The decision in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] is one of the most significant judgments in Indian arbitration law, particularly concerning the grounds on which an arbitral award can be set aside by the courts. This case widened the interpretation of “public policy of India” under Section 34 of the Arbitration and Conciliation Act, 1996, thereby increasing the scope of judicial review.
Case Background: ONGC entered into a contract with Saw Pipes for the supply of casing pipes. A delay occurred in the shipment due to unforeseen circumstances, and Saw Pipes contended that the delay was excusable under the force majeure clause. However, ONGC deducted liquidated damages for the delay, and the dispute went to arbitration. The arbitrator ruled in favor of Saw Pipes, holding the delay was justified and the deduction unwarranted.
ONGC challenged the award under Section 34, claiming it was against public policy. The Bombay High Court upheld the award. ONGC then appealed to the Supreme Court.
Supreme Court’s Ruling: The Supreme Court held that an award that is “patently illegal” is against public policy and can be set aside. It found that the arbitrator had misinterpreted the terms of the contract, particularly the force majeure clause, and thus the award was contrary to the contractual terms and the law. Therefore, the award was set aside.
Key Takeaways:
- The Court expanded the definition of “public policy” to include patent illegality.
- An award contrary to the terms of the contract or statutory provisions is considered to be against public policy.
- This introduced judicial scrutiny into the merit of arbitral decisions.
Impact on Indian Arbitration: This judgment led to increased intervention by Indian courts in arbitration matters, often resulting in delays and the defeat of arbitration’s core purpose—finality and efficiency. Critics argued that this expansion of public policy diluted the sanctity of arbitral awards and discouraged foreign parties from choosing India as an arbitration-friendly jurisdiction.
Post-Saw Pipes Developments: Due to growing concerns about judicial overreach, the 2015 Amendment to the Arbitration Act aimed to restrict the grounds for setting aside an award. The amended Section 34 clarified that “patent illegality” would apply only to domestic awards and not to international commercial arbitrations.
Conclusion: ONGC v. Saw Pipes remains a landmark case for understanding judicial intervention in arbitration in India. While it was intended to ensure fairness and legality in arbitral decisions, it also served as a wake-up call for legal reforms to protect the autonomy of the arbitration process. Its legacy is seen in both the criticisms it sparked and the legislative reforms it inspired.