O.M.P./416/2004 of OIL INDIA LTD. Vs ESSAR OIL LTD. A+

IN THE HIGH COURT OF DELHI AT NEW DELHIO.M.P. 416 of 2004 & I.A. No. 10758 of 2012

Reserved on: 23[rd]July, 2012Decision on: 17[th]August, 2012

OIL INDIA LIMITED.

Through:

..... Petitioner

Mr. Shanti Bhushan, Senior Advocatewith Mr. Navnit Kumar andMs. Deepika Ghotawar, Advocates.

Versus

ESSAR OIL LIMITED.

..... RespondentThrough:Mr. Sandeep Sethi, Senior Advocatewith Mr. Rishi Agrawal, Ms. MeghaMehtaAgarwalandMs.MishaRohtagi, Advocates.

CORAM: JUSTICE S. MURALIDHAR

JUDGMENT17.08.2012

Introduction

1. Oil India Limited (‘OIL’) has in this petition under Section 34 of theArbitration and Conciliation Act, 1996 (‘Act’) challenged the majorityAward dated 6[th]August 2004 of the three member Arbitral Tribunal (‘AT’)that adjudicated the disputes between OIL and the Respondent Essar OilLimited (‘EOL’) arising out of contract dated 8[th]May 1995 entered intobetween the parties for drilling of offshore wells on turnkey basis offshoreSaurashtra Coast, Gujarat and offshore North East Coast (‘NEC’), Orissafor the purpose of exploration of oil and/or gas.

Background Facts

2.OIL issued Notice Inviting Tender (‘NIT’) dated 19[th]July 1993 forsetting of four Offshore Exploratory Oil/Gas Wells, three Wells atSaurashtra Offshore of the West Coast of Gujarat and one Well in NEC,Offshore of Orissa (drilled with self-propelled floater including allsupporting services for the exploration of oil and/or gas on turnkey basis).

3. In response to the NIT, EOL submitted its offer on 6[th]December 1993which was subsequently clarified / amended. EOL submitted its final pricedbid dated 13[th]January 1995 offering to deploy one Turret Moored Self-Propelled Drillship “Essar Discoverer” on turnkey basis complete withdrilling and other associated equipment, personnel and services for thepurpose of drilling of exploratory oil and gas wells and performing theAuxilary Operations and services for OIL (referred to in the contract as‘Operator’). After some exchange of correspondence, OIL accepted EOL’soffer and Letter of Intent (‘LOI’) dated 20[th]February 1995 was issued.Consequent upon the acceptance of EOL’s offer, the parties entered into acontract dated 8[th]May 1995.

4. Certain relevant definitions contained in the contract read as under:

“1.1“Drilling Unit” means the Turret Moored Drillship EssarDiscoverer with all equipment supplies and supporting servicesin good operating condition as detailed in Annexures 2 to 4.

1.3“Commencement Date” means the date when the drillingunit arrives on first or standby location with all equipment,supplies as detailed in Annexure 2 to 4 and personnel as detailedin Annexure-5.

1.4“Termination Date” means the date when the drilling unit

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is released by Operator, all equipment of Operator and othercontractors of operator having been off-loaded, and the DrillingUnit is available to contractor after deanchoring for cruisingfrom Demobilization site, i.e. the location drilled last.

1.13“OperationsBase”:Contractorshallestablishanoperations base at Rajkot, Gujarat for Saurashtra Offshoreoperations and at Bhubaneswar, Orissa for North East CoastOffshore operations, to keep close liaison with Operator andshall ensure that services of operations manager of contractor orhis representative shall be available to operator for emergencies.1.14“Supply Base”: Contractor shall establish Supply Baseat Okha Port, Gujarat and/or any other port suitable to thecontractor with prior permission of the Operator to feed drillingoperation at Saurashtra Basin. In the event of establishment ofbase other than at Okha Port all expenses pertaining to shift ofoperators equipment and materials shall be at Contractor’saccount. An offshore supply base will also be established by theContractor at Paradip Port, Orissa for North East Coast OffshoreOperations. Both the supply bases should be equipped withcranes, warehouse and storage facilities and shall also receiveall the materials of operator for further transportation to theDrilling Unit at such bases.”5. Under Article 2.2, the four offshore wells were to be completed within aperiod of one year with provision for extension to complete the Wells, ifnecessary. The Contractor (EOL) confirmed that the Operator (OIL) shallnot have to pay EOL during the extension period required for completing thefour wells, except for meal charges beyond 12 Operator’s personnel as perthe contract and additional day rate operations, if carried out by OIL otherthan indicated in the contract. The first drilling location was L-2, the secondL-3 and third L-4, on the offshore of Saurashtra Coast, Gujarat. The lastdrilling location was to be L-1 on the NEC, Orissa. Under Article 2.3, aprecondition for commencement of actual drilling work by EOL was to be

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written declaration drawn and signed at the first drilling location i.e. L-2 bythe representatives of the OIL and EOL as to the availability of theequipment, material, other allied items and the fulfillment by EOL of boththe personnel requirements and the objective conditions to satisfactorilycommence uninterrupted drilling operations by the Drilling Unit (‘DU’) atthe drilling locations.

6.Under Article 3.1, OIL held out that it had Petroleum ExplorationLicence (‘PEL’) in the Arabian Sea off the Saurashtra Coast, Gujarat and inBay of Bengal off the NEC. Under Article 3.3, EOL was to provide itsdrillship (Essar Discoverer) along with material, associated services andpersonnel. Four locations were to be set up in period of one year as per thefollowing schedule:

7. The inter-location move time between L-2 and L-3 was one day, from L-3 to L-4 one day and from L-4 to L-1 fifteen days. The drilling daysincluded 43 days wire line logging period and 9 days coring period. UnderArticle 3.25, EOL personnel were to inspect all materials to be furnished byOIL upon delivery and were to notify OIL representative of any apparentdefect found so that OIL could replace such defective materials. If EOLfailed to notify OIL of any defects, it was to be conclusively presumed thatsuch appliances and materials were free from apparent defects.

8. Article 4 dealt with mobilization and demobilization of the DU. UnderArticle 4.4, the mobilization of the DU could be delayed for better weatherconditions, if mutually agreed between OIL and EOL. Article 5 dealt withtermination. Under Article 5.1, OIL could by giving 30 days written noticeto EOL with copy to their Head of Team at the drill site, terminate thecontract at any time during the period of contract, if OIL was satisfied thatEOL “is incompetent and incapable of performing any of its obligationsunder this contract, including change of any crew member in spite of beingadvised in writing to improve upon its performance”.

