Arbitration In IndiaHon’ble Delhi High Court Upholds Arbitral Award, Rejects Challenge to Loss of Profit Claim in Construction Dispute

The Hon’ble Delhi High Court, in M/S K.S. Jain Builders v. Indian Railway Welfare Organization, Original Miscellaneous Petition (COMM) 456 of 2022 decided on January 25, 2024, held that a party accepting payment under an Arbitral award cannot later contest the award regarding denied claims.

FACTS

The Award of Contract (hereinafter referred to as “Contract”) issued on dated  12 April 2016, valued at INR 33,52,66,929/- ( Thirty-Three Crore Fifty-Two Lakh Sixty-Six Thousand Nine Hundred Twenty-Nine Only.). The contract pertained to the construction of a residential complex in Lucknow, Uttar Pradesh, with a timeline of 30 months for completion. The Petitioner claims the project faced significant delays due to the Respondent’s failure to secure timely approval of building plans and environmental clearances. Moreover, the scope of the project was reduced when only 126 dwelling units were approved, rather than the initially agreed 144 units.

Despite the delays, the agreement was formally executed on 15 February 2018, and the work commencement date was set to 2 February 2018, upon submission of the Bank Guarantee. However, actual work was delayed until environmental clearances were obtained in November 2018. Once work began, the Petitioner faced continuous interruptions due to the Respondent’s failure to supply reinforcement steel, a key material the Respondent was obligated to provide under the clause 5.3 of Special Condition of Contract (hereinafter referred to as “SCC”) in  contract. By September 2020, the Petitioner sought resolution through arbitration due to the non-supply of materials. However, the Respondent cited force majeure due to the COVID-19 pandemic and terminated the contract on 2 February 2021, following multiple project delays and challenges in the real estate sector.

The Petitioner pursued arbitration for compensation, claiming damages for resource engagement and loss of profits. The arbitral tribunal ruled in favour of the Petitioner, granting an Impugned award dated 7^th, July, 2022 of INR 1,42,34,622/- (One Crore Forty-Two Lakh Thirty-Four Thousand Six Hundred Twenty-Two Only) with 8% interest per annum, while dismissing the Respondent’s counterclaims.

The Petitioner has confined their challenge to the award concerning Claim No. 5, asserting that the tribunal failed to adequately compensate for the loss of profit due to the Respondent’s breach of contract. The tribunal’s finding acknowledged that the Respondent was in breach, yet the awarded compensation was based on a reduced profit margin of 5%, as stipulated in the General Conditions of Contract (hereinafter referred to as “GCC”). The Petitioner argues that the award under-compensates for the losses incurred from the unexecuted work.

ISSUES BEFORE THE DELHI HIGH COURT

1. Whether a party can challenge an award after receiving amount payable under it?
2. Whether the arbitral award is vitiated by “patent illegality” under Section 34 of the Arbitration and Conciliation Act, 1996?

CONTENTIONS OF THE PARTIES

The Petitioner contended that the impugned award violated Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “A&C Act”) specifically Sections 34(2)(b)(ii) and 34(2A) of A&C Act . They argued that the award contravened the fundamental policy of Indian law, conflicted with the basic principles of morality and justice, and was marred by patent illegality. Therefore, the Petitioner asserted that the award warranted interference by the court. The Petitioner further argued that, despite submitting comprehensive evidence to support its claims, and despite the tribunal’s detailed examination of that evidence, the decision to only partially allow Claim No. 5 was flawed.

The Petitioner contended that key documents were overlooked, and the Arbitral tribunal applied irrelevant contract terms, which were neither pleaded nor argued by the Respondent. This, the Petitioner claimed, resulted in a manifest illegality visible on the face of the record.

Additionally, the Petitioner submitted that the tribunal contradicted its own findings in the operative part of the award. They emphasized that the tribunal applied terms of the contract that were not relevant to the dispute at hand, further illustrating the patent illegality. Specifically, the Petitioner argued that the tribunal made an error in reducing the claim for “Loss of Profits” based on Clause 4.3(iii) of the GCC of the Indian Railways Welfare Organisation (hereinafter referred to as “IRWO”). This clause, the Petitioner contended, pertained to additional, altered, or substituted work and had no bearing on Claim No. 5. The Petitioner had presented evidence establishing that a 15% profit rate was factored into the scope of the work, a point not contested by the Respondent. Instead, the Respondent argued that the 15% figure included 7.5% overheads and 7.5% profit, as per Central Public Works Department (hereinafter referred to as “CPWD”) circulars.

The Petitioner further contended that it was erroneous for the tribunal to apply Clause 2.4.1 of the GCC to reduce the scope of work by 25%. The Petitioner argued that this clause was not applicable to the facts of the case, as the contract value had already been reduced by 23%. Hence, applying an additional 25% reduction amounted to a grave error. As a result, the Petitioner asserted that it was entitled to loss of profit on the balance work value at the rate of 7.5%, as admitted by the Respondent.

