http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 42  

CASE NO.: Appeal (civil)  4492 of 1998

PETITIONER: Mcdermott International Inc.

RESPONDENT: Burn Standard Co. Ltd. & Ors.

DATE OF JUDGMENT: 12/05/2006

BENCH: B.P. Singh & S.B. Sinha

JUDGMENT: J U D G M E N T I.A. NOS.2-3 IN CIVIL APPEAL NO. 4492 OF 1998

S.B. SINHA,  J :

INTRODUCTION

       Oil was discovered in the Bombay High Region in 1974 whereupon a  plan of rapid development of off-shore oil and gas production was embarked  by the Government of India through Oil and Natural Gas Commission  (ONGC).  With a view to achieve exploration of production programme,  ONGC appointed contractors to fulfill substantial portions of its off-shore  construction requirements.  Burn Standard Company Limited (for short  "BSCL") was interested in the second stage of platform construction of  ONGC, i.e., structural and progress fabrication and material procurement.   Four contracts were thereafter awarded in favour of BSCL for fabrication,  transportation and installation of six platforms bearing No. ED, EE, WI-8,  WI-9, WI-10 and N3 and associated pipelines.  They were to be installed in  ONGC’s Bombay High Sea.   

CONTRACT

       The said contracts covered:

(i)     Material procurement and fabrication of the ED and EE jackets, piles  and decks.   (ii)    Transportation and installation of the ED and EE jackets, piles and  decks.   (iii)   Material Procurement and fabrication of the WI-8, WI-9, WI-10 and  N-3 Jackets, piles, temporary decks and decks (the "Four Platform  Fabrication Main Contract") and  (iv)    Transportation and installation of the WI-8, WI-9, WI-10 and N-3  jackets, piles, temporary decks and decks, and installation of four  pipelines and eight risers (the "Four Platform Installation Main  Contract").

                The said contracts contained arbitration agreements.

       BSCL and Mcdermott International Inc. (for short "MII") entered into  Technical Collaboration Agreement on 25th September, 1984 in terms  whereof the latter agreed to transfer technology to the former with regard to  design, construction and operation of a fabrication yard.  The said agreement  contains a separate arbitration clause between the parties.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 42  

       However, with regard to the fabrication and installation of off-shore  platforms, BSCL decided to give a sub-contract of the work to MII on a  project by project basis.  BSCL while retained the job of fabrication of the  ED and EE decks, six helidecks and procurement of materials for the overall  project other than pipeline materials and some process equipment which was  issued by ONGC sub-contracted the remaining work.   

       In terms of a letter of intent dated 14th September, 1984 a contract was  entered into by and between BSCL and ONGC for fabrication and  installation of offshore platforms ED, EE, WI-8, WI-9, WI-10 and N-3 and  laying of WI-8 to WI-9, WI-9 to WI-10, WI-9 to WIS and N-3 to NO  pipelines and 8 associated risers as well as WI-7 to WI-8, WI-9 to SD, WI- 10 to SV, EB to SC1, EC to SHP, ED to SHP, EE to SHP pipelines and 11  associated risers.  A part of the said contract work was assigned to MII in  respect of fabrication, transporation and installation of structures, modules,  platforms and pipeline components on or about 1st January, 1986.  The work  under the said agreement was to be completed within 24 months but in all  respects it was completed in early 1989.   

TERMS OF THE CONTRACT

       The relevant covenants between the parties contained in the said  agreement are as under:

"Article 2. MII shall unless inconsistent with the  provisions of this Sub-contract perform fulfill and  observe all the obligations, covenants and  agreements required on the part of BSCL to be  performed, fulfilled and observed in terms of the  Main Contracts to the extent these obligations,  covenants and agreements relate to the Sub- contract Work including such obligations,  agreements and covenants as may in future be  added, modified or provided in the Main Contracts  between the Buyer and BSCL with concurrence of  MII to the extent thereof.  These obligations,  covenants and agreements, as have been agreed to  be performed, fulfilled and observed by MII shall  include the performance of the Sub-contract work  in the manner and to the specifications as provided  in the respective Main Contracts.

Article 3 3.1 MII shall be bound to BSCL by the terms of  this Sub-contract Agreement and to the extent that  the provisions of the respective Main Contract  between Buyer and BSCL apply to the relevant  Sub-Contract work of MII as defined in this Sub- contract Agreement, MII shall assume towards  BSCL all the obligations and responsibilities  which BSCL, by such Main Contract, assumes to  Buyer and shall have the benefit of all rights,  remedies and redresses against BSCL which  BSCL, by such Main Contract, has against Buyer,  insofar as applicable to this sub-contract  Agreement, provided that when any provision of  the respective Main Contract between Buyer and  BSCL is inconsistent with this Sub-contract  Agreement, this Sub-contract Agreement shall  govern and prevail over the Main Contract. 3.2 BSCL shall be bound to MII by the terms of  this Sub-Contract Agreement and to the extent that  the provisions of the respective Main Contracts  between Buyer and BSCL apply to the relevant

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 42  

Sub-contract work of MII as defined in this Sub- contract Agreement, BSCL shall assume towards  MII all the obligations and responsibilities that  Buyer, by such Main Contracts, assumes towards  BSCL, and shall have the benefit of all rights,  remedies and redress against MII which Buyer, by  such Main Contracts, has against BSCL insofar as  applicable to this sub-contract Agreement provided  that when any provisions of the Main Contract  between Buyer and BSCL is inconsistent with any  provisions of this Sub-contract Agreement, this  Sub-contract Agreement shall govern and prevail  over the Main Contract.   

Article \026 5 5.1 Except as otherwise provided herein, all claims  made by Buyer against BSCL shall be the  responsibility of MII when such claims arise or are  derived from MII’s Sub-contract Scope of Work;  similarly, all claims made by Buyer that arise or  derive from BSCL’s Scope of Work shall be the  responsibility of BSCL.  To the extent that BSCL,  as Main Contractor vis-‘-vis Buyer, would be  liable for any claims that arise or are derived from  MII’s Sub-contract Scope of Work, MII shall hold  harmless and keep indemnified BSCL from any  such claims to the extent analogous with MII’s  Sub-contract.

Article \026 6 - Arbitration 6.1 Should there by any dispute or difference  between BSCL and Buyer in regard to any matter  connected with BSCL relating to or arising out of  the Main Contract (s), which may involve MII’s  performance or affect MII’s interest under the  subcontract, BSCL shall keep MII informed and  shall act in consultation and coordination with MII  to ascertain the facts and agree on the appropriate  action to be taken.  MII shall render all assistance  and cooperation that BSCL may require in this  regard.  If it is determined that the dispute or  difference does not involve MII’s performance or  affect MII’s interests, MII shall render such  reasonable assistance and cooperation as BSCL  may require; provided, however, that MII shall be  entitled to reimbursement of costs, if any, incurred  therefor with the prior approval of BSCL.

6.2 If any dispute or difference arising between  BSCL and Buyer under or in respect of or relating  to the Main Contract insofar as it relates to the  work to be carried out by MII is referred to  arbitration and any award/ judgment/ decree/ order  is passed, or a settlement is otherwise reached with  MII’s consent, MII shall be bound to accept the  same and bear all MII’s liability resulting  therefrom.  MII shall, however, be assisted at all  stages by BSCL with such arbitration proceedings  and MII shall bear all expenses of such arbitration/  litigation and/ or negotiated settlement, if any.   However, expenses incurred by BSCL in deputing  their officials to attend such arbitration/  proceeding/ litigation would be to BSCL/s  accounts.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 42  

6.3 All disputes and differences in respect of any  matter relating to or arising out of or in connection  with the execution or construction of this  subcontract document, if the same cannot be and/  or is not the subject matter of dispute between  BSCL and the Buyer under the Main Contracts and  is not settled mutually by negotiation, shall be  referred to arbitration under the Indian Arbitration  Act, 1940, as amended from time to time, by  appointing some agency acceptable to both the  parties as Arbitrators and if no agency is found  acceptable to both the parties, then by constituting  a Board of Arbitration consisting of three  Arbitrators, one to be nominated/ appointed by  each party and the third to be appointed by the two  Arbitrators as Umpire.  The arbitration proceeding  shall be held at New Delhi and the decision of the  Arbitrators or the Umpire as the case may be shall  be final and binding on both parties hereto.  The  arbitrators or the umpire, as the case may be, shall  record their reasons for passing awards, copies of  which shall be sent to the parties.

Article -10 10.1 Any amendment and/ or modification of this  Sub-contract shall be valid only if it is in writing  and signed by both the parties. All other terms and conditions not specified in this  sub-contract shall be as stipulated in the Main  Contracts. 10.2 This Sub-Contract Agreement shall be  governed by the Laws of the Republic of India."

DISPUTES

       Disputes and differences having arisen between the parties, MII  invoked the arbitration clause by a legal notice dated 10th April, 1989.   

       Several proceedings as regards invocation of arbitration clause were  initiated by the parties before the Calcutta High Court.  The said proceedings  ultimately ended in favour of MII leading to appointment of two arbitrators  for determination of the disputes and differences between the parties.  The  arbitrators who were earlier appointed were removed and Mr. Justice A.N.  Sen, a retired Judge of this Court was appointed as a sole arbitrator.  It is  stated that Mr. Justice A.N. Sen declined to act as an Arbitrator and by an  order dated 28th August, 1998, Mr. Justice R.S. Pathak was appointed by this  Court as a sole arbitrator.  The Arbitrator was to continue with the  proceedings from the stage it had reached.  The said order is in the following  terms:

"1. Mr. Justice R.S. Pathak, retired Chief Justice of  India is appointed as the sole Arbitrator.  In the  case to resolve the disputes and differences which  had been raised by the parties and were the subject  matter of the arbitration proceedings before the  arbitrators earlier appointed;

2) That the Learned Arbitrator shall enter upon the  reference within three weeks from the date of  service of this order upon him.

3) That the arbitration proceedings shall be held at  New Delhi.  However, in the event the learned  Arbitrator considers it necessary to hold any sitting

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 42  

at any other place, he may do so with the consent  of the parties;

4) The learned Arbitrator shall continue with the  proceedings from the stage where the proceedings  of the arbitration were on 8.5.1998, when the  impugned order came to be made by the Calcutta  High Court;

5) All the proceedings held till 8.5.1998 shall be  treated as the arbitration proceedings held before  the learned sole Arbitrator now appointed;

6) It shall be in the discretion of the learned  Arbitrator to take or not to take oral evidence or to  take oral evidence by way of affidavits.  The  learned arbitrator would be at liberty to adopt  summary proceedings for concluding arbitration  proceedings.

7) That the learned Arbitrator shall publish his  Award, as far as possible, within a period of one  year from the date of entering upon the reference;

8) That the fees of the Arbitrator (which may be  fixed by him) and all expenses of arbitration  proceedings shall be shared equally by the parties;

9) The learned Arbitrator shall file the Award in  this Court.

10) Any application which may become necessary  to be filed during or after the conclusion of  arbitration proceedings, shall be filed only in this  Court."

CLAIM OF MII

       Before the learned Arbitrator, MII raised the following claims:

1. For Fabrication of jackets,  Temporary Decks and Main Decks US$ 1,182,817.94 2. For Transportation and Installation  of jackets and Decks US$ 4,351,062.68

3. For Installation of Pipelines and  Risers US$ 840,064.23 4. For Structural Material  Procurement US$ 5,301,534.13

For Bulk Material Procurement US$ 84,919.14 UKL 262,296.43 S$ 680,764.29 5.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 42  

For Transportation of Pipe US$ 1,231,415.00 6. For Reimbursables US$ 377,309.30 7. For Change Orders and Extra Work US$ 7,423,741.95 8. For Delays & Disruptions US$ 13,233,343.00 8A. For exchange Entitlements US$ 2,881,195.03 9. For Interest upto 21 August, 1989 US$ 10,909,772.19 UKL 148,254.14 S$ 521,102.56

Total US$47,817,174.59 UKL 410,550.57 S$ 1,201,866.85"

                Before the Arbitrator, apart from the aforementioned amount, interest  on the outstanding amount was also claimed at the rate of 15% per annum on  all claims for which invoices were not paid until the award, as well as  interest from 21st August, 1989 and future interest at the rate of fifteen per  cent.   

       BSCL filed counter statements as also counter-claims before the  learned Arbitrator.

       The learned arbitrator took up for his consideration the following  claims for his consideration:

1.      Fabrication of Jackets, Temporary Decks and Main Decks 2.      Transportation and Installation of Jackets, Decks (Permanent &  Temporary) and Helidecks 3.      Pipelines and Risers Installation 4.      Structural Material and Rolling 5.      Bulk Material 6.      Transportation of Pipes 7.      Reimbursables 8.      Change Orders and Extra Works 9.      Delays and Disruptions 9A.     Whether MII is entitled to an exchange loss as claimed in   paragraphs 4.74 to 4.78 of the Statement of Claims? If so, in what  amount? 10.     Interest 11.     Jurisdiction 12.     Did MII commit breach of the contract? 13.     Is the Claim of MII barred by limitation? 14.     Counter Claim 15.     General

       It was agreed to by and between the learned counsel for the parties  that the 1996 Act in stead and in place of 1940 Act shall apply.