9. Under Article 27, the parties agreed that all disputes and differencesbetween them were to be referred to arbitration under the Rules of the IndianCouncil of Arbitration (‘ICA’). The venue of the arbitration was to be NewDelhi or Rajkot or Bhubaneswar at the option of OIL.

10. OIL states that there was an initial delay of 6 days in the commencementof the operations at L-2. The first well was spudded only on 14[th]June 1995.The drilling at L-2 was completed after the expiry of 161 days on 21[st]November 1995. There was delay of 119 days in drilling which included45 days lost for repair of EOL’s various equipments and four days lost forcementing squeeze. The inter location move time from L-2 to L-3 took 19days resulting in delay of 18 days. The operation at L-3 took 46 days.Three days were lost for improving the cementing of the casing and twodays were lost in repairs. The inter location move time from L-3 to L-4, took8 days thereby causing delay of 7 days. The delay of 25 days in interlocation movement resulted in the stipulated time for drilling being exceededby 92 days. Consequently, the further inter location movement from L-4 to

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L-1 was delayed.

11. The work at L-2 commenced on 8[th]June 1995 and work at L-4 wascompleted on 16[th]July 1996, whereas under the contract EOL was obliged todrill all the four wells within 365 days. The inter location movement from L-4 to L-1 which ought to have been completed on 31[st]July 1996 did notcommence till 3[rd]September 1996. It is the case of OIL that the drillship(Essar Discoverer) reached at L-1 around 24[th]September 1996. According toOIL the drill ship did not conform to the definition of DU in terms ofArticle 1.1 of the contract.

12. At this stage, it is necessary to note certain relevant facts. By letterdated 19[th]July 1996, EOL informed the OIL that the Essar Discoverer wasin the process of pulling up BOP stack after release at location L-4 and wasawaiting better weather for travel. The Ministry of Petroleum and NaturalGas (‘MoPNG’), Government of India granted PEL for Offshore NEC underthe cover of letter dated 22[nd]July 1996.

13. In letter addressed to EOL on 23[rd]July 1996, OIL pointed out variousshortcomings and operational deficiencies in EOL’s performance of thecontract as noticed during the drilling operation at L-2, L-3 and L-4. EOLreplied on 23[rd]July 1996 denying the contentions of OIL and inter aliasetting out decisions of EOL to ensure that the standard of equipmentmaintenance was further improved. On 13[th]August 1996, EOL informedOIL that Essar Discoverer had been “waiting on weather till 12[th]August1996” and that the period between 18[th]July and 12[th]August 1996 should beadded to the time allowed for completion of the contract without levying any

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penalty.

14.By letter dated 20[th]August 1996, OIL informed EOL that it was“pleased to extend the contract under Article 2.2 for period for completionof the wells, one in location L-4 in SEP and the other in location L-1 in NECor until 31[st]March 1997 whichever is earlier at the same rate, terms andconditions”.By separate letter dated 20[th]August 1996, EOL informedOIL that it would be able to mobilize to the NEC only by the end ofSeptember 1996 and further that the period from October to December wasunfit for carrying out drilling operations in the NEC. It also expressed itsapprehension that even after mobilization EOL would not be able tocomplete anchoring and commence drilling operations due to adverseweather conditions.

15.OIL claimed to have written to EOL on 22[nd]and 24[th]August 1996showing various defaults and deficiencies on the part of EOL while drillingthe wells at locations L-2 and L-3. This was followed by meeting whichtook place between the parties on 26[th]August 1996 at Rajkot. In thetechnical presentation made by EOL at the meeting it claimed that it had lostconsiderable amount of time and money on drilling at location L-2 due toincorrect data provided by OIL and it was in the interest of OIL and thesafety of the well to review the drilling programme for location L-1. EOLhad carried out third party inspection of the casing pipes offered by OIL atBhubaneswar and Paradip. Many of the casings had been rejected due toheavy corrosion and not meeting the required oilfield standards, there wasneed to immediately replace them. The clearances between 10-3/4” and 8-5/8” casings were inadequate. Several vital parameters of 14” casing were

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found in not conformity with API recommendations. It was pointed out thatthis deficiency had serious consequences endangering the well, the rig andthe life of the people on board. This was reiterated by EOL in its letter dated3[rd]September 1996 to OIL.

16.On 13[th]September 1996, EOL informed OIL that Essar Discovererwhich had sailed from Okha to location L-1 was estimated to arrive atParadip on 24[th]September 1996 and that all associated services required tobe provided by EOL would be mobilized in time for the drillship tocommence drilling operations on arrival at location L-1. EOL asked OIL toarrange to obtain Offshore Defence Advisory Group (ODAG) clearance aswell as other clearance that may be required for the drillship. On 20[th]September 1996, EOL informed OIL that the drillship had been takendirectly to location L-1. On 21[st]September 1996, OIL insisted that EssarDiscoverer should reach at Paradip soon to obtain clearances from thedifferent authorities before moving to location L-1. EOL in responseasserted that there was no need for drillship to call at any port. However,OIL’s stand in its letter dated 23[rd]September 1996 was that the EssarDiscoverer should be brought to Paradip for taking clearances from thevarious authorities. In its letter dated 23[rd]September 1996, EOL stated thatthe responsibility for obtaining clearance, under Article 9.9(b) of thecontract from the naval authorities and ODAG was of OIL. By another letterdated 25[th]September 1996, EOL informed OIL that it would be chargingDay Rate D-3 from 24[th]September 1996 till such time OIL arranged theclearances.

17. In the meanwhile, on 24[th]July 1996 itself OIL had written to the

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Defence Research and Development Organisation (‘DRDO’) about thedrilling in the NEC being proposed to be started by 3[rd]week of August 1996.The Secretary, MoPNG also wrote letter dated 11[th]September 1996 to theMinistry of Defence (‘MoD’) making fervent plea for clearance to begranted for oil exploration in the NEC. This was reiterated in letter dated25[th]September 1996 from OIL to the Chief Controller (R&D), MoD. OILalso wrote to the MoPNG on 16[th]September 1996 stating that it hadapproached the naval authorities for grant of “No Objection Certificate”(‘NOC’) and requested the MoPNG also to suitably advise the NavalHeadquarters for instructions to appropriate naval command for carrying outthe inspection of the drillship immediately. The DRDO rejected the grant ofpermission for any period after 31[st]December 1996. In its letter dated 1[st]October 1996, the DRDO stated that operation in the NEC would be stoppedwith effect from 1[st]January 1997, since the zone was needed by the DRDOfor undertaking defence related missions.

