Delhi High Court
Budhiraja Electricals vs Public Work Department (Govt. Of Nct Of … on 21 May, 2026
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 04.05.2026
Judgment pronounced on: 21.05.2026
+ OMP (ENF.) (COMM.) 46/2018 & I.A. 4165/2018 (U/O XXI
Rule 41(2)
BUDHIRAJA ELECTRICALS .....Decree Holder
Through: Ms. Kirti Mewar, Advocate
versus
PUBLIC WORK DEPARTMENT (GOVT. OF NCT OF
DELHI) .....Judgement Debtor
Through: Mr. Dhananjaya Mishra, Mr.
Navneet Dogra and Mr.
Bhargav Verma, Advocates
+ O.M.P. (COMM) 207/2017 & I.A. 5261/2017 (Stay)
PUBLIC WORK DEPARTMENT (GOVT. OF DELHI)
THROUGH ITS OFFICE EXECUTIVE ENGINEER
(ELECTRICAL) .....Petitioner
Through: Mr. Dhananjaya Mishra, Mr.
Navneet Dogra and Mr.
Bhargav Verma, Advocates
versus
BUDHIRAJA ELECTRICALS THROUGH ITS PARTNER
MR. MOHINDER LAL BUDHIRAJA .....Respondent
Through: Ms. Kirti Mewar, Advocate
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CORAM:
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
JUDGMENT
HARISH VAIDYANATHAN SHANKAR, J.
1. The Objection Petition, being O.M.P. (COMM.) 207/20171,
has been instituted under Section 34 of the Arbitration and
Conciliation Act, 19962, seeking setting aside of the Arbitral Award
dated 26.10.2016, as revised on 07.01.20173, rendered by the learned
Sole Arbitrator insofar as it pertains to Claim Nos. 3 and 6, along with
the corresponding claims relating to interest.
2. The Enforcement Petition, being O.M.P.(ENF.)(COMM.)
46/20184, has been filed under Order XXI Rules 10 and 11 read with
Section 151 of the Code of Civil Procedure, 1908 and Section 36 of
the A&C Act, seeking enforcement of the aforesaid Impugned Arbitral
Award.
3. It is pertinent to note that both the aforesaid proceedings arise
from the same Arbitral Award. While the Objection Petition calls into
question the validity and sustainability of the Impugned Arbitral
Award, the Enforcement Petition seeks its enforcement. In such
circumstances, it is expedient that the challenge to the Arbitral Award
under Section 34 of the A&C Act be considered prior to, and in
conjunction with, the execution proceedings. This course is
necessitated to obviate the possibility of inconsistent findings, avoid
1
Objection Petition
2
A&C Act
3
Arbitral Award
4
Enforcement Petition
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multiplicity of proceedings, and ensure that the enforceability of the
Arbitral Award is determined in a coherent and conclusive manner.
4. For the sake of convenience, clarity, consistency, and ease of
reference, this Court proposes to refer primarily to the facts and
pleadings as set out in the Objection Petition while adjudicating the
present matters.
5. Needless to state, the findings and conclusions arrived at in the
Objection Petition, insofar as they pertain to the validity and
sustainability of the Impugned Arbitral Award, shall have a direct and
determinative bearing on the Enforcement Petition, since the
execution proceedings arise out of the very same Arbitral Award.
Consequently, the conclusions reached in the Petition under Section
34 of the A&C Act shall, to the extent applicable, govern the
execution proceedings.
BRIEF FACTS:
6. The present disputes arise out of a Tripartite Agreement
executed between the Public Works Department, Government of NCT
of Delhi, M/s Parnika Commercial & Estate Pvt. Ltd., being the main
contractor, and M/s Budhiraja Electricals, being the electrical sub-
contractor, in relation to the work pertaining to construction of EDP
Cell-cum-Referral Clinic/Administrative Block-cum-OPD Block and
Additional Basement Parking at G.B. Pant Hospital, New Delhi, under
Composite Contract No. 98/EE(E)/PWD/ED-1/2005-06, subsequently
re-allotted as No. 47/EE(E)/B-241/2007-08.
7. The work was commenced from 11.01.2006 and the stipulated
date of completion was 10.07.2008. It is not in dispute that the work
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was ultimately completed on 30.11.2011 and the delay stood
regularised by the Department without the levy of compensation.
8. Disputes subsequently arose between the parties inter alia in
relation to claims concerning escalation under Clause 10CC of the
General Conditions of Contract5, compensation towards deployment
of staff and watch and ward during the extended period, loss of
turnover/profitability, withheld amounts and interest thereon.
9. Upon invocation of arbitration, this Court, in proceedings under
Section 11 of the A&C Act, appointed Shri Vinod Jain, District &
Sessions Judge (Retd.), as the learned Sole Arbitrator to adjudicate the
disputes between the parties.
10. The learned Arbitrator rendered the Impugned Arbitral Award
dated 26.10.2016, subsequently revised on 07.01.2017 under Section
33 of the A&C Act, whereby various claims of the Claimant were
allowed.
11. Aggrieved thereby, the Petitioner instituted the Objection
Petition under Section 34 of the A&C Act, seeking the setting aside of
the Impugned Arbitral Award, whereas the Award Holder instituted
the Enforcement Petition seeking enforcement thereof.
12. The challenge by the Petitioner before this Court is confined
primarily to the findings returned by the learned Arbitrator in respect
of Claim No. 3 relating to escalation under Clause 10CC of the GCC
and Claim No. 6 concerning loss of turnover/profitability on account
of prolongation of the contract, along with the corresponding claims
relating to interest.
5
GCC
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13. It is in the aforesaid backdrop that the present matters have
come up for consideration before this Court.
SUBMISSIONS BY THE PARTIES:
14. Learned counsel appearing on behalf of the Petitioner would
submit that the challenge to the Impugned Arbitral Award is, in
substance, confined to the findings returned by the learned Arbitrator
in respect of Claim Nos. 3 and 6, along with the corresponding claims
relating to interest.
15. It would be submitted that Claim No. 3 pertains to the grant of
escalation under Clause 10CC of the GCC, which has been
erroneously granted for the extended period of the contract. Claim No.
6 relates to the award of compensation towards alleged loss of profits
on account of the prolongation of the contract, which is assailed as
being without evidentiary foundation.
16. Learned counsel appearing on behalf of the Petitioner would
contend that the Impugned Arbitral Award, insofar as it allows Claim
No. 3 (Rs.38,96,175/- towards escalation) and Claim No. 6
(Rs.16,23,195/- towards loss of profits), is liable to be set aside as
being contrary to the public policy of India and suffering from patent
illegality.
17. It would be further contended that the findings returned by the
learned Arbitrator are sans any cogent evidence, and the Impugned
Arbitral Award, to that extent, is non-speaking and devoid of reasons,
thereby falling foul of the mandate under Section 31(3) of the A&C
Act. It would also be contended that an arbitral award which is based
on no evidence or fails to disclose intelligible reasons would warrant
interference under Section 34 of the A&C Act. In support of this
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proposition, reliance would be placed on Associate Builders v. DDA6
and Ssangyong Engineering & Construction Co. Ltd. v. National
Highways Authority of India7.
18. Learned counsel would further contend that the award of
Rs.38,96,175/- under Claim No. 3 towards escalation under Clause
10CC of the GCC is wholly untenable, inasmuch as the said clause is
confined to the stipulated period of the contract and does not extend to
the prolonged period. It would further be urged that the learned
Arbitrator has erroneously invoked Section 73 of the Indian Contract
Act, 1872 8 in the absence of any proof of actual loss or damage
suffered by the Respondent. It would also be submitted that damages
cannot be awarded on mere assumptions or equitable considerations,
but must be founded upon clear evidence of loss. Reliance in this
regard is placed on General Manager, Northern Railway v. Sarvesh
Chopra9.
19. Insofar as Claim No. 6 is concerned, learned counsel would
contend that the award of Rs.16,23,195/- towards loss of profits is
equally unsustainable, having been granted on a purely notional and
formulaic basis. It would be submitted that the learned Arbitrator has
mechanically applied a 15% benchmark (10% towards overheads and
5% towards profit) on the value of the work, purportedly relying upon
a Central Public Work Department 10 memorandum dated
14.12.2007, without any evidence to demonstrate that the contractor
had in fact suffered loss of profits or was prevented from undertaking
other works. It would be contended by the learned counsel for the
6
(2015) 3 SCC 49
7
(2019) 15 SCC 131
8
ICA
9
(2002) 4 SCC 45
10
CPWD
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Petitioner that loss of profit cannot be presumed and must be strictly
proved. In this regard, reliance is placed on M/S Kailash Nath
Associates v. Delhi Development Authority 11 and Bharat Coking
Coal Ltd. v. L.K. Ahuja12.
20. Learned counsel would further contend that the grant of interest
in the Arbitral Award by the learned Arbitrator is wholly
consequential to the aforesaid claims and cannot be sustained
independently. It would be submitted that once the principal amounts
awarded under Claim Nos. 3 and 6 are liable to be set aside; the award
of interest thereon in any manner would necessarily fall.