PARTIAL AWARD

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 42  

       The learned arbitrator having heard the parties inter alia on  jurisdictional question initially passed a partial award on 9th June, 2003  determining the same in favour of MII.  The decision on points Nos. 6, 8 and  9 were deferred for a period of four months by the learned Arbitrator so as to  enable BSCL to dispose of all claims raised by MII in the meanwhile which  had arisen before reference to the arbitration.  The said claims were rejected.   A detailed reasoned statement by ONGC/BSCL referring to each individual  document relied upon were filed in the arbitral proceedings.  However, by  reason of the said partial award, as regards points Nos. 1 to 5, 7 and 9A, MII  became entitled to payment from BSCL the following amounts:

"On Point No. 1 US$ 1,182,817.69 On Point No. 2 US$ US$ 3,133,612.40 & 28,400.00 On Point No. 3 US$ US$ 665,039.41 & 54,000.00 On Point No. 4 US$ US$ 2,809,100.54 & 2,300,200.00 On Point No. 5 US$ UK Pound Singapore$ 65,207.39 232,604.40 & 548,271.81 On Point No. 7 US$ 322,351.87

US$ 52,422.51

US$ 1,573,466.00

US$ 512,187.16 On Point No. 9A US$ 3,330,790.94"

PROCEEDINGS RE: ADDITIONAL AWARD         

       On point No. 10, MII was held to be entitled to interest on the amount  awarded at the rate of 10% per annum from the date on which the amount  fell due for payment till the date of the partial award and the awarded  amount together with interest was directed to bear interest at the same rate  from the date of the award to the date of payment.

       The parties thereafter filed applications under Section 33 of the  Arbitration and Conciliation Act, 1996 alleging that certain claims made by  them had not been dealt with and/ or were omitted from consideration by the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 42  

learned arbitrator in his partial award.   

       MII in its application contended:

"(i) While deciding Point No. 4 regarding  Structural Material and Rolling, MII’s claim for  US$ 128,000.00 as contended in paragraph 4.29 of  the Statement of Claim has not been dealt with and  has been omitted from the Award. (ii) While deciding Point No. 7 regarding  Corporate Income Tax, MII’s claim that BSCL  should be liable to the tax authorities for all further  liabilities for Indian Corporate Income Tax as may  be assessed in respect of the income received by  MII under the Sub-contract as also for all tax  liabilities that may be assessed in respect of any  Award in favour of MII in the present arbitration  proceedings as contained in paragraph 4.84 of the  Statement of Claim has not been dealt with and has  been omitted from the Award. (iii) In deciding Point No. 7 regarding Corporate  Income Tax, MII has claimed two amounts one of  US$ 804,789.36 being interest @15% per annum  up to 29 February, 1992 paid by MII in respect of  Corporate Income Tax liability to the Tax  authority, and the other on account of principal  amount of tax payment of US$ 1,623,048.00.  In  paragraphs 18.17 and 18.18 of the Award, the  learned Arbitrator has in respect of the principal  claim allowed an amount of US$ 1,573,466.00 on  account of Corporate Income Tax and an amount  of US$ 512,187.16 by way of interest.  MII has  also claimed interest on these two amounts from  29 February 1992 till payment.  This claim for  interest has not been dealt with in the Award and  has been omitted from the Award. (iv)    While deciding Point No. 10 relating to  interest, MII’s claim for interest on amounts paid  but paid late as contained in paragraphs 5.1 and 5.2  has not been dealt with and has been omitted from  the Award."

       BSCL raised a preliminary objection in regard to the MII’s claim  under Section 33 of the Act contending that there exists no provision for  making a partial award.   

ADDITIONAL AWARD         By reason of the additional award dated 29th September, 2003, the  learned Arbitrator, however, held:

"1. MII’s claim in respect of US$ 128,000.00 is  not accepted. 2. MII’s claim for a declaration that BSCL is liable  to the tax authorities for all further liabilities for  Indian Corporate Income-tax as may be assessed in  future in respect of income received by MII under  the Sub-Contract is allowed only insofar as it  related to MII’s liability, if any, to Corporate  Income-tax, on the amounts awarded to it by a  Partial Award, an Additional Award and a Final  Award. 3. MII is entitled to interest at 10% per annum for  the period from 1 March 1992 to the date of  payment in respect of the principal amount of US$

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 42  

1,573,466.00 on account of Corporate Income-tax  and the interest amount of US$ 512,187.16  calculated up to 29 February, 1992. 4. MII is entitled to interest at 10% per annum for  the period of delay in BSCL making payment of  MII’s invoices, that if, for the period from due date  of payment to the date of actual payment.  Such  amount will carry interest at 10% per annum from  the date of the Partial Award to the date of its  payment."

       The learned Arbitrator rejected the BSCL’s objection in regard to the  maintainability of the said proceeding stating that the same can be a subject  matter for determination of jurisdictional question in a proceeding under  Section 33 of the 1996 Act.

       BSCL filed an application under Section 34 of the Act questioning the  said partial award dated 9th June, 2003 as also the additional award dated  29th September, 2003.

FINAL AWARD

       The learned Arbitrator thereafter took up the left over matters for his  consideration, viz., points Nos. 6, 8 and 9 observing that ONGC in the  meantime had expressed no interest in participating in the decision making  process at the inter-party level and, thus, arrived at an inference that the  machinery set up under the sub-contract has broken down and it would be  for him to determine the same.

       The final award was thereupon passed.   

       On point No. 6 which related to transportation of pipes, the learned  arbitrator held MII to be entitled to US$ 919,194.32 against BSCL in respect  of the nine barge pipes for transporting them from Mangalore to Bombay.

       Point No. 8 related to Change Orders and Extra Work.  The learned  Arbitrator awarded MII US$ 305,840.00 as regards Change Order No. 1.  As  regards Change Order No. 6, MII was awarded US$72,000.00 against  BSCL.  Furthermore, in respect of Change Order No. 9, MII was awarded  US$ 300,000.00 against BSCL.  As regards Extra Work, MII was awarded  US$ 4,870,290.96 against BSCL pursuant to the invoices covered under the  said point whereas MII’s claim for US $637,473.00 was rejected.

       Point No. 9 related to delays and disruptions.  MII was awarded US$  574,000.00 against BSCL in respect of Change Order No. 2.  MII was  further awarded US$1,271,820.00 and US$355,000.00 against BSCL under  Change Order Nos. 3 and 7 respectively.  As regards increased cost and  expenditure incurred by MII, it was awarded US$8,973,031.00.

       So far as the claim of interest is concerned, the learned arbitrator  made the following order:

"MII is entitled to interest on the amounts awarded  under various heads by Final Award.  In my  opinion, having regard to the circumstances of the  case, a rate of interest at 10 percent per annum will  be appropriate from the date on which the amount  fell due for payment to the date of this Final  Award.  The awarded amount including interest  shall bear the interest at the same rate from the  date of this Final Award to the date of the payment  by BSCL."

       The learned arbitrator also awarded US$750,000.00 as costs of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 42  

arbitration.

       An application was filed by BSCL under Section 34 of the Act  praying for setting aside the final award.

SUBMISSIONS:

       Mr. Jayanto Mitra, learned senior counsel and Mr. Pallav Sisodia,  learned counsel appearing on behalf of BSCL made the following  submissions:

(i)     The arbitrator had no jurisdiction to make a partial award which is  not postulated under the 1996 Act as an award in piecemeal is  impermissible in law.   (ii)    While making the partial award, the learned Arbitrator opined that  involvement of ONGC was imperative for determination of point  Nos. 6,8 and 9, i.e., claims relating to transportation of pipes,  Change Orders and Extra Work and delays and disruptions and,  thus, the final award must be held to be bad in law.   (iii)   As the subcontract provided for a back to back contract,  determination of various claims depended upon determination of  interpretative application of the main contract by ONGC wherefor  directions of ONGC were binding on the parties.   (iv)    Although US $ 8.8 million has been awarded as regard alleged  delay and disruption of work, no reason, far less any cogent or  sufficient reason, as was mandatorily required in terms of Section  31 of the Act having been assigned, the impugned award is vitiated  in law.   (v)     In its award, the learned Arbitrator was bound to determine the  actual loss suffered by the parties and as the same was not  determined, the award cannot be enforced.   (vi)    The award as regards loss of profit under various heads is based on  no evidence and, thus, wholly unreasonable.   (vii)   The claims made by MII were not only contrary to the terms of  contract but also substantive law of India and were otherwise  opposed to public policy.   (viii)  As the contract did not contain any agreed schedule or any  stipulation as to whether the work was required to be finished  within a stipulated period, in view of the fact that the contention of  the MII was that the time was of the essence of contract, the only  remedy available to it in terms of Section 55 of the Indian Contract  Act was to revoke the contract upon giving a notice therefor.  In  absence of such a notice, damages could not be claimed.  Reliance  in this behalf has been placed on Arosan Enterprises Ltd. Vs.  Union of India and Another [(1999) 9 SCC 449]. (ix)    No amount towards extra work was payable to MII having regard  to the payment clauses contained in the contract and in particular  the minutes of the meeting held by the parties on 9th August, 1984. (x)     In view of the clear terms of the contract, ONGC was a necessary  party and the learned Arbitrator committed an error in refusing to  implead it in the proceeding.   (xi)    The learned Arbitrator having rejected the claim of the MII in his  partial award dated 9th June, 2003 on the ground that increased  overhead decrease of profit and additional management cost had  not been raised before reference to arbitration and, thus, was  beyond the scope of arbitral reference, could not have determined  the self same question in his final award.  The objection and the  award for US$ 8.8 million had not been taken into consideration  and, thus, the same is liable to be set aside.   (xii)   The learned Arbitrator could not have awarded the said sum solely  on the basis of the opinion of one Mr. D.J. Parson who did not  have any personal knowledge of the facts of the case, particularly  in view of the fact that no evidence was adduced as regards  sufferance of actual loss by MII.  Mechanical application of  Emden Formula was also wholly uncalled for and no award could

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 42  

be made relying on or on the basis thereof.   (xiii)  So far as the claim of extra work is concerned, the learned  Arbitrator has wrongly allowed the claim of MII in respect of  invoice Nos. 2806470 to 2806475 although due date for payment  of the said amount fell after the commencement of reference to  arbitration and, thus, as no dues existed on that date, the Arbitrator  had no jurisdiction to make an award in relation thereto. (xiv)   As regards "exchange loss", MII’s claim was allowed without any  amendment to the statement of claim.  Claim of MII was wrongly  allowed by the learned Arbitrator for entire value of the invoices  without any deduction as delay in making payment by BSCL to  MII on account of delay in receiving payment from ONGC has no  relevance and in any event was contrary to the terms of the  contract.

The learned Arbitrator had also not taken into consideration that in  terms of the contract, foreign exchange rate was frozen at the rate  of Rs. 100 X 8.575 Dollars as was applicable on 9th August, 1984.

(xv)    The claim for US$ 2.3 million was outside the scope of reference  to arbitration as no demand therefor was made.  Such a claim was  made for the first time only in the statement of claim. (xvi)   In terms of Clause 37 of the contract entered into by and between  ONGC and BSCL, no award by way of damage was payable.   Similar provision was also contained in the subcontract entered  into by and between the parties. (xvii)  As MII was to compensate for the supply of materials by BSCL  subsequently, no award for a sum of US$ 2.3 million could be  made. (xviii) As no invoice in respect of the claim of US$ 28,400 on account of  an additional barge trip to transport the ED Temporary Deck had  been raised, the learned Arbitrator had no jurisdiction to decide the  same. (xix)   The award under the said head for a sum of US$ 54,000 on account  of additional survey of WIS and WI9 pipeline was not an arbitrable  dispute being clearly outside the purview of the arbitration  proceedings. (xx)    Relying on or on the basis of American Institute of Steel  Construction (AISC) Code as a base for measurement being  contrary to the contract, the award is liable to be set aside.. (xxi)   (a) Re: Buoyancy Tanks in respect of ED and EE Jackets

As BSCL had paid MII for fabrication of the same buoyancy tanks  and the buoyancy tanks were the same which were used for W18,  W19 and W110 and N3 Platform, claim on the said account once  over again was not maintainable ignoring the the evidence of Mr.  S.K. Mukherjee (RW-1).

(b) Tie Down and Sea Fastening

As Tie Down materials are required for safe transportation of  structures allotted on transportation barge, the learned Arbitrator  erred in allowing the claim of MII as they are not permanent part  of jacket decks of any platform.

(c ) Substitution of Materials

The learned Arbitrator committed a serious error in not taking into  account the material evidence adduced by BSCL to the effect that  MII was instructed to substitute the specified materials with  available material at no additional cost of fabrication.

In terms of the contract, it was for the MII to procure the materials  which were to be reimbursed by BSCL.  The claim for US$  20832.108 was based on fabrication charges on account of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 42  

increased tonnage for material substitution for W18, W19, W110  and N3 jackets and piles as well as ED and EE jackets and, thus, as  the learned Arbitrator had allowed claim only to the extent of  fabrication, the amount claimed by MII could not have been  allowed in toto.

       Mr. Dipankar Gupta, learned senior counsel appearing on behalf of  MII, on the other hand, submitted that no case has been made out for setting  aside the award of the learned Arbitrator.    

       In reply to the submissions made on behalf of BSCL, it was urged:

Re. Increased Overhead Decrease of Profit and Additional Management  Cost

       The amount has been awarded on the basis of statement of Mr. D.J.  Parsons.  The contract clearly provided that W18, W19, W110 and N3  platforms were to be completed by 30th December, 1985 whereas ED and EE  platforms were to be commissioned in February, 1986.  It is not the case of  MII that the time was of the essence of contract and, thus, in terms of  Section 55 of the Indian Contract Act, damages were payable.  Even in terms  of the main contract between BSCL and ONGC, time was not of the essence  of the contract.  The contract contained clauses for extension of time and  liquidated damages which is also indicative of the fact that time was not of  the essence of the contract and, thus, damages for delay is permissible in law  in view of the decision of this Court in Hind Construction v. State of  Maharashtra [(1979) 2 SCC 70]

       Change Order Nos. 2, 3 and 7 covered compensation under various  heads as specified therein.  The award of the learned Arbitrator clearly  shows that additional costs had been incurred by MII and, thus, the award  cannot be faulted.  The partial award did not deal with the said claims.  The  dispute was specifically referred to arbitration in terms of notice dated 10th  April, 1998.  The quantification of damages being a matter of evidence and  proof, no case has been made out for interference with the award particularly  in view of the fact that BSCL had never raised any objection as regards the  jurisdiction of the Arbitrator.   

