"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Saturday, February 20, 2010

Dolphin Drilling Limited v. ONGC Limited

Dolphin Drilling Limited v. ONGCL

Court: Supreme Court of India
Date of Judgement: 17.02.2010
Parties: Dolphin Drilling Limited (based in Norway) & ONGC (India)
Application: Section 11(6) for the appointment of arbitrator:
Section 11(6) reads:

"Where, under an appointment procedure agreed upon by the parties, -
(a) A party fails to act as required under that procedure; or
(b) The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) A person, including an institution, fails to perform any function entrusted to him or it under that procedure,
A party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the
appointment
."

Judge: Aftab Alam, J.
Comment:
An application was filed by Dolphin for the reference of a dispute to arbitration.
In rig contracts, due to rapid fluctuations in the market rate for rigs and the uncertainties in the duration of the contract, parties often dispute on the duration of contract. The instant case is another example of parties to rig contracts disputing on the duration of rig contracts. In many cases, the rigs operate on the basis of day rates (that is, a fixed sum paid daily on the basis of the status of the rig. If the rig is carries drilling operations, then it is to be paid what is known as the operating rate; if the rig is on standby (not drilling), it is paid a standby rate, which, for obvious reasons, is lesser than the operating rate. But the day rates are determined according to the capabilities of the rig. For example, in 2004, a rig of the capability of Dolphin's rig "Belford Dolphin" (the rig which was used to carry out drilling operations for ONGC in the instant case) would have performed drilling operations at a day rate ranging between US $ 150,000 to USD 200,000. Note that the said rate is a daily rate to be paid and not the overall contract price- if stated in rupee terms (with conversion at Rs. 45 per dollar), ONGC would have had to pay more than Rs. 67,50,000 per day! Given the high stakes involved parties are bound to litigate unless the contracts are super-tight, which possibility is equivalent to the number of people who do not curse their bosses!!!
Disputes arose between the parties as to additional work done for about two months approximately, for which ONGC had allegedly part-paid Dolphin. Dophin gave a notice invoking arbitration and appointed an arbitrator from their side. ONGC did not respond. Therefore Dolphin approached the court. The court appointed an arbitrator for ONGC since ONGC did not appoint an arbitrator as per the contract (the arbitration tribunal was to consist of three arbitrators, one appointed by each party and the third arbitrator appointed by the arbitrators nominated by the parties). There is nothing that is wrong or appreciable about the final decision. This judgement is one of those several hundred decisions (perhaps one of those thousand decisions) on Section 11 applications. But what is interesting is the contention of ONGC and the response of the judge on the point.
Counsel for ONGC contended that the agreement to arbitrate was a one-time measure and parties could not invoke the arbitration agreement repeatedly even though the disputes may be different and unconnected to each other. The judge rightly rejected the contention of ONGC. An agreement to resolve disputes by arbitration implies that parties have chosen to arbitrate instead of litigating in courts. If there was no arbitration agreement, would it be reasonable to contend that parties' right to approach the court is a one-time measure? Surely not.
But counsel for ONGC rightly contended that the expenses involved in arbitration are huge. Believe me when I say- arbitrations are very very expensive! I''ll give the reader an idea of how costly arbitrations are .In a typical ad hoc arbitration involving retired supreme court/ high court judges, the costs involved per day or a part thereof are as below:
  1. a per sitting fee (one sitting is roughly equivalent to three hours) ranges between Rs. one lakh to two lakhs per arbitrator (that makes it 3-6 lakhs for three), plus
  2. a one time reading fee of one to three lakhs, plus
  3. fee paid to the senior advocate (which ranges anywhere between one lakh to four lakhs per appearance/ hearing/ hour- this might be a conservative estimate in arbitrations involving very large claims) plus
  4. fee ranging between ten thousand to fifty thousand for the junior counsel (per hour) plus,
  5. six-twelve thousand (again, per hour) if you are hiring a law firm to conduct all the drafting and briefing work, plus
  6. a few thousands for the representative of the party litigating plus
  7. the stay in a five star hotel for the three arbitrators (if the arbitrator is not from the city where arbitration takes place plus
  8. 10,000-50,000 per day for the venue of arbitration
  9. 1,000-2,000 for the typist/ administrative costs
The above is just a conservative estimate of costs that a company might incur in a day or a part of a day.
But the costs do not justify the choice of ONGC and Dolphin to have the disputes under contract arbitrated. I pity ONGC. A dispute under the very same contract was already pending before a tribunal consisting of three arbitrators. Imagine the costs that ONGC (and Dolphin) would have shelled out for it. Since the already pending arbitration was in its final stages, this new dispute under the contract could not be referred to those arbitrators because referring this dispute would entail delay in the award on the existing dispute. In fact, many contracts should, and do, contain provisions which mandate the parties to refer new disputes to an arbitral tribunal constituted previously for deciding on dispute in connection with the same contract. Also, a situation may so arise that claims are made during the currency of the contract and the claims are restricted to the date of invocation of arbitration or the date of submission of statement of claim. During the conduct of arbitration, if the contract ends, the claimant would want the tribunal to decide on the same nature of claims (through an amendment to the statement of claims) but which arose after the date of invocation of arbitration or statement of claim. It would be costly for the defendant to object to reference of such new disputes to the same arbitral tribunal, considering the costs involved, event hough it is a matter of law that arbitrators on their own cannot usurp jurisdiction to decide new disputes that were not referred to them by the parties. (Arbitrators, you see, are creatures of contract)
Having rejected the contention of ONGC, Justice Alam has made one interesting suggestion (at para 7):
"The issue of financial burden caused by the arbitration proceedings is indeed a legitimate concern but the problem can only be remedied by suitably amending the arbitration clause. In future agreements, the arbitration clause can be recast making it clear that the remedy of arbitration can be taken recourse to only once at the conclusion of the work under the agreement or at the termination/cancellation of the agreement and at the same time expressly saving any disputes/claims from becoming stale or time -barred etc. and for that reason alone being rendered non-arbitrable."
An interesting suggestion to postpone arbitration till conclusion of the contract, especially because it gives sufficient amount of time (depending on the time for work to be performed after the dispute has arisen) for the parties (before initiating arbitration but after the dispute has arisen) attempt to resolve their disputes.

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