18. Without mentioning the above efforts made by it to obtain naval andDRDO clearances, OIL wrote to EOL on 1[st]October 1996, calling upon it tofulfill its contractual obligation to obtain necessary clearance stating that allpossible assistance would be provided by OIL in terms of Article 6.9 of thecontract. EOL was asked to position its drillship at location L-1immediately. On 10[th]October 1996, OIL wrote to EOL stating that it wasEOL’s obligation to obtain clearance from the Naval Authorities as perArticle 6.9 of the contract. It took the stand that the requirement that the OILshould obtain the clearances was outside the provisions of the contract andnot acceptable to them.

19.Within two days thereafter on 12[th]October 1996, OIL addressed thefollowing letter to EOL:

“Dear Sirs,

Whereasyouareincompetentandincapableofperforming your obligations under the aforesaid contract,pleasetakenoticethatOilIndiaLimitedherebyterminates the above contract in terms of the relevantconditions thereof with immediate effect.

This is without prejudice and in addition to all otherrights and contentions which Oil India Limited hasagainst you under the aforesaid contract and in law.”

20. On 11[th]October 1996, the naval authorities visited the drillship EssarDiscoverer, carried out an inspection and granted clearance that was validtill 31[st]December 1996 which was the period up to which DRDO had alsogranted permission to OIL. On 18[th]October 1996, the naval clearance wasconveyed to OIL by the Flag Officer Commanding-in-Chief of the EasternNaval Command.

21. It is the case of EOL that under Article 3.3 of the contract total time of163 days had been allocated for completion of drilling at location L-1. By12[th]October 1996, OIL realised that only less than 80 days would beavailable for this purpose up to 31[st]December 1996 and therefore, thedrilling process at location L-1 could not be completed by then. Also, OIL’sliability to compensate EOL for non-utiltisation of the DU for the entireperiod would stand attracted. To avoid this, OIL decided unilaterally toterminate the contract. EOL further contends that this termination wascontrary to Article 5 of the contract in terms of which 30 days’ prior noticewas to be given. Admittedly, no such notice was given by OIL to EOL. As

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result of the sudden termination of the contract, EOL was compelled in turnto terminate its contracts with various parties for rig positioning services,supply services, mud logging services, cementing services and ROV servicesetc.

22. It is the case of OIL that EOL did not have complete DU at location L-1 on 24[th]September 1996. It was supposed to have two Offshore SupplyVessels (‘OSV’) and one Blowout Preventer (‘BOP’). According to OILonly one OSV Nand Cauvery carrying material from Base Station at Okhareached location L-1 on 1[st]October 1996. The BOP stack had been sent formaintenance to Abu Dhabi, and one OSV was waiting at Dubai. The BOPwas loaded on the said OSV by 7[th]October 1996. It was therefore contendedthat EOL was not in position to commence drilling operation at L-1 on thedate when the Essar Discoverer reached L-1.

23. On 17[th]October 1996, EOL submitted three invoices to OIL, oneclaiming amount in lieu of notice period, the second for demobilizationcharges after completion of operations at L-4 and the third for Day Ratecharges for 18 days on the basis of denial of access to L-1.

Arbitral proceedings

24. The disputes and differences were referred to the AT comprising Mr.Justice R.S. Pathak, former Chief Justice of India as Presiding Arbitrator,Mr. Justice Rajinder Sachar, retired Chief Justice of High Court of Delhiand Mr. Justice J.K. Mehra, retired judge of Delhi High Court as co-Arbitrators. EOL filed its statement of claims, claiming the following

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26. The AT framed the following issues:

“1. Whether the Claimant or the Respondent was obligedto obtain any clearance for drilling at location L-1 fromthe Government including DRDO and Naval authorities?

2. Whether under the facts and circumstances of the casetheClaimantwasincompetentandincapableofperforming the contract?

3. Whether under the facts and circumstances, thecontract was rightfully terminated by the Respondent?

4. Whether the various claims and counter-claims made

by the parties are maintainable under the contractualterms and conditions?

5. Whether under the facts and circumstances, theClaimant is entitled to relief on any or all of its claims?Claimant is entitled to relief on any or all of its claims?

6. Whether the Respondent is entitled to relief on itscounter-claim?counter-claim?

7. To what other relief is the Respondent entitled?”

27. On behalf of EOL Mr. N. Ramesh was examined as CW-1, Mr. A.D.Amladi as CW-2 and Mr. E. Kotylak as CW-3. The said witnesses filed theiraffidavits and were cross-examined. OIL’s witnesses were Mr. RanabirSircar, RW-1, Mr. Tradip Kataky, RW-2 and Mr. Dwijaraj Dash, RW-3.They filed affidavits and were cross-examined by EOL.

The Majority Award

28. The majority Award dated 6[th]August 2004 by Justice Pathak and JusticeMehra decided as under:

(i) It was OIL and not EOL which was obliged to obtain priorclearances from DRDO and the naval authorities for drilling atlocation L-1;clearances from DRDO and the naval authorities for drilling atlocation L-1;

(ii) OIL failed to prove that EOL was incompetent and incapable ofperforming the contract. Consequently, the contract was not rightfullyterminated by OIL;performing the contract. Consequently, the contract was not rightfullyterminated by OIL;

(iii)EOL was entitled to US Dollar (‘USD’):

1,296,880 as acknowledged by OIL towards well completion

charges for L-4

2083.33 being the Day Rate 3 for one hour in terms of Article4.3 of the contract being the time during which the drillship wason 15[th]July 1996 waiting for orders from OIL; and

750,000 on account of inter location move from L-4 to L-1;

3,000,000 towards demobilization charges;540,000 for waiting at location L-1;2,166 material procured by EOL for OIL112,388 for Brine Solution2,580 for Filter Cartridges

Rs.50,630 + Rs.25,280 + Rs.37,548 towards telephone and faxcharges

(iv)EOL was held entitled to (in USD):

