Merely Having An Explicit Clause Not Sufficient To Make Time The Essence Of Contract – SC Upholds Arbitral Award

The Court also held that since time was not the essence of the contract, pre-estimated damages (liquidated damages) could not be granted to a party for the delay on the part of the other party in performing the contract.

Senior Advocate Mr. Shyam Divan appeared for Remi Metals during the proceedings before the Court while Mr. K. R. Sasiprabhu, AOR appeared for ONGC.

Appeals were preferred by both Remi Metals and ONGC against the judgment passed by the Uttarakhand High Court which had allowed the Arbitration appeal of ONGC filed under Section 37 of the Arbitration Act. The High Court held that both the Arbitral Tribunal and District Court erred in holding that time was not the essence of the contract and only the actual losses suffered by ONGC could be granted and not liquidated damages.

In this case, there were certain delays on the part of Remi Metals in meeting the obligation as required under the contract for which various extensions were given by ONGC. In this context, ONGC had deducted an aggregate amount of a certain sum as liquidated damages from various bills submitted by Remi Metals. There were other claims which were disputed by the Remi Metals which were claimed before a panel of arbitrators.

The Arbitral Tribunal had held that liquidated damages could not be granted as there was no breach of contract due to the fact that time was not the essence. The Tribunal proceeded to determine the actual damages based on the evidence furnished. Also, the tribunal held that ONGC would not be entitled to claim any damage for losses incurred during the extended period of delivery where liquidated damages were expressly waived.

The Apex Court after analyzing the findings of the Arbitral Tribunal and the lower Courts held, "Reliance on the contractual conditions and conduct of parties to conclude that existence of extension clause dilutes time being the essence of the contract, was in accordance with rules of contractual interpretation."

The Court also noted the following principles regarding the relevancy of time conditioned obligations –

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. [Refer to Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794].

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. [Refer Holme v. Guppy, (1838) 3 M & W 387]

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

Additionally, the Court observed, "It is now settled that 'whether time is of the essence in a contract', has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract."

"When a standard form of a contract is utilised, ONGC is assumed in law to have the larger bargaining power to enter into a contract, unless clear intention is shown to the contrary. In this case at hand, a reasonable interpretation against ONGC may be utilized," the Bench opined.

Further, the Court held, "the promisee (ONGC) waived the liquidated damages initially and the same cannot be imposed, unless such imposition was clearly accepted by parties. In this case, the interpretation of the Arbitral Tribunal could not be faulted as being perverse, for the reasons stated above."

The Court while upholding the Arbitral Award gave the following observations –

The interpretation given by the Tribunal to the contractual clauses having extension procedure and imposing liquidated damages are good indicators that 'time was not the essence of the contract.'

The Tribunal's view to impose damages based on actual loss could be upheld as the liquidated damages were waived and absence of precise language for reimposing liquidated damages.

The Arbitral Tribunal was correct in distinguishing the dictum of this Court in Saw Pipes which validated the imposition of liquidated damages in a similar contract.

Both the High Court and District Court strayed beyond the limitation under Section 34 and Section 37 of the Arbitration Act.

Other aspects of the award did not require interference of the Court in view of the law laid down in Project Director, National Highways No.45E and 220, National Highways Authority of India v. M. Hakeem.

In light of the observations, the Court set aside the order of the High Court and District Court and allowed the appeal filed by Remi Metals, and disposed of the appeal filed by ONGC.

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