INSIDE
ARBITRATION
- Union of India v. Ahluwalia Contracts (India) Ltd. FAO(OS)(COMM) 108 of 2023 and CM Nos. 26534 of 2023 and 26535 of 2023
CIVIL LAW
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WHITE-COLLAR CRIMES
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ARBITRATION
Date: 09 May 2025
Case Name: Union of India v. Ahluwalia Contracts (India) Ltd. FAO(OS)(COMM) 108 of 2023 and CM Nos. 26534 of 2023 and 26535 of 2023
Forum: Delhi High Court
The present dispute arose out of a contract executed between the appellant i.e., Union of India, and the respondent i.e., Ahluwalia Contracts (India) Ltd., for execution of electrical works (Package-III) at AIIMS, Patna. The scope of work included supply, erection, installation, commissioning, and maintenance of electrical equipment. The contractual period stipulated for completion of works was sixteen months, commencing from 19.08.2011 and ending on 18.12.2012, with time being the essence of the contract. The respondent claimed that the appellant failed to provide necessary infrastructure such as sub-station buildings and work fronts in a timely manner, which resulted in prolongation of work and compelled the respondent to incur substantial additional expenditure towards mobilization, site office, head office administration and security.
Upon failure to resolve the dispute amicably, the respondent invoked arbitration. A Sole Arbitrator was appointed on 27.06.2014. The respondent raised seventeen claims before the Arbitral Tribunal ("AT"). While some of these claims were allowed, Claim Nos. 3, 4, 5, 7, 12, 14, and 17 were rejected. The AT based its rejection of Claims 3, 4, 5, and 7 (concerning site and head office expenditure, conveyance, and labour welfare) and Claim 12 (loss of profits during the extended period) on Clauses 12.2 of the General Clauses of Contract ("GCC") and Clause 2(x) of Schedule 'F', holding that overheads and profits were included in the item rates. Claim 14 (bonus for early completion) was rejected as premature.
Aggrieved, the respondent filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act") before the Single Judge, challenging the rejection of Claim Nos. 3, 4, 5, 7, and 12. The Single Judge held that the AT's reasoning, particularly its interpretation of Clause 2(x), was perverse and set aside the award to that extent.
The present intra-court appeal under Section 37(1)(c) of the Act was filed by the appellant, challenging the setting aside of the award.
Issues: The principal issue for consideration before the Division Bench was:
Whether the AT's rejection of Claim Nos. 3, 4, 5, 7, and 12 was vitiated by patent illegality, justifying the Single Judge's intervention under Section 34 of the Act?
Arguments of the Parties:
The appellant argued that the AT rightly rejected Claims 3, 4, 5, and 7, relying upon Clause 2(xi) of Schedule 'F', which allowed a 15% margin over DSR rates to cover profits and overheads. According to the appellant, the claims for prolongation costs stood subsumed within this margin.
In contrast, the respondent submitted that Clause 2(x) was inapplicable to claims arising from prolongation due to the appellant's delays, as it only governed deviations like extra items and substituted quantities. The respondent argued that the AT had misapplied the clause to deny legitimate claims for damages due to delay. With respect to Claim 12, the respondent contended that the computation of loss of profits was based on a reasonable estimate derived from anticipated monthly earnings over the extended duration.
Observations of the Court:
The Court noted that the arbitral award rejected Claims 3, 4, 5, and 7 solely on the ground that item rates included a margin for overheads and profits as per Clause 2(x) of Schedule 'F'. However, these claims did not pertain to extra items or deviations under Clause 12 of the GCC, but rather to additional costs incurred due to delays directly attributable to the appellant. The Court further observed that Claim 12 related to loss of profits during the extended period and had been rejected by the AT on the basis that it was speculative and unsupported by evidence.
Reasoning of the Court:
The Court held that the application of Clause 2(x) by the AT to reject Claims 3, 4, 5, and 7 was misplaced and constituted a patent illegality on the face of the record. The 15% markup stipulated under Clause 2(x) was clearly intended for pricing deviations such as extra or substituted items and not for assessing claims arising from contractual prolongation. The Tribunal's mechanical reliance on this clause to dismiss otherwise substantiated claims was irrational and legally untenable.
The Court also found support from a prior judgment rendered by a coordinate bench in a similar matter involving the same parties and contractual terms, which had taken a consistent view.
However, the Court disagreed with the Single Judge's interference with respect to Claim 12. The Tribunal had rightly held that the respondent's calculation of profits was hypothetical and lacked evidentiary support. Citing Supreme Court decisions in Bharat Coking Coal Ltd. v. L.K. Ahuja and Unibros v. All India Radio, the Court reiterated that a party claiming loss of profits must demonstrate that it lost other work opportunities and suffered actual financial detriment. Since the respondent failed to adduce such evidence, the AT's rejection of Claim 12 was found to be a plausible view not liable to be disturbed under Section 34.
Held:
The Division Bench allowed the appeal in part. It set aside the Single Judge's order insofar as it interfered with the rejection of Claim 12 by the AT. The arbitral award in respect of Claim 12 was thus restored. However, the Court affirmed the Single Judge's decision setting aside the rejection of Claim Nos. 3, 4, 5, and 7, upholding the finding that these rejections were perverse and based on a patent misinterpretation of the contract.
The judgment of the Division Bench of the Delhi High Court reinforces the limited scope of judicial interference with arbitral awards under Section 34 and 37 of the Act. While upholding the autonomy of the arbitral process, the Court emphasised that arbitral findings which are plainly irrational or based on a fundamental misapplication of contractual provisions are liable to be set aside. The Court balanced deference to arbitral reasoning with its duty to correct patent illegality, setting aside the AT's findings on prolongation cost claims while preserving its decision on speculative claims for loss of profits.
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