       Reliance on the Emden Formula cannot be said to be against the law  prevailing in India as Sections 55 and 73 of the Indian Contract Act provided  only for entitlement to compensation and not the mode and manner in which  such compensation is to be quantified.

       Clause 37 of the Main Contract between ONGC and BSCL has no  application as MII’s claim is not for any consequential damage but for the  direct losses occasioned by BSCL’s breach of contractual duty to honour its  time bound commitments.  The said clause cannot be extended to the  obligations towards MII under the sub-contract as ONGC has no role to play  in respect of the breach of its obligations towards it by BSCL under the sub- contract.

Re: Partial Award

       A partial award is in effect and substance an interim award within the  meaning of Section 31(6) and 2(c) of the Act and, thus, the validity of the  partial award is not open to question.

Re: Exchange Loss

       Clause 4.0 of contract only relates to payment for transportation and  installation and BSCL did not make any payment to MII despite receipt of  the whole amount from ONGC except an amount of Rs. 12,70,290/-.  In any  event, Clause 4.0 has no relevance to the exchange loss dispute.  BSCL  acted contrary to the agreed terms as it made payment upon applying the  fixed exchange rate of Rs. 100 = US$8.575.  BSCL was to pay to MII the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 42  

amount as per the current rate, only on reconciliation MII was to refund the  excess amount to BSCL which ensured that exchange loss would be shared  by both the parties.   

Re: Uninvoiced Claims

       BSCL never raised any objection before the Arbitrator that the claim  for US$ 2,300,200 for procurement of structural material could not be raised  in view of the provisions contained in Section 16 of the 1996 Act.  Invoice  in any event, is merely a basis for claim and such a claim may be raised in  correspondences as also in the meetings.  The claim for US$ 2,300,200 was  not strictly claim for damages, as in terms of the contract BSCL was  required to procure the steel and as it being not in a position to do so, MII  agreed to procure the same on its behalf if BSCL would agree to pay US$  2,300,200 to cover MII’s cost for accelerated procurement and other costs.   This offer was the subject matter of correspondence between the parties.  As  no dispute was raised to recover the same amount from BSCL, procurement  job was undertaken.  The finding arrived at by the learned Arbitrator in this  behalf is entirely a finding of fact. Reference to Clause 5 of the Contract was  wholly irrelevant.  This clause provides that BSCL shall procure suitable  steel for "jackets’ on replacement basis for MII purchased steel. BSCL did  not procure the required amount of steel to replace the structural materials  that MII provided from its inventory as an accommodation to BSCL. MII did  so on the understanding that the structural material removed from MII’s  inventory would be promptly replaced by BSCL. BSCL did not replace the  material.  

Re: Method of Measurement

       Clause 23.1.1 (a) & (c) of the Main Contract between BSCL and  ONGC has no application as the same covers payment for ’structural  material’ which is an altogether different claim being Claim No. 4.  The  claim was towards labour charges for fabrication of structures, labour  charges and not claim for cost of material.  AISC Code applied in relation to  the fabrication job is as under:

"The scheme of the Contract provides in relation to  Fabrication and the application of AISC Code is  explained below: (i)     the sub-contract provides total estimated tonnage of  18, 178 ST with following break-up: ED?EE Platforms 6078 ST  (page 166 I.A. no.2 Vol.2) WI8, WI9, WI10 and N3 platforms 12,100 ST/ 18, 178 ST (page 371 I.A. no.2 vol.2)"

Re: Buoyancy Tanks for ED and EE Jackets

       MII’s claim is for labour cost at the rate of US$ 1067 per ST involved  for fabrication work in the refurbishment of the Buoyancy Tanks.  The  finding of the Arbitrator is a finding of fact inter alia based on the admission  of the witness, namely, Shri S.K. Mukherjee, who was examined on behalf  of BSCL

Re: Tie Down and Sea Fastening

       In offshore construction, jackets and decks are fabricated onshore and  then they are transported on barges to the offshore location for installation.   Jobs pertaining to Tie Down and Sea Fastening required substantial  fabrication work and no claim has been made towards costs of welding the  Tie Downs and Sea Fasteners to the deck.

       Clause 2 of the Contract would have no application to the instant case  as it provides only for a stage payment on milestone basis.  But, clause  2.1(a)(i) which substantially covers sea fastening job as part of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 42  

fabrication contract would be applicable.  BSCL had not been able to show  that the fabrication of Tie Down and Sea Fastening materials were included  within the scope of transportation and not as a separate item under the head  ’fabrication’.

Re: Substitution

       It was for BSCL in terms of the sub-contract to procure and supply all  materials but as it was not in a position to do so, MII on instructions of  BSCL used available materials which was having larger thickness and  weight vis-a-vis those specified in the ONGC’s specifications.  The same  having been approved both by the Engineer and ONGC, MII was entitled to  compensation towards the labour charges at the rate of US$ 1067 per ST.

Re: Extra Work Invoice Nos. 2806470 to 2806475

       The invoices which were contained in Annexure 9 to MII’s statement  of claims were substituted by new documents in terms whereof the due date  of invoice was corrected to 9th March, 1989 and, thus, fall due for payment  prior to the notice dated 10th April, 1989 invoking arbitration.  The payment  of extra work became due when the work was performed and moreover, the  invoices in question did not specify any date for payment.

Re: Interest

       The ground has been taken only in the supplementary affidavit filed  on behalf of BSCL on 21st September, 2004 beyond a period of three months  as specified in Section 34 of the Act.  The Arbitrator has awarded the  principal amount and interest thereon upto the date of award and future  interest thereupon which do not amount to award on interest on interest as  interest awarded on the principal amount upto the date of award became the  principal amount which is permissible in law.

CHALLENGE TO AWARD: LEGAL SCOPE OF  

       Section 2(1)(b) of the 1996 Act reads as under: "2(1)(b) "arbitration agreement" means an agreement  referred to in section 7"

       In terms of the 1996 Act, a departure was made so far as the  jurisdiction of the court to set aside an arbitral award is concerned vis-‘-vis  the earlier Act.  Whereas under Sections 30 and 33 of the 1940 Act, the  power of the court was wide, Section 34 of the 1996 Act brings about certain  changes envisaged thereunder.   

       Section 30 of the 1940 Act reads, thus: "Grounds for setting aside award \026 An award shall not be  set aside except on one or more of the following grounds,  namely:  (a)     That an arbitrator or umpire has misconducted  himself or the proceedings; (b)     That an award has been made after the issue of an  order by the Court superseding the arbitration or after  arbitration proceedings have become invalid under Sec  35; (c)     That an award has been improperly procured or is  otherwise invalid."

       The Section did not contain expression "error of law\005.".  The same  was added by judicial interpretation.  While interpreting Section 30 of the  1940 Act, a question has been raised before the courts as to whether the  principle of law applied by the arbitrator was (a) erroneous or otherwise or  (b) wrong principle was applied.  If, however, no dispute existed as on the  date of invocation, the question could not have been gone into by the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 42  

Arbitrator. CHANGES UNDER THE NEW ACT

The 1996 Act makes a radical departure from the 1940 Act. It has  embodied the relevant rules of the modern law but does not contain all the  provisions thereof.  The 1996 Act, however, is not as extensive as the  English Arbitration Act.

       Different statutes operated in the field in respect of a domestic award  and a foreign award prior to coming into force of the 1996 Act, namely, the  1940 Act, the Arbitration (Protocol and Convention) Act, 1937 and the  Foreign Awards (Recognition and Enforcement) Act, 1961.  All the  aforementioned statutes have been repealed by the 1996 Act and make  provisions in two different parts, namely, matters relating to domestic award  and foreign award respectively.

Vis-‘-vis Grounds for setting aside the award:

       After the 1996 Act came into force, under Section 16 of the Act the  party questioning the jurisdiction of the arbitrator has an obligation to raise  the said question before the arbitrator.  Such a question of jurisdiction could  be raised if it is beyond the scope of his authority.  It was required to be  raised during arbitration proceedings or soon after initiation thereof.  The  jurisdictional question is required to be determined as a preliminary ground.   A decision taken thereupon by the Arbitrator would be subject matter of  challenge under Section 34 of the Act.  In the event, the arbitrator opined  that he had no jurisdiction in relation thereto an appeal thereagainst was  provided for under Section 37 of the Act.

       The 1996 Act makes provision for the supervisory role of courts, for  the review of the arbitral award only to ensure fairness.  Intervention of the  court is envisaged in few circumstances only, like, in case of fraud or bias by  the arbitrators, violation of natural justice, etc. The court cannot correct  errors of the arbitrators. It can only quash the award leaving the parties free  to begin the arbitration again if it is desired. So, scheme of the provision  aims at keeping the supervisory role of the court at minimum level and this  can be justified as parties to the agreement make a conscious decision to  exclude the court’s jurisdiction by opting for arbitration as they prefer the  expediency and finality offered by it.

       However, this Court, as would be noticed hereinafter, has the occasion  to consider the matter in great detail in some of its decisions.

       In Primetrade AG v. Ythan Ltd. [(2006) 1 All ER 367], jurisdictional  issue based on interpretation of documents executed by the parties fell for  consideration having regard to the provisions of the Carriage of Goods by  Sea Act, 1992.  It was held that as the appellant therein did not become  holder of the bills of lading  and alternatively as the conditions laid down in  Section 2(2) were not fulfilled, the arbitrator had no jurisdiction to arbitrate  in the disputes and differences between the parties.         

Vis-‘-vis the duty to assign reasons

       Another important change which has been made by reason of the  provisions of the 1996 Act is that unlike the 1940 Act, the Arbitrator is  required to assign reasons in support of the award.  A question may  invariably arise as to what would be meant by a reasoned award.  

       In Bachawat’s Law of Arbitration and Conciliation, Fourth Edition,  pages 855-856, it is stated:

"\005’Reason’ is a ground or motive for a belief or a course  of action, a statement in justification or explanation of  belief or action. It is in this sense that the award must

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 42  

state reasons for the amount  awarded.            The rationale of the requirement of reasons is that  reasons assure that the arbitrator has not acted  capriciously.   Reasons reveal the grounds on which the  arbitrator reached the conclusion which adversely affects  the interests of a party. The contractual stipulation of  reasons means, as held in Poyser and Mills’ Arbitration  In Re, "proper, adequate reasons". Such reasons shall not  only be intelligible but shall be a reason connected with  the case which the court can see is proper. Contradictory  reasons are equal to lack of reasons.  

       The meaning of the word " reason"  was  exaplained by the Kerala High Court in the  contest of a  reasoned award\005   "Reasons  are the links  between  the materials on  which certain conclusions are based and the actual  conclusions."\005

A mere statement of reasons does not satisfy the  requirements of s.31(3) .  Reasons must be based upon  the materials submitted before the arbitral tribunal.   The  tribunal has to give its reasons on consideration of the  relevant materials while the irrelevant material may be  ignored\005

       Statement of reasons is mandatory requirement  unless dispensed with by the parties or by a  statutory  provision."  

       In Konkan Railway Corporation Ltd. v. Mehul Construction Company  [(2000) 7 SCC 201], this Court emphasized the mandatoriness of giving  reasons unless the arbitration agreement provides otherwise.

Public Policy  

       In Renusagar Power Co. Ltd. v. General Electric Co. [(1994) Supp 1  SCC 644], this Court laid down that the arbitral award can be set aside if it is  contrary to (a) fundamental policy of Indian Law, (b) the interests of India;  or (c) justice or morality.  A narrower meaning to the expression ’public  policy’ was given therein by confining judicial review of the arbitral award  only on the aforementioned three grounds.  An apparent shift can, however,  be noticed from the decision of this Court in Oil and Natural Gas  Corporation Ltd. v. Saw Pipes Ltd. (for short ’ONGC’)[(2003) 5 SCC 705].   This Court therein referred to an earlier decision of this Court in Central  Inland Water Transport Corporation Ltd.  v. Brojo Nath Ganguly [(1986) 3  SCC 156] wherein the applicability of the expression ’public policy’ on the  touchstone of Section 23 of the Indian Contract Act and Article 14 of the  Constitution of India came to be considered.  This Court therein was dealing  with unequal bargaining power of the workmen and the employer and came  to the conclusion that any term of the agreement which is patently arbitrary  and/ or otherwise arrived at because of the unequal bargaining power would  not only be ultra vires Article 14 of the Constitution of India but also hit by  Section 23 of the Indian Contract Act.  In ONGC (supra), this Court, apart  from the three grounds stated in Renusagar (supra), added another ground  thereto for exercise of the court’s jurisdiction in setting aside the award if it  is patently arbitrary.

       Such patent illegality, however, must go to the root of the matter.  The  public policy violation, indisputably, should be so unfair and unreasonable  as to shock the conscience of the court.  Where the Arbitrator, however, has  gone contrary to or beyond the expressed law of the contract or granted  relief in the matter not in dispute would come within the purview of Section

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 42  

34 of the Act.  However, we would consider the applicability of the  aforementioned principles while noticing the merit of the matter.

       What would constitute public policy is a matter dependant upon the  nature of transaction and nature of statute.  For the said purpose, the  pleadings of the parties and the materials brought on record would be  relevant to enable the court to judge what is in public good or public interest,  and what would otherwise be injurious to the public good at the relevant  point, as contradistinguished from the policy of a particular government.   [See State of Rajasthan v. Basant Nahata, (2005) 12 SCC 77].