21. It would thus be contended by the learned counsel for the
Petitioner that the Impugned Arbitral Award, to the aforesaid extent, is
liable to be set aside.
22. Per contra, learned counsel appearing on behalf of the
Respondent would oppose the contentions advanced on behalf of the
Petitioner concerning the above-mentioned claims.
23. Learned counsel for the Respondent would contend that the
Impugned Arbitral Award does not warrant any interference under
Section 34 of the A&C Act, inasmuch as the same is founded upon a
proper, detailed and reasoned appreciation of the pleadings, evidence,
and material placed on record.
24. It would be submitted that the learned Arbitrator has, after duly
considering the claims and upon a comprehensive evaluation of the
oral and documentary evidence, including the cross-examination of
witnesses, rendered a well-reasoned and speaking award which
reflects due application of mind.
11
2015 (4) SCC 136
12
(2004) 5 SCC 109
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25. It would further be contended that the present Petition is, in
substance, an attempt by the Petitioner to seek a re-adjudication of the
disputes on merits, which is impermissible within the limited scope of
Section 34 of the A&C Act.
26. Learned counsel for the Respondent would submit that the
Impugned Arbitral Award is just, proper, and intelligible, and does not
suffer from any perversity or patent illegality, particularly in view of
the fact that the findings returned therein are, inter alia, based upon
admissions made by the Petitioner’s witness during cross-
examination.
27. Learned counsel would further contend that the Petitioner has
failed to establish any ground falling within the limited contours of
interference under Section 34 of the A&C Act, including any
demonstrable conflict with the public policy of India. It would be
submitted that the scope of judicial interference with arbitral awards
stands considerably circumscribed, and the Court cannot act as a court
of appeal by re-appreciating evidence or substituting its own view for
that of the learned Arbitrator.
28. In support of the aforesaid submission, reliance would be
placed by the learned counsel for the Respondent on Ssangyong
Engineering (supra) contending that the expression “public policy of
India” is confined to contravention of the fundamental policy of
Indian law or the most basic notions of justice or morality, and that
“patent illegality” must go to the root of the matter and does not
include mere erroneous application of law. Further, re-appreciation of
evidence is impermissible in proceedings under Section 34 of the
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A&C Act. The said position, as per the Respondent, has been
reiterated in Delhi Airport Metro Express (P). Ltd. v. DMRC13.
29. Learned counsel would further contend that the findings
recorded by the learned Arbitrator are squarely founded upon
admissions made by the Petitioner in its pleadings as well as by its
witness during cross-examination, and such admissions constitute the
best form of evidence. In this regard, reliance would be placed on
Delhi Transport Corporation v. Shyam Lal and Union of India v.
Ibrahim Uddin14 to contend that admissions, though not conclusive,
are decisive unless successfully explained or withdrawn.
30. It would be contended that the award towards escalation under
Claim No. 3 and loss of profitability under Claim No. 6, along with
the corresponding interest, has been rightly granted by the learned
Arbitrator upon a categorical finding that the delay in completion of
the work was not attributable to the Respondent. It would be
submitted that the said finding stands duly supported by the admission
of the Petitioner’s own witness. It would further be submitted that the
said witness has also admitted that escalation under Clause 10CC of
the GCC is not barred during the extended period where the delay is
attributable to the Department.
31. Learned counsel for the Respondent would also contend that
the learned Arbitrator has correctly applied the provisions of Section
73 of the ICA, read with Clause 10CC of the GCC, while allowing the
claim towards escalation, and such findings, being based on evidence
and admissions, do not suffer from any perversity so as to warrant
13
(2022) 1 SCC 131
14
(2004) 8 SCC 88
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interference. Reliance in this regard would be placed on Deconar
Services Pvt. Ltd. v. NTPC Ltd.15.
32. In conclusion, learned counsel for the Respondent would submit
that the present Petition instituted under Section 34 of the A&C Act is
nothing but an attempt to assail the correctness of the findings
returned by the learned Arbitrator on merits, which is wholly
impermissible in law. It would, therefore, be contended that the
Petition is devoid of merit and is liable to be dismissed.
ANALYSIS:
33. This Court has heard the learned counsel appearing for the
parties at length and, with their able assistance, has carefully perused
the Impugned Arbitral Award and the other material placed on record.
34. At the outset, it is apposite to note that this Court remains
conscious of the limited scope of its jurisdiction while examining an
objection petition under Section 34 of the A&C Act. There is a
consistent and evolving line of precedents whereby the Hon’ble
Supreme Court has authoritatively delineated and settled the contours
of judicial intervention in such proceedings.
35. In this regard, a three-Judge Bench of the Hon’ble Supreme
Court, after an exhaustive consideration of a catena of earlier
judgments, in OPG Power Generation (P) Ltd. v. Enexio Power
Cooling Solutions (India) (P) Ltd.16, while dealing with the grounds
of conflict with the public policy of India and patent illegality,
grounds which have also been urged in the present Petitions, made
certain pertinent observations, which are reproduced hereunder:
15
2009 SCC OnLine Del 4109
16
(2025) 2 SCC 417
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“Relevant legal principles governing a challenge to an arbitral
award
30. Before we delve into the issue/sub-issues culled out above, it
would be useful to have a look at the relevant legal principles
governing a challenge to an arbitral award. Recourse to a court
against an arbitral award may be made through an application for
setting aside such award in accordance with sub-sections (2), (2-A)
and (3) of Section 34 of the 1996 Act. Sub-section (2) of Section
34 has two clauses, (a) and (b). Clause (a) has five sub-clauses
which are not relevant to the issues raised before us. Insofar as
clause (b) is concerned, it has two sub-clauses, namely, (i) and (ii).
Sub-clause (i) of clause (b) is not relevant to the controversy in
hand. Sub-clause (ii) of clause (b) provides that if the Court finds
that the arbitral award is in conflict with the public policy of India,
it may set aside the award.
Public policy
31. “Public policy” is a concept not statutorily defined, though it
has been used in statutes, rules, notification, etc. since long, and is
also a part of common law. Section 23 of the Contract Act, 1872
uses the expression by stating that the consideration or object of an
agreement is lawful, unless, inter alia, opposed to public policy.
That is, a contract which is opposed to public policy is void.
*****
35. In Renusagar Power Co. Ltd. v. General Electric Co., 1994
Supp (1) SCC 644, a three-Judge Bench of this Court observed
that the doctrine of public policy is somewhat open–textured and
flexible. By citing earlier decisions, it was observed that there are
two conflicting positions which are referred to as the “narrow
view” and the “broad view”. According to the narrow view, courts
cannot create new heads of public policy whereas the broad view
countenances judicial law making in these areas. In the field of
private international law, it was pointed out, courts refuse to apply
a rule of foreign law or recognise a foreign judgment or a foreign
arbitral award if it is found that the same is contrary to the public
policy of the country in which it is sought to be invoked or
enforced. However, it was clarified, a distinction is to be drawn
while applying the rule of public policy between a matter governed
by domestic law and a matter involving conflict of laws. It was
observed that the application of the doctrine of public policy in the
field of conflict of laws is more limited than that in the domestic
law and the courts are slower to invoke public policy in cases
involving a foreign element than when a purely municipal legal
issue is involved. It was held that contravention of law alone will
not attract the bar of public policy, and something more than
contravention of law is required.
*****
37. What is clear from above is that for an award to be against
public policy of India a mere infraction of the municipal laws of
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India is not enough. There must be, inter alia, infraction of
fundamental policy of Indian law including a law meant to serve
public interest or public good.
*****
40. In ONGC Ltd. v. Western Geco International Ltd., (2014) 9
SCC 263, paras 35, 38 & 39, which also related to the period prior
to the 2015 Amendment of Section 34(2)(b)(ii), a three-Judge
Bench of this Court, after considering the decision inONGC
Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, without exhaustively
enumerating the purport of the expression “fundamental policy of
Indian law”, observed that it would include all such fundamental
principles as providing a basis for administration of justice and
enforcement of law in this country. The Court thereafter
illustratively referred to three fundamental juristic principles,
namely:
(a) that in every determination that affects the rights of a
citizen or leads to any civil consequences, the court or
authority or quasi-judicial body must adopt a judicial
approach, that is, it must act bona fide and deal with the
subject in a fair, reasonable and objective manner and not
actuated by any extraneous consideration;
(b) that while determining the rights and obligations of
parties the court or Tribunal or authority must act in
accordance with the principles of natural justice and must
apply its mind to the attendant facts and circumstances
while taking a view one way or the other; and
(c) that its decision must not be perverse or so irrational that
no reasonable person would have arrived at the same.
41. In Associate Builders v. DDA, (2015) 3 SCC 49, a two-Judge
Bench of this Court, held that audi alteram partem principle is
undoubtedly a fundamental juristic principle in Indian law and is
enshrined in Sections 18 and 34(2)(a)(iii) of the 1996 Act. In
addition to the earlier recognised principles forming fundamental
policy of Indian law, it was held that disregarding:
(a) orders of superior courts in India; and
(b) the binding effect of the judgment of a superior court
would also be regarded as being contrary to the
fundamental policy of Indian law.