124,277 towards delay in payment of invoice dated 1[st]December 1995 at 12% per annum

12,740 being the interest at 12% per annum for delay inpayment of invoice dated 1[st]January 1996

3,478 towards interest for delay in payment of invoice dated 1[st]February 1996

27,707 towards interest at 12% per annum on the delayedpayment of the well completion charges;

(v) EOL was entitled to (in USD)

595,781.25 for wrongful deduction by OIL of LiquidatedDamages (‘LD’) from the invoice raised by EOL, beyond thescope of Article 15.2,Damages (‘LD’) from the invoice raised by EOL, beyond thescope of Article 15.2,

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292,101.95 in respect of invoice on account of deductions madedisallowing the time spent on remedial jobs

590,000 as regards the deductions made in respect of the period of409 and 63 hours in December 1995 and January 1996

94,374.30 being 5% retention from the invoice of EOL by OIL

259,375 in respect of claims of EOL upon unjustified deductionfrom other invoices

313,985 for expenses incurred at Rajkot and Bhubaneswar aftercompleting location L-4

349,423.51 for the cost of additional material purchased and usedat location L-2

Rs.7,31,178 as damages for wrongful invocation of the bankguarantee and

Rs.15 lakhs towards costs and expenses of litigation.

(vi) Interest at 12% per annum from 1[st]May 1997 till the date of theAward and post-Award interest at 8% per annum till the date of actualpayment was awarded to EOL. However, EOL’s claim for USD1,500,000 for compensation in lieu of notice of termination, wasrejected. The total claims of EOL allowed were in the sum of USD8,369,339 and Rs. 68,30,504 together with interest at 12% per annumtill the date of the Award and at 8% per annum thereafter till the dateof payment.

(vii) The following counter-claims of OIL were allowed (in Rs.):3,28,304 towards reimbursement of telephone expenses (CounterClaim No. 6)

2,51,019 towards hire charges for port space at Okha in Paradip(Counter Claim No.7)

4,244 towards electricity charges (Counter Claim No.8)

2,897 towards hiring charges for cars (Counter Claim No. 9)

20,267 towards wireless licence fee (Counter Claim No. 10)

12,000 towards transportation charges of dressing mill (Counter Claim

No. 11)

19,854 towards cost of off-loading third party Contractors’ material(Counter Claim No. 12)

1,66,884 towardscompensationfor labour force providedforinspection of material (Counter Claim No. 14)

77,00,000 towards recovery of material cost (Counter Claim No.15)

(viii) The remaining counter-claims of OIL were rejected. total of Rs.85,05,469 of OIL’s counter-claims were allowed together with interest at12% per annum till the date of the Award and at 8% per annum thereafter tillthe date of payment.

The Dissenting Award

29. Justice Sachar who gave the dissenting Award first held that OIL couldnot be held to have acted illegally in terminating the contract. The claim forthe inter location move from L-4 to L-1 was rejected, since even up to 18[th]October 1996, the BOP and OSV were not in position to reach L-1. Theclaim for USD 3 million towards demobilization of the DU was allowed.Justice Sachar rejected the claim of EOL in the sum of USD 900,000 forwaiting at location L-1. Justice Sachar had rejected the claims for delayedpayment of invoices or the reimbursement of the deductions made by OIL.

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EOL’s claims for telephone and fax charges, procurement of material, brinesolution, filter cartridges were allowed. EOL’s claim for cost of additionalmaterial at location L-2, the damages for wrongful invocation of bankguarantee as well as claim for past interest were all rejected. On the claimsof EOL that he allowed, Justice Sachar granted post-Award interest at therate of 12% per annum. Barring one counter-claim relating to entitlement ofOIL to refund of the differences between cost of 9-5/8” and 7” casing, allother counter-claims were rejected. On the question of pro rata refund ofmobilization charges, EOL was directed to refund to OIL half of USD 6.5million.

Delay in pronouncement of Award and I.A. No.10758 of 2012

30.The first submission by Mr. Shanti Bhushan, learned Senior counselappearing for OIL, was that the impugned Award was delivered more thanthree years after it was reserved and extraordinary delay by itself rendered itcontrary to the public policy of India. Referring to the judgments of theSupreme Court in Kanhaiyalal v. Anupkumar (2003) 1 SCC 430,Bhagwandas Fatechand Daswani v. HPA International (2000) 2 SCC 13,Anil Rai v. State of Bihar (2001) 7 SCC 318 and R.C. Sharma v. Union ofIndia (1976) 3 SCC 574, he submitted that where an unexplained delay inthe delivery of judgment by High Court itself gave “rise to unnecessaryspeculations in the minds of parties to case” could be the sole ground for itbeing set aside, then fortiori an arbitral Award that was delivered after anunexplained delay should be set aside as being opposed to the public policyof India. He referred to the decision in Oil & Natural Gas Corporation Ltd.v. Saw Pipes Ltd. (2003) 5 SCC 705 (hereafter ‘the ONGC case’) andsubmitted that the phrase ‘public policy of India’ was wide enough to

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include ‘some matters which concern public good and the public interest’and expeditious pronouncement of arbitral Awards was one such.

31. Mr. Shanti Bhushan referred to the decision of the learned Single Judgeof this Court in Harji Engg. Works Pvt. Ltd. v. M/s Bharat HeavyElectricals Ltd. 2009 I AD (Delhi) 50 and urged that in that case an Awardthat was delayed for over three years was set aside on that ground by theCourt. Mr. Bhushan’s attention was drawn to another judgment of this Courton the issue in Peak Chemical Corporation Inc. v. National AluminiumCo. Ltd. 2012 II AD (Delhi) 304 which sought to distinguish the judgmentin Harji Engg. Works on facts. OIL then filed I.A. No. 10758 of 2012,praying that since view contrary to Harji Engg. Works had been taken inPeak Chemical the issue ought to be referred to larger Bench. In the saidapplication, the Petitioner also sought to formally add ground to the mainpetition to challenge the Award on the ground of delay in pronouncement.Referring to the decision in U.P. Power Corporation Ltd. v. Rajesh Kumar2012 (4) SCALE 687, Mr. Bhushan submitted that failure to refer the issueto larger Bench would be ‘deviation from the judicial decorum anddiscipline’. He referred to the decisions in Tarini Kamal Pandit v. PrafullaKumar Chatterjee (Dead) by LRs. (1979) 3 SCC 280 and GurucharanSingh v. Kamla Singh (1976) 2 SCC 152 in support of the amendmentsought to the petition to add ground at the stage of arguments.

