Undisputed Claims Can't Be Set-Off Against Unliquidated Damages That Are Not Ascertained: Bombay High Court

Single judge G.S. KULKARNI reiterated that a Section 9 Court would not be unduly bound by procedural law contained in the Code of Civil Procedure, 1908, the underlying principle being to make arbitration an effective form of dispute resolution; and that a performance bank guarantee ("PBG") cannot be invoked contrary to the provision for its invocation in the PBG itself.

Ocean Sparkle Limited ("petitioner") and Oil and Natural Gas Corporation Ltd. ("ONGC") entered into an agreement dated June 14, 2018. Pursuant to the agreement the petitioner had chartered its vessel, 'OSL Glory' to ONGC for a period of three years, commencing from March 20, 2018 at 12.18 hours. The parties agreed that the agreement would stand completed unless automatically extended for a period not exceeding 30 days under the same rates to the satisfaction of ONGC.

On September 1, 2019 the petitioner's vessel (whilst on ONGC charter) collided with ONGC unmanned platform 'RS-21'. The surveyor appointed by the P&I Club of the petitioner stated in its preliminary report that the prevailing repair rate of an offshore contractor and the repair estimates were in the range of USD 30,000. However, ONGC claimed an amount of USD 616,490 towards compensation. The petitioner denied any negligence and wilful misconduct. On February 18, 2021 the petitioner and ONGC extended the agreement from March 20, 2021 to April 19, 2021. Upon completion of the extended period, the vessel of the petitioner stood de-hired by ONGC at 8.48 hours and was returned to the petitioner.

ONGC withheld payment of petitioner's invoices for March and April, 2021. The petitioner had issued a PBG of respondent no. 2, bank. The PBG was a security to seek performance of the agreement, and as provided under Clause (5) of such PBG, it was to remain in force during the period that was taken for performance of the contract. The petitioner at the request of ONGC had extended the PBG from time to time and last of such extension was up to June 6, 2022. The petitioner contended that there is likelihood that ONGC may invoke the PBG to appropriate the amounts under it towards the alleged damages suffered by it.

The petitioner initiated the present proceedings under section 9 of the Arbitration & Conciliation Act, 1996 ("the Act"). The petitioner contended that once the amounts under the invoices are undisputed, such amounts either need to be paid to the petitioner by the respondent or they need to be deposited in this Court pending the arbitral proceedings. ONGC contended that the bank guarantee shall remain in force during the period of performance and till all claims of ONGC are satisfied. It submitted that Clause 10 of the agreement in question itself grants ONGC an unconditional option to invoke the same in respect of any amount due from the petitioner, and for which the bank guarantee was unconditionally extended by the petitioner till June, 2022. The petitioner is estopped from contending that the said bank guarantee cannot be invoked on account of its own conduct.

The Court noted that firstly, although the incident had taken place on September 1, 2019 and the probable loss suffered by ONGC could be almost immediately known or ascertained soon after the incident, ONGC for the first time almost after 16 months from the date of the incident by its letter dated December 17, 2020 made a claim against the petitioner. Secondly, ONGC continued with the charter of the petitioner's vessel subsequent to September 1, 2019 and honoured the invoices as raised by the petitioner for the period of September 2019 to March 2020. Such contractual conduct of ONGC makes it quite clear that ONGC never had any grievance regarding performance of the agreement by the petitioner. Thirdly, it is not in dispute that till the expiry of the contract period ONGC utilized the petitioner's vessel. This being the case, the Court found no justification for ONGC to withhold payment of invoice amounts payable to the petitioner.

With respect to invocation of PBG, the Court noted that clause (5) of the PBG provides that the guarantee of the bank shall remain in force during the period that is taken for the performance of the contract, namely the agreement period from 20 March 2018 till 18 March 2021 and the extended period. The court referred to Hindustan Construction Co. Ltd. vs. State of Bihar & Ors., (1999)8 SCC 436 and Larsen and Toubro Ltd. vs. Allahabad Bank & Ors., (2016 SCC OnLine Bom 5311) while stating that, it is a settled principle of law that the invocation of a PBG will have to be in accordance with the terms of the PBG or the invocation itself would be bad.

The Court held that any claim for unliquidated damages that need to be determined through evidence cannot be set-off against admitted and undisputed claims. Moreover, the Court also reiterated that PBGs are dependent upon their own terms for invocation and cannot be invoked contrary to the agreed terms. Consequently, with the end of the Agreement term, the PBG need not be extended, neither can it be invoked to set-off unliquidated damages.

Case Title : Ocean Sparkle Limited. V Oil and Natural Gas Corporation Ltd. And anr

Citation: 2022 LiveLaw (Bom) 233

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