Merely having explicit clause may not be sufficient to make ‘time essence of contract’, says Apex Court while upholding Arbitral Award

Read Judgment: WELSPUN SPECIALTY SOLUTIONS LIMITED vs. ONGC

Pankaj Bajpai

New Delhi, November 16, 2021: While upholding the award passed by the Arbitral Tribunal, the Supreme Court has held 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, added the Court. 

A Division Bench of Chief Justice N.V. Ramana and Justice Surya Kant therefore observed that the Arbitral Tribunal’s interpretation of contractual clauses having extension procedure and imposition of liquidated damages, were good indicators that ‘time was not the essence of the contract’.

Further, the Arbitral Tribunal’s view to impose damages accrued on actual loss basis did merit to be sustained in view of the waiver of liquidated damages and absence of precise language which allowed for re-imposition of liquidated damages, added the Bench.

Going by the background of the case, the Arbitral Tribunal considering a construction dispute between Welspun Specialty Solutions Limited (Appellant) and ONGC (Respondent) held that pre-estimated 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 noted that contracts containing provision for extension of time or payment of penalty on default would dilute the obligation of timely performance and render the clauses imbuing time as essence of the contract ineffective. 

Challenging the same, the respondent filed petition u/s 34 of the Arbitration and Conciliation Act, 1996, which was dismissed by the District Court observing that time was not the essence of the contract and only the losses actually suffered could be granted. The High Court however set aside such Arbitration award. Hence, present appeal. 

After considering the arguments, the Apex Court found that the main challenge to the award was against the imposition of unliquidated damages, when the matter of fact stood that the contract between parties stipulated for pre-estimated damages (liquidated damages). 

The concerned contract contained provisions for liquidated damages for breach of contract, particularly breach of deadlines set in the contract. Under Indian Contract law, such liquidated damages are recognized, subject to the same being reasonable, added the Court. 

The Division Bench therefore said that reliance by Arbitral Tribunal 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. 

Speaking for the Bench, Chief Justice noted that the Arbitral Tribunal construed the provision of Section 55 of the Indian Contract Act to interpret the term ‘loss’ to mean actual tangible loss provable by evidence, instead of pre-estimated loss, which is a reasonable interpretation, as the other party was not able to impugn the same by pointing to any documents or correspondence to the contrary. 

When a standard form of a contract is utilized, ONGC is assumed in law to have the larger bargaining power to enter into a contract, unless clear intention is shown to the contrary, added the Chief Justice. 

“ONGC had waived liquidated damages twice before giving extension with pre-estimated damages. The approach of the Arbitral Tribunal was to hold that once liquidated damages were waived in the first extension, subsequent extension could not be coupled with liquidated damages unless a clear intention flowed from the contract”, observed the Bench. 

The Apex Court therefore said that the promisee (ONGC) waived the liquidated damages initially and the same cannot be imposed, unless such imposition was clearly accepted by parties. 

Thus, the Apex Court set aside the judgment of the High Court observing that it had strayed beyond the limitation u/s 34 & 37 of the Arbitration Act.