TMI Blog2010 (7) TMI 1087X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the submission of the appellant as to how the sub-contract was also tax protected, which was their main plea. It is true that if there is an error apparent on the face of the award or where the umpire had exceeded his jurisdiction or travelled beyond the reference, the court can interfere. However in view of what is noted above it is not possible to say that the award suffers from any of the above defects so as to call for interefence. The intention of the parties in providing a clause like clause 17.3 could not be ignored. It had to be given a due weightage. This is what the umpire has done and has given the direction to the respondent to compensate the appellant for the amount of the necessary and reasonable extra cost caused by change in law. We have no hesitation in holding that the award of the umpire is a well reasoned award and one within his jurisdiction, and which gives a meaningful interpretation to all the clauses of the contract including clause 17.3. In the circumstances in our view the High Court has clearly erred in interfering with the award rendered by the umpire. However, we are not required to go into that issue since we are otherwise holding that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange of law and that under clause 17.3 of the General Conditions of Contract forming part of the contract between the parties, the respondent was required to reimburse this amount since it was in the nature of necessary and reasonable extra cost arising out of change of law. (In the General Conditions of contract its clauses are referred to as sections.) As against this, the submission of the respondent was that they were responsible only for the appellant s tax liability under clause 23 of the General Conditions, and if at all, it was the responsibility of the appellant under clause 13.2.7 thereof to take care of the obligations of the Sub-Contractor. 4. The two arbitrators appointed by the appellant and the respondent differed while deciding this claim of the appellant for reimbursement. This led to Sir Micheal Kerr entering the reference as the Umpire who has accepted appellant s claim, by award dated 27.6.1995. By the said award, the umpire directed the respondent to pay the appellant the sum of Japanese Yen 129,764,463/- with interest at 4.5% per annum from 15.5.1991 to date of award. He declared that in the event of appellant becoming liable to pay further sums to MII the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The short facts leading to this appeal are as follows: 6. On 22nd July, 1982 the respondent invited tenders for installation and commissioning on turn-key basis of a Platform Complex on its Bombay High (South) Offshore Site. The closing date for the bid was 11.10.1982. On the date of closing of the bid, the fiscal limit of Indian Income-tax Laws was 12 Nautical Miles in the territorial waters of India. The work to be done under the above mentioned tender was about 100 miles off the coast, and hence, the income arising therefrom was not subject to income-tax in India. The appellant had submitted its tender offer on 11th October 1982, which was accepted by the respondent and an agreement between the two came to be signed on 7th September, 1983 for executing the above work for the contract price of J.Y.10,823,237,000/-. Clause 13.1 of the General Conditions of Contract which provides for this contract price laid down that the contract price is the firm price without escalation subject to the provisions of the contract . The contract clearly stipulated that the remuneration provided to the appellant under the contract would be tax protected and would be net of all taxes. 7. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity was imposed to the tune of US$ 1,12,447.84 (₹ 1,85,23,780/-). MII paid that amount and claimed it from the appellant. The appellant reimbursed the same, and claimed it from the respondent under clause 17.3 of the General Conditions of Contract, which provided for situations arising out of change of law. The respondent did not accept this claim. As pointed out earlier, respondent contended that they were responsible for the tax liability of the appellant alone under clause 23 of the General Conditions of Contract, and under clause 13.2.7 thereof it was the responsibility of the appellant to meet all the obligations of the Sub-Contractor. 10. On 6th March, 1991 the appellant served on the respondent a notice of arbitration under clause 17.2 of the agreement between the parties and filed their statement of claim on 13th October, 1992. Both the parties appointed their respective arbitrators as per the agreement. The two arbitrators differed in their determination, vide Reasons for conclusions dated 4.7.1994 and 18.7.1994. Hence, the matter was referred to Sir Micheal Kerr as Umpire, who gave his award as aforesaid. The Relevant Terms of the Agreement entered into betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lternative makes other than those agreed already for procurement without the prior written consent of the Company. 14. Clause 5.10.5 lays down that the Contractor shall protect, indemnify and hold the Company (ONGC) harmless against all losses and claims, including such claims arising out of the negligence of the Contractor or its subcontractors, and the particulars of this indemnity are specified in this clause. 15. Clause 5.11.3. lays down that the Contractor shall observe and comply with and shall ensure that all his subcontractors also observe and comply with the laws, regulations or requirements of any states which are littoral states with respect to any sea areas comprised at site, and of any international authority or international convention or other rule of international law or custom applicable thereto. This is subject to the exception in clause 5.11.2 which provides as follows: The Contractor shall conform in all respects, and shall ensure that all his subcontractors also conform in all respects with the provisions of any statute, ordinance or laws as aforesaid except where such laws, statutes or ordinances conflict with any laws, statutes or ordinances of Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DUTIES AND TAXES: Indian Customs Duties, if any, levied upon fabricated structures, sub-assemblies and equipment and all components which are to be incorporated in the Works under the Contract shall be borne by the Company. The Company shall bear all Indian income taxes levied or imposed on the Contractor under the Contract, on account of its or their offshore personnel while working at offshore or on account of payments received by Contractor from the Company for Work done under the Contract. Notwithstanding the foregoing, the Company shall have no obligation whatsoever in respect of the Contractor s onshore employees whether they may be expatriate or nationals. Question arising for consideration 20. As stated above, the submission of the appellant was that the tax liability of MII arose out of change of law and the appellant had to reimburse that amount to MII. This affected the position of the appellant economically. The reimbursement of the tax liability of MII by the appellant was merely the