Further, elaborating upon the third juristic principle (i.e. qua
perversity), as laid down inONGC Ltd. v. Western Geco
International Ltd., (2014) 9 SCC 263, it was observed that where:
(i) a finding is based on no evidence; or
(ii) an Arbitral Tribunal takes into account something
irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such
decision would necessarily be perverse[Associate Builders
case, (2015) 3 SCC 49, para 31].
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To this a caveat was added by observing that when a court applies
the “public policy test” to an arbitration award, it does not act as a
court of appeal and, consequently, errors of fact cannot be
corrected; and a possible view by the arbitrator on facts has
necessarily to pass muster as the arbitrator is the ultimate master of
the quantity and quality of evidence to be relied upon when he
delivers his arbitral award. It was also observed that an award
based on little evidence or on evidence which does not measure up
in quality to a trained legal mind would not be held to be invalid on
that score. Thus, once it is found that the arbitrator’s approach is
not arbitrary or capricious, it is to be taken as the last word on facts.
The 2015 Amendment in Sections 34 and 48
42. The aforementioned judicial pronouncements were all prior to
the 2015 Amendment. Notably, prior to the 2015 Amendment the
expression “in contravention with the fundamental policy of Indian
law” was not used by the legislature in either Section 34(2)(b)(ii) or
Section 48(2)(b). The pre-amended Section 34(2)(b)(ii) and its
Explanation read:
*****
44. By the 2015 Amendment, in place of the old Explanation to
Section 34(2)(b)(ii), Explanations 1 and 2 were added to remove
any doubt as to when an arbitral award is in conflict with the public
policy of India.
45. At this stage, it would be pertinent to note that we are dealing
with a case where the application under Section 34 of the 1996 Act
was filed after the 2015 Amendment, therefore the newly
substituted/added Explanations would apply [SsangyongEngg. &
Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131].
46. The 2015 Amendment adds two Explanations to each of the
two sections, namely, Section 34(2)(b)(ii) and Section 48(2)(b), in
place of the earlier Explanation. The significance of the newly
inserted Explanation 1 in both the sections is two-fold. First, it does
away with the use of words : (a) “without prejudice to the
generality of sub-clause (ii)” in the opening part of the pre-
amended Explanation to Section 34(2)(b)(ii); and (b) “without
prejudice to the generality of clause (b) of this section” in the
opening part of the pre-amended Explanation to Section 48(2)(b);
secondly, it limits the expanse of public policy of India to the three
specified categories by using the words “only if”.
Whereas, Explanation 2 lays down the standard for adjudging
whether there is a contravention with the fundamental policy of
Indian law by providing that a review on merits of the dispute shall
not be done. This limits the scope of the enquiry on an application
under either Section 34(2)(b)(ii) or Section 48(2)(b) of the 1996
Act.
47. The 2015 Amendment by inserting sub-section (2-A) in Section
34, carves out an additional ground for annulment of an arbitral
award arising out of arbitrations other than international
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commercial arbitrations. Sub-section (2-A) provides that the Court
may also set aside an award if that is vitiated by patent illegality
appearing on the face of the award. This power of the Court is,
however, circumscribed by the proviso, which states that an award
shall not be set aside merely on the ground of an erroneous
application of the law or by reappreciation of evidence.
48.Explanation 1 to Section 34(2)(b)(ii), specifies that an arbitral
award is in conflict with the public policy of India, only if:
(i) the making of the award was induced or affected by
fraud or corruption or was in violation of Section 75 or
Section 81; or
(ii) it is in contravention with the fundamental policy of
Indian law; or
(iii) it is in conflict with the most basic notions of morality
or justice.
49. In the instant case, there is no allegation that the making of the
award was induced or affected by fraud or corruption, or was in
violation of Section 75 or Section 81. Therefore, we shall confine
our exercise in assessing as to whether the arbitral award is in
contravention with the fundamental policy of Indian law, and/or
whether it conflicts with the most basic notions of morality or
justice. Additionally, in the light of the provisions of sub-section
(2-A) of Section 34, we shall examine whether there is any patent
illegality on the face of the award.
50. Before undertaking the aforesaid exercise, it would be apposite
to consider as to how the expressions:
(a) “in contravention with the fundamental policy of
Indian law”;
(b) “in conflict with the most basic notions of morality or
justice”; and
(c) “patent illegality” have been construed.
In contravention with the fundamental policy of Indian law
51. As discussed above, till the 2015 Amendment the expression
“in contravention with the fundamental policy of Indian law” was
not found in the 1996 Act. Yet, in Renusagar Power Co.
Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, in the
context of enforcement of a foreign award, while construing the
phrase “contrary to the public policy”, this Court held that for a
foreign award to be contrary to public policy mere contravention of
law would not be enough rather it should be contrary to:
(a) the fundamental policy of Indian law; and/or
(b) the interest of India; and/or
(c) justice or morality.
*****
55. The legal position which emerges from the aforesaid discussion
is that after “the 2015 Amendments” in Section 34(2)(b)(ii) and
Section 48(2)(b) of the 1996 Act, the phrase “in conflict with the
public policy of India” must be accorded a restricted meaning in
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terms of Explanation 1. The expression “in contravention with the
fundamental policy of Indian law” by use of the word
“fundamental” before the phrase “policy of Indian law” makes the
expression narrower in its application than the phrase “in
contravention with the policy of Indian law”, which means mere
contravention of law is not enough to make an award vulnerable.
To bring the contravention within the fold of fundamental policy of
Indian law, the award must contravene all or any of such
fundamental principles that provide a basis for administration of
justice and enforcement of law in this country.
56. Without intending to exhaustively enumerate instances of such
contravention, by way of illustration, it could be said that:
(a) violation of the principles of natural justice;
(b) disregarding orders of superior courts in India or the binding
effect of the judgment of a superior court; and
(c) violating law of India linked to public good or public interest,
are considered contravention of the fundamental policy of
Indian law.
However, while assessing whether there has been a contravention
of the fundamental policy of Indian law, the extent of judicial
scrutiny must not exceed the limit as set out in Explanation 2 to
Section 34(2)(b)(ii).
*****
Patent illegality
65. Sub-section (2-A) of Section 34 of the 1996 Act, which was
inserted by the 2015 Amendment, provides that an arbitral award
not arising out of international commercial arbitrations, may also
be set aside by the Court, if the Court finds that the award is visited
by patent illegality appearing on the face of the award. The proviso
to sub-section (2-A) states that an award shall not be set aside
merely on the ground of an erroneous application of the law or by
reappreciation of evidence.
66. InONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, while
dealing with the phrase “public policy of India” as used in Section
34, this Court took the view that the concept of public policy
connotes some matter which concerns public good and public
interest. If the award, on the face of it, patently violates statutory
provisions, it cannot be said to be in public interest. Thus, an award
could also be set aside if it is patently illegal. It was, however,
clarified that illegality must go to the root of the matter and if the
illegality is of trivial nature, it cannot be held that award is against
public policy.
67. In Associate Builders v. DDA, (2015) 3 SCC 49, this Court
held that an award would be patently illegal, if it is contrary to:
(a) substantive provisions of law of India;
(b) provisions of the 1996 Act; and
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(c) terms of the contract [See also three-Judge Bench
decision of this Court in State of Chhattisgarh v. SAL
Udyog (P) Ltd., (2022) 2 SCC 275].
The Court clarified that if an award is contrary to the substantive
provisions of law of India, in effect, it is in contravention of
Section 28(1)(a) of the 1996 Act. Similarly, violating terms of the
contract, in effect, is in contravention of Section 28(3) of the 1996
Act.
68. In SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131 this Court specifically dealt with the 2015
Amendment which inserted sub-section (2-A) in Section 34 of the
1996 Act. It was held that “patent illegality appearing on the face
of the award” refers to such illegality as goes to the root of matter,
but which does not amount to mere erroneous application of law. It
was also clarified that what is not subsumed within “the
fundamental policy of Indian law”, namely, the contravention of a
statute not linked to “public policy” or “public interest”, cannot be
brought in by the backdoor when it comes to setting aside an award
on the ground of patent illegality [ See SsangyongEngg. &
Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131]. Further, it
was observed, reappreciation of evidence is not permissible under
this category of challenge to an arbitral award
[See SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131].
Perversity as a ground of challenge
69. Perversity as a ground for setting aside an arbitral award was
recognised in ONGC Ltd. v. Western Geco International Ltd.,
(2014) 9 SCC 263. Therein it was observed that an arbitral decision
must not be perverse or so irrational that no reasonable person
would have arrived at the same. It was observed that if an award is
perverse, it would be against the public policy of India.
70. In Associate Builders v. DDA, (2015) 3 SCC 49 certain tests
were laid down to determine whether a decision of an Arbitral
Tribunal could be considered perverse. In this context, it was
observed that where:
(i) a finding is based on no evidence; or
(ii) an Arbitral Tribunal takes into account something
irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such
decision would necessarily be perverse.