       In ONGC (supra), this Court observed:

"31. Therefore, in our view, the phrase "public  policy of India" used in Section 34 in context is  required to be given a wider meaning. It can be  stated that the concept of public policy connotes  some matter which concerns public good and the  public interest. What is for public good or in public  interest or what would be injurious or harmful to  the public good or public interest has varied from  time to time. However, the award which is, on the  face of it, patently in violation of statutory  provisions cannot be said to be in public interest.  Such award/judgment/decision is likely to  adversely affect the administration of justice.  Hence, in our view in addition to narrower  meaning given to the term "public policy" in  Renusagar case10 it is required to be held that the  award could be set aside if it is patently illegal.  The result would be \027 award could be set aside if  it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if  the illegality is of trivial nature it cannot be held  that award is against the public policy. Award  could also be set aside if it is so unfair and  unreasonable that it shocks the conscience of the  court. Such award is opposed to public policy and  is required to be adjudged void."

       We are not unmindful that the decision of this Court in ONGC (supra)  had invited considerable adverse comments but the correctness or otherwise  of the said decision is not in question before us.  It is only for a larger Bench  to consider the correctness or otherwise of the said decision.  The said  decision is binding on us.  The said decision has been followed in a large  number of cases.  [See The Law and Practice of Arbitration and Conciliation  by O.P. Malhotra, Second edition, page 1174.]

       Before us, the correctness or otherwise of the aforesaid decision of  this Court is not in question.  The learned counsel for both the parties  referred to the said decision in ex tenso.   

       We, therefore, would proceed on the basis that ONGC (supra) lays  down the correct principles of law.   

SUPERVISORY JURISDICTION

       We may consider the submissions of the learned counsel for the  parties on the basis of the broad principles which may be attracted in the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 42  

instant case, i.e., (i) whether the award is contrary to the terms of contract  and, therefore, no arbitrable dispute arose  between the parties; (ii) whether  the award is in any way violative of the public policy; (iii) whether the  award is contrary to the substantive law in India, viz., Sections 55 and 73 of  the Indian Contract Act; (iv) whether the reasons are vitiated by perversity in  evidence in contract ; (v) whether adjudication of a claim has been made in  respect whereof there was no dispute or difference; or (vi) whether the  award is vitiated by internal contradictions.

       For the aforementioned purpose, it would be necessary to see as to  what law the arbitrator was required to apply.

       We may, therefore, consider the legal submissions before adverting to  the merit of the matter.

VALIDITY OF THE ’PARTIAL AWARD’

       The 1996 Act does not use the expression "partial award".  It uses  interim award or final award.  An award has been defined under Section 2(c)  to include an interim award.  Sub-section (6) of Section 31 contemplates an  interim award.  An interim award in terms of the said provision is not one in  respect of which a final award can be made, but it may be a final award on  the matters covered thereby, but made at an interim stage.

       The learned arbitrator evolved the aforementioned procedure so as to  enable the parties to address themselves as regard certain disputes at the first  instance.  As would appear from the partial award of the learned arbitrator,  he deferred some claims.  He further expressed his hope and trust that in  relation to some claims, the parties would arrive at some sort of settlement  having regard to the fact that ONGC directly or indirectly was involved  therein.  While in relation to some of the claims, a finality was attached to  the award, certain claims were deferred so as to enable the learned arbitrator  to advert thereto at a later stage.  If the partial award answers the definition  of the award, as envisaged under Section 2(c) of the 1996 Act, for all intent  and purport, it would be a final award.  In fact, the validity of the said award  had also been questioned by BSCL by filing an objection in relation thereto.

       We cannot also lose sight of the fact that BSCL did not raise any  objection before the arbitrator in relation to the jurisdiction of the Arbitrator.   A ground to that effect has also not been taken in its application under  Section 34 of the Act.  We, however, even otherwise do not agree with the  contention of Mr. Mitra that a partial award is akin to a preliminary decree.   On the other hand, we are of the opinion that it is final in all respects with  regard to disputes referred to the arbitrator which are subject matter of such  award.  We may add that some arbitrators in stead and in place of using the  expression "interim award" use the expression "partial award".  By reason  thereof the nature and character of an award is not changed.  As, for  example, we may notice that in arbitral proceedings conducted under the  Rules of Arbitration of the International Chamber of Commerce, the  expression "partial award" is generally used by the arbitrators in place of  interim award.  In any view of the matter, BSCL is not in any way  prejudiced.  We may state that both the partial award and the final award are  subject matter of challenge under Section 34 of the Act.          Section 33 of the Act empowers the arbitral tribunal to make  correction of errors in arbitral award, to give interpretation of a specific  point or a part of the arbitral award, and to make an additional award as to  claims, though presented in the arbitral proceedings, but omitted from the  arbitral award.  Subsection (4) empowers the arbitral tribunal to make  additional arbitral award in respect of claims already presented to the  tribunal in the arbitral proceedings but omitted by the arbitral tribunal  provided  1.      There is no contrary agreement between the parties to  the reference; 2.      A party to the reference ,with notice to the other party

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 42  

to the reference ,requests the arbitral tribunal to make  the additional award; 3.      Such request is made within thirty days from the receipt  of the arbitral award; 4.      The arbitral tribunal considers the request so made  justified; and 5.      Additional arbitral award is made within sixty days  from the receipt of such request by the arbitral tribunal  

       The additional award, in our opinion, is not vitiated in law.

DELAY AND DISRUPTION Operative facts

       According to the applicants, the contract entered into by and between  MII and BSCL did not provide for any period of completion.  MII, on the  other hand, states that at that time when the contract was entered into it was  supposed to be performed by 30th December, 1985 as would appear  hereinafter:

"For Jackets and Temporary Decks (for platforms WI-8,  WI-9, WI-10 and N-3), the completion period is 30 April  1985 and for Decks and Helidecks ( for platforms WI -8,  WI-9, WI-10 and N-3) the completion date is 30  December 1985. Clause (ii) in the ’Schedule of  Completion of Well Platforms’ states: "\005the completion  dates\005.will be reckoned for purpose of L/d."

       In terms of the provisions of the contract the jobs in respect of WI-8,  WI-9, WI-10 and N-3 were to be performed within the said period.   

       A stipulation for commissioning of ED and EE platforms within a  time frame has also been mentioned, i.e., February, 1986 as would appear  from the following:

"1. The agreed for commissioning of platforms ED & EE  is by  end  of February 1986, subject  to the provisions of  this Contract."

       MII served a notice on 10th April, 1998 invoking the arbitration  agreement.  The same would not mean that it should have repudiated the  contract as soon as 20 months schedule fixed by the contract expired.  Delay  and disruptions might have occurred for various reasons.  In the instant case,  therefore, the matter would be covered by the second part of Section 55 of  the Indian Contract Act providing that where the parties did not intend time  to be of the essence of the contract, the contract was not voidable, but the  promisee was entitled to compensation for loss occasioned.  For the  aforementioned purpose, no notice was required to be served.  In any event,  the contract provided for extension of time, as would appear from clause  27(ii) and the relevant portions of clause 28 which read as under:

"27 (ii) Should  be amount of extra  work, if any, which  Contractor is required to perform  under clause  24 to 26  ants, fairly entitled Contractor to  extension of time   beyond  the scheduled  date for completion of either the  whole or part  of the works or for such extra work  as the  case may be, Company and Contractor shall  mutually  discuss  and decide extensions of time, to be granted to  Contractor and the revised schedule for completion of the  Works.

28 (i) Subject any requirements in the Contract  Specifications as to the completion of any portion of the  work before completion of the whole and subject to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 42  

other provisions contained in the Contract, the Works  shall be completed in accordance with the agreed  schedule as indicated in Appendix-II.   Company may, if  the exigencies of the works or other projects so required  amend the completion schedule and/or phase out  completion.   

28(iii)\005No extension in completion shall be permitted  unless authorized in writing by Company as a "Variation  in completion schedule" or as otherwise specified in the  Contract.   In any case, no portion of the works shall  extend beyond the commencement of the 1986  monsoon."   

       The parties, furthermore, agreed for payment of liquidated damages,  as would appear from clause 28(v)(a) which reads as under:         "a)   recovery  is its sole and only  remedy  for  delayed  completion of work by Contractor, as  ascertained  and agreed liquidated  damages, and not by   way  of penalty,  as sue  equivalent  to  2.5%  of the    Contract Price  for the item which  is delayed, for each   month of delay (or  prorate thereof  for part  of a month),   beyond  the scheduled completion date, subject to a  maximum  of 7.5 %  of  the said   Contract  price.  Such  liquidated damages shall be loveable after allowing  a  grace period  of 15 days.   The monsoon peril requiring  which no work can be carried out orders, shall be  excluded for the purpose of determining the quantum of  delay in completion of work.."          

       Moreover, the contract itself contains provisions for extension of its  terms and payment of damages in case of delay in execution of the contract.

       The claim for increased overhead and decreased profit and additional  project management cost flows out of the same operative facts as the delay  and disruption change in respect of Change Order Nos. 2, 3, and 7.   

       We may at the outset point out that the question as regards the effect  of the said claims which were not considered in the first round of the arbitral  proceedings shall be dealt with a little later.

       So far as the Change Order No. 2 is concerned, the learned arbitrator  has accepted the contention of the MII that it had to incur additional cost due  to delay in receipt of equipment and materials supplied.  In his Final Award,  the learned arbitrator noticed:

"\005It appears that BSCL accepted and  acknowledged that MII had incurred additional  cost on account of this delay occasioned by  BSCL\005"

       So far as, Change Order No. 3 is concerned, the learned arbitrator in  paragraph 67.2 of the Final award noticed as under:

"\005This was followed by a meeting on 7-8 October  1986 attended by the representatives of ONGC,  EIL, BSCL and MII, during which ONGC advised  BSCL that BSCL should absorb one half the  mobilization and demobilization costs of MII’s  marine equipment, since the delay was occasioned  by BSCL in completing the helidecks\005"

       So far as Change Order No. 7 is concerned, the learned Arbitrator has

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 42  

recorded in paragraph 68.1 of the Final Award as under:

"\005This Change Order was accepted by BSCL and  ONGC but MII has received no payment\005"

       It was further recorded in paragraph 68.4 of the Final Award:

"\005Even after the work was completed, there was  a meeting on 16-17 June, 1987 at which ONGC  informed that the Change Order was agreed to in  principle\005"

       So far as the claim of compensation in addition to the said Change  Order Nos. 2,3 and 7 is concerned, the statement of claim of MII is as under:

"4.65: The BSCL delays and disruptions required  McDermott to alter the fabrication and installation  sequence to match deliveries of equipment. This  precluded McDermott performing certain activities as  planned in the Subcontract. Change order No.2 relates to  additional cost incurred by McDermott due to delay in  receipt of equipment and material supplied by BSCL.  BSCL’s delivery of the equipment was upto seventeen  months late. During this period, McDermott continued to  fabricate the decks installing material as it became  available. The delay resulted in additional costs to  McDermott due to change order with cost effect of  US$574,000.00. BSCL has failed and neglected to make  payment of the invoice for this change order.

4.66: Change order no.3 relates to mobilization and  demobilization of Derrick Barge 26 to complete BSCL  work in the 1986/1987 construction season. The  Subcontract price was based on mobilization and  demobilization of a single barge in the 1984/1985 and  1985/1986 construction seasons only and performance of  the offshore scope of work in a continuous sequence.  Due to BSCL delays, the WI-8, WI-9, WI-10 and N3  decks and helidecks were not completed for installation  during the 1985/1986 work season. Further, the WI-7 to  WI-8 pipeline and five risers could not be installed due to  unavailability  of material and lack of access to the EB  and EC jackets, which were still under construction.   In  the 1986/1987 construction season, Mcdermott used  Derrick Barge 27, which was already in the field, to  install the WI-8, WI-9, WI-10 and N3  decks.    Mcdermott also had to mobilize  Derrick Barge 26  in the  same construction season for installation of the WI-7  to   WI-8  pipeline  and associated risers.   On the  instructions of BSCL, Mcdermott mobilized  Derrick  Barge 26 in February 1987. Derrick Barge 26 installed  the pipelines and risers and was demobilized from the  field on 10 March 1987.   For the  mobilization/demobilization of Derrick Barge 26 for the  1986/1987 construction season work, McDermott  submitted a change order to BSCL with cost effect of US  $ 1,271,820.00.   BSCL has failed and neglected to make  payment of the invoices for this change order.

4.67      Change Order no.7 relates to offshore installation  or late-supplied equipment on the WI-8 , WI-9, WI-10   and N3 decks.   As early as February,1986,  the parties   contemplated that certain BSCL-supplied equipment  planned  for installation  by McDermott onshore would  have to be installed offshore due  to the projected late

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 42  

delivery.   The cost of installing equipment off shore is  much US $ 1,140,705.00.   On 6 November 1986,  McDermott reviewed the list of outstanding equipment  and revised its change order to US $ 355,000.00.   On the  instructions of BSCL, McDermott performed the change  order work and installed outstanding equipment offshore.   BSCL has failed and neglected to make payment of the  invoice for this change order."  

       In the Final Award also the learned arbitrator noticed:

"The discussion covering earlier issues establishes that  BSCL was guilty of delays and disruptions.  Proceeding  from there, the question is whether MII  is entitled to an  amount  on account of increased overhead  and loss of  profit  and additional project management costs?   MII  states that construction law recognizes that construction  contractor incurs two general jobs of costs in the course  of its operation; the operating costs that are attributable to  a particular project, and costs such as overhead that are  expended  for the performance of the business as a  whole, including t‘he particular project.   Consequently,  construction law recognizes that owner caused delay  entitles the contractor to recover from the owner the  increased overhead and loss of profit as part  of damages.    Reference has been made to Hudson’s building and  Engineering Contracts.   Article 8.176-91 pp. 1074-81  (11th edn.), Molly J.B., "A formula for Success".  Three  formulae have been evolved for computation of a claim  for increased overhead and loss   of profit due to  prolongation of the works :  the Hudson Formula; The  Emden Formula and Eicheay Formula. Of these three, the  Emden Formula is the one widely applied and which has  received judicial support in a number of cases."

