This article is written by Rishabh Tyagi, Campus Law Centre, University of Delhi, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute resolution from Lawsikho. This article has been edited by Ojuswi (Associate Lawsikho).
This article has been published by Sneha Mahawar.
The Supreme Court in the case, Welspun Specialty Solutions Ltd. vs ONGC ((2022) 2 SCC 382), decided upon one of the fundamental components that are often the part of contracts. It was pondered upon by the Court that what makes time be the essence of the contract. Along with this, the judgment given by the Court makes us think about how the liquidated damages clause would work in contracts post this judgment.
This article analyses these factors decided upon by the Court and also scrutinizes the reasoning on which the Court upheld the arbitral award. The case becomes important to understand as the nuances it touches upon set a precedential value that alters the trajectory of future cases. It also impacts the mindset of the drafters of the legislation, who will be the brains behind the follow-up contracts for the major business transactions.
Facts and Issues
On winning the bid for the tender mooted by ONGC (respondent) for the purchase of steel casing pipes, Welspun Specialty Solutions (appellant) got into a contract with the respondent. It was explicitly mentioned in the contract that time was the essence under Section 55 of the Indian Contract Act, 1872, and also in case of delay in deliveries of the material by the appellant, both the parties agreed upon genuine liquidated damages to be levied.
Now on different occasions, there was a delay on part of the appellant to fulfil their obligations and subsequent extensions were provided by the respondent against such delays. While making payments against the various invoices given by the appellant, the respondent deducted an aggregate amount of USD 8,07,804.03 and INR 1,05,367 as the stipulated liquidated damages in the contract. Owing to such gross deduction, the appellant initiated arbitral proceedings and sought a refund of the contentious deducted amount.
The arbitral tribunal gave the award in favour of the appellant based on the reasoning given on two major points. Firstly, time was not considered to be of the essence as the contract contains clauses that provided for extension in time and levying of penalties and liquidated damages in case of delays. Secondly, it was concluded by the tribunal that since time was not of the essence, therefore there could be no breach of contract and thus the respondent would not be entitled to recover liquidated damages. For the loss suffered by the respondent, the tribunal awarded unliquidated damages which amounted to less than what the respondent deducted from the final invoices.
Displeased by the award, the respondent appealed the same before the District Court under Section 34 of the Arbitration and Conciliation Act, 1996. Finding no issues, the Court refused to alter the award. Further, it was appealed by the respondent in the High Court, wherein the Court concluded that both the tribunal and District Court had erroneously looked over the circumstances of the case. The respondent was allowed to recover damages. Thus, the appeal finally came to the Supreme Court to decide upon the legality of the impugned award.
The issues before the Court were that:
- whether the findings of the tribunal regarding time not being the essence of the contract were correct; and,
- whether the imposed unliquidated damages would sustain given the contract had provisions for liquidated damages.
The Court stated that to understand whether the time is of the essence, the contract shall be read as a whole and not just certain isolated provisions. The reasoning applied by the Arbitral Tribunal was concurred with by the Court and it was further said that since the time is not of the essence, it would not be appropriate to invoke the liquidated damages clause. The Tribunal’s findings were found to be in line with the contractual expositions and no irregularity was found.
So, the Court in its restricted domain set aside the High Court’s decision and upheld the award to be just and valid.
Time is not an essence
This issue was at the core of the dispute in the case we are dealing with. Section 55 of the Indian Contract Act, 1872 (hereinafter “Act”) enunciates upon the contract where time is the crucial factor and the voidability of such a contract depends upon whether the obligations are completed by the parties within the decided time limit. To further expand upon this, para 1 of Section 55 states that where time is not the essence, the contract doesn’t become voidable. But even then, the party facing the breach of contract is entitled to recover damages that are caused in the effect of that breach.
Now, in respect of this point of contention, the Arbitral Tribunal concluded that even though the parties agreed to make time to be of the essence of the contract, the mere existence of such a clause is not enough. There were clauses wherein it was stated that in case of delay, an extension for the same would be provided and along with these there were clauses that stated the penalties and liquidated damages to be charged in case of such setbacks. This is supported by the Supreme Court judgment in Hind Construction Contractors vs State of Maharashtra where it was held that the significance of time gets diminished if there is a presence of a liquidated damage clause. In the light of such clauses, the time was held not to be a crucial factor in determining the trajectory of the disputed contract.
The Supreme Court further stated that to determine whether the time is of essence or not the entirety of the contract must be looked upon. The concurrence of the Court with the award over this aspect can be understood as the reasoning to support this conclusion is in line with the statutory provisions and the nature of the contract. It is the reasoning given for the other aspect that draws our attention as even the Court seems to have overlooked it.
Contention over liquidated damages clause
To strengthen its stand, ONGC (respondent) contended that the Tribunal erred in granting unliquidated damages under Section 55 read with the provisions of Section 73 of the Act. Also, they stated judgment of ONGC vs Saw pipes to support their contention of getting damages under Section 55 read with Section 74.
Since the respondent gave the appellant waivers on certain occasions, the Court rejected the reliance upon Sawpipes judgment. The Court is in unison with the Tribunal’s reasoning that since there were extensions in timelines and waivers of damages on certain occasions, the respondent was not entitled to the liquidated damages. This might set an unwanted precedent for disputes regarding construction contracts where unliquidated damages could be claimed even if liquidated damages are mentioned in the contract.
In recent case law, Kailash Nath Associates v Delhi Development Authority (2015), the Supreme Court stated that the mere presence of a liquidated damages clause doesn’t mean that in every such case damages would be given. If no loss or damage is proved no compensation would be granted. So, the Tribunal was in right to grant actual damages to the appellant as the damages levied by the respondent were way more than the actual loss. But the Tribunal and subsequently the Court overlooked the nuances of Section 74. On a proper interpretation of the said Section, the actual damages could have been given under its purview.
The judgment, in this case, can be seen as an after effect of the 2015 amendment to the Arbitration and Conciliation Act, 1996. The said amendment was an effort by the legislature to close the floodgates opened up by the decision of the Sawpipes case in regards to Section 34 of the A&C Act, 1996. The non-interference of the Court in the Arbitral award is a welcome step for the progression of the arbitrational scenario in the country.
The decision elucidates that for time to be the essence, the surrounding circumstances, the language of the contract, and the employers’ actions concerning these will be the determining factors. The question also comes up regarding the efficacy of the liquidated damages clause in the contracts as the same can be set aside by the competent Tribunals and the Courts. In respect of this, the Court seems to have reached the correct conclusion but the overlooking of Section 74 of the Act has the potential to set the wrong precedent. The doctrine of contra proferentem, which states that ambiguity in the language of the contract would work against the one who created it, seems to have been invoked by the Court in regards to this clause.
At the heart of the decision, the Tribunal and subsequently the Supreme Court have reached an ideal outcome in respect of the facts and circumstances of the case, even though there were certain lacunae in the reasoning behind the grant of damages. It would be a welcome step if the Court soon steps in to fix this rationale of damages under the said Section. Also, the gesture of the Court, in this case, shows that the domain of Arbitration is headed towards being a more preferred way to settle the disputes in India.
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