32. Mr. Sandeep Sethi, learned Senior counsel appearing for EOL, referredto Rule 58 of the ICA Rules, and submitted that since OIL failed to raise anobjection at the first available instance before the AT about exceeding thetime limit of two years specified in Rule 63 for completion of the arbitral

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proceedings and continued to participate even thereafter, OIL should bedeemed to have waived such objection as to the delay in the completion ofarbitral proceedings and pronouncement of the Award. He referred toSection 4 of the Act and to the decisions in Bharat Sanchar Nigam Ltd. v.Motorola India Private Limited (2009) 2 SCC 337 and Shyam TelecomLtd. v. ARM Ltd. (2004) 3 Arb.LR 146 (Delhi) and submitted that where aparty which knows that the requirement under the arbitration agreement hasnot been complied with still proceeds with the arbitration without raising anobjection it should be held to have waived its right to object. Reliance wasplaced on the decisions in Indian Oil Corporation Limited v. Devi,Constructions Engineering Contractors (2009) 2 Arb.LR 361 (Madras)(DB) and Reliance Industries Ltd. v. Madan Stores Pvt. Ltd. 146 (2008)DLT 543. It was further submitted that the Petitioner had to demonstrate theprejudice caused to it on account of such delay. Reliance was placed on thedecisionsinC.Beepathummav.VelasariShankaranarayanaKadambolithaya (1964) 5 SCR 836 and Narayan Prasad Lohia v. NikunjKumar Lohia (2002) 3 SCC 572. Referring to the decision in NationalThermal Power Corporation Ltd. v. Wig Brothers Builders and EngineersLtd. 2009 (2) Arb.LR 238 (Delhi) Mr. Sethi submitted that an amendmentsought to the petition eight years after it was filed, and that too at the stageof final arguments, ought not to be permitted. He further submitted that ifOIL was aggrieved by the delay in pronouncement of the Award it couldhave initiated steps under Section 14(2) read with Section 14(1) of the Actby seeking intervention of the Court. However, it did not do so.

33. The question whether an Award is vulnerable to invalidation on accountof the unexplained delay in its pronouncement, in the context of the 1996

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Act, was considered by the Supreme Court in the ONGC case in which inpara 30 it said:

“30. It is true that under the Act, there is no provision similar toSections 23 and 28 of the Arbitration Act, 1940, whichspecifically provided that the arbitrator shall pass award withinreasonable time as fixed by the Court. It is also true that onoccasions, arbitration proceedings are delayed for one or otherreason, but it is for the parties to take appropriate action ofselecting proper arbitrator(s) who could dispose of the matterwithin reasonable time fixed by them. It is for them to indicatethe time-limit for disposal of the arbitral proceedings. It is forthem to decide whether they should continue with the arbitrator(s) who cannot dispose of the matter within reasonable time.However, non-providing of time-limit for deciding the disputeby the arbitrators could have no bearing on interpretation ofSection 34. Further, for achieving the object of speedier disposalof dispute, justice in accordance with law cannot be sacrificed.In our view, giving limited jurisdiction to the Court for havingfinality to the award and resolving the dispute by speediermethod would be much more frustrated by permitting patentlyillegal award to operate. Patently illegal award is required to beset at naught, otherwise it would promote injustice.”34. In Harji Engg. Works Pvt. Ltd., while the later paragraph in the ONGCcase which explained when an Award could be said to be contrary to the‘public policy of India’ was noticed, the above observations in para 30 werenot. In any event, as explained in Peak Chemical Corporation Inc., thedecision in Harji Engg. turned on its own facts. The decision in Harji Engg.should not be understood as laid down as an inviolable law that irrespectiveof the facts and circumstances of case, if there is delay in pronouncing anAward then it should be set aside. OIL is therefore mistaken in concludingthat there is conflict between the decisions in Harji Engg. and PeakChemical Corporation Inc. In subsequent decision in Union of India v.Niko Resources 2012 V AD (Del) 573 the Court noticed both the above

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decisions and further explained the circumstances under which the delay inpronouncement of the Award could be but one factor, among others, thatmight persuade the Court to set it aside. It was explained that when anAward was challenged on the ground of delay in its pronouncement, theCourt would examine the facts and circumstances and ascertain if such delayhad led to the Award being rendered patently illegal or opposed to the publicpolicy of India. On the facts of Niko Resources it was observed that thedelay in that case had indeed led to an invalid Award being passed.Consequently, the Court declines the prayer of OIL that the said issue shouldbe referred by the Court to larger bench.

35. As regards the plea of OIL that it should be permitted to challenge theimpugned majority Award, on the ground of delay in its pronouncement, byway of amendment to the petition, the Court notes that this plea was soughtto be urged first only in the written submissions filed by OIL on 20[th]October2008, four years after the petition was filed. The formal amendment to thegrounds was sought only in 2012 during the course of final arguments. InNational Thermal Power Corporation Ltd. v. Wig Brothers Builders andEngineers Ltd. the Court did not entertain plea urged for the first time inwritten submissions without seeking amendment to the petition. In thepresent case, since OIL has filed formal application, although belatedly,seeking permission to amend the petition without urging any new facts, theCourt permits it to do so.

36. Turning to the challenge to the impugned majority Award on the groundof delay in its pronouncement, the Court notes that Rule 63 of the ICARules, which was applicable to the arbitration agreement between the

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parties, does set time limit of two years for the conclusion of the arbitralproceedings by the AT. Rule 58 of the ICA Rules, provides that: “Any partywho proceeds with the arbitration with the knowledge that any provision orrequirement of these rules has not been complied with and who fails to statehis objection thereto in writing, shall be deemed to have waived his right toobject.” OIL continued to participate in the arbitral proceedings beyond theperiod of two years without objecting to the delay beyond two years in itscompletion. The waiver under Rule 58 read with Section 4 of the Act didresult. The decisions in Bharat Sanchar Nigam Limied v. Motorola IndiaPrivate Limited, Shyam Telecom Ltd. v. ARM Ltd. and Indian OilCorporation Limited v. Devi Constructions support this conclusion.