However, by way of a note of caution, it was observed that when a
court applies these tests it does not act as a court of appeal and,
consequently, errors of fact cannot be corrected. Though, a possible
view by the arbitrator on facts has necessarily to pass muster as the
arbitrator is the ultimate master of the quantity and quality of
evidence to be relied upon. It was also observed that an award
based on little evidence or on evidence which does not measure up
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in quality to a trained legal mind would not be held to be invalid on
that score.
71. In SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131, which dealt with the legal position post the 2015
Amendment in Section 34 of the 1996 Act, it was observed that a
decision which is perverse, while no longer being a ground for
challenge under “public policy of India”, would certainly amount to
a patent illegality appearing on the face of the award. It was
pointed out that an award based on no evidence, or which ignores
vital evidence, would be perverse and thus patently illegal. It was
also observed that a finding based on documents taken behind the
back of the parties by the arbitrator would also qualify as a decision
based on no evidence inasmuch as such decision is not based on
evidence led by the parties, and therefore, would also have to be
characterised as perverse [ See SsangyongEngg. & Construction
Co. Ltd. v. NHAI, (2019) 15 SCC 131].
72. The tests laid down in Associate Builders v. DDA, (2015) 3
SCC 49 to determine perversity were followed in SsangyongEngg.
& Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 and later
approved by a three-Judge Bench of this Court in Patel Engg.
Ltd. v. North Eastern Electric Power Corpn. Ltd., (2020) 7 SCC
167.
73. In a recent three-Judge Bench decision of this Court in DMRC
Ltd. v. Delhi Airport Metro Express (P) Ltd., (2024) 6 SCC 357,
the ground of patent illegality/perversity was delineated in the
following terms: (SCC p. 376, para 39)
“39. In essence, the ground of patent illegality is available
for setting aside a domestic award, if the decision of the
arbitrator is found to be perverse, or so irrational that no
reasonable person would have arrived at it; or the
construction of the contract is such that no fair or
reasonable person would take; or, that the view of the
arbitrator is not even a possible view. A finding based on
no evidence at all or an award which ignores vital
evidence in arriving at its decision would be perverse and
liable to be set aside under the head of “patent illegality”.
An award without reasons would suffer from patent
illegality. The arbitrator commits a patent illegality by
deciding a matter not within its jurisdiction or violating a
fundamental principle of natural justice.”
Scope of interference with an arbitral award
74. The aforesaid judicial precedents make it clear that while
exercising power under Section 34 of the 1996 Act the Court does
not sit in appeal over the arbitral award. Interference with an
arbitral award is only on limited grounds as set out in Section 34 of
the 1996 Act. A possible view by the arbitrator on facts is to be
respected as the arbitrator is the ultimate master of the quantity and
quality of evidence to be relied upon. It is only when an arbitral
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award could be categorised as perverse, that on an error of fact an
arbitral award may be set aside. Further, a mere erroneous
application of the law or wrong appreciation of evidence by itself is
not a ground to set aside an award as is clear from the provisions of
sub-section (2-A) of Section 34 of the 1996 Act.
75. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.,
(2019) 20 SCC 1, paras 27-43, a three-Judge Bench of this Court
held that courts need to be cognizant of the fact that arbitral awards
are not to be interfered with in a casual and cavalier manner, unless
the court concludes that the perversity of the award goes to the root
of the matter and there is no possibility of an alternative
interpretation that may sustain the arbitral award. It was observed
that jurisdiction under Section 34 cannot be equated with the
normal appellate jurisdiction. Rather, the approach ought to be to
respect the finality of the arbitral award as well as party’s autonomy
to get their dispute adjudicated by an alternative forum as provided
under the law.
*****
Scope of interference with the interpretation/construction of a
contract accorded in an arbitral award
84. An Arbitral Tribunal must decide in accordance with the terms
of the contract. In a case where an Arbitral Tribunal passes an
award against the terms of the contract, the award would be
patently illegal. However, an Arbitral Tribunal has jurisdiction to
interpret a contract having regard to terms and conditions of the
contract, conduct of the parties including correspondences
exchanged, circumstances of the case and pleadings of the parties.
If the conclusion of the arbitrator is based on a possible view of the
matter, the Court should not interfere [See: SAIL v. Gupta Brother
Steel Tubes Ltd., (2009) 10 SCC 63; Pure Helium India (P)
Ltd. v. ONGC, (2003) 8 SCC 593; McDermott International
Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181; MMTC
Ltd. v. Vedanta Ltd., (2019) 4 SCC 163]. But where, on a full
reading of the contract, the view of the Arbitral Tribunal on the
terms of a contract is not a possible view, the award would be
considered perverse and as such amenable to interference [South
East Asia Marine Engg. & Constructions Ltd. v. Oil India Ltd.,
(2020) 5 SCC 164].
Whether unexpressed term can be read into a contract as an
implied condition
85. Ordinarily, terms of the contract are to be understood in the
way the parties wanted and intended them to be. In agreements of
arbitration, where party autonomy is the grund norm, how the
parties worked out the agreement, is one of the indicators to
decipher the intention, apart from the plain or grammatical meaning
of the expressions used [BALCO v. Kaiser Aluminium Technical
Services Inc., (2016) 4 SCC 126].
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86. However, reading an unexpressed term in an agreement would
be justified on the basis that such a term was always and obviously
intended by the parties thereto. An unexpressed term can be
implied if, and only if, the court finds that the parties must have
intended that term to form part of their contract. It is not enough for
the court to find that such a term would have been adopted by the
parties as reasonable men if it had been suggested to them. Rather,
it must have been a term that went without saying, a term necessary
to give business efficacy to the contract, a term which, although
tacit, forms part of the contract [Adani Power (Mundra)
Ltd. v. Gujarat ERC, (2019) 19 SCC 9].
87. But before an implied condition, not expressly found in the
contract, is read into a contract, by invoking the business efficacy
doctrine, it must satisfy the following five conditions:
(a) it must be reasonable and equitable;
(b) it must be necessary to give business efficacy to the
contract, that is, a term will not be implied if the contract
is effective without it;
(c) it must be obvious that “it goes without saying”;
(d) it must be capable of clear expression;
(e) it must not contradict any terms of the contract [Nabha
Power Ltd. v. Punjab SPCL, (2018) 11 SCC 508,
followed in Adani Power case, (2019) 19 SCC 9].”
(emphasis supplied)
36. In view of the aforesaid settled principles governing the scope
of jurisdiction under Section 34 of the A&C Act, this Court shall now
proceed to examine the challenge raised by the Petitioners in respect
of Claim No. 3 pertaining to escalation, Claim No. 6 relating to loss of
profits, and the corresponding interest is awarded by the learned
Arbitrator under the Impugned Arbitral Award.
Claim No. 3 – Escalation under Clause 10CC of the GCC
37. The first issue that arises for consideration pertains to the
legality and sustainability of the award of Rs.38,96,175/- under Claim
No. 3, which was adjudicated as Issue No. 2 in the Impugned Arbitral
Award.
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38. The controversy, in its essential formulation, concerns the
reconciliation of the contractual regime governing escalation under
Clause 10CC of the GCC with the Respondent’s attempt, as Claimant
before the learned Arbitral Tribunal, to seek compensation under
Section 73 of the ICA for the period beyond the stipulated date of
completion.
39. A bare reading of Clause 10CC of the GCC demonstrates that
the said provision constitutes a complete and self-contained code
governing escalation arising out of an increase or decrease in the
prices of labour and material. The clause, by its express language,
restricts the grant of escalation only to work executed during the
stipulated period of the contract and unequivocally excludes any
entitlement for work executed during the extended period.
Significantly, the clause specifically stipulates that no escalation shall
be payable for work executed during the extended contract period,
even where extension of time has been granted without taking action
under Clause 2. Clause 10CC, therefore, is not merely an enabling
provision prescribing the methodology for the computation of
escalation, but also a limiting provision defining the temporal
boundaries within which such entitlement may be claimed. Clause
10CC of the GCC is reproduced herein below for ready reference:
“CLAUSE 10 CC – Payment due to Increase/Decrease in
Prices/Wages after Receipt of tender for works: If the prices of
materials (not being materials supplied or services rendered at
fixed prices by the department in accordance with clause 10 & 34
thereof) and/or wages of labour required for execution of the work
increase, the contractor shall be compensated for such increase as
per provisions detailed below and the amount of the contract shall
accordingly be varied, subject to the condition that such
compensation for escalation in prices shall be available only for the
work done during the stipulated period of the contract. No
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period even if extension of time is granted without any action
under clause 2 and also no such compensation shall be payable for
a work for which the stipulated period of completion is equal to or
less then the time as specified in Schedule F. Such compensation
for escalation in the prices of materials and labour, when due, shall
be worked out based on the following provisions:-
i. The base date for working out such escalation shall be
the last stipulated date of receipt of tenders including
extension, if any.
ii. The cost of work on which escalation will be payable
shall be reckoned as below:
a) Gross value of work done upto this quarter:
b) Gross value of work done upto this last
quarter:
c) Gross value of work done since previous
quarter:
d) Full assessed value of secured advance
fresh paid in this quarter:
e) Full assessed value of secured advance
recovered in this quarter:
f) Full assessed value of secured advance for
which escalation is payable in this quarter:
g) Advance payment made during this quarter:
h) Advance payment recovered during this
quarter:
i) Advance payment for which escalation is
payable in this quarter:
j) Extra items paid as per clause 12 based on
prevailing market rates during this quarter:
Then,
M= C± F ± I – J
N=0.85 M
k) Less cost of material supplied by the
department as per clause I 0 and recovered
during the quarter
l) Less cost of services rendered at fixed
charges as per clause 34 and recovered during
the quarter.”