Section 55 of the Indian Contract Act

       Section 55 of the Indian Contract Act reads as under:

"55. When a party to a contract promises to do a  certain thing at or before a specified time, or  certain things at or before specified time, and fails  to do any such thing at or before the specified  time, the contract, or so much of it as has not been  performed, becomes voidable at the option of the  promisee, if the intention of the parties was that  time should be of the essence of the contract. 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. If, in case of a contract voidable on account of the  promisor’s failure to perform his promise at the  time agreed, the promisee accepts performance of  such promise at any time other than that agreed,  the promisee cannot claim compensation for any  loss occasioned by the non-performance of the  promise at the time agreed, unless, at the time of  such acceptance, he gives notice to the promisor of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 42  

his intention to do so."

       In Arosan Enterprises Ltd. (supra), the law was stated in the following  terms:

"13. These presumptions of the High Court in our  view are wholly unwarranted in the contextual  facts for the reasons detailed below but before so  doing it is to be noted that in the event the time is  the essence of the contract, question of there being  any presumption or presumed extension or  presumed acceptance of a renewed date would not  arise. The extension if there be any, should and  ought to be categorical in nature rather than being  vague or on the anvil of presumptions. In the event  the parties knowingly give a go-by to the  stipulation as regards the time- the same may have  two several effects: (a) parties name a future  specific date for delivery, any (b) parties may also  agree to the abandonment of the contract- as  regards (a) above, there must be a specific date  within which delivery has o be effected and in the  event there is no such specific date available in the  course of conduct of the parties, then and in that  event, the courts are not left with any other  conclusion but a finding that the parties themselves  by their conduct have given a go-by to the original  term of the contract as regards the time being the  essence of the contract. Be it recorded that in the  event the contract comes within the ambit of  Section 55, Contract Act, the remedy is also  provided therein\005"

       It was further observed:

"19. Turning now on to the issue of duty to speak,  can it be said that silence on the part of the buyer  in not replying to the letters dated 15-11-1989, 20- 11-1989, 24-11-1989, 4-12-1989 and 20-12-1989  only shows that the buyer was not willing to  extend the delivery period after 15-11-1989 \027 the  answer cannot but be in the negative, more so by  reason of the fact that fixation of a second delivery  date by the Appellate Bench of the High Court as  noticed above, cannot be termed to be in  accordance with the law. There was, in fact, a duty  to speak and failure to speak would forfeit all the  rights of the buyer in terms of the agreement.  Failure to speak would not, as a matter of fact,  jeopardise the seller’s interest neither would the  same authorise the buyer to cancel the contract  when there have been repeated requests for acting  in terms of the agreement between the parties by  the seller to that effect more so by reason of a  definite anxiety expressed by the buyer as  evidenced in the intimation dated 8-11-1989 and as  found by the arbitrator as also by the learned  Single Judge."

       We, therefore, are of the opinion that in the instant case the second  part of Section 55 of the Indian Contract Act would be attracted and not the  first part.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 24 of 42  

Whether time was the essence of contract

       The question which, further, arises for consideration is as to whether  the Respondents having proceeded on the basis that time was of the essence  of the contract, it was bound to issue a notice of repudiating the contract  subject to reservation as regards its claim of damages.  MII, however, states  that it had never raised a contention that the time was of the essence of the  contract, but the claim arises in view of the delay caused in completion of  the contract for a period of 34 months and consequent escalation of costs.   The price payable in terms of the sub-contract did not adequately cover  increased costs expended by MII.  On a plain reading of the provisions of  Section 55 of the Indian Contract Act, it is evident that as the parties did not  intend that time was to be of the essence of the contract on the expiry  whereof the contract became voidable at the instance of one of the parties,  but by reason thereof the parties shall never be deprived of damages.  

       We may notice that the BSCL had never pleaded before the Arbitrator  that the time was of the essence of the contract.  In Construction contracts  generally time is not of the essence of the contract unless special features  exist therefor.  No such special features, in the instant case, has been brought  to our notice.

       The learned arbitrator proceeded on the basis that the BSCL had  accepted and acknowledged that no additional cost on account of delay was  occasioned in completing the helidecks.  MII is found to have incurred  additional cost for offshore installation.  The learned arbitrator has also  found that MII had not received any payment on account of such increased  cost.  The compensation under the said head of claim was only in addition to  Change Order Nos. 2,3 and 7 to which we shall advert to a little later.

       This Court in Hind Construction v. State of Maharashtra [(1979) 2  SCC 70] stated:

"7.     The question whether or not time was of the  essence of the contract would essentially be a question of  the intention of the parties to be gathered from the terms  of the contract. [See Halsbury’s Laws of England, 4th ed.,  Vol.4, para 1179]." "8.     Even where the parties have expressly proided that  time is of the essence of the contract such a stipulation  will have to be read along with other provisions of the  contract and such other provisions may, on construction  of the contract, exclude the inference that the completion  of the work by a particular date was intended to be  fundamental. [See Lamprell v. Billericay Union (19849)  3 Exch 283, 308; Webbv. Hughes (1870) LR 10 Eq 281;  Charles Rickards Ltd. v. Oppenheim (1950) 1 KB 616]."

UNINVOICED CLAIMS:

       The principal question which arises for consideration is whether  uninvoiced claims could be a subject matter of dispute.  While dealing with  the claims falling within the purview of the partial award, the arbitrator  noticed:

"23. Interruption of WI-9 to WI-S  Pipeline  laying  (US$  115,087.50) The Statement of claim by MII mentions that an amount  of US $ 10,671,340.00 on account of delay and  disruption expenses and costs are claimed.  Admittedly,  they had not yet been invoiced when the reference to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 25 of 42  

arbitration was made.  It is not clear what are the specific  claims included within that sum.   If they had not been  invoiced, it cannot be said that they remained unpaid, and  that therefore, a difference or dispute had arisen between  the parties when the reference to arbitration was made."          It was further noticed:          "Reference has been made to the claim in respect of the  standby of the MII transportation spread, additional  compensation on account of the construction of  temporary emergency helidecks, the extended stay of MII  personnel and a claim in respect of Lay Barge 26. All  these claims will be considered after it has been  satisfactorily proved that invoices in respect of each of  these claims were issued and had become due for  payment before the reference to arbitration was made and  also meanwhile the arbitration record will have received  the statement of ONGC/BSCL in respect of Change  Order Proposals Nos. 2,3,7 and 8. Therefore, the  consideration of these claims is deferred."

         No invoice was raised by MII for the following claims:          (i)     Claim of US$ 2,300,200 for procurement of structural material on  BSCL’s behalf. (ii)    US $28,400 for additional Barge trip. (iii)   US $54,000 for additional pipeline survey.

       The said claims are the subject matter of the partial award.  It was  dealt with by the learned arbitrator in the following terms:

"It was pointed out by BSCL that ONGC did not accept  the reconciliation attempted by MII in regard to the  pipelines. I have examined the documents pertinent to  this question, and I find that the variation is so marginal  that it can reasonably be ignored. It seems to me that to  take account of those variations is to attempt to make too  fine a point. I would accept the reconciliation statement  and proceed on that basis. BSCL contends that the claim  made by MII on account of the additional survey of the  WI-8, WI-9 pipelines is not acceptable because it is  covered within the lump sum price mentioned in the  Subcontract. I am not impressed by that submission  because had it been so covered ONGC would not have  undertaken to conduct the additional survey itself. It was  treated as some thing outside the subject matter covered  by the lump sum price and when ONGC requested BSCL  to conduct the additional survey, and at the behest of  BSCL the additional survey was conducted by MII, there  is good reason for MII to claim the payment of  US$54,000 for that survey."

       While dealing with the claims for the standby of DB 26 and  interruption to WI-9 to WI S pipelines laying, the arbitrator in its partial  award held:

"22. Standby Derrick Barge 26 (US$1,396,800.00) The claim for payment of standby charges in respect of  Derrick Barge 26 relates to a standby for 24 days of that  vessel. The MII Statement of Claim mentions that MII  has not sent any invoice to BSCL. Therefore it cannot be  said that any claim has been made by MII yet in the  matter. Consequently, the position is that no difference or  dispute concerning this had arisen between the parties

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 26 of 42  

when the reference to arbitration was made. Therefore, so  far as this arbitration is concerned, the claim cannot be  entertained. It falls outside this arbitration and cannot be  considered."

"23. Interruption of WI-9 to WI-S Pipeline Laying  (US$115,087.50) The Statement of Claim by MII mentions that an amount  of US$10,671,340.00 on account of delay and disruption  expenses and costs are claimed. Admittedly, they had not  yet been invoiced when the reference to arbitration was  made. It is not clear what are the Specific claims included  within that sum. If they had not been invoiced, it cannot  be said that they remained unpaid, and that therefore a  difference or dispute had arisen between the parties when  the reference to arbitration was made."  

       The said claims were, thus, rejected only on the ground that no  invoice had been raised and consequently no difference or dispute had arisen  by and between the parties at the time when the reference to arbitration was  made.

       Mr. Mitra contended that applying the same line of reasoning, the  learned arbitrator should have rejected the aforementioned claims.   However, we may notice that the said claim as regard procurement of  structural material related to damages.  According to MII, the said claim  strictly did not relate to damages under the contract.  The BSCL was  required to procure the steel and as it was not in a position to do so, the MII  had agreed to procure steel on its behalf provided it agreed to cover the  MII’s cost for accelerated procurement, material priced premiums, order  fixing costs and other incidental charges.  It is not in dispute that such a  claim was the subject matter of correspondence which passed between the  parties.  Receipt of such letters from MII is not denied or disputed by BSCL.   It has also not been disputed that right reserved by MII to claim such  additional costs towards procurement of the materials on behalf of BSCL  was not denied or disputed.  Only pursuant to or in furtherance of the said  correspondence, procurement on the said basis had been undertaken by MII  and acceptance of BSCL in this behalf was presumed.  The learned  Arbitrator proceeded on such presumption.  According to learned arbitrator,  despite such knowledge, BSCL failed to make payment.  The learned  arbitrator in his award has gone into the said question in detail.  Reference  had been made to the evidence of Shri A.R. Taylor, who was examined on  behalf of MII.  The said witness was cross-examined by BSCL.  Both the  parties had filed detailed written submissions before the learned arbitrator.   It is on the basis of such evidence brought on record and submissions made  before him, the learned arbitrator held:

"\005In my opinion, BSCL must be taken to have  accepted the proposal of MII and to have gone  along with MII’s action flowing from that proposal  and to have benefited thereby."

       With a view to consider the submission of Mr. Mitra that in terms of  the contract entered into by and between the parties, MII was not  entitled to  the said claim, it would be proper to notice the relevant clause of the contract  which is in the following terms:

"5. Replacement Steel : BSCL shall procure suitable steel for jackets (based on  MTO supplied by MII) on a replacement  basis for MII  purchased steel.   BSCL shall purchase steel as plate  suitable  for rolling 24 in O.D.  and above  tubulars.    Replacement  material  shall be delivered by BSCL  to  MII’s yard at Dubai  Emirate, United Arab Emirates or to  Singapore  Port Authority  for transshipment by MII (at  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 27 of 42  

BSCL’s cost) to Batam Island,  Indonesia.  MII shall  indicate the destination when furnishing the replacement  steel request."

       In terms of the aforementioned provision of the contract, BSCL was  required to procure suitable steel for jackets on replacement basis in regard  to quantum of steel purchased by MII.  If BSCL had failed to procure the  said required amount of steel to replace the structural materials which MII  had provided from its inventory as an accommodation to BSCL, indisputably  the understanding between the parties was that either such materials should  be replaced or the cost therefor had to be paid. It has not been disputed  before the arbitrator that BSCL promptly replaced the material.  It is in that  view of the matter, the learned arbitrator in his partial award held:

" 15.19         The procurement was effected by MII from  its inventory on the basis that it would be replaced by  BSCL promptly. It was not so replaced. To effect the  replacement MII would be compelled to pass through the  entire burdensome process of procuring the structural  material directly from outside sources. MII suffered loss  and damage which it has quantified at US$ 2.3 million in  the light of the considerations mentioned by it earlier."

       The arbitrator has noticed that the claim of MII arose only after it has  been satisfactorily proved that the invoices in respect of each of these claims  were issued and had become due for payment before reference to arbitrator.   It furthermore appears that paragraph 23 of the partial award and the claim  for compensation on the aforementioned head are not identical.  Para 23 of  the partial award dealt with the claim in respect of WI-9 to WI-S pipeline  laying.  So far as paragraph 24 of the said award is concerned, the learned  arbitrator noticed the specific invoices issued against Change Order Nos. 2,  3 and 7 relating to delay and disruptions.  It is, therefore, in our considered  opinion, not correct to contend that the invoice is the only base whereby and  where under a claim can be made.  There is no legal warrant for the said  proposition.  A claim can also be made through correspondence or in  meetings.   

       A claim for overhead costs resulting in decrease in profit or additional  management costs is a claim for damages.

       An invoice is drawn only in respect of a claim made in terms of the  contract.  For raising a claim based on breach of contract, no invoice is  required to be drawn.   

       It is furthermore not in dispute that the claim for damages had been  made prior to invocation of arbitration.  Once such a claim was made prior  to invocation, it became a dispute within the meaning of the provisions of  the 1996 Act.  It is not disputed that the same claim was specifically referred  to arbitration by MII in terms of its notice dated 10th April, 1989.

       While claiming damages, the amount therefor was not required to be  quantified.  Quantification of a claim is merely a matter of proof.   

