Welspun Specialty Solutions Limited Vs Oil And Natural Gas Corporation Ltd: Merely Having An Explicit Clause Is Not Sufficient To Make Time The Essence Of The Contract, Says SC

DATE OF JUDGEMENT
November 13, 2021

BENCH
CJI N.V. Ramana
Justice Surya Kant

PARTIES
Appellant- Welspun Specialty Solutions Limited (Formerly Known as Remi Metals Gujarat Ltd.)
Respondent- Oil And Natural Gas Corporation Ltd.

SUBJECT

Section 55 of the Indian Contract Act uses the phrase "time as an essence of the contract" and states that if the parties have agreed to perform a certain act within a certain period of time and either party fails to do so, the contract becomes voidable at the promisee's option if they wanted to make time an essence of the contract, and if they did not, the promisee can seek compensation for any losses he has suffered as a result of the delay.

LEGAL PROVISIONS

Section 55 and Section 74 of the Indian Contract Act, 1872

OVERVIEW

• The respondent, ONGC, issued a global tender for the procurement of 3,93,297 metres of seamless steel casing pipes, to which the Appellant Remi Metals was a successful bidder.
• The purchase orders were issued accordingly and it was mentioned in the POs that“the delivery period will commence within 16 weeks and will be completed in 40 weeks”. The POs, among other things, also mentioned that the time and date of delivery is the essence of the supply order and that delivery must be completed not later than the date specified. There were also specified clauses for liquidated damages in case the terms and conditions are not met.
• When the dispute between the two regarding the contract went to the Arbitral Tribunal, it was held that simply having a clause in the contract making time the essence of it would not be enough to determine it; rather, an overall view having regard to all the terms of contract are to be taken into consideration. It was noted by the tribunal that since the contract had a provision for extension of time or payment of penalty it, on default, dilutes the obligation of timely performance and renders the clauses containing time as an essence of the contract ineffective.
• On the point of liquidated damages, the tribunal held that liquidated damages, which are pre-estimated damages, cannot be granted as there was no breach of contract due to the fact that time was not the essence.
• The respondents filed a petition under Section 34 of the Arbitration and Conciliation Act before the district court. The district court agreed with Arbitral Tribunal and held that it was correct in holding that time was not the essence of the contract and only the losses actually suffered could be granted. Both parties then appealed the same before the High Court of Uttarakhand.
• The High Court disagreed with the view of the Tribunal as well as the District Court. The court held that both the arbitral award and order of the District Judge erred in construction of the contract with respect to whether time was the essence or not.
• In this appeal before the Supreme Court, the Appellant submitted that the view taken by the Arbitral tribunal was reasonable, plausible and can be sustained. This is because the contract provided for extension of time as well as for liquidated damages. The respondents on the other hand, submitted that reading of the contract makes it clear that the time was of the essence, which was also signified in every extension given.

ISSUES

1. Was time the essence of the Agreement to make supplies under the four Purchase Orders?

JUDGEMENT ANALYSIS

• The Apex Court held that the ‘time not being the essence of the contract’, as determined by the Arbitral Tribunal, was beyond reproach. It was noted that the Arbitral Tribunal's reliance on contractual conditions and conduct of parties to reach the conclusion that the existence of an extension clause dilutes the contract's time essence was consistent with the rule’s contractual interpretation.
• The court observed some basic principles by referring to landmark cased in order to consider the relevancy of time conditioned obligations in contract-

1. The general rule followed, subject to the nature of contract is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794 was referred]
2. Subject to the exception that the promisee is not entitled to liquidated damages, ifhe has prevented the promisor from completing the work by the completion date by his act or omission. [Holme v. Guppy, (1838) 3 M & W 387 is to be referred]
3. These general principles may be amended by the express terms of the contract as stipulated in this case.

• The court decided that whether time is of the essence in a contract must be determined by reading the entire contract as well as the circumstances surrounding it.Just because the contract has an explicit clause may not be sufficient to make time the essence of the contract.
• It was observed that “as the contract was spread over a long tenure, the intention of the parties to provide for extensions surely reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates ONGC’s effort to uphold the integrity of the contract instead of repudiating the same.”
• The court explained the Arbitral Tribunal’s interpretation of 2nd para of Section 55 of the Contract Act and said that “the Arbitral Tribunal construed the aforesaid provision to interpret the term ‘loss’ to mean actual tangible loss provable by evidence, instead of pre-estimated loss.” The court deemed this to be a reasonable interpretation keeping in mind the facts and circumstances of the case and that the other party was not able to impugn the same by pointing to any documents or correspondence to the contrary.
• The court noted that ONGC waived liquidated damages twice before giving extension with pre-estimated damages and so the same cannot be imposed, unless such imposition was clearly accepted by parties and a clear intention flowed from the contract.
• The court allowed the appeal and set aside the order of the High Court as well as District Court’s interference, and decided to uphold the award of the Arbitral Tribunal.

CONCLUSION

The Supreme Court observed that simply having contractual clauses about the time may not be sufficient to make time the essence of the contract. It is to be seen after reading the entire contract as well as the surrounding facts and circumstances. It was concluded that an extension clause in the contract dilutes time being the essence of the contract.

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