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CASE NO.: Appeal (civil)  5210 of 2007

PETITIONER: ONGC Ltd.

RESPONDENT: Garware Shipping Corpn. Ltd.

DATE OF JUDGMENT: 14/11/2007

BENCH: Dr. ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No.15036 of 2005)

Dr. ARIJIT PASAYAT, J.

1.      Leave granted.         2.      Challenge in this appeal is to the judgment rendered by a  Division Bench of the Bombay High Court dealing with an  appeal questioning the correctness of the order passed by a  learned Single Judge who dismissed the appellant\022s appeal  under Section 34 of the Arbitration and Conciliation Act, 1996  (in short the \021Act\022) questioning the Arbitrator\022s award.         3.      The controversy lies within a very narrow compass.         4.      The factual background is almost undisputed and is  essentially as follows:

    The appellant required off shore vessels (in short \021OSVs\022)  inter-alia, for supplying material from its onshore bases to its  offshore installations. After initially meeting its requirements  by chartering foreign OSVs, the appellant decided to develop a  fleet of Indian Flag vessels. Various Indian companies  including the respondent and the Shipping Corporation of  India (in short \021SCI\022)  acquired OSVs, with a view to chartering  them to the appellant. The respondent acquired five vessels-  (named Garware I to Garware V) which were handed over to  the appellant in the months of November and December, 1983  and January and March, 1984.      The dispute pertains to the cost of repairs and  maintenance of the respondent\022s OSVs for the eleventh to the  sixteenth year of their operation. Even though there is no  dispute regarding the first two terms of five years each,   reference to the manner in which the rates for the same were  arrived at is necessary. A working group under the Director  General of Shipping was constituted by the Ministry of  Petroleum to determine the floor day rate in respect of the  vessels keeping two objects in mind, i.e. (a) long term  availability of the OSV\022s for the appellant and (b) economic  viability to ensure the respondent\022s survival in the business.  The report was submitted by the working group on 8.3.1984  suggesting the day rate which comprised of two components,   i.e. (a) capital recovery factor and (b) operating expenses.   Contracts were accordingly entered into for the first five year  period beginning from 1983-84. The Government of India by  an order dated 18.8.1984 approved the report in certain

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respects only. There is no dispute between the parties  regarding the payments of operating costs for the first five  years. The charter was extended by another five years. A  committee presided over by Dr. A.N.Saxena was formed to  review the operating costs payable for the extended term. The  Government approved the report of the Committee on  5.8.1993. There is no dispute between the parties in respect of  the payments regarding the second five year period also.        5.      The present dispute relates to the period beyond ten  years so far as relates to the basis for computing the rates for  repairs and maintenance. By an order dated 29.4.1993 the  charter was extended by a further six years. By an order dated  16.3.1995 and as modified by an order dated 14.9.1995, a  committee also presided over by Dr. A.N. Saxena was formed  to recommend a suitable formula for the charter rate for the  further extended period.       6.      The committee submitted its report on 14.9.1997. This  committee made recommendations inter-alia in respect of  repair and maintenance expenses. The reference to arbitration  was confined only to the payment of these repairs and  maintenance expenses. 7.      The Government of India by a letter dated 15.6.1998  accepted the recommendations of the second Dr. A.N. Saxena  Committee only partially. Representations were thereafter  made by the Indian Shipping Companies including the  respondent for reconsideration of the recommendations.  Pursuant thereto, the Government of India appointed a High  Level Working Group presided over by Mr. Naresh Narad for  considering the outstanding pending issues. The following  recommendations of the High Power Committee are relevant:       \023Pending Issues. 1.      Determination of year   a) 1 to 5 years as per      from which R & M                payments already      expenses are to be                      made. Settled cases      actualized.                             Not to be reopened.

                              b) 6 to 10 years as per                                  norms fixed by Dr.                                  Saxena Committee                                  of 1995-77.                                                                c) 11 and 12 years to                                  actualized on the basis                                  of S.C.Is\022 OSVs as                                  recommended by                                   Dr. Saxena Committee                                  of 1995-77.\024                                   8.      Disputes and differences arose between the appellant  and inter-alia the respondent and others regarding the method  to the adopted for calculating rates payable with reference to  the eleventh to the sixteenth years. The respondent, therefore,  filed Writ Petition No.2788 of 2001 for various reliefs.       9.      By an order dated 7.12.2001 a Division Bench of the  High Court recorded that the Writ Petition involved certain  contractual disputes and that both the parties had agreed to  refer the disputes raised in the Writ Petition to the sole  arbitration of Mr. Justice M.L.Pendse (a former Judge of the  Bombay High Court and the former Chief Justice of the  Karnataka High Court). The order which is a short one, reads  as follows:

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\023This writ petition involves certain contractual  disputes relating to repairs and maintenance  expenses etc. contract between the parties  contain an arbitration clause. Both the  parties agree to refer the disputes raised in  the writ petition to sole arbitration of Justice  M.L. Pendse (Retd.).  Parties further agree  that in case Justice Pendse is not in a  position to take up the arbitration, Justice  D.R. Rege (Retd.) shall be the arbitrator for  the disputes between the parties.  Arbitrator  is requested to dispose of the arbitration as  expeditiously as possible.       Petition is disposed of.\024

     10.     The learned arbitrator noted the respondent\022s  submission that while calculating the payments due for the  11th to 16th years of the operation of the OSVs of the  respondent, the appellant has overlooked the important fact  that the OSVs of the respondent were taken on charter one  year prior to the appellant obtaining the OSVs of the SCI. The  respondent, therefore, contended that it was not correct that  the corresponding years of SCI should be taken into account  while determining amounts payable to the respondent. The  learned arbitrator rejected the appellant\022s contention. He held  that the committee nowhere recommended that irrespective of  the period of induction, the years should be calculated of that  of the SCI. He held that the respondent had not questioned  the recommendations made by the High Level Working Group  Report and the second Saxena Committee Report but merely  contended that the mode of implementation thereof was  incorrect. The arbitrator further observed and accepted that it  was not open for him to go behind the report and the only  area of enquiry is whether or not the report was correctly  implemented. He came to the conclusion that on a close  scrutiny of the reports, it was clear that neither of the  committees examined whether the entitlement of each OSV is  to be determined with reference to the years of actual user or  only with reference to the calendar years. He also came to the  conclusion that for the computation of repairs and  maintenance expenses, it was necessary to take into  consideration the years of operation and not the calendar  years. It was held that the 12th year of operation of SCI\022s  OSVs should be equated with the 13th year of operation of the  OSVs of the respondent and so on. He also held that the  interpretation suggested by the appellant would lead to great  injustice. For instance, the OSV of the respondent would  complete 11 years of operation while the OSVs of the SCI  would have operated only for 10 years.       11.     Appellant questioned correctness of learned Arbitrator\022s  conclusion by filing an appeal under Section 34 of the Act.  Learned Single Judge dismissed the appeal holding that the  conclusion was rational. An appeal filed was also dismissed.        12.     According to the Division Bench, the learned arbitrator  has considered and construed the reports while arriving at his  conclusions. The entire dispute in the Writ Petition and before  the learned arbitrator centered around this issue. The basis of  the calculation adopted by the learned arbitrator was, not only  logical but just and fair. The provisions of the said reports are  not such that they required no interpretation and were merely

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to be applied without anything more. They called for a proper  interpretation and construction before being applied to the  facts of the case. The learned arbitrator did so.           13.     The learned Single Judge held that undoubtedly there  was no reference so far as the period of 13 to 16 years are  concerned to the learned Arbitrator.  But the prayers and the  writ petitions clearly indicated that even for that period an  issue was raised.

14.     The Division Bench was of the view that even if the mode  of calculation as applied by the arbitrator is not very  appropriate in its effect, that could not be a ground for  exercise of power under Section 34.   

15.     It noted that the reference in fact did not include the 13th  to the 16th year to inspect that the arbitrator thought it  improper to open the same. The High Court was of the view  that a narrow technical reading of the Award cannot be made.

16.     In support of the appeal, learned counsel for the  appellant submitted that both learned Single Judge and the  Division Bench failed to notice that the Award made by the  Arbitrator was beyond the reference made. The arbitrator\022s  view that the corresponding year could be a more appropriate  factor is without foundation. The Bench mark of SCI in a  particular year could not be departed from. There was no  scope for shifting of figures. There is no rule of universal  application that the cost of maintenance would be more when  the vehicle becomes older. The normative figure for third  period remained constant. The order of operation is the  operating order and the financial order is defining. Though in  the Writ Petition there was challenge to 13 to 16 years, a bare  reading of the writ petition shows that it did not relate to the  said period.

17.     In response, learned counsel for the respondent  submitted that two views are possible and, therefore, High  Court\022s view should not have interfered. Arbitrator had  accepted one view which is possible.  No one says that it is de  hors the Committee\022s report.  It is a case where no interference  is called for under Article 136 of the Constitution of India,  1950 (in short the \021Constitution\022) as substantive justice had  been done, even though the order may be wrong on some  parts.

18.     Some of relevant parts of the Report of HLWG need to be  noted:

       \023This High Level Working Group  therefore, concludes that R&M expenses are  to be actualized with effect from the 11th year  of operation.\024

It was further noted as follows:

\023This Committee was seized of the anomaly of  lower rates being paid to those Owners who  exercised greater management effectiveness  by ensuring lower capital costs, lower interest  rates and lower debt equity ratios.

