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Bombay High CourtIndian Cases

Oil And Natural Gas Corporation Ltd. vs Jagson International Ltd. on 30 October 2001

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Bombay High Court
Oil And Natural Gas Corporation Ltd. vs Jagson International Ltd. on 30 October, 2001
Equivalent citations: (2002)104BOMLR551
Author: F.I. Rebello
Bench: F.I. Rebello

F.I. Rebello, J.

1. Disputes were referred to Arbitration. An Award Came to be passed on 18.12.1999 directing payment of various amounts along with interest at the rate of 15% p.a. from the date the amounts became due till payment. The counter-claim filed by the present petitioners, has been rejected. By the present petition, Petitioners pray that the Award dated 18.12.1999 made and published by the learned Arbitrators, be set aside and or suitably modified. A few facts need to be set out considering the controversy in issue and the contentions raised on behalf of the Petitioners. There was admittedly a contract entered into between the Petitioners and Respondents on 25.2.1989. Clause 1.3 of the contract provided for its duration. The said clause provided that the Agreement was initially to be for a period (Primary Term) of one working season i.e. upon 15th May, 1989 from the commencement date and that Operator shall have the right to extend the Primary Term of the agreement, in two installments not exceeding one working season each on the same rates, terms and conditions as set forth by giving thirty days written notice to the Contractor before the expiration of the Primary Term. Working season was to be from the 15th September, of each year to 15th May of each year. No rate of compensation whatsoever was to be payable during period of 15th May to 15th September in each year notwithstanding anything contained elsewhere in the Agreement. Sub-Clause (b) therein provided that the agreement will be automatically extended, under the same rates, terms and conditions to cover the time necessary to complete or abandon, to the satisfaction of Operator the well-in-progress at the end of the Primary Term of the Agreement or extension thereof, if any. Clause 1.2 provided for termination and sets out that the agreement shall come to an end when the drilling of the last well is completed/terminated or the well is abandoned and all equipment belonging to operator or its third parties are off-loaded and the Drilling Unit is ready for pulling its last anchor. Compensation payable has been set out in Clause 3 under various headings like mobilization, demobilization, day rate, operating rate, non-operating rate, moving rate. Break down and Break down rate, hull inspection, etc. Clause 28 provides for settlement of disputes. Relevant portion of which may be reproduced hereunder:

If any dispute, difference or question shall at any time thereafter arise between the parties hereto or their respective representative or assignees in respect of the construction of these presents or concerning anything herein contained or arising out of these presents or as to the right, liabilities or duties of the said parties hereunder, which cannot be mutually resolved by the parties, the same shall be referred to Arbitration….
Clause 29 provided that the Agreement including all matters connected with this agreement, shall be governed by the laws of India (both substantive and procedural) for the time being in force and shall be subject to exclusive jurisdiction of the Indian Courts.
2. On 15.5.1998, a telex was addressed by the Petitioners to the Respondents whereby the Petitioners under the terms of the contract for extension of the contract exercised their right for the period of one more working season towards the first installment in terms of Clause 1.3(a) of the contract on the same rates, terms and conditions. A further request was made to acknowledge the receipt and to depute authorised representative for signing of addendum intimating programme in advance. By further communication dated 10th August, 1989, the Petitioners wrote to the Respondents that in furtherance of the contract dated 25th February, 1989 and telex of 15.5.1989, they had exercised the option to extend the validity of the contract for a period of one working season in terms of Clause 1.3(A) on the same rates, terms and conditions. In view of the above the Respondents were requested to extend the validity of the performance bond submitted by them against above contract to cover the period of above extension in terms of Clause 3.15 of the Contract. By letter dated 30.9.1989, the Petitioners forwarded to the Respondents apart from copy of another contract which will be referred to later, a copy of the first addendum for extension of contract for one working season. It was mentioned therein that the drafts are subject to approval of the Competent Authority. On 8.11.1989 in response to the request by the Respondents for release of payments, Respondents wrote to the Petitioner, that in response to their letter of 30.9.1989, the addendum sent by them on 30th September, 1989 contained some modifications to the agreement dated 25th February, 1989. It was further mentioned that considering Clause 1.3 of the Agreement dated 25.2.1989 it could be done by exchange of letters to that effect. On June 25, 1991, the Petitioners had written to the Respondents in the matter of payment of foreign exchange and in so far as period from 17.1.1990 to 17.6.1989 is concerned, pointed out that all payments including foreign exchange had been paid though there was no contract. To firm up the foreign exchange escalation already made upto 30.4.90, the petitioner wanted the Respondents to (a) sign the contract and (b) produce copies of the invoices of their collaborators in support of the remittance made during the period from 17.1.1990 to 17.6.1990. It was further mentioned that till such time the contract is signed, it will not be possible for them to release further payments. For the period from 16.11.90 to 8.5.1991 it may be pointed out that the Respondents signed the contract and payments have been made.