(emphasis supplied)
40. Significantly, the contractual position in this regard is not in
dispute. It is also borne out from the record that the Respondent, in its
Statement of Claim before the learned Arbitral Tribunal, expressly
admitted that escalation under Clause 10CC of the GCC was
admissible only up to the stipulated period of completion and that no
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contractual entitlement survived beyond such period. It was further
acknowledged that escalation amounts on labour and material
components up to the stipulated completion period had already been
released. The Respondent, therefore, consciously shifted the
foundation of its claim and asserted that the present claim was, in
substance, one for damages under Section 73 of the ICA, while merely
adopting the formula under Clause 10CC as a convenient mechanism
for quantification.
41. It is in the backdrop of these pleadings that the findings
returned by the learned Arbitrator are required to be examined. The
relevant extracts concerning Claim No. 3 from the Impugned Arbitral
Award read as follows:
“Claim No.3:-
Dispute formed due to non-payment against second and final
escalation bill under Clause 10 cc-Rs38,96,175/-.
11. It is pleaded by Claimant that this claim has arisen on account
of prolongation of contract and the Claimant is claiming damages
in the shape of labour and material escalation. As the Claimant was
not responsible for delay, in completion of the work, so this claim
is tenable for the work done beyond stipulated date of completion.
His case is basically, for compensation for damages u/s 73 of
Contract Act, 1873 i.e. on account of failure on the part of the
Respondent to get the work completed within the stipulated period
of 30 months i.e. by 10.7.2008 but prolonged the contract upto
30.11.2011 i.e. with delay of 3 years 4 months and 20 days. The
Claimant has adopted the rational procedure laid down under
Clause 10 cc of the Agreement to calculate this amount and is so
entitled for this Calculated amount of Rs 38,96,175/-.
12. To contest this Claim, Respondent pleaded that as per Clause
10 cc of General Contract Condition, no escalation is permissible
for the work executed in the extended contract period, even if
extension of time is granted, without any action under Clause 2
thereof and therefore, this claim of the Claimant is not tenable.
13. However, it is also pleaded by the Respondent that a sum of Rs.
5,35,522/-was duly sanctioned, in terms of Clause 10 CC by the
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Respondent vide its office order dated 30.9.2009 and this amount,
has already been paid to the Claimant as escalation, upto the
stipulated date of completion of the work.
*****
Issue No.2:
This issue pertains to Claim No.3 of the Claimant, under which he
is claiming escalation amount of Rs. 38,96,175/-, calculated as per
provisions of Clause l 0 CC. As far as quantum of the Claim and its
calculation is concerned, there is no dispute, regarding the
correctness thereof. But the Respondent has resisted this Claim, by
contending that Clause 10 cc of general conditions, does not allow
this Claim. In this regard it is contended by Ld. Counsel of the
Respondent that clause 10 cc do not permit escalation in the
extended contract period, even if extension of time is granted
without any action under Clause 2 of general contract condition.
But it is also pleaded that a sum of Rs. 5,35,522/- was duly
sanctioned and paid, under Clause 10 CC for escalation, up to the
stipulated date of completion.
54. On the other hand Ld. Counsel for the Claimant has contended
that this Claim is not under Clause 10 cc but is also u/s 73 of the
Contract Act, 1873, dealing with a situation of failure on the part of
the Respondent to get the work completed within the stipulated
period. It is also contended that when clause 10 cc is read with
clause 2 of General Conditions, then it leads to the conclusion that
payment of escalation amount, during the extended period is barred
only when there is default on the part of the contractor even when
no action was taken against the contractor by the department.
55. On careful consideration of rival contentions of both the
parties, no doubt is left that there is every merits in the case of the
Claimant and there is no merit in the case of the Respondent. If
there is any fault on the part of the contractor, in not completing
the work within the stipulated time period, then action under
Clause 2 can be taken against him by the department. But it is the
sweet wish of the department, to take or not to take, action against
defaulting contractor. If once clause 2 is applicable, for the fault on
the part of the contractor, then Clause 10 cc bars the contractor to
claim escalation for the work executed on the extended contract
period.
56. As above noted, there is nothing to prove or to presume any
fault on the part of the Claimant, rather fault if any may be on the
part of the Respondent. Even sole witness of the Respondent, who
is responsible officer of the Respondent in Cross-examination has
admitted that delay in the completion of work was not attributable
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to the Claimant but it can be attributable to the Respondent.
Therefore, it is cleared that Clause 10 cc does not help the
Respondent.
57. In this regard it is also pertaining to mention that, finding no
fault on the part of the contractor, the Respondent has already
released a sum of Rs. 5,35,522/as escalation of up-to the stipulated
date of completion work. Had there been any fault on the part of
the contractor, then perhaps even this amount would not have been
released to the contractor by the department. Therefore, as per the
provisions of Section 73 of the Contract Act, as well as, as per the
provisions of Clause 10 cc read with Clause 2C of General
Conditions, it is very clear that the Claimant is entitled for claimed,
rightly calculated escalation amount of Rs 38,96,175/-
58. Consequently, this issue is hereby decided in favour of the
Claimant and against the Respondent, to the effect that Claimant is
entitled for Second and final escalation amount of Rs.38,96, 175/-
from the Respondent.
59. Claim no. 4 of the Claimant, for refund of Rs 89123/- withheld
by the Respondent on account of table of milestone drawn, was
also set at naught by releasing it on 24.4.2015 during the pendency
of these· proceedings and that is why the Claimant claimed no
issue for this Claim.”
42. A perusal of the aforesaid findings reveals that the learned
Arbitrator has himself categorically recorded that Clause 10CC of the
GCC does not permit escalation during the extended period of the
contract. However, notwithstanding such express finding, the learned
Arbitrator proceeded to award a sum of Rs.38,96,175/- towards
escalation by invoking Section 73 of the ICA read with Clause 10CC
of the GCC, primarily on the reasoning that the delay in execution was
not attributable to the Respondent and could instead be attributed to
the Petitioner.
43. The reasoning adopted by the learned Arbitrator, when tested
against the pleadings and the contractual framework governing the
parties, discloses an inherent contradiction which renders the finding
legally unsustainable. Once it stood accepted, both by the Respondent
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in its Statement of Claim and by the learned Arbitrator in the Award
itself, that Clause 10CC of the GCC ceased to apply beyond the
stipulated period of completion, it became incumbent upon the learned
Arbitrator to independently examine the claim strictly within the
framework of Section 73 of the ICA. However, instead of undertaking
such an exercise, the learned Arbitrator proceeded to apply the very
formula contained in Clause 10CC of the GCC, despite
simultaneously holding that the said clause was contractually
inapplicable to the extended period.
44. This approach, in the considered view of this Court, amounts to
a clear departure from the contractual regime agreed between the
parties. The Respondent’s case, as pleaded, was not that Clause 10CC
of the GCC itself conferred any right to escalation beyond the
stipulated period, but only that the said clause could be utilised as a
notional basis for computation of damages. The learned Arbitrator,
however, failed to examine whether the essential ingredients
necessary for sustaining a claim under Section 73 of the ICA, namely,
proof of actual loss and a demonstrable causal nexus between the
alleged breach and the loss claimed, stood established on the basis of
evidence led before the learned Tribunal. The Award is conspicuously
silent with respect to any evidence demonstrating the actual increase
in costs or substantiating the quantified figure of Rs.38,96,175/-.
45. The learned Arbitrator has merely observed that there is no
dispute regarding the correctness of the calculation, without disclosing
the evidentiary basis on which such conclusion has been arrived at.
There is no discussion of the documentary material relied upon by the
Respondent, no scrutiny of the computation reflected in the exhibits
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placed on record, and no analysis whatsoever of the actual financial
loss allegedly suffered by the Respondent. The finding, therefore, rests
not upon proof, but upon assumption, which is impermissible in law
while adjudicating a claim for damages under Section 73 of the ICA.
46. It is well settled that damages under Section 73 of the ICA
cannot be awarded in the absence of proof of actual loss. Mere
adoption of a contractual formula, particularly one which itself stands
excluded by the terms of the contract for the relevant period, cannot
substitute the requirement of evidence. By treating the formula under
Clause 10CC of the GCC as a proxy for proof of damages, the learned
Arbitrator has effectively dispensed with the fundamental burden
resting upon the claimant to establish actual loss and its quantification.
