waiving them and granting extensions in a contract? The Supreme Court of India recently addressed this question in a dispute between Welspun Specialty Solutions Limited (formerly Remi Metals Gujarat Ltd.) and Oil and Natural Gas Corporation Ltd. (ONGC). The core issue revolved around whether time was of the essence in their contract and the validity of ONGC’s deduction of liquidated damages for delayed supply of goods. The bench, comprising Chief Justice N.V. Ramana and Justice Surya Kant, delivered the judgment, with the opinion authored by Chief Justice N.V. Ramana.

Case Background

ONGC floated a global tender for the purchase of seamless steel casing pipes. Remi Metals was a successful bidder, claiming to act as a supplier for Volski Tube Mills, Russia. ONGC issued four purchase orders (POs) to Remi Metals. The POs specified that the delivery period would commence within 16 weeks and be completed within 40 weeks from the date of the PO. The POs also included clauses stating that time was of the essence and that delayed supplies would be treated as supplied after the schedule period, potentially leading to liquidated damages.

During the execution of the contract, there were delays, and ONGC granted several extensions to Remi Metals. Despite these extensions, ONGC deducted an aggregate amount of US $807,804.03 and Rs. 1,05,367 as liquidated damages from Remi Metals’ bills. This led to a dispute, with Remi Metals claiming a refund of the deducted liquidated damages, among other claims.

Timeline

Course of Proceedings

The dispute was initially referred to an Arbitral Tribunal. The Tribunal held that time was not of the essence of the contract and that ONGC could not claim liquidated damages. Instead, it determined actual damages based on the evidence provided. Aggrieved by this, ONGC filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, before the District Court. The District Court upheld the Tribunal’s decision on time being not the essence but modified the arbitration costs. Both parties then appealed to the High Court of Uttarakhand. The High Court overturned the decisions of both the Arbitral Tribunal and the District Court, ruling that time was indeed of the essence and that ONGC was entitled to liquidated damages. Review petitions were filed, which were disposed of with some modifications. Finally, both parties appealed to the Supreme Court.

Legal Framework

The judgment primarily revolves around the interpretation of Section 74 of the Indian Contract Act, which deals with compensation for breach of contract where a penalty is stipulated. It states:

“When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”

The Court also considered Section 55 of the Indian Contract Act, particularly the second paragraph, which states:

“If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.”

The Court also examined the scope of Section 34 of the Arbitration and Conciliation Act, 1996, which provides grounds for setting aside an arbitral award.

Arguments

Remi Metals’ Submissions:

• The Arbitral Tribunal’s view was reasonable and plausible.
• Time was not of the essence of the contract because the contract allowed for extensions and liquidated damages.
• ONGC waived liquidated damages in the first two extensions and could not claim them for further extensions.
• The Court should not casually interfere with arbitral awards unless they are patently illegal.

ONGC’s Submissions:

• The imposition of liquidated damages was upheld in similar circumstances in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705.
• Unliquidated damages cannot be awarded when the contract provides for liquidated damages.
• The contract clearly states that time was of the essence, which was also indicated in every extension given.
• The award interprets the contract clauses unreasonably.

The innovativeness of Remi Metals’ argument lies in its emphasis on the waiver of liquidated damages by ONGC during the initial extensions, which, they argued, should preclude ONGC from claiming liquidated damages for subsequent extensions, unless explicitly agreed upon.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Was time the essence of the Agreement to make supplies under the four Purchase Orders and was the delivery date to be reckoned from the date of the supply order?
2. Was ONGC justified in recovering liquidated damages of US $807,804.03 and Rs. 1,05,367/-?
3. Was the Claimant entitled to extension of delivery dates without levy of liquidated damages on account of force majeure condition as stated in paragraphs 12.D.3 and 12.D.4 of the Statement of Claim?
4. Was ONGC entitled to impose liquidated damages on the basis of the entire value of the Purchase Orders?
5. Is the Claimant entitled to refund of any part of the amount recovered by ONGC as liquidated damages?
6. Is the Claimant entitled to US $2,44,121.03 and Rs.5,76,244.21 as interest on delayed payment as in Exhibit ‘H’ to the Statement of Claim?
7. Whether the Claimant is entitled to any interest? If so, at what rate and for what period?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

Cases:

• Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 – Supreme Court of India: This case defined “public policy” in the context of enforcing foreign awards, stating it must be contrary to fundamental policy of Indian law, the interests of India, or justice or morality.
• ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 – Supreme Court of India: This case expanded the scope of Section 34 of the Arbitration Act to include “patent illegality” as a ground for challenging an award. It also upheld the validity of liquidated damages clauses.
• ONGC Ltd. v. Western Geco International Limited, (2014) 9 SCC 263 – Supreme Court of India: This case reiterated that the illegality of an award must go to the root of the matter to violate public policy.
• Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1 – Supreme Court of India: This case emphasized that courts should not interfere with arbitral awards unless the perversity of the award goes to the root of the matter.
• Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49 – Supreme Court of India: This case discussed the limited scope of judicial interference with arbitral awards.
• Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794 – UK House of Lords: This case established the general rule that a promisor is bound to complete the obligation by the date stated in the contract.
• Holme v. Guppy, (1838) 3 M & W 387 – UK Court of Exchequer: This case established that a promisee is not entitled to liquidated damages if their actions prevented the promisor from completing the work by the completion date.
• Project Director, National Highways No.45E and 220, National Highways Authority of India v. M. Hakeem – Supreme Court of India: This case discussed the limited scope of judicial interference in arbitral awards.
• Maula Bux v. Union of India [(1969) 2 SCC 554] – Supreme Court of India: This case held that in every case of breach of contract, the person aggrieved is not required to prove actual loss or damage suffered by him before he can claim a decree.