The Respondent, in defending the impugned award, contended that none of the grounds raised by the Petitioner could be entertained, given the limited scope of judicial interference under Section 34 of the A&C Act. They argued that the Petitioner’s challenges did not fall within the permissible criteria for setting aside an arbitral award as outlined under the A&C Act. The Respondent emphasized that accepting any of the Petitioner’s grounds would amount to a re-appreciation of evidence, which is not permissible under Section 34 of A&C Act. They contended that the arbitral tribunal had thoroughly considered all relevant evidence, and its findings should not be disturbed merely because the Petitioner was dissatisfied with the outcome.

Furthermore, the Respondent argued that the award had been rendered in compliance with the applicable legal standards and that the Petitioner’s claims of illegality or non-application of mind by the tribunal were unfounded. Thus, the Respondent urged the court to dismiss the Petitioner’s challenge and uphold the arbitral award.

DECISION AND FINDINGS

The Court noted, at the outset, that the Petitioner sought to set aside the part of the arbitral award dated July 7, 2022, specifically disallowing the balance amounts under Claim No. 4 and Claim No. 5. However, during proceedings on January 19, 2024, the Petitioner clarified that they were no longer pursuing the challenge regarding Claim No. 4 and focused solely on Claim No. 5. The court observed that the Petitioner’s challenge to only the disallowed portion of Claim No. 5 could not be entertained for several reasons. First, referring to the Supreme Court’s decision in National Highways Authority of India v. M. Hakeem & Anr., it was held that courts cannot modify an arbitral award under Section 34 of the A&C Act. Although partial annulment of an award is permissible, altering or modifying the award is not. Therefore, the court must assess whether the contested parts are severable from the rest of the award. In this case, the court held that Claim No. 5, involving loss of profits, could not be separated from the rest of the award, as the calculation of damages was intricately linked to the rationale for awarding damages.

The court pointed out that the arbitral tribunal took a holistic approach in its assessment of Claim No. 5. Dissecting the award for partial annulment would undermine the integrity of the tribunal’s decision-making process, leading to an incongruous outcome. Hence, the court refrained from fragmenting the award where the findings were interconnected. The court also examined whether the Petitioner had established grounds to set aside the entire award with respect to Claim No. 5. The Petitioner argued that the tribunal incorrectly applied Clauses 2.4.1 and 4.3(iii) of the GCC and should have adhered to the CPWD rates. However, the court found no merit in this argument, holding that the arbitral tribunal’s view was plausible and intervention was not warranted. The court clarified that, as long as the tribunal’s interpretation was reasonable, courts should not interfere.

The court held that the Petitioner’s contention that the arbitral award conflicted with the “Public Policy of India” and suffered from “Patent Illegality” was unfounded. The court noted that the tribunal’s application of contract terms did not amount to a violation of the fundamental policy of Indian law or the basic notions of justice. Furthermore, the tribunal’s decision to award a 5% profit rate as damages did not rise to the level of patent illegality, as the calculation of lost profits is inherently speculative. The court reiterated that the threshold for determining patent illegality is high and requires more than just an erroneous application of law. The tribunal’s decision to award 5% damages based on its assessment of hypothetical profits was reasonable and within the scope of its authority.

The court further held that the Petitioner’s argument regarding the non-consideration of certain documents or the tribunal’s alleged oversight of the Respondent’s admission about contractors’ profit did not amount to patent illegality. Citing the proviso to Section 34(2A) of the A&C Act, the court emphasized that an award cannot be set aside merely on the grounds of an erroneous application of law or re-appreciation of evidence. In conclusion, the court found no grounds for setting aside the award pertaining to Claim No. 5, noting that the tribunal had carefully considered all relevant facts and evidence in arriving at its decision. The court held that the tribunal’s award was justified and fell within the permissible limits of arbitral discretion.

Thus, the court dismissed the petition, finding no merit in the Petitioner’s arguments.

AMLEGALS Remarks

The Hon’ble Delhi High Court reiterated the restrictions with which the judiciary must approach Section 34 of the Act while setting aside an arbitral award. The contention of the Petitioner challenging the rejection of Claim No. 5 was found unsustainable because it was founded upon a holistic as well as well-reasoned assessment of the evidences made by the learned arbitrator. Held that the award did not suffer from patent illegality or contravene public policy, emphasizing that the tribunal’s interpretation of contract terms, although bitterly contested, still lay well within the ambit of its authority.

The court further made it clear that speculation on hypothetical profits, absent clear proof, cannot form a basis for setting aside an award. The dismissal of the petition operated to reassert the finality and integrity of arbitral proceedings with the end that parties’ approach with respect for the tribunal’s expertise and avoid the unwarranted modification sought. It simply restates the commitment of the judiciary to the principle of arbitration and the need to ensure that intervention is limited only to cases manifesting clear and glaring errors.

Team AMLEGALS,

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