Such an approach renders the Award legally vulnerable.
47. The legal position governing claims for damages and the
necessity of proof of actual loss has been comprehensively explained
by the Hon’ble Supreme Court in McDermott International Inc. v.
Burn Standard Co. Ltd.17, wherein it was held as under:
“100. While claiming damages, the amount therefor was not
required to be quantified. Quantification of a claim is merely a
matter of proof.
*****
Actual loss: Determination of
108. A contention had been raised both before the learned arbitrator
as also before us that MII could not prove the actual loss suffered
by it as is required under the Indian law viz. Sections 55 and 73 of
the Indian Contract Act as Mr D.J. Parson had no personal
knowledge in regard to the quantum of actual loss suffered by MII.
D.J. Parson indisputably at one point of time or the other was
associated with MII. He applied the Emden Formula while
calculating the amount of damages having regard to the books of
accounts and other documents maintained by MII. The learned
arbitrator did insist that sufferance of actual damages must be17
(2006) 11 SCC 181
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proved by bringing on record books of accounts and other relevant
documents.
109. Sections 55 and 73 of the Indian Contract Act do not lay down
the mode and manner as to how and in what manner the
computation of damages or compensation has to be made. There is
nothing in Indian law to show that any of the formulae adopted in
other countries is prohibited in law or the same would be
inconsistent with the law prevailing in India.
110. As computation depends on circumstances and methods to
compute damages, how the quantum thereof should be determined
is a matter which would fall for the decision of the arbitrator. We,
however, see no reason to interfere with that part of the award in
view of the fact that the aforementioned formula evolved over the
years, is accepted internationally and, therefore, cannot be said to
be wholly contrary to the provisions of the Indian law.
111. In State of U.P. v. Allied Constructions [(2003) 7 SCC 396]
this Court held: (SCC p. 398, para 4)
“4. Any award made by an arbitrator can be set aside only
if one or the other term specified in Sections 30 and 33 of
the Arbitration Act, 1940 is attracted. It is not a case
where it can be said that the arbitrator has misconducted
the proceedings. It was within his jurisdiction to interpret
clause 47 of the agreement having regard to the fact-
situation obtaining therein. It is submitted that an award
made by an arbitrator may be wrong either on law or on
fact and error of law on the face of it could not nullify an
award. The award is a speaking one. The arbitrator has
assigned sufficient and cogent reasons in support thereof.
Interpretation of a contract, it is trite, is a matter for the
arbitrator to determine (see Sudarsan Trading
Co. v. Govt. of Kerala [(1989) 2 SCC 38]). Section 30 of
the Arbitration Act, 1940 providing for setting aside an
award is restrictive in its operation. Unless one or the
other condition contained in Section 30 is satisfied, an
award cannot be set aside. The arbitrator is a Judge chosen
by the parties and his decision is final. The court is
precluded from reappraising the evidence. Even in a case
where the award contains reasons, the interference
therewith would still be not available within the
jurisdiction of the court unless, of course, the reasons are
totally perverse or the judgment is based on a wrong
proposition of law. An error apparent on the face of the
records would not imply closer scrutiny of the merits of
documents and materials on record. Once it is found that
the view of the arbitrator is a plausible one, the court will
refrain itself from interfering (see U.P. SEB v. Searsole
Chemicals Ltd. [(2001) 3 SCC 397] and Ispat Engg. &
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Foundry Works v. Steel Authority of India Ltd. [(2001) 6
SCC 347]).”
112. It is trite that the terms of the contract can be express or
implied. The conduct of the parties would also be a relevant factor
in the matter of construction of a contract. The construction of the
contract agreement is within the jurisdiction of the arbitrators
having regard to the wide nature, scope and ambit of the arbitration
agreement and they cannot be said to have misdirected themselves
in passing the award by taking into consideration the conduct of the
parties. It is also trite that correspondences exchanged by the
parties are required to be taken into consideration for the purpose
of construction of a contract. Interpretation of a contract is a matter
for the arbitrator to determine, even if it gives rise to determination
of a question of law. (See Pure Helium India (P)
Ltd. v. ONGC [(2003) 8 SCC 593] and D.D. Sharma v. Union of
India [(2004) 5 SCC 325].)
113. Once, thus, it is held that the arbitrator had the jurisdiction, no
further question shall be raised and the court will not exercise its
jurisdiction unless it is found that there exists any bar on the face of
the award.
114. The above principles have been reiterated in Chairman and
MD, NTPC Ltd. v. Reshmi Constructions, Builders &
Contractors [(2004) 2 SCC 663], Union of India v. Banwari Lal
& Sons (P) Ltd. [(2004) 5 SCC 304], Continental Construction
Ltd. v. State of U.P. [(2003) 8 SCC 4] and State of U.P. v. Allied
Constructions [(2003) 7 SCC 396].
115. A court of law or an arbitrator may insist on some proof of
actual damages, and may not allow the parties to take recourse to
one formula or the other. In a given case, the court of law or an
arbitrator may even prefer one formula as against another. But,
only because the learned arbitrator in the facts and circumstances of
the case has allowed MII to prove its claim relying on or on the
basis of Emden Formula, the same by itself, in our opinion, would
not lead to the conclusion that it was in breach of Section 55 or
Section 73 of the Indian Contract Act.”
(emphasis supplied)
48. Furthermore, the invocation of Clause 10CC of the GCC for the
purpose of quantification, despite a categorical finding that the said
clause does not govern the extended period, effectively results in a
rewriting of the contractual bargain between the parties. An arbitral
tribunal, while interpreting contractual provisions, remains bound by
the express limitations incorporated therein and cannot, under the
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guise of equitable considerations, extend contractual benefits beyond
what the parties themselves contemplated. The Impugned Arbitral
Award, in effect, grants escalation for a period expressly excluded
under the contract and does so solely by relying upon a clause which
even the Respondent had conceded to be inapplicable for such period.
49. The reasoning adopted by the learned Arbitrator, therefore,
suffers from a dual infirmity, namely, firstly, a failure to adhere to the
contractual stipulation expressly governing escalation; and secondly, a
failure to apply the settled legal principles governing the award of
damages under Section 73 of the ICA. The Impugned Arbitral Award
does not disclose any intelligible nexus between the pleadings, the
evidence on record, and the conclusions ultimately reached. The
Award, therefore, falls short of the requirement of a reasoned
determination as mandated under Section 31(3) of the A&C Act.
50. This Court is of the considered opinion that although the delay
in execution of the work may have been attributable to the Petitioner,
such circumstance by itself could not have empowered the learned
Arbitrator to award escalation by way of compensation for the post-
stipulated period of the contract, dehors the express contractual
stipulations and the settled legal requirements governing proof and
quantification of damages under Section 73 of the ICA.
51. In view of the aforesaid discussion, this Court is of the
considered opinion that the Award, insofar as it relates to Claim No. 3,
cannot be sustained and is accordingly liable to be set aside.
Claim No. 6 – Loss of Turnover/Profitability
52. The next issue that arises for consideration pertains to the award
of Rs.16,23,195/- under Claim No. 6 towards alleged loss of turnover
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and profitability on account of prolongation of the contract, which
came to be adjudicated as Issue No. 4 in the Impugned Arbitral
Award.
53. Before adverting to the merits of the controversy, this Court
deems it appropriate to extract the relevant findings returned by the
learned Arbitrator in relation to Claim No. 6. The relevant portion of
the Impugned Arbitral Award reads as under:
“Claim No. 6:-
Dispute formed due to loss of turn over /profitability as a result of
prolongation of contract…. Rs. 16,23,195/-
21. It is pleaded by the Claimant that he had anticipated, quantum
of his profit on the original set up of the tender, under which
completion of work was 30 months, but it prolonged to 69.70
months. Therefore, anticipated profit, has been divided into total
period of completion, including the extended period. The delay
was not attributable to him but to the Respondent, and so the
Claimant is entitled for loss of profit, besides other consequential
claim. For this, he has relied upon CPWD official memo dated
14.12.2007, allowing contractors profit and overheads to the extent
of 15%. Out of this 15%, 10% is overhead on cost of material and
labour and remaining 5% is profit.
22. Since cost of completed Electrical Work was Rs 2,48,38,485/-,
so his 5% profit comes to Rs 12,41,924/-. It was for completing the
work within 30 months since it prolonged to 39.21 months beyond
stipulated period of 30 months, so his profit of Rs. 12,41,924/-
stands divided into 69.21 months, so he is entitled for this
calculated amount of Rs. 16,23,195/-.
23. To resist this Claim of the Complainant, the Respondent
pleaded that there is no clause in the contract against which this
claim can be raised and also that prolongation did not prevent him
for taking any new project.
*****
ISSUES NO. 4:
This issue pertains to Claim No. 6 of the Claimant for Rs
16,23,195/- for the loss of turnover/profitability.
