India – Merely Having An Explicit Clause May Not Be Sufficient To Make Time Essence Of The Contract.

15 December 2021
 

The Hon’ble Supreme Court recently in the matter of Welspun Speciality Solutions Limited (formerly known as Remi Metals Gujurat Ltd.) Vs. Oil and Natural Gas Corporation Ltd., while deciding the correctness of the decision to set aside the arbitral award, has held that whether time is of essence in a contract has to be determined not only from the reading of the entire contract but also from the surrounding circumstances and merely having explicit clause may not be sufficient to make time the essence of the Contract.

 

Factual Background and Issues Involved
 

Welspun Speciality Solutions Limited (‘Welspun’) was the successful bidder of the tender floated by Oil and Natural Gas Corporation Ltd. (‘ONGC’) for purchasing the aggregate quantity of seamless steel casing pipes. In furtherance thereof, four Purchase Orders (‘POs’) were issued. These POs specifically provided the timeline of delivery and that the time and date of delivery is of essence. Among other terms, POs also provided that even when extension for delivery period is granted, such extension will be without prejudice to purchaser’s right to claim damages unless the same is waived off in writing. Further, the POs provided for clauses regarding purchaser’s right to recover damages on the ground of delayed delivery which included provisions for liquidated damages.

 

Dispute and differences arose between the parties essentially in relation to the delay in meeting the obligations as was required. In this context, various extensions were granted by ONGC. For delayed supply/delivery, ONGC had deducted an aggregate amount of liquidated damages from various bills submitted by Welspun. The liquidated damages deducted by ONGC along with its other claims were disputed by Welspun in arbitration proceedings.

 

The Arbitral Tribunal by way of its award allowed actual damages in favour of ONGC based on the evidence furnished before it regarding the losses incurred by it. However, the pre-estimated liquidated damage as sought by ONGC was not allowed. Also, ONGC was not allowed any claims for damages for losses incurred during the extended period of delivery where liquidated damages were expressly waived. 
 

Aggrieved by the award, ONGC filed a petition under section 34 of the Arbitration & Conciliation Act, 1996 (‘Act’) before District Court whereby it essentially contended that award was not in tune with the contract. In this regard, ONGC also contended that they made genuine and reasonable pre-estimation of the liquidated damages as per the negotiations between the parties at the time of entering the Contract which should have been allowed. The District Court upheld the award on the point that time was not essence of the contract entered between the parties and only actual losses suffered by ONGC could be granted. The District Court order was challenged by way of petition filed under section 37 of the Act filed before High Court of Uttrakhand. 

 

By way of this section 37 petition, the High Court held that both Arbitrator and District Court erred in construction of the contract as to whether the time was of essence or not. The High Court inter alia also held that both arbitral award and District Court has committed a gross error in arriving at the conclusion that ONGC had to prove the loss before recovering any damages. Thereafter, review petitions were filed by the parties against the order passed in the section 37 petition. In the review petitions, some claims were modified and some were upheld. Aggrieved by the orders passed in the review petitions, both parties approached the Supreme Court.

 

The parties put forth the following arguments before the Supreme Court. Welspun case was essentially that the view taken by the Arbitral Tribunal was reasonable and plausible. That time was not the essence of the contract between the parties as the contract provided for extension of time as well as for liquidated damages. ONGC contended that Arbitral Award cannot be sustained as the contract provided for liquidated damages and therefore unliquidated damages cannot be given. That the contract as well as every time extensions given provides that time was of essence in the contract. ONGC, among other things, also contended that award interprets contractual clauses in a manner which is neither reasonable nor plausible. 
 

FINDINGS  
 

The Supreme Court before dealing with the merits of the matter went ahead to set out the  limited scope of section 34 of the Act (before the 2015 amendment) which provides for only specific and limited grounds for interfering with an Arbitral Award. In doing so, the Supreme Court specifically noted that the award has been challenged on the ground of patent illegality and it being against the public policy of India. To examine when an award can be challenged on the ground of patent illegality and it being against the public policy of India, the Supreme Court referred to the relevant jurisprudence on the subject matter, to determine whether the present award could be construed as an Appealable Order under section 37 of the Act.  

 

The Supreme Court went on to consider as to whether ONGC was entitled for the pre-estimated/ liquidated damages for which Court had to consider whether time was of essence for the contract between the parties. The Supreme Court initially laid down the basic principles regarding the time conditioned obligations, which are reproduced herein below: 
 

“…

1. Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794]

 

2. That is subject to the exception that the promisee is not entitled to liquidated damages, if by his act or omissions he has prevented the promisor from completing the work by the completion date. [Holme v. Guppy, (1838) 3 M & W 387]

 

3. These general principles may be amended by the express terms of the contract as stipulated in this case ….”

 

In furtherance of the aforesaid general principles, the Supreme Court reiterated that the settled position of law that time is of essence of a contract has to be determined not only from the reading of the entire contract but also from the surrounding facts and circumstances involved in each case. In view of this, the Supreme Court specifically held that merely having explicit clause may not be sufficient to make time the essence of the Contract.

 

Applying the aforesaid legal principles to the facts of the present matter, the Supreme Court noted that since ONGC granted extension of time for delivery on certain occasion shows its efforts to uphold the integrity of the contract instead of repudiating the same. Court also noted that terms of the contract showed that time bound performance was necessary. Under the contract time was the essence, subject to extension granted by ONGC without prejudicing its right to recover damages. However, Court found that Arbitral Tribunal interpretation on the contractual clauses was a plausible view considering the extension provision and imposition of liquidated damages provisions under the contract indicating that time was not of essence under the Contract.
  

In addition to that, the Supreme Court agreed with the interpretation of the contract by the Arbitral Tribunal that computation of actual damages should be based on loss incurred which are provable with evidence was a plausible interpretation of the terms of the contract between the parties in view of the facts and circumstances of the case and supported with section 55 of the Indian Contract Act, 1872. Section 55 of the Contract Act essentially provides that when intention of the parties is that time should not be the essence of the contract then promisee is entitled for compensation for any loss occasioned to him by failure of the promisor in not fulfilling its obligation at or before the specified time. The Supreme Court also observed that approach of Arbitral Tribunal was reasonable and plausible one on the point that once liquidated damages was waived off by ONGC in the first extension, subsequent extension could not be coupled with liquidated damages unless a clear intention flowed from a contract in clear terms.     

 

In view of the aforesaid findings, the Supreme Court refused to interfere with the Award.