On 12.10.1990, in respect of one working season, first installment, the Respondents wrote to the Petitioners as under:

However, if you wish, we can again sign extension of the agreement for the reason 1989-90 on the same terms and conditions as mentioned by you in your telex for which we have already worked and you have been paying us till April, 1990.
Reference has already been made to the subsequent letter dated 25.6.1991. What emerges from this is that in so far as the contract was concerned, it was signed. In so far as first firm extension, though respondents earlier expressed their reluctance they signed the addendum by exchanging letters. Subsequently it was agreed by the letter of 12.10.1990 to sign extension agreement. Similarly, letter of 25.6.1991 would indicate that in so far as second extension is concerned, there was also an agreement signed for the period 16.11.1990 to 8.8.1991.
3. On 17.5.1989, the Respondents had written to the Petitioners that they were nearing completion of the last well given to them. It was pointed out that the Drillership Viking Driller was one of the biggest drillship and had been successfully drilling in extremely bad weather in Taiwan and other areas and can continue drilling in Indian waters including Bombay High during monsoon. It was also pointed out that the monsoon was not likely to be severe before the middle of July, 1989 as per reports. Considering that respondents called upon the Petitioners to allow them to continue to drill atleast one more well and they confirmed that in case they are unable to move from the location on completion of the well, they shall go on zero rate. There was other correspondence exchanged which will be adverted to later on. Suffice it to say that based on the correspondence exchanged, Respondents were allowed to drill one more well, though the terms of the contract according to petitioners were not reduced to writing.

4. On disputes arising between the parties, matter was referred to Arbitrators and the Award has been passed by the Arbitrators. Before this Court the Petitioners have impugned that part of the Award in so far as what may be described as single well transaction. Challenge to that is three fold : (a) that there was no agreement in writing between parties and consequently there being no arbitral clause, award to that extent is without jurisdiction; (b) claims were independent claims and considering that, they are barred by limitation considering the date of invocation of the arbitral clause; (c) in so far as foreign exchange remittance are concerned, the Arbitral Tribunal in rejecting the petitioner’s contention acted without jurisdiction.

On the other hand, on behalf of the Respondents their learned Counsel contends that the transaction in respect of the single well transaction was part of the original contract. It was so understood, payments were made on the same basis and in these circumstances, finding by the Arbitrators that it was under the same contract cannot be said to be without jurisdiction; In so far as finding on limitation is concerned, the learned Arbitral Tribunal had clearly given a finding of fact that the notice by the Respondents invoking arbitration was given on 12.8.1993 and rights of the parties and obligations are settled on the completion of the contract which was May, 1991. Accordingly time for limitation starts running from May, 1991 and as such invocation was within limitation. The finding on this aspect by the Tribunal, it is contended is purely a finding of fact and there is no error of law apparent on the face of the record and as such would not be subject to any challenge under Section 34. Lastly it is contended that in so far as foreign exchange aspect is concerned, Arbitral Tribunal rightly held that the Petitioners herein had not given any notice to the Respondents identifying any item or items which it questions and specifying the reasons thereof as required under Sub-clause (a). The Petitioners had also not exercised their rights to audit accounts within three years after the date of the notification and considering that and the contract there was no any other provision authorizing O.N.G.C. to ask for any details in addition to what is provided. In the matter of jurisdiction, it was contended that the finding, considering clauses of the agreement cannot be said to be outside the terms of the contract. Petitioners have not established any misconduct on the part of the learned Arbitrators and consequently no inference can be called for in so for as the findings are concerned and as such the challenge ought to be rejected. At any rate, there has been acquiescence by the Petitioner and consequently also the challenge on that count must be rejected.