68. Undisputedly, date of start of work was 11.1.2006. Stipulated
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date of completion of the work was 10.7.08 but the work was
actually completed on 30.11.11. The delay was regularized by the
Respondent vide its letter dated 4.7.15 (Ex CW 1/9). As already
discussed and found delay was not due to any fault on the part of
the Claimant nor on the part of the main contractor, but may be on
the part of the Respondent, which is also so admitted by the sole
witness of the Respondent. Initially time allowed for completion of
work was 30 months which was integral part of the contract,
naturally the Claimant would have anticipated his profits on the
original set up of that time period, but it prolonged to 69.10
months, therefore, the Claimant is certainly entitled for loss of his
turnover/ profitability, due to prolongation of the contract. The
claimant had also served his prior notice Ex CW 1/15 upon the
Respondent for his this claim, which remained un-replied. The
Claimant relying upon CPWD office memo no. DGW/MAN/150
dated 14.12.2007, has rightly assessed his loss of turnover/
profitability to the tune of 15%, which comes to Rs. 16,23,195/.
(5% profit+ 10% overhead on cost of material). lt was when costs
of completed work was Rs. 2,48,38,485/- and when work was
completed in prolonged period of 39.21 months, beyond stipulated
period of 30 months. CPWD vide its said Memo dated 14.12.2007
had enhanced the element of contractor’s profits and overheads
from 10 to 15% w.e.f. l4.12.2007. Therefore, the Claimant has
rightly calculated his this loss to the tune of Rs 16,23,195/-.
69. I do not find any merit in the case of the Respondent to contest
this case that prolongation of contract did not prevent the Claimant
for taking any new project, as admittedly he remained with this
work till its final completion.
70. Resultantly, this issue is hereby decided in favour of the
Claimant and against the Respondent to the effect that the Claimant
is entitled to Rs. 16,23,195/- from the Respondent for loss of \
turnover /profitability due to prolongation of the completion of the
work.”
54. A perusal of the aforesaid findings reveals that the reasoning of
the learned Arbitrator proceeds substantially on the premise that since
the contract period stood prolonged from 30 months to approximately
69 months, and the delay was not attributable to the Respondent
herein, the Respondent would be “certainly entitled” to compensation
towards loss of turnover and profitability. Proceeding on such
premise, the learned Arbitrator accepted the computation of
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Rs.16,23,195/- by observing that the Respondent herein, relying upon
CPWD Office Memorandum No. DGW/MAN/150 dated
14.12.2007 18 , had “rightly assessed” such loss at 15%, comprising
10% overheads and 5% profit.
55. At the outset, it must be observed that the entire edifice of the
aforesaid finding rests upon a broad presumption that prolongation of
a contract, by itself, necessarily results in loss of profitability.
However, the Impugned Arbitral Award does not disclose any
discussion of evidence establishing that the Respondent herein had, in
fact, suffered such loss, nor does it indicate any material
demonstrating the actual financial impact occasioned by the delay.
56. The learned Arbitrator has not adverted to any documentary
evidence, books of accounts, balance sheets, profit and loss
statements, or other financial material substantiating the alleged loss.
There is no examination as to whether the Respondent’s resources
remained idle during the extended period, whether any alternative
contracts or business opportunities were foregone, or whether there
was any actual diminution in profitability attributable to the
prolongation of the contract. The conclusion that the Respondent
herein was “certainly entitled” to such damages is, therefore, founded
on abstraction and assumption rather than evidentiary analysis.
57. More importantly, the adoption of the CPWD Office
Memorandum as the sole basis for quantification is wholly misplaced.
The said memorandum, at best, lays down a general normative
guideline regarding the percentage of the contractor’s profit and
overheads ordinarily factored into public works contracts. It does not,
18
CPWD Office Memorandum
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by itself, establish that such profit was actually lost in a given factual
scenario. The learned Arbitrator, however, has treated the said
memorandum as determinative of the Respondent’s entitlement,
without undertaking any independent inquiry into the actual loss
allegedly suffered.
58. The reasoning of the learned Arbitrator, therefore, suffers from
a fundamental legal infirmity, namely, the substitution of a notional
formula in place of proof of damages. It is trite that a claim for loss of
profits is in the nature of damages under Sections 73 and 74 of the
ICA and must necessarily be supported by cogent evidence
establishing both the existence and quantum of such loss. Mere
prolongation of the contract, even if attributable to the employer, does
not automatically entitle a contractor to a fixed percentage of the
contract value by way of damages.
59. The principles governing the award of damages under Sections
73 and 74 of the ICA have been authoritatively expounded by the
Hon’ble Supreme Court in Kailash Nath Associates (supra), wherein
it was held that even where a sum is stipulated in the contract, such
stipulation merely represents the upper limit of compensation and
does not dispense with the requirement of proving actual loss where
such proof is possible. The Hon’ble Supreme Court further clarified
that it is only in cases where damages are inherently incapable of
precise proof that a genuine pre-estimate may be relied upon. The
relevant observations as rendered in the said judgement are
reproduced hereinbelow:
“43. On a conspectus of the above authorities, the law on
compensation for breach of contract under Section 74 can be stated
to be as follows:
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43.1. Where a sum is named in a contract as a liquidated amount
payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if
it is a genuine pre-estimate of damages fixed by both parties and
found to be such by the court. In other cases, where a sum is named
in a contract as a liquidated amount payable by way of damages,
only reasonable compensation can be awarded not exceeding the
amount so stated. Similarly, in cases where the amount fixed is in
the nature of penalty, only reasonable compensation can be
awarded not exceeding the penalty so stated. In both cases, the
liquidated amount or penalty is the upper limit beyond which the
court cannot grant reasonable compensation.
43.2. Reasonable compensation will be fixed on well-known
principles that are applicable to the law of contract, which are to be
found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for
damage or loss caused by a breach of contract, damage or loss
caused is a sine qua non for the applicability of the section.
43.4. The section applies whether a person is a plaintiff or a
defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in
future.
43.6. The expression “whether or not actual damage or loss is
proved to have been caused thereby” means that where it is
possible to prove actual damage or loss, such proof is not dispensed
with. It is only in cases where damage or loss is difficult or
impossible to prove that the liquidated amount named in the
contract, if a genuine pre-estimate of damage or loss, can be
awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money
under a contract. Where, however, forfeiture takes place under the
terms and conditions of a public auction before agreement is
reached, Section 74 would have no application.”
(emphasis supplied)
60. In the present case, the claim towards loss of profits could not
have been sustained in the absence of any evidentiary foundation.
Mere reliance on a notional percentage or a generalized assumption of
loss, without proof of actual financial detriment or any material
demonstrating a reasonable pre-estimate of damages, falls foul of the
settled principles governing the award of compensation under the
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ICA. The Impugned Arbitral Award, therefore, insofar as it grants
such damages without substantiation, becomes legally untenable.
61. Moreover, there is, in the entire reasoning of the learned
Arbitrator, no discussion whatsoever of evidence substantiating the
quantified claim of Rs.16,23,195/-. The Impugned Arbitral Award
merely records that the Respondent herein had “rightly assessed” its
loss by applying a 15% formula, without disclosing how such
assessment was borne out from the evidentiary material placed on
record. The absence of any analytical discussion or evidentiary
scrutiny renders the finding manifestly unsustainable.
62. The Award, insofar as it relates to Claim No. 6, thus discloses a
clear instance where damages have been granted solely on the basis of
generalized assumptions and formulaic computation, without proof of
actual loss. Such an approach is contrary to the mandate of Section
31(3) of the A&C Act, which obligates an arbitral tribunal to furnish
intelligible and reasoned findings supported by analysis of the
material on record.
63. The aforesaid position also finds direct support from the
judgment of the Hon’ble Supreme Court in Unibros v. All India
Radio19, wherein the Court categorically held that formulae such as
Hudson’s Formula may aid in estimating claims towards loss of
overheads and profitability, but cannot, by themselves, constitute
proof of such loss. The Hon’ble Supreme Court in the said judgement
clarified that a claimant seeking damages on account of loss of
profitability must adduce credible and cogent evidence demonstrating
the actual loss suffered as a consequence of prolongation of the
19
2023 SCC OnLine SC 1366
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contract. The relevant observations made in that judgment are
reproduced herein below:
“16. To support a claim for loss of profit arising from a delayed
contract or missed opportunities from other available contracts that
the appellant could have earned elsewhere by taking up any, it
becomes imperative for the claimant to substantiate the presence of
a viable opportunity through compelling evidence. This evidence
should convincingly demonstrate that had the contract been
executed promptly, the contractor could have secured
supplementary profits utilizing its existing resources elsewhere.
17. One might ask, what would be the nature and quality of such
evidence? In our opinion, it will be contingent upon the facts and
circumstances of each case. However, it may generally include
independent contemporaneous evidence such as other potential
projects that the contractor had in the pipeline that could have been
undertaken if not for the delays, the total number of tendering
opportunities that the contractor received and declined owing to the
prolongation of the contract, financial statements, or any clauses in
the contract related to delays, extensions of time, and
compensation for loss of profit. While this list is not exhaustive
and may include any other piece of evidence that the court may
find relevant, what is cut and dried is that in adjudging a claim
towards loss of profits, the court may not make a guess in the dark;
the credibility of the evidence, therefore, is the evidence of the
credibility of such claim.