       In fact BSCL never raised any plea before the arbitrator that the said  claim was arbitrary or beyond its authority.  Such an objection was required  to be raised by BSCL before the arbitrator in terms of Section 16 of the 1996  Act.  It may also be of some interest to note that this Court even prior to the  enactment of a provision like Section 16 of the 1996 Act in Waverly Jute  Mills Co. Ltd. v. Raymon & Co. [(1963) 3 SCR 209; Dharma  Prathishthanam v. Madhok Construction (2005) 9 SCC 686] clearly held that  it is open to the parties to enlarge the scope of reference by inclusion of fresh  dispute and they must be held to have done so when they filed their  statements putting forward claims not covered by the original reference.

METHOD FOR COMPUTATION OF DAMAGES

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 28 of 42  

       What should, however, be the method of computation of damages is a  question which now arises for consideration.  Before we advert to the rival  contentions of the parties in this behalf, we may notice that in M.N.  Gangappa v. Atmakur Nagabhushanam Setty & Co. and Another [(1973) 3  SCC 406], this Court held:

"In the assessment of damages, the court must  consider only strict legal obligations, and not ’the  expectations, however reasonable, of one  contractor that the other will do something that he  has assumed no legal obligation to do.  

       [See also Lavarack v. Woods of Colchester Ltd (1967) 1 QB 278]

       The arbitrator quantified the claim by taking recourse to the Emden  formula.  The learned arbitrator also referred to other formulae, but, as  noticed hereinbefore, opined that the Emden Formula is a widely accepted  one.   

       It is not in dispute that MII had examined one Mr. D.J. Parson to  prove the said claim.  The said witness calculated the increased overhead  and loss of profit on the basis of the formula laid down in a manual  published by the Mechanical Contractors Association of America entitled  ’Change Orders, Overtime, Productivity’ commonly known as the Emden  Formula.  The said formula is said to be widely accepted in construction  contracts for computing increased overhead and loss of profit.  Mr. D.J.  Parson is said to have brought out the additional project management cost at  US$1,109,500.  We may at this juncture notice the different formulas  applicable in this behalf.

(a)    Hudson Formula: In Hudson’s Building and Engineering Contracts,  Hudson formula is stated in the following terms:

"Contract head office overhead &    x     contract sum    x     period of delay" Profit percentage                                 contract period        

       In the Hudson formula, the head office overhead percentage is taken  from the contract.  Although the Hudson formula has received judicial  support in many cases, it has been criticized principally because it adopts the  head office overhead percentage from the contract as the factor for  calculating the costs, and this may bear little or no relation to the actual head  office costs of the contractor.

(b) Emden Formula:      In Emden’s Building Contracts and Practice, the  Emden formula is stated in the following terms:

"Head office overhead & profit   x   Contract sum     x    period of delay" 100     contract period  

       Using the Emden formula, the head office overhead percentage is  arrived at by dividing the total overhead cost and profit of the contractor’s  organization as a whole by the total turnover.  This formula has the  advantage of using the contractors actual head office and profit percentage  rather than those contained in the contract.  This formula has been widely  applied and has received judicial support in a number of cases including  Norwest Holst Construction Ltd. v. Cooperative Wholesale Society Ltd.,  decided on 17 February, 1998, Beechwood Development Company  (Scotland) Ltd. v. Mitchell, decided on 21 February, 2001 and Harvey  Shoplifters Ltd. v. Adi Ltd., decided on 6 March, 2003.

(c) Eichley Formula:    The Eichleay formula was evolved in America  and derives its name from a case heard by Armed Services Board of  Contract Appeals, Eichleay Corp.  It is applied in the following manner:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 29 of 42  

Step 1       Contract Billings         Total overhead for          Overhead allocable  Total Billings for contract   x       contract period      =   to the contract period

Step 2       Allocable overhead                             Total days of contract                                  =   Daily Overhead rate

Step 3

Daily Contract Overhead         Number of Days      Amount of Unabsorbed  Rate                               x       of delay              =   overhead"

       This formula is used where it is not possible to prove loss of  opportunity and the claim is based on actual cost.  It can be seen from the  formula that the total head office overheads during the contract period is first  determined by comparing the value of work carried out in the contract  period for the project with the value of work carried out by the contractor as  a whole for the contract period.  A share of head office overheads for the  contractor is allocated in the same ratio and expressed as a lump sum to the  particular contract.  The amount of head office overhead allocated to the  particular contract is then expressed as a weekly amount by dividing it by  the contract period.  The period of delay is then multiplied by the weekly  amount to give the total sum claimed.  The Eichleay formula is regarded by  the Federal Circuit Courts of America as the exclusive means for  compensating a contractor for overhead expenses.

       Before us several American decisions have been referred to by Mr.  Dipankar Gupta in aid of his submission that the Emden formula has since  been widely accepted by the American courts being Nicon Inc.v. United  States, decided on 10 June, 2003 (USCA Fed. Cir.), Gladwynne  Construction Company v. Balmimore, decided on 25 September, 2002 and  Charles G. William Construction Inc. v. White, 271 F.3d 1055.

       We do not intend to delve deep into the matter as it is an accepted  position that different formulas can be applied in different circumstances and  the question as to whether damages should be computed by taking recourse  to one or the other formula, having regard to the facts and circumstances of a  particular case, would eminently fall within the domain of the Arbitrator.

       If the learned Arbitrator, therefore, applied the Emden Formula in  assessing the amount of damages, he cannot be said to have committed an  error warranting interference by this Court.

ACTUAL LOSS : DETERMINATION OF  

       A contention has been raised both before the learned Arbitrator as also  before us that MII could not prove the actual loss suffered by it as is required  under the Indian law, viz., Sections 55 and 73 of the Indian Contract Act as  Mr. D.J. Parson had no personal knowledge in regard to the quantum of  actual loss suffered by the MII.  D.J. Parson indisputably at one point of time  or the other was associated with MII.  He applied the Emden Formula while  calculating the amount of damages having regard to the books of account  and other documents maintained by MII. The learned Arbitrator did insist  that sufferance of actual damages must be proved by bringing on record  books of account and other relevant documents.  

Sections 55 and 73 of the Indian Contract Act do not lay down the  mode and manner as to how and in what manner the computation of  damages or compensation has to be made.  There is nothing in Indian law to  show that any of the formulae adopted in other countries is prohibited in law  or the same would be inconsistent with the law prevailing in India.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 30 of 42  

       As computation depends on circumstances and methods to compute  damage, how the quantum thereof should be determined is a matter which  would fall for the decision of the arbitrator.  We, however, see no reason to  interfere with that part of the award in view of the fact that the  aforementioned formula evolved over the years, is accepted internationally  and, therefore, cannot be said to be wholly contrary to the provisions of the  Indian law.

        In State of U.P. v. Allied Constructions [(2003) 7 SCC 396], this  Court held: "4. Any award made by an arbitrator can be set  aside only if one or the other term specified in  Sections 30 and 33 of the Arbitration Act, 1940 is  attracted. It is not a case where it can be said that  the arbitrator has misconducted the proceedings. It  was within his jurisdiction to interpret clause 47 of  the agreement having regard to the fact-situation  obtaining therein. It is submitted that an award  made by an arbitrator may be wrong either on law  or on fact and error of law on the face of it could  not nullify an award. The award is a speaking one.  The arbitrator has assigned sufficient and cogent  reasons in support thereof. Interpretation of a  contract, it is trite, is a matter for the arbitrator to  determine (see Sudarsan Trading Co. v. Govt. of  Kerala). Section 30 of the Arbitration Act, 1940  providing for setting aside an award is restrictive  in its operation. Unless one or the other condition  contained in Section 30 is satisfied, an award  cannot be set aside. The arbitrator is a Judge  chosen by the parties and his decision is final. The  court is precluded from reappraising the evidence.  Even in a case where the award contains reasons,  the interference therewith would still be not  available within the jurisdiction of the court unless,  of course, the reasons are totally perverse or the  judgment is based on a wrong proposition of law.  An error apparent on the face of the records would  not imply closer scrutiny of the merits of  documents and materials on record. Once it is  found that the view of the arbitrator is a plausible  one, the court will refrain itself from interfering  (see U.P. SEB v. Searsole Chemicals Ltd. and  Ispat Engg. & Foundry Works v. Steel Authority  of India Ltd.)."

       It is trite that the terms of the contract can be express or implied. The  conduct of the parties would also be a relevant factor in the matter of  construction of a contract. The construction of the contract agreement, is  within the jurisdiction of the arbitrators having regard to the wide nature,  scope and ambit of the arbitration agreement and they cannot, be said to  have misdirected themselves in passing the award by taking into  consideration the conduct of the parties. It is also trite that correspondences  exchanged by the parties are required to be taken into consideration for the  purpose of construction of a contract. Interpretation of a contract is a matter  for the arbitrator to determine, even if it gives rise to determination of a  question of law. [See Pure Helium India (P) Ltd. v. Oil & Natural Gas  Commission, (2003) 8 SCC 593 and D.D. Sharma v. Union of India (2004)  5 SCC 325].  

       Once, thus, it is held that the arbitrator had the jurisdiction, no further  question shall be raised and the court will not exercise its jurisdiction unless

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 31 of 42  

it is found that there exists any bar on the face of the award.

The above principles have been reiterated in Chairman and MD,  NTPC Ltd. v. Reshmi Constructions, Buildres & Contractors (2004) 2 SCC  663; Union of India v. Banwari Lal& Sons (P) Ltd. (2004) 5 SCC 304;  Continental Construction Ltd. v. State of U.P. (2003) 8 SCC 4; State of U.P.  v. Allied Constructions (2003) 7 SCC 396.

       A court of law or an arbitrator may insist on some proof of actual  damages, and may not allow the parties to take recourse to one formula or  the other.  In a given case, the court of law or an arbitrator may even prefer  one formula as against another.  But, only because the learned arbitrator in  the facts and circumstances of the case has allowed MII to prove its claim  relying on or on the basis of Emden Formula, the same by itself, in our  opinion, would not lead to the conclusion that it was in breach of Sections 55  or Section 73 of the Indian Contract Act.   

CLAUSE 37 \026 EFFECT OF

       We may now look at clause 37 of the main contract entered into by  and between ONGC and BSCL which reads as under:

"37. INDIRECT AND CONSEQUENTIAL  DAMAGES: Neither company nor contractor shall be liable to  the other for any consequential damages, which  shall include but not be limited to loss of revenue/  profits, loss or escape of product, etc."

       In Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority  [(1988) 2 SCC 338], whereupon Mr. Mitra placed strong reliance, an award  made under the old Act was in issue.  A dispute had arisen whether there  was a claim and denial or repudiation thereof. In that context, it was held:

"There should be dispute and there can only be a dispute  when a claim is asserted by one party and denied by the  other on whatever grounds. Mere failure or inaction to  pay does not lead to the inference of the existence of  dispute. Dispute entails a positive element and assertion  of denying, not merely inaction to accede to a claim or a  request. Whether in a particular case a dispute has arisen  or not has to be found out from the facts and  circumstances of the case."

       There is no dispute about the aforementioned principle but the same  would not mean that in every case the claim must be followed by a denial.  If  a matter is referred to any arbitrator within a reasonable time, the party  invoking the arbitration clause may proceed on the basis that the other party  to the contract has denied or disputed his claim or is not otherwise interested  in referring the dispute to the arbitrator.

       In Bharat Coking Coal Ltd. v. L.K. Ahuja [(2004) 5 SCC 109], this  Court opined:

"24. Here when claim for escalation of wage bills  and price for materials compensation has been paid  and compensation for delay in the payment of the  amount payable under the contract or for other  extra works is to be paid with interest thereon, it is  rather difficult for us to accept the proposition that  in addition 15% of the total profit should be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 32 of 42  

computed under the heading "Loss or Profit". It is  not unusual for the contractors to claim loss of  profit arising out of diminution in turnover on  account of delay in the matter of completion of the  work. What he should establish in such a situation  is that had he received the amount due under the  contract, he could have utilised the same for some  other business in which he could have earned  profit. Unless such a plea is raised and established,  claim for loss of profits could not have been  granted. In this case, no such material is available  on record. In the absence of any evidence, the  arbitrator could not have awarded the same. This  aspect was very well settled in Sunley (B) & Co.  Ltd. v. Cunard White Star Ltd by the Court of  Appeal in England. Therefore, we have no  hesitation in deleting a sum of Rs. 6,00,000  awarded to the claimant."

       We are herein not concerned with such a case.

                In terms of Clause 37 of the main contract, reference whereto has  been made hereinbefore, neither of the parties are liable to the other for any  consequential damages.  The claim for damages raised by MII cannot be said  to be consequential damages.  The claim relates to direct losses purported to  have been occasioned by the failure to perform the contractual duty on the  part of the BSCL and to honour the time bound commitments.  Such a loss,  according to MII, occurred on account of increased overhead cost and  decreased profit and additional management costs by reason of BSCL’s  delays and disruptions.  It is only in that view of the matter, the Emden  formula was taken recourse to.  Furthermore, clause 37 of the main contract  was a matter of an agreement by and between ONGC and BSCL.  In law, it  could not have been extended to the obligations assumed by BSCL towards  MII in terms of the contract entered into by and between the said parties.  So  far as ONGC is concerned, it cannot be said to have any role to play in the  event of breach of obligation on the part of the BSCL towards its sub- contractor.

       Article 3.1 of the sub-contract reads as under:

"MII shall be bound to BSCL by the terms of this Sub- contract Agreement and to the extent that the provisions  of the respective Main Contract between Buyer and  BSCL apply to the relevant sub-contract work of MII as  defined in this sub-contract agreement, MII shall assume  towards BSCL all the obligations and responsibilities  which BSCL, by such Main Contract, assumes to Buyer  and shall have the benefit of all rights, remedies and  redresses against BSCL which BSCL, by such Main  Contract, has against Buyer, insofar as applicable to this  sub-contract Agreement, provided that when any  provisions of the respective Main Contract between  Buyer and BSCL is inconsistent with this sub-contract  agreement, this sub-contract agreement shall govern and  prevail over the Main Contract."