19.     The High Level Working Group, therefore, felt that  though it is now not possible to correct any anomalies that

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may have crept in during the first twelve years, at least for the  last term of four years the formula should reflect, as far as  practicable, the principle of equal pay for equal work.       20.     It is to be noted that the anomalies referred to in the  subsequent paragraphs relate to the anomaly of lower rates  being paid to owners to exercise greater management  effectiveness by ensuring lower capital because of lower  interest rate and lower rate equality ratio.

21.     The recommendations of the HLWG are as follows:

1. Determination of year  from which R&M  expenses are to be actualized a.      1st to 5th year as per  payments already made.  Settled cases not to be  reopened.

b.      6th to 10th year as  per norms fixed by the Dr.  Saxena Committee of  1995-97.

c.      11th and 12th years  to be actualised on the  basis of SCI\022s OSVs as  recommended by the Dr.  Saxena Committee of  1995-97.

5. Ceiling rates for\023A\024 type  Vessels only pertaining  to the period beyond 12  years of operation

a. From 1st to 5th year  ceiling rates as already  paid by ONGC.

b. From 6th to 1Oth  year  floor rates to be paid by  ONGC. c. For the 11th and 12th  years ceiling rates to be  paid by ONGC

6. Compensation in lieu  of CRF a. The Operating  Expenses (including Crew  Salary & Wages covering  agreements between INSA and MUI/ NUSI) as  determined on the last day  of the 12th year of  operation for each vessel, (as per recommendations

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of the Dr. Saxena  Committee and further  modified by this Working  Group) to be fixed and  made applicable for the  next four year i.e. from the  13th to the 16th year.

                         22.     Operating costs are to be calculated on the basis of  actual expenditure incurred by SCI in operating SCI\022s OSVs  for full (first) one year period.

23.     The committee observed that the actual expenses of SCI  have not followed any uniform pattern. The scale to be  suggested by the committee needed to be based on some  normative amount for a base year over which an escalation of  9.5% per annum may be considered for a block of five years  and for subsequent block of five year the base may be changed  in the same pattern as that of victualling cost. The committee  observed that the total cost of repair and maintenance for the  block of five years, that is, 1988-89 to 1992-93 of SCI\022s OSVs  is Rs.106.482 lacs per OSV as against the recommended  amount of Rs.97.618 lacs given in the JS & FA committee  report. The committee considered that the SCI\022s audited  statement of R&M expenses may be considered as appropriate  amount for reimbursement to Shipowners. The difference  between SCI\022s audited R&M expenses and the normative  amount was to be reimbursed to the Shipowners on receipt of  SCI\022s audit statement from time to time in proportion to the  BHP of the respective OSVs.

24.     As the concept of reimbursement is the measure fixed,  the year of operation can vary is an irrelevant factor. The  repair and maintenance expenses have also been dealt by the  Committee.  

25.     In accordance with the deliberation of the Committee on  this at para 3.5.5, the committee recommended the normative  R&M expenses of OSV of 5400 BHP for the year 1988-89 to  1993-94 to be same as given in the JS&FA Committee report.  The R&M expenses for the subsequent years were  recommended at the rate of 9.5% escalation per annum on the  expense of the year 1993-94 upto 1998-99 and the amount for  of subsequent years @ 9.5% escalation per annum. The  difference between the recommended normative amount given   and the  actual R&M expense of SCI\022s OSVs of 5400 BHP  (Audited statements) were to be reimbursed on year to year  basis after receipt of the audited statement from SCI  additional reimbursement of corresponding overhead expenses  in the ratio of 15:85 of the differential amount will also be  made. The differential amounts for other OSVs were  recommended to be calculated pro rata basis of the BHP of the  respective OSVs w.r.t. above differential amount for OSVs of  5400 BHP.       26.     Though there was some controversy as to whether the  year referred to is the financial year as reimbursement was on  year to year basis after receipt of the auditor\022s statement from  SCI the norms obviously relate to financial year.       27.     A few factual aspects need to be noted. So far as Essar is  concerned, the year is same as SCI. In case of Bann, there was  one time settlement and it is only JESCO  which challenged

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the report. SCI\022s first year of operation was 1984-85. The  figures for that year  provide some material for rationalization.  It is to be noted that stress is on re-imbursement. Thus the  measure is fixed and, therefore, year of operation is  immaterial. It needs no reiteration that claim was for 11th and  12th years and the award also covered from 13th to 16th year. It  is also to be noted that the HLWG referred to certain  anomalies. But they related to the previous years. The \023Bench  Mark\024 is the figure of SCI of particular year. So when entry to  business was made is irrelevant.        28.     There is no proposition that the courts could be slow to  interfere with the arbitrator\022s Award, even if the conclusions  are perverse, and even when the very basis of the Arbitrator\022s  award is wrong. In any case this is a case where interference is  warranted and we set aside the norms prescribed by the  Arbitrator as upheld by the learned Single Judge and the  Division Bench.         29.     The appeal is allowed to the aforesaid extent with no  order as to costs.