18. Hudson’s formula, while attained acceptability and is well
understood in trade, does not, however, apply in a vacuum.
Hudson’s formula, as well as other methods used to calculate
claims for loss of off-site overheads and profit, do not directly
measure the contractor’s exact costs. Instead, they provide an
estimate of the losses the contractor may have suffered. While
these formulae are helpful when needed, they alone cannot prove
the contractor’s loss of profit. They are useful in assessing losses,
but only if the contractor has shown with evidence the loss of
profits and opportunities it suffered owing to the prolongation.
19. The law, as it should stand thus, is that for claims related to
loss of profit, profitability or opportunities to succeed, one would
be required to establish the following conditions : first, there was a
delay in the completion of the contract; second, such delay is not
attributable to the claimant; third, the claimant’s status as an
established contractor, handling substantial projects; and fourth,
credible evidence to substantiate the claim of loss of profitability.
On perusal of the records, we are satisfied that the fourth condition,
namely, the evidence to substantiate the claim of loss of
profitability remains unfulfilled in the present case.”
(emphasis supplied)
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64. The judgment in Unibros (supra), therefore, unequivocally
clarifies that a claim for loss of profitability cannot succeed merely
upon establishing delay attributable to the employer. The claimant
must additionally demonstrate, through credible evidence, that it had
the capacity and opportunity to undertake other profitable ventures
and that such opportunities were in fact lost on account of the
prolongation of the contract.
65. In the present case, although the first two conditions identified
in Unibros (supra), namely, the existence of delay and absence of
fault on the part of the Respondent herein, may prima facie stand
satisfied, there is not even a semblance of consideration by the learned
Arbitrator with respect to the third and fourth requirements. The
Impugned Arbitral Award contains no discussion regarding the
Respondent’s status as an established contractor handling multiple
substantial projects, nor does it examine any evidence demonstrating
actual loss of business opportunities or profitability during the
extended period of the contract.
66. In the considered opinion of this Court, the error committed by
the learned Arbitrator is not merely one relating to the appreciation of
evidence, but goes to the very root of the matter. A substantial
monetary claim has been awarded in favour of the Respondent herein
without any examination of the evidentiary foundation necessary to
sustain such a claim in law. The Impugned Arbitral Award, therefore,
becomes vulnerable to interference within the parameters of Section
34 of the A&C Act.
67. Accordingly, this Court is of the considered view that the
finding of the learned Arbitrator allowing Claim No. 6 towards loss of
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turnover or profitability amounting to Rs.16,23,195/- cannot be
sustained and is liable to be set aside.
Interest Awarded in Relation to Claim Nos. 3 and 6
68. Insofar as the award of interest by the learned Arbitrator is
concerned, this Court finds that the grant of interest is not an
independent or standalone determination, but is intrinsically ancillary
and consequential to the principal claims awarded under the Impugned
Arbitral Award.
69. The Impugned Arbitral Award, as revised on 07.01.2017, while
adjudicating Issue Nos. 6 and 7, computed interest components in
respect of all claims allowed by the learned Arbitrator, including the
amounts awarded under Claim No. 3 towards escalation and Claim
No. 6 towards loss of turnover or profitability. The relevant findings
of the learned Arbitrator read as under:
“ISSUES NO. 6 & 7
These issues pertain to claims No. 7 & 8 i.e. pendent lit and future
interest.
76. In view of the above finding on above issue no. 5, the Claimant
is allowed interest @12% p.a. on the amounts due from the date of
cause of action till the date of award and @18% p.a. from the date
of award till the date of realization.
77. Thus, under these issues, the claimant is further entitled for the
following.
a) Interest @12% p.a. on the amount of Rs. l,33,146.33 for the
period from the date of cause of action till the date of award
i.e. 28.11.2013 to 26.10.2016 which comes to Rs.46,575.71/-.
b) Interest @12 p.a. on an amount of Rs. 20,948.71/- for the
period from the date of cause of action till the date of award
i.e. 29.07.2015 to 26.10.2016 which comes to Rs.3,140.58.
c) Interest @12% p.a. on an amount of Rs. 30,003.92/- for the
period from the date of cause of action till the date of award
i.e. 25.05.2015 to 26.10.2016 which comes to Rs. 5,139.30.
d) Interest @12% p.a. on final escalation bill of Rs.38,96,175/-
for the period from the date of cause of action till the date of
award i.e. 30.05.2011 to 26.10.2016 which comes to
Rs.25,32,407.00/-
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e) Interest @ 12% p.a. on the amount of damages due to
deployment of watch and ward staff of Rs. 1l,14,924/- for the
period from the date of cause of action till the date of award
i.e. 30.05.2011 to 26.10.2016 which comes to Rs.
7,24,670.00/-
f) Interest @12% p.a. on account of loss of turnover/profitability
amounting to Rs. 16,23,195/- for the period from the date of
cause of action till the date of award i.e. 30.05.2011 to
26.10.2016 which comes to Rs. 10,55.0532.28
TOTAL························· Rs.43,66,965.84 (Rounded to
Rs.43,66,966/-)
78. It is pertinent to mention here that under issue No.-5, the
claimant is already found entitled for Rs. l,84,098.96 on account of
interest up to the date of payments.
Now, the total amount of interest up to the date of award comes to
Rs.45,51.065/ (Rs.43,66,966/- + Rs. l,84,099/-).
Therefore, these issues are hereby decided accordingly.”
70. This Court has, in the preceding discussion, arrived at a
categorical finding that the awards under Claim No. 3, amounting to
Rs. 38,96,175/- towards escalation, and Claim No. 6, amounting to Rs.
16,23,195/- towards loss of turnover or profitability, are unsustainable
in law, being vitiated by absence of evidentiary foundation, disregard
of express contractual stipulations, and lack of reasoned adjudication
as mandated under Section 31(3) of the A&C Act.
71. It necessarily follows, as a matter of legal consequence, that the
award of interest on the aforesaid amounts, as reflected in Paragraph
Nos. 77(d) and 77(f) of the Impugned Arbitral Award cannot survive
independently. The grant of interest is merely consequential to the
principal monetary claims and cannot stand once the substantive
claims themselves have been set aside. In other words, once the
substratum of the principal amount awarded in respect of Claim Nos.
3 and 6 are found to be legally unsustainable; the superstructure of
interest founded thereupon must also necessarily collapse.
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72. Accordingly, this Court is of the considered opinion that the
award of interest, insofar as it pertains to Claim Nos. 3 and 6 are
equally liable to be interfered with under Section 34 of the A&C Act.
CONCLUSION:
73. In view of the foregoing discussion, and for the reasons
recorded hereinabove, this Court is of the considered opinion that the
Arbitral Award dated 26.10.2016, as revised on 07.01.2017, rendered
by the learned Arbitrator in respect of Claim No. 3 relating to
escalation and Claim No. 6 relating to loss of turnover or profitability,
along with the corresponding award of interest thereon, suffers from
patent illegality apparent on the face of the record and is liable to be
interfered with within the limited jurisdiction contemplated under
Section 34 of the Arbitration and Conciliation Act, 1996.
Consequently, the necessary legal consequences shall follow both in
relation to the Objection Petition as well as the Enforcement Petition.
I. O.M.P.(COMM.) 207/2017
74. Accordingly, the Objection Petition being O.M.P. (COMM.)
207/2017 is allowed. The Impugned Arbitral Award dated 26.10.2016,
as revised on 07.01.2017, is set aside insofar as it relates to:
(i) Claim No. 3 concerning escalation amounting to Rs.38,96,175/-;
(ii) Claim No. 6 concerning loss of turnover or profitability
amounting to Rs.16,23,195/-; and
(iii) the corresponding award of interest thereon as reflected in
Paragraph Nos. 77(d) and 77(f) of the Impugned Arbitral Award.
75. The remaining portions of the Impugned Arbitral Award, not
having been assailed before this Court, shall remain undisturbed and
shall continue to operate in accordance with law.
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76. The Objection Petition, along with pending application(s), if
any, stands disposed of in the aforesaid terms.
77. No order as to costs
II. O.M.P.(ENF.)(COMM.) 46/2018
78. Insofar as the Enforcement Petition being
O.M.P.(ENF.)(COMM.) 46/2018, filed by the Award Holder
(Respondent in the Objection Petition), is concerned, this Court,
having set aside the Impugned Arbitral Award to the extent it relates
to Claim Nos. 3 and 6, along with the corresponding award of interest
contained in Paragraph Nos. 77(d) and 77(f), the Award shall not
remain enforceable to that extent.
79. However, insofar as the remaining portions of the Award are
concerned, the Enforcement Petition shall proceed in accordance with
law and in terms of the surviving portions of the Award.
80. The parties are directed to place on record their respective
calculations, in light of the surviving portion of the Award, on the next
date of hearing.
81. List on 11.08.2026.
HARISH VAIDYANATHAN SHANKAR, J.
MAY 21, 2026/sm/kr/ma
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