5. Considering the nature of the controversy, the real question is whether the one well contract forms part of the original contract and if it forms part of the original contract, whether the disputes could be settled in terms of the arbitration clause as reproduced earlier. The learned Arbitrators have recorded a finding based on some correspondence as referred to in Paragraph 12 and other paragraphs of the Award, that the Petitioners herein offered the work as part and parcel of the work to be done under the Contract dated 25.2.1989. Admittedly there is no other contract executed between the parties and Clause 3.1 as referred to is contained in the contract dated 25.2.1989. The learned Tribunal therefore, held that the claim are arbitrable under Clause 28 of the Contract dated 25.2.1989.

To constitute an arbitration agreement, there must be an agreement in existence, that is to say the parties must be at ad idem. See Union of India v. G.S. Atwal & Co. . The question is whether the parties were ad idem about the existence of the arbitration agreement as only then would the Arbitrators have jurisdiction. Jurisdiction of an Arbitrators is solely derived from the arbitration agreement. The Arbitrators have jurisdiction to deal only with matters arising from the contract which the parties agreed to refer to. See Prabartak Commercial Corporation v. C.A.D. Products . The present is not a case of a dispute arising out of or connected with the contract in which case acquiescence of the parties would be relevant. This is a case where during the period of one well contract itself the Respondents were informed by the petitioners to enter into an addendum/contract. Therefore, during the course of the one well contract, the parties were not at ad idem about the agreement including the arbitral clause. This would if proved be a case of patent lack of jurisdiction. See Tarapore & Co. v. State of M.P. . Even though the Arbitrators have given a finding on jurisdiction that is not conclusive and it is for the Court to finally decide the same. Disputes about the existence of a contract and as to the existence of facts to so hold must be determined by the Court and not by the Arbitrators. Arbitrators cannot by their finding, clothe themselves with jurisdiction as it is the Court under Section 33 which has to decide the question. An Arbitrator would be guilty of legal misconduct if he clothes himself with jurisdiction which is not there. If the finding as to the existence of the arbitral clause is based on non-consideration of material documents the Arbitrators would be clearly guilty of legal misconduct within the meaning of Section 30(a) of the Act of 1940. See K.P. Polulose v. State of Kerala . For that purpose reference will have to be made to the correspondence exchanged between the parties to find out as to whether the non-consideration of the said correspondence has resulted in the Arbitrators misconducting themselves and whether their finding discloses an error of law apparent on the face of the record.

6. With that let me briefly advert to the correspondence on record and the effect of consideration or non-consideration thereof. A finding has been recorded by the Arbitrators that apart from the contract of 25.2.1989, there was no other contract in so far as the one well is concerned. The first letter to be considered is dated 17.5.1989, by the Respondent to the Petitioner which has been referred to in the earlier part of this judgment. The next letter is of 22.5.1989 again from Respondents to Petitioners which is in furtherance to the Respondent’s earlier letter dated 17.5.1989. In this letter it is pointed out that in the event they are unable to move from the location on completion of the well, they shall go on zero rate. Respondent by their next letter dated 23.5.1989 stated that it was further agreed that in case of “waiting on” for material and services due to bad whether, they shall accept “zero” rate. Last sentence of that letter reads as under:

We would once again request you to kindly engage our drillship “Viking Driller” immediately.
On 31.7.1989, Petitioners sent a telex to the Respondent. In that telex they pointed out the well which the Petitioners had allowed the Respondents to drill on 3.6.89, there had been a complete shut down on 8.7.1989 till the date of the telex. The Respondents were called upon to immediately improve performance failing which contract was liable for termination after issuing 15 days notice under Clause 3.14 of the Contract. On 25.7.1989, Respondents informed Petitioners that three generators were on line with the SCR system and were ready to start drilling operation by 18.30 hrs. on 22.7.1989. The fourth Diesel Engine was also under repair and the same would be ready for operation by Saturday, 29th July, 1989. The alternator for the fourth diesel engine was also being air freighted and the same would also be operational within a week. In the light of that they requested the Petitioners to allow the respondents to resume the drilling operation at the present location as soon as possible. On 27.7.1989, the Respondents again wrote to the Petitioner with reference to their letter of 25.7.1989 and confirming that if the drillship is put on zero rate, due to break down, they agree to reimburse O.N.G.C. all the costs incurred by O.N.G.C. for providing material including Diesel, Fuel and Water and for providing services including third party services during the period of zero rate due to break down. The last part states that in view of above, Respondents should be allowed to resume the drilling operations immediately.
The respondents by their letter of 28.7.1989 had agreed to reimburse all the costs as indicated therein during “waiting on weather” also during the remaining period of the operations till the present well is completed. The Petitioners informed the respondents that they had accepted the above mentioned two letters and the contents therein. The Respondents were called upon to complete the repairs of all the generators and other equipments if any, so that the operations can be resumed without jeopardizing the safety of the well. There is one more letter dated 29.7.1989 which was subject matter of the dispute between the parties. By this letter, respondents have set out that if the Respondents are not allowed to resume operations, they would withdrew the letter dated 28.7.1989 and other letters referred to therein. I will advert to this letter in the later part of the discussion. We then have the telex dated 1.8.1989 from the respondents to the petitioners wherein reference is made to the telex of the Petitioner of 31.7.1989 as also to letters dated 27th and 28th July, 1989 and it set out therein that they i.e. the Respondents are agreeable to reimburse O.N.G.C. all the costs incurred for providing material including diesel, fuel, water and third party services during the period of zero rate due to breakdown of their equipments and waiting on weather. The last sentence reads as under:
We clarify that this will apply only after we are given permission to start operations.
In passing it may be observed that there is no reference to the letter dated 29.7.1989 atleast in this telex which is dated 1.8.1989. Much will turn on this document which has not been considered or atleast the effect by the Arbitral Tribunal.
We then have the telex of 8.8.1989 by the Petitioners to Respondents pointing out that there was urgent need of repair from other things i.e. of ballast system in addition to generators of the rig as the rig was required to be taken to port for those repairs. The second part of that letter points out that the Respondents would have to reimburse the Petitioner the cost incurred by O.N.G.C. for providing material and services including third party services during the period of zero rate due to breakdown and waiting for weather as agreed by them vide their letters dated 27th July and 28th July, 1989 with effect from 8th July, 1989. On 3.9.1989 are purported minutes which record that Viking Driller is ready to resume safe drilling from now. On 30.9.1989 Stores and Purchase Officer of the Petitioners wrote to the Respondents, forwarding copy of the contract of charter hire for one well drillship. Addendum was annexed thereto. On 8.11.1989 which has been referred to earlier, apart from addendum and original contract, respondents informed the Petitioners that they were not aware of any agreement of one well programme and that the Petitioners had not intimated to them to sign a new agreement for one well nor had they asked for it. On 23.11.1989, the Petitioners wrote to the Respondents in the matter of provisional payment. Therein they set out that in the absence of contract for conducting drilling during monsoon the payments made for the rig “Viking Driller” are provisional. Thereafter, it is mentioned that the respondents are requested to sort out the differences and sign the contract for regulating the pending payments. Then to be considered is the letter of June 25th 1991 wherein again for the period 26.5.1989 to 17.1.1990 it is pointed that though payments have been made no contract has been signed and that the Respondents should sign the contract.
7. What does this correspondence indicate? Does it indicate that the parties were at ad idem that there was a written contract in existence for one well programme or does it show that there was a clear dispute between the parties as to the existence of a written contract in respect of the one well programme. That the Respondents were allowed to carry on work, there can clearly be no dispute. That the respondents have been paid in terms of the rates as set out in the original contract also there can be no dispute except the Petitioner’s correspondence in which they have stated that the payment is provisional. The question still is, could the Arbitral Tribunal have come to the same conclusion which they have arrived at as to the existence of the arbitration agreement, if the correspondence referred to herein had been referred to. The entire award on the issue of jurisdiction proceeds on the footing that the one well programme was under the original contract and that the Respondents had withdrawn the offer which was made, by letter dated 29.7.1989. It is recorded that the Petitioners who disputed the letter dated 29.7.1989 produced by the Respondents were unable to prove that the letter of 29.7.1989 as produced was not the letter which was sent by the Respondents. That can be said to be finding on fact. The question however is that apart from the letter of 29.7.1989, assuming it is proved as held by the Arbitrator, there was the telex of 31.7.1989 sent by the Petitioner by which the Petitioner informed the Respondents that they had accepted the term contained in letter of 24.7.89 and 28.7.89. There is then the telling ‘telex’ dated 1.8.89 by the Respondent to the Petitioner in which the Respondent have referred to their letters dated 27th, 28th July, 1989 and the telex of the Petitioner dated 1.8.1989. There is no reference to the letter dated 29.7.1989.