       By reason of the said provision, therefore, the Main Contract between  ONGC and BSCL would apply to the relevant sub-contract work and MII  was enjoined with a duty towards BSCL to fulfill its obligations and  responsibilities.  But, thereby, BSCL cannot absolve itself from its liability  so far as breach of the terms and conditions of the sub-contract is concerned.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 33 of 42  

In other words, by reason of Article 3.1, the contract by and between ONGC  and BSCL has not been subsumed in the sub-contract so as to absolve the  BSCL from its own contractual liability for breach of contract or otherwise.

METHOD OF MEASUREMENT

       The main contention of BSCL in this behalf is that the learned  arbitrator acted illegally and without jurisdiction in adopting the AISC Code.   The question arose in the context of the provisions in the contract that MII  was required to undertake to fabricate the materials which were required to  be supplied and, therefore, was entitled to fabrication charges from BSCL.   It has not been denied or disputed before us that the parties did not agree to a  fixed method of measurement.  They did not refer to the AISC Code in the  contract but only because AISC code was not referred to in the contract, the  same by itself may not be a ground for us to hold that the arbitrator had gone  beyond the terms of the contract.  Clause 23.1.1(a) and (c) of the main  contract reads as under:

"a)    Payment for structural material  viz. steel and steel  tubulars,   anodes, flooding  and grouting  stems,  rubberized  rings and rubberized items for barge  hampare, rub-strips and boat landing  shall be  made on  the basis  of actual landed  cost at Contractor’s  yard.   Landed cost would include  c.i.f. price, testing charges, if  any plus port charges   clearing and handling charges at  Port, transportation to Contractor’s  fabrication yard plus  local taxes (like octroi ) if any, company shall pay to  Contractor an additional 7 = per cent of the landed cost  referred to above to cover the  cost of procurement."

(c ) In computing the quantity of steel materials used on  each platform for the purpose of sub-clause (a) above, an  allowance of 4% shall be made for wastage. The payment  to Contractor shall be for weights including the wastage  element credit for steel scrap shall be given by Contractor  to Company at the rate of Rs. 500.00 per short ton for the  said wastage of 4%."

       Clause 11 and Clause 5 read as under: "11.  Fabricated Tonnages: "The quantities of materials used in the Works shall be  jointly ( i.e. by ONGC/Engineer, BSCL and MII )  determined on the basis of as-fabricated tonnage as per  the Main Contract between Buyer and BSCL  and shall  be used for adjusting the Subcontract Price."

"5. The preceding fabrication rates are worked out taking  into consideration installation of all equipment,  fabrication and installation of process piping, electricals   and instrumentation work including  pre-commissioning   and all yard test in addition to structural fabrication work  in accordance with the specifications. For computing  the  tonnage for reimbursement of fabrication, installation,  pre-commissioning and testing work at the yard by MII   the tonnage of equipment and items  for top side facilities  shall not  be included and fabrication tonnage  shall be  solely on the basis of as built tonnage as approval by  buyer."

       Submission of Mr. Mitra is that a combined reading of the  aforementioned provisions would go to show that the method of  measurement was the subject matter of the contract.  We do not agree.   Clause 23.1.1 has no application in the present case as it covers payment for  structural material which has no nexus with the Claim No. 4.  The claim of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 34 of 42  

MII was for labour charges due under the sub-contract for fabricating the  structures.   

       The learned arbitrator, in his partial award, while dealing with the said  claim held:

"15.7:    As regards replacement steel, BSCL would  procure suitable  steel for jackets (based on MTO  supplied by MII) on a replacement basis for MII  purchased steel.   BSCL would purchase steel  as plate   suitable for rolling 24 in OD and tubulars.   Replacement   material would be delivered  by BSCL  to  MII’s  yard at  Dubai, UAE or to Singapore Port Authority for  transshipment by MII , at  BSCL’s  cost,  to Batam  Island,  Indonesia.   In the matter  of computing  the  prices payable  for structural fabrication of piles, Jackets  and decks Clause 23.1.1  of the main fabrication  contracts provided that the prices  would be computed as  follows:  The payment  for structural material, namely,  steel  and steel tubulars and anodes, flooding  and  grouting system, rubberized   rings and rubberized  items  for barge bumpers, rub strips and boat landing would be  made on the basis of actual landed  cost  at  the yard  of  BSCL  or MII.   The landed cost would include CIF  price, testing charges, if any  plus  port charges, clearing   and handling  charges at port , transportation  to BSCL’s   or MII’s  fabrication yard  plus  local taxes, and ONGC  would pay to BSCL in additional  7 = per cent  of the  landed cost to cover the cost of procurement."

       Wastage allowance was relevant only for the purpose of allowance  due to BSCL from MII in respect of scrap materials.  The learned arbitrator  in his award had referred to evidence adduced in this behalf by Shri A.R.  Taylor.  The provisions of the contract have no bearing on calculation of  gross fabricated weight of the structures for determining the fabrication  charges due.    

       The use of AISC Code relates to the claim for fabrication charges  being Claim No. 1.  The said claim was for labour charges which was not a  claim for cost of material and, thus, nothing to do therewith.  The scheme of  the contract provides that total estimated tonnage of 18,178 ST will have the  following break \026 ups:

ED/EE Platforms                                 \026 6078 ST WI-8, WI-9, WI-10 and N3 platforms \026 12100 ST                                                    18178 ST

       Since the total tonnage of 18,178 ST was only an estimated tonnage,  the sub-contract made provision for variation of the contract price on the  basis of ’as fabricated’ tonnage.   Further the quantities of the materials used  were to be jointly determined by ONGC /EIL, BSCL and MII on the basis of  fabricated tonnage which was to be used for adjusting the sub-contract price.  If the "as fabricated tonnage" was found to be less than the estimated  tonnage, the excess payment received by MII through monthly bills was to  be refunded.  If the "as fabricated tonnage" was found to be more than the  estimated tonnage, MII was to be paid for the additional tonnage by applying  the rate of US $ 1067 per ST.  The contract was silent with respect to the  method or code to be applied for determining the "as fabricated tonnage".

       Clause 1.1.13 defined specifications to mean Industry Standard Codes  (ISC).  In the absence of a contractually specified method of calculation, the  MII applied the AISC Manual of Steel Construction for calculating the as  fabricated tonnage. AISC is an industry standard.  It has been applied by  ONGC in other contracts. Even the Arbitrator has noted that the BSCL has  also accepted the validity of the AISC Code. Now the BSCL cannot turn

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 35 of 42  

around and take a contrary position before this court in the proceedings  under Section 34 of the Act. Hence by adopting the AISC Code, the  Arbitrator has not acted contrary to the terms of contract.

       The arbitrator in his award noticed that the parties impliedly accepted  the validity of the AISC method of calculation for calculating the final  fabricated weight in the following terms:

"\005Instances of those contracts have been provided by  MII during the arbitration proceeding showing that the  AISC Code has been employed for determining the final  "as fabricated tonnage" of structures\005It seems to me  that inasmuch as BSCL has applied the AISC Code in the  case of long to long point distance measurement it cannot  be denied that the AISC Code is regarded as a valid basis  for measurement it cannot be denied that the AISC Code  is regarded as a valid basis for measurement. There is no  reason why it should be applied in the case of one  category of fabrication and not in the case of another."

        If before the arbitrator, the said mode of calculation was accepted, we  do not see any reason why the BSCL should be permitted to raise the said  question before us.

BUOYANCY TANKS FOR ED AND EE JACKETS

                It involves a question of fact.  It was a part of Claim No. 1 for  fabrication.  The contention of the BSCL is that whereas Buoyancy tanks  which were used in WI-8 and N3 jackets were removed by MII after  installation thereof, the same had been used after refurbishment on the  ED/EE jackets and in that view of the matter, no fabrication was required to  be done.  The claim of MII was that it had nothing to do with the cost of  material or the nature of the fabrication work involved.  Its claim was purely  based on the labour cost at the rate of US $1067 per ST which was incurred  by it towards fabrication work in the refurbishment of the Buoyancy Tanks.   According to it, the tonnage of the Buoyancy Tanks had not been taken into  account by ONGC on the ground that no fabrication work was done after  removal of the Buoyancy Tanks from N3 and WI-8 Jackets.  The learned  arbitrator, however, in his partial award found as of fact that substantial  fabrication work had been done by MII in the refurbishment of the said  Buoyancy Tanks in the following terms:

"12.22\005Accepting those instructions, MII made  substantial fabrication in refurbishing, handling, rigging  and welding the buoyancy tanks on the ED and EE  jackets. The oral evidences of RW S.K. Mukherjee shows  that the attachment of buoyancy tanks involves  substantial fabrication activity.  There can be no doubt  that fabrication work had to be done and that involved a  measure of labour activity. MII has demonstrated that  there was difference in weight between the original  buoyancy tanks used on the N-3 and W-8 jackets and the  weight of those tanks when used on the ED and EE  jackets. It says that this clearly points to substantial  fabrication activity for refurbishment of those two tanks."  

       It has further been held by the learned Arbitrator that MII had also  been able to establish that there had been a difference in weight between the  original Buoyancy Tanks used on N-3 and WI-8 Jackets and the weight of  those tanks when used in ED and EE Jackets.  In fact, the learned arbitrator  in arriving at the said conclusion had taken into consideration the admission  of Shri S.K. Mukherjee who was examined on behalf of BSCL itself that  attachment of Buoyancy Tanks involved substantial fabrication activity.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 36 of 42  

The dispute raised is a matter of appreciation of evidence.  The findings  arrived at by the learned arbitrator cannot, thus, be said to be perverse.   

TIE-DOWNS AND SEA-FASTENING

       This claim relates to the question whether MII was entitled to  payment for fabrication as the tie-downs and sea-fastening require  substantial fabrication job in regard whereof there did not exist any  provision in the contract.  The learned arbitrator has accepted the claim of  MII holding that offshore construction contracts, jackets and decks are  fabricated onshore and then they are transported on barges to the offshore  location for installation wherefor the lugs, braces and other sea-fastening and  tie-down items are required to be created which the installation contractor is  to use to weld the jackets and decks to the transportation barges, thereby  securing the jackets for their journey to the offshore location.  MII had  merely claimed payment for fabrication of tie-downs and sea-fastening as  part of the fabrication scope of work.  Reference has been made to clause 2  of the contract which is as under:

"2.1 (i)        (a) Load-out, seafastening, \005. 60% of the  transportation and installation  lumpsum  price of jacket, piles & appurtenances (b)     Load-out, seafastening, \005.40% of the  transportation and installation lumpsum  price of Decks, Hook-up and resting

       The said provision has no application in the instant case as it merely  provides for stage payment on milestone basis.  In fact, the clause which  would be attracted in the present case is contained in clause 2.1(a)(i) is as  under:

"The scope of work to be executed by Contractor under  this Contract shall comprises\005 (i)     Jackets  Including bergs bumbers, best landing, grouting  an  flooding systems, launch trustees, riser clamps. Catholic  protection anodes, and mats and other accessories and  components indicated in the drawings  and specifications    including  lifting lugs, pulling lugs, retaining  lugs etc.  for lead out and refastening and upending of the jacket."

       It specifically covers sea-fastening as part of the scope of fabrication  contract work.  WI-8, WI-9, WI-10 and N-3 fabrication contract also  contains a similar clause in Clause 2.1.

       The learned arbitrator in para 12.24 of his award noticed that BSCL  itself has acknowledged to ONGC that the tie-down materials had been  fabricated as part of the fabrication scope and the weight could not be  disallowed in calculating the ’as fabricated tonnage’.  It, therefore, evidently  cannot take a stand which is contrary thereto and inconsistent therewith.   Thus, by reason of the award, the learned arbitrator was of the opinion that  the sea-fastening and tie-down were part of the transportation and  installation scope and BSCL did not succeed in proving that the said item  should be included in the scope of transportation and is not a separate item  under the head of fabrication.  Again, the findings of the learned arbitrator  were within his domain, being findings of fact.

FOREIGN EXCHANGE

       Dispute in relation to the said claim would depend upon the  interpretation of clause 3 of Section 2 of the Consolidated Sub-Contract  Price Schedule which provides: "While the sub-contract price for the work described in  the letter of intent is payable by BSCL to MII in U.S.  Dollars the Main Contract Price is payable by ONGC to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 37 of 42  

BSCL in Indian Rupees. It has been agreed that Rupee- U.S. Dollar Excahnge rate shall remain fixed at Rs.  100.00=U.S$8.575 and loss or gain due to any variation  in the Rupee-U.S. Dollar exchange rate at the time of  actual remittance of bills would be to MII’s account.

       The aforesaid rate was the prevailing rate as on 9  August 1984 as mentioned in the Letter of Intent dated  11 September 1984. Within 30 days of completion of  MII’s scope of work under the Sub-contract, a  reconciliation will be made of all the payments made  from time to time.

       If the cumulative value of all Rupess expended to  buy U.S. Dollar remittance for the Sub-contract work  described in the Letter of Intent is less than the Rupee  equivalent of the Sub-contract price as determined on the  basis of the aforesaid rate prevailing on 9 August 1984,  BSCL shall remit the balance amount of Indian Rupees,  if any, to MII in U.S. Dollars at the prevailing rate of  exchange on the date of such U.S. Dollar remittance; and  if after such reconciliation it is found that BSCL have  expended Rupees in excess of the Rupees equivalent of  the Sub-contract Price for the work described in the  Letter of Intent, MII shall arrange to refund any such  excess in Rupees to BSCL."

       Clause 4.0 of the contract provides that the payment will be made by  BSCL to MII on receipt of payment by BSCL from ONGC.