37. After the AT reserved the Award, and when no Award was pronouncedfor over year thereafter, OIL could have, in the first instance persuaded theAT to expedite the pronouncement of the Award and if that wasunsuccessful OIL could have filed an application in the Court under Section14 (2) read with Section 14 (1) (a) of the Act to seek the termination of themandate of the AT on the ground that there was unreasonable delay in thepronouncement of the Award. Section 14 (1) (a) specifically refers to thefailure of the Arbitrator to act “without undue delay”. This aspect wasadverted to in Union of India v. Niko Resources Ltd. OIL for reasons bestknown to it did not opt for this course.

38. The Court notices an inconsistency in the plea of OIL as regards itschallenge to the impugned Award. OIL states in para ‘A’ (page 2) and para18 (page 29) of the petition that it confines its challenge to the extent theimpugned majority and dissenting Awards allow the claims of EOL and

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disallow wholly or partially the counter claims of OIL. In other words OILacceptstheimpugnedAwards,evenifthereisadelay intheirpronouncements, as long as they allow wholly or partly some of OIL’scounter claims. This inconsistency contradicts and deprives OIL’s plea of itsforce.

39. The Court proposes to apply the test explained in Niko Resources toexamine if the delay in the pronouncement of the impugned Award has ledto its being vitiated in law. As will be discussed hereafter, the impugnedAwards, both the majority and the dissenting Awards, are detailed andreasoned and deal with each claim and counter claim at great length. Thepassage of time since the reserving the Award has not led to any plea orsubmission of the parties being overlooked. Unlike in Union of India v.Niko Resources Ltd. where this Court found that the majority Award hadfailed to deal with the issues raised in the dissenting Award, in the presentcase the majority Award deals with each of the issues dealt with by thedissenting Award. It cannot therefore be said that delay in pronouncement ofthe Award has rendered it patently illegal or opposed to the public policy ofIndia.

40. The challenge to the impugned Award on the ground of delay in itspronouncement is hereby rejected.

Challenge to the majority Award on merits

41. On merits, it was submitted by Mr. Bhushan that one of the essentialconditions of the contract which had to be fulfilled by the Respondent wasthat the DU had to comprise the BOP and OSV at all times and that they had

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to necessarily be made available to commence the drilling. The obtaining ofDRDO and naval clearance was the obligation of EOL and that had tomandatorily precede the commencement of drilling operations. The majorityAward erred in holding that the obligation to obtain such clearance was notthat of EOL. The majority Award overlooked the undisputed fact that whenit reached the L-1 site, the DU did not have the BOP and the two OSVs.

42. Mr. Bhushan pointed out that EOL had acted in defiance of OIL’sdirection that the DU should report at Paradip port for the purpose of navalclearance. After initially informing OIL that the DU would report at Paradipon 24[th]September 1996, EOL unilaterally decided to take the DU to L 1straightway. This was clearly in breach of the contract. Therefore, OIL wasjustified in concluding that EOL was incapable and incompetent to performits obligations under the contract. There was no requirement in law that OILhad to give detailed reasons for such conclusions in its letter dated 12[th]October 1996 terminating the contract. As long as facts and documents onrecord supported the decision of the OIL, it was perfectly justified interminating the contract. The requirement under Article 5 was only that 30days’ advance notice of termination had to be given and not show causenotice. Mr. Bhushan submitted that the majority Award purported to sit inappeal over the decision of the OIL to terminate the contract, which waslegally impermissible for it to do. Mr. Bhushan commended for acceptancethe conclusion in the dissenting Award that there was no justification forEOL to have taken the DU directly to L-1. Reference was also made to theevidence of Mr. Tradip Kataky, the witness on behalf of OIL.

43. Turning to the majority Award in respect of the individual claims of

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EOL and counterclaims of OIL, Mr. Bhushan submitted that the drillingoperations in relation to the wells at locations L-2, L-3 and L-4 in SaurashtraOffshore were not completed by EOL within the contractually stipulatedperiods. There were inordinate delays caused by EOL. The 365 days’ periodfor completion of the drilling of all the four wells including the one at L-1was exceeded. The facts showed that EOL was unwilling to proceed tolocation L-1 to complete the drilling operations within the stipulated time.The majority Award erred in interpreting Article 15.2 of the contractpertaining to levy of LD charges. There was no justification for the AT toaward EOL USD 750,000 for interlocation move from L-4 to L-1 since theinterlocation had not been completed as per the terms of the contract.Further, awarding USD 3,000,000 for de-mobilization of the DU was notjustified. Awarding of USD 900,000 in favour of EOL for waiting atlocation L-1 was not justified as the DU as defined in Article 1.1 was notavailable at Location L-1 and there was no question of EOL being able tocommence drilling at L-1. The application of Article 10.7 (B) for awarding asum of USD 540,000, the awarding of USD 112,388 for procurements madeby EOL and the applicability of Article 14.7 for interest on the delayedpayments was also challenged. It was submitted that the contract was on aturnkey basis and therefore, the provisions of Article 18.11 were notapplicable. The disallowing of the deductions made by OIL by the majorityof the AT was also challenged as being contrary to the contractualprovisions. The award of the amounts in foreign currency and the award ofinterest @ 12% per annum from 1[st]May 1997 till the making of the Awardand post-Award interest @ 8% per annum were also challenged.

44. Mr. Sandeep Sethi, learned senior counsel appearing for EOL, referred to

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the evidence on record which showed that OIL itself had accepted that EOLsatisfactorily had drilled the wells at L-2 to L-4. OIL had itself renewed thecontract on 20[th]August 1996 by extending the time for completion of thedrilling at L-4 and L-1 up to 31[st]March 1997.There was no basis for OIL tosuddenly conclude on 12[th]October 1996 that EOL was incompetent andincapable of performing its contractual obligations. OIL was pursuing theissue of grant of naval clearance with the DRDO even as of October 1996.This itself showed that requisite security clearance had to be obtained byOIL from the DRDO and naval authorities. Even before naval clearancecould be granted on 18[th]October 1996, OIL abruptly terminated the contracton 12[th]October 1996. Mr. Sethi pointed out that the total number of days tobe spent on each location, L-1 to L-4 were set out in the contract itself. OILrealized that on account of the delay in obtaining naval clearance, thenumber of days required for drilling at location L-1 would exceed the outertime limit for carrying such operations, as permitted by the DRDO i.e., 31[st]December 1996. The liability to pay ‘well compensation charges’ to EOLdamages would accrue in the event that the DU mobilized by EOL at L-1was unable to be used to its full potential in terms of the contract. OIL wouldalso have to pay EOL the de-mobilisation charges in terms of the contract ifthe drilling operations at L-1 concluded prior to the scheduled completiondate. It was with view to avoiding this that OIL abruptly terminated thecontract.