Statutes:

• Section 74, Indian Contract Act, 1872: This section deals with compensation for breach of contract where a penalty is stipulated.
• Section 55, Indian Contract Act, 1872: This section explains the effect of failure to perform a contract within a specified time when time is not of the essence.
• Section 34, Arbitration and Conciliation Act, 1996: This section provides grounds for setting aside an arbitral award.

Judgment

The Supreme Court set aside the High Court’s order and upheld the Arbitral Tribunal’s award. The Court agreed with the Arbitral Tribunal that time was not of the essence in the contract due to the presence of extension clauses and the conduct of the parties. Additionally, the Court held that ONGC could not impose liquidated damages after initially waiving them in the first two extensions. The Court emphasized that the interpretation of the contract by the Arbitral Tribunal was a plausible one and should not be interfered with.

The Court also noted that the Arbitral Tribunal’s decision to award damages based on actual loss was a reasonable interpretation of the contract and the law, particularly in light of the waiver of liquidated damages.

How each authority was viewed by the Court?

• Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 – The Court referred to this case to understand the scope of “public policy” but did not apply it directly to the facts of the case.
• ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 – The Court distinguished this case, noting that it did not involve a situation where the party had waived liquidated damages before granting extensions.
• ONGC Ltd. v. Western Geco International Limited, (2014) 9 SCC 263 – The Court referred to this case to reiterate that the illegality of an award must go to the root of the matter to violate public policy.
• Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1 – The Court referred to this case to emphasize that courts should not interfere with arbitral awards unless the perversity of the award goes to the root of the matter.
• Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49 – The Court referred to this case to discuss the limited scope of judicial interference with arbitral awards.
• Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794 – The Court referred to this case to observe the general rule that a promisor is bound to complete the obligation by the date stated in the contract.
• Holme v. Guppy, (1838) 3 M & W 387 – The Court referred to this case to observe that a promisee is not entitled to liquidated damages if their actions prevented the promisor from completing the work by the completion date.
• Project Director, National Highways No.45E and 220, National Highways Authority of India v. M. Hakeem – The Court referred to this case to discuss the limited scope of judicial interference in arbitral awards.
• Maula Bux v. Union of India [(1969) 2 SCC 554] – The Court referred to this case to observe that in every case of breach of contract, the person aggrieved is not required to prove actual loss or damage suffered by him before he can claim a decree.
• Section 74, Indian Contract Act, 1872 – The Court analyzed this section to determine the validity of liquidated damages.
• Section 55, Indian Contract Act, 1872 – The Court analyzed this section to understand the effect of failure to perform a contract within a specified time when time is not of the essence.
• Section 34, Arbitration and Conciliation Act, 1996 – The Court analyzed this section to understand the grounds for setting aside an arbitral award.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Interpretation of Contractual Clauses: The Court emphasized that the presence of extension clauses and the conduct of the parties indicated that time was not of the essence of the contract.
• Waiver of Liquidated Damages: The Court found that ONGC’s initial waiver of liquidated damages during the first two extensions was a significant factor. It held that ONGC could not reimpose liquidated damages for subsequent extensions without clear acceptance by the parties.
• Reasonable Interpretation: The Court stressed that the Arbitral Tribunal’s interpretation of the contract and the law was a plausible one and should not be interfered with unless it was patently illegal.
• Distinction from Previous Cases: The Court distinguished the present case from ONGC Ltd. v. Saw Pipes Ltd., noting that the earlier case did not involve a waiver of liquidated damages.
• Actual Loss vs. Liquidated Damages: The Court supported the Arbitral Tribunal’s decision to award damages based on actual loss, as opposed to liquidated damages, given that time was not of the essence and liquidated damages had been waived.

The Court’s reasoning was a mix of factual considerations (like the conduct of the parties and the presence of extension clauses) and legal interpretations (such as the application of Sections 55 and 74 of the Indian Contract Act). The legal considerations had a slightly higher percentage as the court had to decide on the legal validity of the Arbitral Tribunal’s award.

Logical Reasoning:

The Court did not delve into alternative interpretations as the Arbitral Tribunal’s interpretation was found to be plausible. The Court’s decision was based on the specific facts of the case, particularly the waiver of liquidated damages and the absence of clear language allowing for their reimposition.

The Court’s decision was clear: the Arbitral Tribunal’s award was correct, and the High Court’s interference was not justified. The Court emphasized that the Arbitral Tribunal had correctly interpreted the contract and applied the relevant legal provisions.

The majority opinion was delivered by Chief Justice N.V. Ramana, with Justice Surya Kant concurring. There were no dissenting opinions.

The Court’s decision has implications for future cases involving contracts with liquidated damages clauses and extension provisions. It highlights the importance of clear and unambiguous language in contracts and the need to respect the autonomy of the parties in arbitration.

The Court did not introduce any new doctrines or legal principles but rather reaffirmed existing principles of contract law and arbitration.

“Since time was not the essence of the contract, the measure of damages specified under Clause/ Liquidated damages, which was the essence of the contract, cannot be regarded as appropriate for determining the loss sustained by ONGC”

“If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.”

“The Arbitral Tribunal’s interpretation of contractual clauses having extension procedure and imposition of liquidated damages, are good indicators that ‘time was not the essence of the contract’.”

Key Takeaways

• Time is not automatically of the essence in a contract, even if the contract states so. The conduct of the parties and the presence of extension clauses are also relevant.
• Liquidated damages cannot be imposed after being waived, unless there is a clear intention to reimpose them.
• Arbitral awards shouldnot be interfered with unless they are patently illegal or perverse.
• Courts should respect the autonomy of the parties in arbitration.
• In cases where time is not of the essence, actual damages should be determined based on the evidence.