       It is not in dispute that by reason of the contract entered into by and  between the parties the rate was frozen at Rs. 100 = US$ 8.575.  One of the  questions which arise for consideration is as to whether the said provision  applied to all the claims or not.  According to MII, having regard to the  provisions for milestone payments for transportation and installation, Clause  4.0 would apply only in relation thereto.   

       It is contended that BSCL had not correctly understood the merit and  purport of the said provision which has been sought to be explained.  The  said provision according to MII would be as under:   

If the contract is followed, MII gets US$100 and  pays back US$7.43, therefore the net receipt of  MII is US$ 92.57. However, BSCL had adjusted  the exchange rate at the time of payment only. The  rate as per contract 1 US$= 11.662. Thus, the rate  on the date of payment is Rs. 13. Therefore, the net  receipt of MII is only US$ 89.70. In reality, the  loss suffered by MII was much greater since in the  fifty-four month life of the project, the value of the  Indian rupee deteriorated drastically against the  U.S. dollar.

       It is not in dispute that in terms of the contract, the payments made by  BSCL, which was to be in US dollars, was required to be reconciled at the  end of the contract.  According to MII, if BSCL expended less than the  rupee amount stipulated in the sub-contract in dollar payments, BSCL would  convert the unused rupees to dollars to remit the dollars to MII.  Whereas if  BSCL expended more than the agreed amount of rupees, MII would refund  the excess amount to BSCL so as to ensure sharing of exchange loss by both  the parties.  According to MII, however, BSCL acted contrary to the said  provision insofar as instead of paying the full amount of invoice in US  dollars it paid at the fixed exchange rate relying on, or on the basis of, the  aforementioned provisions, resulting in loss suffered by MII.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 38 of 42  

       The learned arbitrator proceeded on the basis that loss of exchange  provisions had no application in respect of structural material (claim 4), bulk  material (claim 5), transportation of pipe (claim 6), reimbursables (claim 7),  change orders and extra work (claim 8) and delay and disruption (claim 9).   BSCL although has acted in breach of the contract in which variation  provision as regard the claims of the sub-contract, viz., scope of fabrication  work (Claim 1), transportation and installation of platforms (Claim 2) and  transportation and installation of pipelines and risers (Claim 3) while making  payments.  It is, however, one thing to say that having regard to the nature of  breach on the part of BSCL, MII would be entitled to claim damages, but it  is another thing to say that by reason thereof it would be entitled to full  payment without deduction relating to the BSCL conversion of Indian  rupees to US dollars.  It is not in dispute that the initial claim of MII was US  $ 2881195.03 which was later on revised to US $ 3330790.94.

       In terms of the agreement, payments were to be made to MII if the  payments were certified by EIL and upon receipt of payments from ONGC  and upon receipt of foreign exchange clearance.  For appreciating the  aforementioned disputes, it may be necessary to refer to the general terms of  payment clause: "1.     Fabrication Claims for structural fabrication work is to be billed by  MII duly certified by EIL on monthly basis and the  payment of the same bills shall be released after 60 days  of receipt of the bill by BSCL. 4.      Payments as stipulated above will be subject to the  following conditions: (a)     Receipt of foreign exchange clearance by BSCL. (b)     Payments on milestone basis will be made by  BSCL to MII only after payments have been received by  BSCL from ONGC."

       The learned arbitrator held that MII would be entitled to receive the  entire amount as BSCL, despite receipt of payment from ONGC, did not pay  the amount to MII.  For the purpose of applicability of the exchange rates,  the same, in our opinion, is irrelevant.  The award was required to be made  in terms of the contract whereby and whereunder the foreign exchange rate  was frozen as was applicable on 9th August, 1994.  The parties were bound  by the said terms of contract.  It may be noticed that the sub-contract was  entered into on 1st January, 1986.  The execution of the contract had started  much earlier, i.e., much before the date of entering into the contract.   The  purpose for which the Rupee \026 US Dollar conversion rate has been frozen as  on 9th August, 1984 must be viewed from the angle that thereby the parties  thought that loss or gain towards the exchange rates would be on account of  MII.  It is in the aforementioned situation that a letter of intent in the  following terms was served:  

"M/s. McDermott International Inc., P.O. Box 3098 Dubai United Arab Emerates.

Dear Sirs,

       Sub: ED, EE, WI-8, 9, 10 & N3 Platforms

       Ref: Minutes of Meeting dt. 9.8.84         Your offer P/M 547 dt. 9.8.84                                 8/3132 dt. 4.9.84

       With reference to the above, we are pleased to issue this  Letter of Intent conveying acceptance of your offer for the  following:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 39 of 42  

1.0 FABRICATION 1.1 Fabrication, load-out & sea-fastening of 6 Jackets with Piles  including all appurtenances such as boat landing, conductor,  riser clamps etc.

1.2 Fabrication, load-out & sea-fastening of 4 main decks, WI- 8, 9, 10 & N3 complete with installation of all equipment,  process piping, electricals and instrumentation work including  all yard test.

1.3 Refurbishing of 4 temporary decks to be supplied by  ONGC.

2.0 TRANSPORTATION 2.1 Transportation, installation, hook-up & commissioning of  all above i.e. 1.1, 1.2 & 1.3 and ED, EE Decks and 6 helidecks  fabricated by BSCL at Jellingham.  Temporary deck will be  collected from ONGC and taken to MII yard.  Additionally the  temporary decks will be removed prior to installation of this  deck and handed back to ONGC.

3.0 Transportation, installation, hook-up & commissioning of  Submarine Pipeines & Risers.

4.0 PRICES

       The lump sum price is as follows:- 4.1     For 1.1, 1.2 & 1.3 of above     US$     19,400,000 4.2     For 2.0 of above                        US$     23,025,000                                 TOTAL   US$     42,425,000

4.3 PIPELINES For 3.0 above pipelines totaling 28 US$ 3,800,000 L.S. KM in  length and installation of 8 risers @ US$ 91 per metre of  pipeline and US$ 156,485 per Riser. 4.4 The above lump sum prices are based on estimated tonnages  and flowline length and number of risers.  Any variation in the  above will alter the prices pro rata. 4.5 The above amounts are based on the exchange rate between  U.S. Dollars and Indian rupees (as ruling on 9.8.84).  Any  variation in the above rate will be to MII’s account.

5.0 TERMS & CONDITIONS 5.1 All terms and conditions other than the payment terms as  stipulated by ONGC in their contract with BSCL for the above  platforms will be applicable to MII. 5.2 The lumpsum price is inclusive of all engineering required  for total scope of BSCL’s & MII’s work for six platforms as  well as all technical service support by provision of expert  personnel to BSCL.

6.0 TERMS OF PAYMENT

Terms of payment are to be mutually discussed and agreed to.   It is however understood that payment on milestone basis will  be made by BSCL to MII only after payments have been  received by BSCL from ONGC.

7.0 DELIVERY MII will ensure delivery in such a manner that the delivery  dates as stipulated by ONGC for the above platforms will be  met.

8.0 It may be noted that this Letter of Intent is subject to  clearance of Import List form DGTD and receipt of sanction

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 40 of 42  

from Government of India for release of requisite amount of  foreign exchange and import licenses etc.  In case Govt’s  clearance/ approval is not received, this Letter of Intent will be  withdrawn without any financial repercussions on either side.   We shall however inform you as soon as Govt’s approval/  clearance is received by us.

Subject to this, we would request you to proceed with the work  to ensure completion within the agreed schedule."

       There might be some delay on the part of BSCL to make payments.   We may not go into the aforementioned question, but to hold that the  exchange rate clause shall cease to have any application only because of the  breaches on the part of BSCL, cannot be accepted.

       We are not in a position to accept that the exchange variation  provision does not relate to the payments in respect of Claim Nos. 1, 2 and  3.  The objection raised by the claimant to the said extent is accepted.

SUBSTITUTION

       It is not in dispute that MII had substituted heavier material, as  material conforming to ONGC specification was not available readily in the  market.  The matter was referred to EIL.  Use of material was found to be  technically acceptable to EIL to which ONGC agreed by a letter dated 3rd  May, 1985.  ONGC, however, made it clear that it would not make payment  for the substituted material.  BSCL immediately by a telex dated 13th May,  1985 informed the same to MII.  ONGC also in its letter dated 6th December,  1984 categorically stated:

       "The subject matter highlighted in your letter  mentioned above has been reviewed by us  and we   have   found  that  payment against  increased tonnage on  account of material substitutions proposed by M/s.  BSCL/MII cannot  be agreed to.   Based on above we  reiterate our view that we will pay the material/  fabrication costs based on the materials shown  in  the  AFC drawings."

       The claim of MII is based on the failure on the part of the BSCL to  fulfil its part of the obligation in procurement of the required material.  It is  true that BSCL agreed to reimburse MII for the same.  MII’s claim is  partially based on the facts that EIL had recommended payments therefor as  stated in a letter to ONGC dated 10 February 1987 and 6 April 1987.  

       However, it is also not in dispute that ONGC did not accept the said  recommendations and refused to take into consideration the substituted  tonnage for payment of ’as fabricated tonnage’.   

       There may be a dispute in this behalf between BSCL and ONGC.   However, admittedly, ONGC refused payment to BSCL.   

       In his partial award, the learned arbitrator noticed that ONGC’s  involvement was imperative.  ONGC had all along maintained its stand that  it was not ready and willing to bear the extra costs.  The correspondence  between the parties was brought on record.   

       Clause 5 of the contract categorically states that MII was to procure  the material which was to be reimbursed by BSCL.  The extra amount  incurred by MII for procuring materials having extra thickness, therefore,  was not payable.  To the aforementioned extent, there has been a novation of  contract.   MII had never asserted, despite forwarding of the contention of  ONGC, that it would not comply therewith.  It, thus, accepted in sub silentio.   It, thus, must be held to have accepted that no extra amount shall be payable.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 41 of 42  

It is one thing to say that some more amount might have been spent towards  fabrication but the learned arbitrator has awarded the exact amount claimed  by MII in the following terms: "I am satisfied that MII is entitled to a payment of US$  20, 832.108 for the disallowed tonnage of 19.584 ST at  the contractual rate of US$ 1067 per ST."

       It is in the aforementioned context that the involvement of ONGC was  necessary and if it is the accepted case of the parties that ONGC would not  entertain any claim of BSCL in this behalf, a fortiori having regard to the  tripartite agreement, the learned arbitrator could have no jurisdiction to  determine the claim in favour of MII only because at one point of time  BSCL had raised its own claim with ONGC.  In other words, any reduction  of the claim of the BSCL by ONGC had a direct nexus with the claim of  MII.  It was, therefore, not a case where ONGC was not involved in the  matter.  The exchange of letters categorically proves that MII had accepted  that it would not be entitled to any extra amount in that behalf.  MII by  necessary implication accepted the said contention.  The principle of  acceptance sub-silentio shall also be attracted in the instant case.  MII was,  therefore, not entitled to raise a claim to the extent of fabrication on account  of the increased charges for substitution of material used for WI-8, WI-9,  WI-10 and N-3 Jackets and piles.   

       To the aforementioned extent, the claim of MII was beyond the terms  of the contract.

INTEREST

       The power of the arbitrator to award interest for pre-award period,  interest pendent lite and interest post-award period is not in dispute.  Section  31(7)(a) provides that the arbitral tribunal may award interest, at such rate as  it deems reasonable, on the whole or any part of the money, for the whole or  any part of the period between the date on which the cause of action arose  and the date on which award is made, i.e., pre-award period.  This, however,  is subject to the agreement as regard the rate of interest on unpaid sum  between the parties.  The question as to whether interest would be paid on  the whole or part of the amount or whether it should be awarded in the pre- award period would depend upon the facts and circumstances of each case.   The arbitral tribunal in this behalf will have to exercise its discretion as  regards (i) at what rate interest should be awarded; (ii) whether interest  should be awarded on whole or part of the award money; and (iii) whether  interest should be awarded for whole or any part of the pre-award period.  

       The 1996 Act provides for award of 18% interest.  The arbitrator in  his wisdom has granted 10% interest both for the principal amount as also  for the interim.  By reason of the award, interest was awarded on the  principal amount.  An interest thereon was upto the date of award as also the  future interest at the rate of 18% per annum.   

       However, in some cases, this Court was resorted to exercise its  jurisdiction under Article 142 in order to do complete justice between the  parties.

       In Pure Helium India (P) Ltd. (supra) this Court upheld the Arbitration  award for payment of money with interest at the rate of 18% p.a. by the  respondent to appellant. However, having regard to long lapse of time, if  award is satisfied in entirety, respondent would have to any a huge amount  by way of interest. With a view to do complete justice to the parties, in  exercise of jurisdiction under Article 142 of the Constitution of India, it was  directed that award shall carry interest at the rate of 6% p.a. instead and in  place of 18% p.a.   

       Similarly in Mukand Ltd. v. Hindustan Petroleum Corpn., [2006 (4)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 42 of 42  

SCALE 453], while this court confirmed the decision of the division bench  upholding the modified award made by the learned single judge, the court  reduced the interest awarded by the learned single judge subsequent to the  decree from 11% per annum to 7 = % per annum observing that 7 = % per  annum would be the reasonable rate of interest that could be directed to e  paid by the appellant to the respondent for the period subsequent to the  decree.

       In this case, given the long lapse of time, it will be in furtherance of  justice to reduce the rate of interest to 7 = %.

       As regards certain other contentions, in view of the fact that the same  relate to pure questions of fact and appreciation of evidence, we do not think  it necessary to advert to the said contentions in the present case.

CONCLUSION

       I.A. Nos. 2 and 3 are allowed in part and to the extent mentioned  hereinbefore. The award of the learned Arbitrator is modified to the  aforementioned extent.  In the facts and circumstances of this case, there  shall be no order as to costs.