45. Referring to the decision in Fertiliser Corporation of India Ltd. v. I.D.IManagement (U.S.A.) AIR 1984 Del 333, Mr. Sethi submitted that thedissenting Award could not be looked into by the Court for any purpose andeven for determining the correctness of the majority Award. It was necessary

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for the Petitioner to show that the majority Award suffered from patentillegality. It was submitted that the majority of the AT had correctlyinterpreted the contractual provisions whereas the dissenting Award misreadand misinterpreted them. Reliance was placed on the decision in SteelAuthority of India Ltd. v. Salzgitter Mannesmann International GMBH189 (2012) DLT 8 to urge that the scope of interference by the Court with anAward under Section 34 of the Act is limited. The Court is not to sit inappeal over the correctness of the findings of the learned Arbitrator on facts.

Decision on merits

46. Before dealing with the submissions on merits, it is necessary to brieflyrecapitulate the scope of the powers of the Court in petition under Section34 of the Act. In McDermott International Inc. v. Burn Standard Co. Ltd.(2006) 11 SCC 181 the Supreme Court reiterated the dictum in the ONGCcase and explained that (SCC, p.210): “the public policy violation,indisputably, should be so unfair and unreasonable as to shock theconscience of the Court.” Further, “what would constitute public policy is amatter dependent upon the nature of transaction and nature of the statute. Forthe said purpose, the pleadings of the parties and the materials brought onrecord would be relevant to enable the Court to judge what is in public goodor public interest, and what would otherwise be injurious to the public goodat the relevant point, as contradistinguished from the policy of particulargovernment.” It was explained in P.R.Shah, Shares & Stock Brokers (P)Ltd. v. B.H.H. Securities (P) Ltd. (2012) 1 SCC 594 that (SCC, p.601): “ACourt does not sit in appeal over the award of an Arbitral Tribunal by re-assessing and re-appreciating the evidence.”47. The central issue first determined in the majority Award was whetherOIL’s decision to terminate the contract by its letter dated 12[th]October 1996was justified. In answering the said question in the negative the majorityAward referred to the clauses of the contract, the correspondence betweenthe parties and other relevant documents. The Court has perused the contractand the evidence only for the purpose of examining whether the view takenby the majority of the AT was plausible one or suffers from patentillegality.

48. Article 5.1 of the contract permits the Operator to terminate the contract“by giving 30 days’ written notice to the Contractor’s office and/or with acopy to their head of team at drill site.” This was subject to the conditionthat the Operator is satisfied “that the Contractor is incompetent andincapable of performing any of his obligations under this contract includingchange of any crew member in spite of being advised in writing to improveupon his performance.” The wording of Article 5.1 does not give OIL anunrestricted discretion to terminate the contract as was suggested by Mr.Bhushan. The word “satisfied” preceding the conclusion of OIL that theContractor was “incompetent and incapable” had to be based on somematerial and not the ipse dixit of OIL. The notice to be given to theContractor 30 days in advance would have to necessarily set out the reasonsfor such conclusion. Given the nature of the operations expected to beundertaken by EOL, and the investment it would have to make to execute it,it was but expected that it would be put on notice of any such proposeddecision of OIL to terminate the contract. The wording of Article 5.1 alsosuggests that the ground for termination had to be that despite OIL’s“advice” to EOL “in writing to improve upon its performance”, EOL had

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not. This was further indication that decision to terminate the contractcould not be taken by OIL at the spur of the moment. Article 5.1 is aninstance of power coupled with duty to act reasonably and fairly. Thismust therefore be viewed as mandatory requirement. Admittedly in thepresent case, this mandatory requirement was not complied with. OIL doesnot deny that it did not give 30 days’ notice of termination to EOL. OIL wastherefore in breach of its obligation under Article 5.1 of the contract.

49. The events leading up to the termination do not show that at any point intime OIL had expressed its dissatisfaction with the work done thus far byEOL or had asked EOL to “improve upon its performance.” On the otherhand, on 20[th]August 1996, OIL extended the time for EOL to complete thedrilling at locations L-4 and L-1 up to 31[st]March 1997. If OIL was unhappywith EOL’s discharge of its obligations under the contract it could not havepossibly extended the time for completion of the drilling at locations L-4 andL-1.

50. The two major reasons highlighted by Mr. Bhushan as justifying OIL’sdecision to terminate the contract was EOL’s failure to obtain naval andsecurity clearance for the drilling operations at L-1 and the fact that the DUthat reached L-1 was incomplete as it did not comprise the BOP and the twoOSVs. In the first place it requires to be noted that under Article 6.9 of thecontract the obligation of the Contractor was to obtain and maintain, with theOperator’s assistance “all approvals, permits and authorizations required bylaws and governmental regulations and orders, for labour, material, servicesand supplies to be furnished by contractor as specified herein.” Significantly,this does not mention security clearance to be obtained by the Contractor.

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On the other hand Article 9.9 (A) sets out OIL’s representation that “it isentitled to carry out in the operating area, the drilling operation hereincontracted for.” Article 9.9 (B) states that apart from the permits to beobtained by the Contractor under Article 6.9, “Operator shall obtain andkeep informed, at its expense, all permits, licences and other governmentalauthorizations, if any, which are required to be obtained by operator for theperformance of the contract.” In the present case the PEL for the NEC wasgranted to OIL only on 22[nd]July 1996. This however did not mean thatdrilling could start at L-1 soon thereafter. In terms of Clause (13) of the PEL“at least two months clear advance notice on commencement of explorationwork” had to be given to the MoD “so that exploration work does not clashwith any naval exercise in the area.” Further, under Clause (18) of the PEL“all vessels deployed in the area by contracted companies shall undergonaval security inspection prior to their deployment” and one month’s noticewas to be given to facilitate clearance. Para 7.2 of Annexure 8 to the contractspecified that all permits and licences required to be obtained for the drillingsite were the responsibility of OIL. All the above clauses unmistakably showthat the obligation to obtain naval and security clearance was that of OIL.The said conclusion of the majority of the AT was not only plausible butbased on correct interpretation of the above provisions of the contract. Theview of the dissenting Arbitrator that “it cannot be said with certainty fromthe record whether naval clearance was the sole responsibility of theclaimant or the respondent” is contrary to the unambiguous clauses of thecontract and is unacceptable.

