Delhi High Court Upholds Arbitral Award In Favour Of GAIL In Dispute With Man Industries Over Delay In Pipe Supply

The Delhi High Court has recently dismissed a petition challenging an arbitral award passed in favour of GAIL (India) Limited, reiterating that the scope of interference under Section 34 of the Arbitration and Conciliation Act is limited. The court said it cannot re-appreciate evidence or disturb an award merely because another interpretation of the contract is possible, so long as the arbitrator's view is a plausible one.

Justice Amit Bansal observed that the arbitral tribunal had interpreted the contract to mean that the price reduction schedule would apply if the supplier failed to adhere to the agreed monthly delivery schedule of pipes.

Since that interpretation flowed from the terms of the contract and was a reasonable one, the court held that it could not be reopened in proceedings under Section 34.

The dispute arose out of a contract under which Man Industries (India) Limited agreed to supply carbon steel coated line pipes to GAIL (India) Limited. The procurement was carried out through Engineers India Limited, and the bid submitted by Man Industries was accepted through a fax of acceptance, after which the parties proceeded on the basis of the contractual delivery schedule.

GAIL had invited bids through Engineers India Limited. The bid submitted by Man Industries was accepted through a fax of acceptance.

Man Industries was required to supply the pipes in a progressive monthly delivery schedule. 90% of the contract value was payable upon delivery, while the remaining 10% was payable after handing over the pipes to GAIL's laying contractor.

Disputes had later emerged over deductions made by GAIL under the Price Reduction Schedule (PRS) for delayed deliveries, reimbursement of Central Sales Tax and interest on delayed payments.

Man Industries invoked arbitration in 2015 and filed claims seeking a refund of about Rs 3.82 crore deducted under PRS, reimbursement of CST and interest. All claims were rejected by the arbitral tribunal. Aggrieved, Man Industries filed a petition under section 34 of the Arbitration Act challenging the award.

The petitioner submitted that the arbitral tribunal had wrongly upheld the deductions made by GAIL under the price reduction schedule despite the fact that deliveries were completed before the stipulated time period under the contract.

It was further argued that GAIL had accepted the delivery without raising any objections and therefore waived strict compliance with the delivery schedule and that GAIL failed to demonstrate any actual loss occasioned by such delay.

With respect to the CST claim, it was submitted that the Central Sales Tax had been increased from 4% to 5% during the contract period and therefore the additional tax burden ought to have been reimbursed by GAIL. Lastly, it was submitted that the No Claim Certificate was issued by Man Industries under economic duress and therefore could not bar subsequent claims.

Per contra, the respondent submitted that the delivery had to be made on a monthly basis and intermediate delays triggered the PRS and that PRS clauses constituted a genuine pre-estimate of damages consciously agreed upon by the parties and therefore actual proof of loss was not required.

GAIL further argued that the petitioner had failed to show payment of CST at the higher rate and therefore the claim for reimbursement was rightly rejected.

The court reiterated the limited scope of interference with an arbitral award under section 34 of the Arbitration Act, holding that courts do not sit in appeal over arbitral awards, and interference is permissible only when the award suffers from perversity, patent illegality or violation of the fundamental policy of Indian law.

On the price reduction schedule, the court observed that the contract clearly provided that time was the essence of the contract and delivery had to be made within the monthly schedule. It observed that, “Therefore, no fault can be found with the finding of the Arbitral Tribunal that time was of essence in the contract.”

It further noted that the arbitral tribunal had interpreted the relevant contractual clauses and had come to the conclusion that delays in monthly deliveries triggered the price reduction schedule. Such interpretation of contractual clauses falls strictly within the domain of the arbitrator and cannot be interfered with by the courts, it ruled.

It further observed that the PRS clause represented a genuine pre-estimate of damages agreed between the parties. Referring to the Supreme Court's decision in ONGC Ltd v Saw Pipes Ltd, the court noted that where the amount stipulated in the contract is a genuine pre-estimate of loss, actual proof of damages is not necessary.

Applying these principles, the court held that the arbitral tribunal had accepted GAIL's case that delay in monthly deliveries affected the pipeline project and that the PRS formula was agreed as a pre-estimate of loss which would be difficult to quantify. The court therefore found no perversity in the tribunal's rejection of claim.

On the CST claim, the court held that the tribunal had rightly rejected the claim because Man Industries had failed to demonstrate payment of the higher tax rate. Since reimbursement presupposes proof of payment, the arbitrator's findings were based on evidence on record and therefore could not be interfered with.

It held that "The Arbitral Tribunal has also observed that in terms of Clause 33.2 of the GCC-Goods, GAIL is liable to reimburse the sales tax to Man Industries and reimbursement necessarily implies that the tax would have been paid by Man Industries. However, Man Industries did not adduce any evidence to show that the differential rate of tax of 1% was paid to the government"

On the effect of the No Claim Certificate, the court rejected the contention, holding that the certificate indicated final settlement of claims and the petitioner had failed to show that it was issued under economic duress.

“As regards the contentions of Man Industries that the 'No Claim Certificate' was signed under economic duress, the Arbitral Tribunal has held that no evidence has been led by Man Industries in this regard and only an oral submission was made”, it held.

Holding that there was no perversity or illegality in the arbitral award, the court rejected the petition.