necessary and reasonable extra cost arising due to the change of law. There is no dispute that this liability of MII arose out of the change of law after the date of bid closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . They are reflected in Para 6.2 of the award which reads as follows:- 6.2 ONGC liability on the true construction of Clause 17.3 effectively depends on the answers to three questions in the circumstances of this case, of which the first can be divided into two parts. These are the following: (1)Since 11 October 1982, the date of the bid closing, has there been (a) any (relevant) change in any legal provision of the Republic of India; or (b) any (relevant) change in the enforcement of any such legal provision by the Republic of India/ (2) If the answer to (1) (a) or (b) be yes , has this affected economically the position of SHI? (1) and (2) are of course interdependent, and the insertion of ( relevant is designed to provide the necessary connection). (3) If the answer to (2) is also yes have SHI incurred any necessary and reasonable extra cost caused by any changes as referred to in (1) above? If the answer to (3) is also yes then ONGC are liable. If any of the answers are different, then ONGC are not liable. 24. It is seen from the award that before answering these three questions the learned umpire went into the issue as to what approach shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule of Hourly Rates , a number of the terms of the proposed Subcontract between SHI and MII were out set in the Bid, including a provision which made it clear that, in the same way as in the Head Contract between SHI and ONGC, the Subcontract was to be tax protected , with the consequence that SHI would be liable for all Indian tax that might become payable by MII. This provision, which referred to MII as Contractor and SHI as Customer was in the following terms: Any foreign (i.e non-U.S.A.) taxes incurred by Contractor and Contractor s employees and which are imposed by or payable to any foreign governmental authority, whether by way of withholding, assessment or otherwise, for work performed hereunder shall be borne by Customer. Any such taxes which are paid directly by Contractor, shall be reimbursed by Customer. As will be seen hereafter, what became Clause 23 in the Head Contract and thus subsequently also in the Subcontract, was in different terms, but the substance was the same. 27. In this background, the umpire answered the three questions and held that there was a relevant change in view of the enactment of Clause 44 BB in the Income Tax Act with ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, learned Additional Solicitor General appearing for the respondent pressed for the acceptance of the approach of the Division Bench viz. that clause 17.3 must be construed as an indemnity clause and that it must be read strictly and narrowly. As far as this submission is concerned, one has to note that as per Section 124 of the Indian Contract Act, a Contract of Indemnity is one under which one party promises to save the other from loss caused to him by the conduct of the promisor or any other person. Thus in the present case, under clause 5.10.5 of the General Conditions of contract, the appellant has given the indemnity to the respondent against all losses that the respondent may suffer out of the negligence of appellant or their sub-contractor. Clause 17.3 thereof does not deal with any such losses. It makes a provision for compensation in the event of the appellant being subjected to extra cost arising on account of change of law. It cannot be compared with indemnity for loss due to conduct of the promisor or of a third party. 30. Mr. Tankha submitted that clauses in the contract have to be given a literal interpretation. He relied upon the judgments of this Court in Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company shall compensate the contractor for all necessary and reasonable extra cost caused by such a change in law, affecting the contractor economically, could the claim for reimbursement made by the appellant from the respondent be held as not covered under this clause? 32. The respondents had contended in the High Court and also before us that it was not necessary for the appellant to reimburse this tax amount to MII and that it was only a voluntary payment on their part. It was also submitted that this payment arose out of the contract between the appellant and MII and not because of change of law as such. Now, as can be seen from the evidence as narrated above, MII became liable to pay this tax amount to the Union of India only because of the retrospective change in the Income Tax Law, brought in subsequent to the date of bid closing. The liability of the appellant to reimburse that amount to MII arose in view of the commitment made by the appellant in their sub-contract to MII. It cannot be ignored that if there was no change of law, this situation would not have arisen at all. It is therefore not possible to treat this payment as voluntary, that is, in the absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord as well as the context. Respondent had contended in their arbitration petition before the High Court that it was not permissible to refer to the precontractual negotiations and the documents arising therein. What the umpire has however done is to look into the context with a view to understand the text. As we have noted above the umpire has looked into the evidence before him including that of the respondent s officer as to how MII had participated in the bid clarification meetings. He considered the submission of the appellant as to how the sub-contract was also tax protected, which was their main plea. It is true that if there is an error apparent on the face of the award or where the umpire had exceeded his jurisdiction or travelled beyond the reference, the court can interfere. However in view of what is noted above it is not possible to say that the award suffers from any of the above defects so as to call for interefence. 35. The view canvassed on behalf of the respondent was that clause 17.3 ought to be read narrowly like an indemnity clause or given a literal interpretation as in the case of an insurance policy. The umpire on the other hand has observed that this cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to sitting in appeal. As held by this Court in Kwality Manufacturing Corporation versus Central Warehousing Corporation reported in (2009) 5 SCC 142, the court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding. 37. It is an obligation of the parties to a contract that they must perform their respective promises, and if a party does not so perform, the arbitrator or the umpire has to give the necessary direction if sought. In that process, they have to give a meaningful interpretation to all the relevant clauses of the contract to make them effective and not redundant. The intention of the parties in providing a clause like clause 17.3 could not be ignored. It had to be given a due weightage. This is what the umpire has done and has given the direction to the respondent to co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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