If the Court comes to the conclusion that the one well programme was under the original agreement then it will be difficult to upset that finding. The terms of the original agreement did not cover the monsoon period. There was no provision or power given to the Competent Authority or any other party in the contract to extend the period during the monsoon. The only provision in the contract to extend the period was for two seasons which are known as primary periods. Therefore, it cannot be said that the powers to give one well contract was under the contract of 23.2.1989. This the learned Arbitrators have not at all considered. Another aspect of the matter is that the learned Arbitrators have proceeded to hold that it is under the contract based on one letter in which the petitioner had threatened to terminate the contract by invoking the clause in the original agreement. During the period when the contract was being carried on, Petitioners have insisted and intimated to the Respondents that a contract has to be entered into. They have by their letters sent the addendum. This is not the conduct of the party which is at ad idem that there is a written contract. The Petitioners have informed the Respondent that the payments are provisional pending signing of the contract. They further informed that no more payment will be made if the written contract was not signed. Clearly there was dispute as to the very existence of the written contract. The learned Arbitrators in not considering this material have misconducted themselves. If this material had been considered, it would be clear that there were disputes between the parties as to the existence of the contract for the one well programme which the Petitioners contending that a new contract has to be entered into and the Respondents contending that it was under the original contract. The conduct of the Petitioner in sending addendum to the contract for two subsequent programme periods have also not been considered. In so far as second addendum is concerned, respondents themselves as correspondence exchanged discloses agreed to enter into and sign the addendum. If this be the position in respect of the addendum for the two primary extended periods, it is difficult to accept that for the period not provided by the contract and that too during the monsoon period, after the Petitioners had made known their intention that contract had to be signed for one well programme that the contract for one well programme was under the original contract. In my opinion, the finding of the Arbitrators on that count discloses an error of law apparent on the face of the record and consequently is liable to be set aside. Petitioners have also not acquiesced as the correspondence on record would show nor have they acquiesced in the Arbitration assuming jurisdiction in respect of one well contract.

8. It may be pointed out that in so far as merits are concerned, in so far as Claim (c) is concerned, there was challenge by the Petitioners to the amounts which have been awarded. That is purely a finding of fact based upon the material before Arbitrators and therefore, in my opinion the challenge has to be rejected.

9. In so far as Claim (e) is concerned, the contention was that for the purpose of supplying potable water, respondents had to reimburse the Petitioners. It is impossible to conceive a situation that after agreeing to supply potable water the respondents will have to pay for the supply. Finding of the Tribunal on that count also cannot be faulted with.

10. The last issue is in respect of interest. In so far as Items at Claim (c) and Claim (e) they are not in the nature of damages but amounts withheld by the Petitioners and as such would be “debt”. However, as there was no agreement in writing between the parties in so far as interest is concerned, considering the provisions of the Interest Act, Interest will have to be payable at the current rate of interest. To that extent, award at the rate of 15% will have to be set aside. This Court has in other matter held that during the period of 1988-89, the current Bank rate of interest was 10% p.a.. In the light of that, interest on the amounts to be awarded would be 10% p.a. from the date they were due till final payment.

In the light of that following order:

The Award in so far as Claim (b) is concerned, is set aside. In so far as Claim (c) and (e) is concerned, the same is confirmed. However, interest on the amount awarded is reduced from 15% to 10% p.a..
Considering that the petition has been allowed only in so far as Claim (b) and further interest on other claims have been reduced to 10%, in the light of the rules framed by this Court, there will be decree in terms of the Award. In so far as amounts awarded under Claims (c) and (e) which will carry interest at the rate of 10% from the date the amounts became due till final payment, if the amount are not already paid.
In the circumstances of the case, there shall be no order as to costs.