Civil Appeal No. 3415 of 2007. Case: Oil and Natural Gas Corporation Ltd. Vs Western Geco international Ltd.. Supreme Court (India)

Case NumberCivil Appeal No. 3415 of 2007
JudgesT.S. Thakur, C. Nagappan and A.K. Goel, JJ.
IssueArbitration and Conciliation Act, 1996 - Sections 34, 34(2), 34(3), 75, 81; Municipal Corporations Act, 1882 - Sections 191, 191(4); Income tax Act; Constitution of India - Article 226
Judgement DateSeptember 04, 2014
CourtSupreme Court (India)


T.S. Thakur, J.

  1. This appeal arises out of an order dated 10th February, 2006 passed by a Division Bench of the High Court of Judicature at Bombay whereby OSA No. 24 of 2006 filed by the Appellant-Corporation has been partly allowed and the order passed by a single bench of the High Court in Arbitration Petition No. 203 of 2005 affirmed with the modification that award of pendente lite and future interest by the Arbitral Tribunal shall stand deleted.

  2. The Appellant-Corporation is engaged in the business of drilling and exploration of oil and natural gases. In November, 1999, the Appellant invited offers for technical upgradation of Seismic Survey Vessel, M.V. Sagar Sandhani (hereinafter referred to as the "Vessel") with a view to modernising the same. According to the tender conditions, one of the main items of equipment required for upgradation of the Vessel was "Streamers" fitted with hydrophones. The specifications, however, did not stipulate the national origin of such hydrophones.

  3. In response to the tender notice Respondent-M/s. Western Geco International Ltd., submitted a bid offering to supply Nessie 4 streamers equipped with "Geopoint" Hydrophones of U.S. origin. The Appellant's case is that the term relating to supply of such Geopoint Hydrophones formed a material part of the offer made by the Respondent-company in whose favour the Appellant-Corporation eventually awarded a contract in terms of its letter dated 10th October, 2000 duly accepted by the Respondent on 25th October, 2000. The Vessel was resultantly handed over to the Respondent on 10th April, 2001 for carrying on the proposed modernisation and upgradation work. A formal contract was in due course executed between the parties on 18th June, 2001.

  4. It is common ground that "Geopoint" Hydrophones of U.S. origin were in terms of the contract fitted in the vessel and test trials of the same conducted. Even so the vessel could not be delivered back to the Appellant on 9th July, 2001, the due date for that purpose, because of some problem which the Respondent encountered in obtaining licence from the U.S. authorities for sale of such hydrophones. The Appellant-Corporation asserts that the Respondent had for the first time made an application to the U.S. authorities for issuance of a licence as late as on 1st August, 2001 i.e. nearly a month after the due date for delivery of the vessel back to the Corporation. No formal rejection of the request for a license was according to the Corporation communicated to it as the matter appeared to be under some kind of negotiations between the Respondent and the authorities in U.S.

  5. The Respondent's case per contra is that it continued its efforts to obtain a licence only to be informed by its sources in the US that the latter was likely to impose certain onerous conditions one of which could be that US made hydrophones can be used only on loan basis that too for a short duration of 24 months only. Respondent's further case is that its source in US had informed it that the US authorities were not likely to grant a licence to sell hydrophones to India. Be that as it may while the matter was pending with the Defence Department, a massive terrorist attack on 11th September, 2001 shook America. The Respondent's hope of getting a licence for sale of US made hydrophones receded further with this unexpected development. The Respondent accordingly informed the Appellant-Corporation about the new development and pleading force majeure the Respondent informed the Appellant-Corporation of the former's inability to equip the vessel with U.S. made hydrophones. The Appellant-Corporation refuted the invocation of force Majeure by its letter dated 20th September, 2001 and informed the Respondent that since the field season was starting shortly any further delay in the delivery of the vessel would adversely affect its operation. The Respondent on its part started looking for and offering alternatives to the U.S. made hydrophones and argued with the Appellant-Corporation that since origin of the hydrophones was not indicated in the bid documents it was testing replacement by M-2 US Geo Spectrum Hydrophones made in Canada at its Norway facilities to check their suitability which exercise the Respondent hoped to complete by 27th September, 2001. The Respondent informed the Appellant-Corporation that if the Corporation accepted the replacement, those hydrophones could be substituted for the US hydrophones within a short time.

  6. The Appellant-Corporation was, however, in no mood to accept a substitute for the contracted hydrophones. It was on the contrary keen to have US made hydrophones fitted on the vessel. The Corporation, therefore, required the Respondent to continue its efforts to secure a licence from the US Government in which direction the Appellant-Corporation on its own moved the concerned Ministry in Government of India to secure a licence. Further information and details in respect of the proposed Canadian hydrophones was all the same called for by the Corporation from the Respondent. Since, however, the efforts to secure a licence from US Government were making no progress, the Respondent sought approval of the Appellant-Corporation to remove the US hydrophones from the vessel and transfer them to their repair facility in Singapore to facilitate replacement by the Canadian made hydrophones. The Respondent also wrote a detailed letter dated 10th October, 2001 to the Appellant-Corporation informing the latter that the US government was not likely to grant a licence and that it had withdrawn the application made for that purpose to prevent a denial. What is important is that by letter dated 16th October, 2001 the Respondent clearly stated that it was not in a position to deliver the vessel with streamers containing the Geopoint Hydrophones of US make. This letter was followed by letter dated 21st October, 2001 addressed to the Appellant-Corporation with a request to permit removal of US hydrophones and replacement of Canadian hydrophones which had been extensively tested 1999 in connection with supply of Seismic Survey Vessel delivered to NOIC for the Iran project. Further information required by the Appellant-Corporation was also supplied by the Respondent by its letter dated 24th October, 2001 with a request to the Corporation to approve the proposed replacement. The Respondent also agreed to give additional warranty of one year for the replaced hydrophones. By another letter dated 13th November, 2001 the Respondent assured the Appellant-Corporation that if the latter agreed to the replacement proposal there would be no financial implications and the additional cost involved in fixing the Canadian hydrophones would also be borne by the Respondent.

  7. It was only on 23rd March, 2002 that the Respondent conditionally agreed to the proposed replacement of the US made hydrophones by those made in Canada. One of the conditions imposed for the replacement by the Appellant-Corporation was the right to recover liquidated damages as per Clause 16 and for excess engagement of vessel as per Clause 14 of the subject contract. The replacement accordingly took place and the Vessel eventually delivered back to the Corporation with Canadian hydrophones on 6th May, 2002. On 24th May, 2002, a formal amendment to the contract was also effected to record the substitution of the US hydrophones by those made in Canada.

  8. With the upgradation and modernisation work completed as per the amended contract, the Respondent raised invoices for payment due to it but realised that the Appellant-Corporation had deducted from its dues a sum of US $ 5,114,300.98 towards excess engagement charges in terms of Clause 14 of the contract. By another letter dated 20th August, 2002, the Appellant-Corporation further deducted a sum of US $ 410,641.20 based on a change in tax law applicable at 4.8% followed by a deduction of a sum of US $ 80,530.10 based on correction for price charges inclusive of income tax at 4.8%. These deductions gave rise to disputes which were referred for adjudication to an arbitral tribunal comprising three former Chief Justices of India before whom the Respondent claimed a sum of US $ 7,327,610.68 towards principal dues plus US $1,205,564.13...

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