51. OIL understood the position correctly as is evident from the fact that itwas OIL that applied to ODAG on 5[th]May 1995 for security clearance for

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drilling the wells at locations L-1 to L-4. On 24[th]June 1996 OIL wrote to theDRDO stating that it was starting drilling operations in the NEC by the thirdweek of August 1996 and asked what action was to be taken at its end. Itwrote similar letter to the Flag Officer Commanding-in-Chief at theEastern Naval Command on 25[th]July 1996. The letter dated 11[th]September1996 from Mr. Vijay Kelkar of OIL to the Scientific Adviser to the DefenceMinister is significant. It pleaded that in light of the fact that the “drillship isexpected to reach the location in the NEC area and start drilling by the endof September 1996”, it was essential “that OIL is given permission,temporarily, for about 7 months till completion of this important exploratorywell.” It added that in case DRDO’s permission was not given it would “leadto OIL’s paying about $3.5 million to the contractors on account of earlytermination of the drilling contract and force majeure condition. Obviouslythis would make every serious impact on the company’s finance.” OIL wrotein the same vein to the Secretary MoPNG seeking his intervention “to adviseNaval Headquarters, New Delhi to instruct appropriate Naval Command tocarry out the inspection of the Drillship immediately.” On 25[th]September1996, the Director (Exploration and Development) OIL wrote to the ChiefController (R&D) in the DRDO requesting earnestly for “immediateapproval for our drilling operations in the NEC area as the contractor hasalready moved the drillship into that particular location and is awaiting ourclearance.” In response on 1[st]October 1996 the Chief Controller (R&D),DRDO conveyed to OIL that it was agreeable to “a maximum period of 3months (i.e. up to 31[st]December 1996) for carrying out the drillingoperations.” In response to question in his cross-examination, Mr. RanabirSircar, OIL’s witness, admitted that “Essar had no role to play in the DRDOclearance.” Referring to letters written by OIL seeking security clearance,

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Mr. Sircar admitted that “permission to drill from DRDO was the obligationof Oil India.”

52. Strangely, after this entire exercise was undertaken by it, OIL wrote toEOL on 10[th]October 1996, not mentioning word about the DRDOclearance given on 1[st]October 1996, and asked EOL to obtain securityclearance as per Article 6.9 of the contract. This stand of OIL followed by itsabrupt termination of the contract two days thereafter was inexplicable. Theinsistence by OIL that EOL should bring the DU to Paradip was not arequirement of the DRDO or the naval authorities. As it transpired, the navalauthorities inspected the DU on 11[th]October 1996 at the location L-1 andgranted naval security clearance by letter dated 18[th]October 1996 to OILwith copy to EOL. This negated the justification for OIL terminating thecontract on the ground that EOL had failed to obtain naval and securityclearance. EOL could not have commenced drilling operations at L-1without the above clearances and so the question of it commencing spuddingoperations immediately upon reaching L-1 did not arise. Before EOL couldbe conveyed the naval clearance, OIL terminated the contract. At that stagetherefore OIL could not have possibly concluded that EOL was incapable orincompetent to perform its obligations.

53. The second reason offered by OIL for terminating the contract was theabsence of the BOP and the two OSVs at L-1 when the DU reached there on24[th]September 1996. The majority Award has rejected this as not being avalid reason for termination of the contract and the Court finds, for reasonsexplained hereafter, that this conclusion was correct. There is no dispute thatafter EOL made two presentations, one at Rajkot on 26[th]August 1996 and

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another at Delhi on 2[nd]September 1996, OIL was satisfied of the drillworthiness and competence of EOL and consented to EOL moving the DUfrom L-4 to L-1. After the DU left L-4 on 3[rd]September 1996, dailyprogress reports were dispatched to OIL till the DU reached L-1. Consistentwith its obligation under Articles 6.4 (E) and (F) of the contract, EOL sentthe BOP to Abu Dhabi for repairs after dismantling it at L-4. OIL wasinformed of this by letter dated 31[st]July 1996. In terms of the DrillingProgramme, set out in Annexure -3 to the contract, the BOP could not havebeen installed before running and cementing of casing of diameter lessthan 18.5/8”. The BOP was therefore not required till the 29[th]day afterspudding of the well at L-1. The BOP was overhauled and loaded on to theOSV in the first week of October 1996 and would have reached L-1 in time.The so-called reason for terminating the contract, i.e. the absence of the BOPand OSVs at L-1, was never communicated to EOL. Mr. Ranabir Sircar, awitness for OIL, in his cross-examination when asked if there was “anyletter or document addressed to Essar between 1[st]and 11[th]October 1996pointing out to alleged shortcomings relating to material, equipment, OSVand the like” sated “I do not find any document with me at present.” Evensubsequently no such document was produced before the AT by OIL. Theconclusion of the majority of the AT that “the drillship did not contain theBOP and was not accompanied by both OSVs on 1 October 1996 atLocation L-1 cannot be made the subject of grievance by OIL” wascorrect.

54. As regards the other individual items of claims and counter claims, boththe majority Award as well as dissenting Award have analyzed the evidencethoroughly. Merely because another view is possible does not constitute

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valid reason for the Court to interfere with the majority Award. Although theCourt has perused the entire evidence with the help of counsel, it is notnecessary for the Court to discuss the evidence in respect of each claim andcounter claim. OIL has been unable to persuade the Court to come to theconclusion that the majority Award in respect of the claims and counterclaims suffers from any patent illegality and is opposed to the public policyof India.

Conclusion

55. For all the aforesaid reasons, this Court does not find any ground havingbeen made out for interference with the impugned majority Award. Thepetition is dismissed with costs of Rs.50,000 which will be paid by OIL toEOL within period of four weeks from today. I.A. No. 10758 of 2012 isdisposed of.

AUGUST 17, 2012bs/AK/Rk

S. MURALIDHAR, J