Kerala High Court
Cochin Port Trust vs East India Engineers on 25 July, 2025
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IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE THE CHIEF JUSTICE MR. NITIN JAMDAR
&
THE HONOURABLE MR.JUSTICE BASANT BALAJI
FRIDAY, THE 25TH DAY OF JULY 2025 / 3RD SRAVANA, 1947
ARB.A NO. 9 OF 2022
AGAINST ORDER DATED 23.12.2021 IN OP(ARB)70 OF 2020 OF ASSISTANT
SESSIONS COURT/PRINCIPAL SUB COURT / COMMERCIAL COURT, ERNAKULAM
APPELLANT/PETITIONER/RESPONDENT:
COCHIN PORT TRUST, WILLINGTON ISLAND, KOCHI-682009,
REPRESENTED BY ITS CHIEF ENGINEER.
BY SRI K ANAND
SMT.LATHA ANAND
SRI.M.N.RADHAKRISHNA MENON
SRI.K.R.PRAMOTH KUMAR
SRI.S.VISHNU (ARIKKATTIL)
SRI.RADHAKRISHNA PILLAI B
SHRI.SIDHARTH P.S.
SHRI.BHARATH MURALI
RESPONDENT/RESPONDENT/CLAIMANT:
EAST INDIA ENGINEERS, REPRESENTED BY ITS PROPRIETOR VINEETH
SHARAMA, EARA-22B, VINAYAKA NILAYAM, MAMATHA NAGAR ROAD,
EDAPPALY P.O., KOCHI-682024.
BY SMT.NIDHI JACOB
SRI.SUKUMAR NAINAN OOMMEN
SRI.SHERRY SAMUEL OOMMEN
THIS ARBITRATION APPEALS HAVING COME UP FOR ADMISSION ON 6.4.2022,
THE COURT ON 25.7.2025 DELIVERED THE FOLLOWING:
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JUDGMENT
(Dated this the 25th day of July 2025)
Basant Balaji, J.
1. This Appeal challenges the dismissal of O.P.(Arb.) No.70 of
2020 by the Commercial Court, Ernakulam. The Original Petition, filed
by the Appellant (then Petitioner) against the Respondent under Section
34 of the Arbitration and Conciliation Act, 1996, (the Act) sought to
overturn an arbitration award dated 26 March 2018.
2. Tenders were floated by the Appellant for the installation of a 200
MM Dia Ductile Iron Pumping Line (Part 1) and road rectification
works (Part 2) at various locations within Willington Island. The
Appellant’s estimates for these works were ₹1,61,78,681/- for Part 1 and
₹27,03,012/- for Part 2. The Respondent submitted the lowest bid for
Part 1 at ₹1,81,73,600/-, which was 12.33% above the estimate.
However, for Part 2, the Respondent quoted ₹9,76,363/-, a figure
63.88% below the estimated cost. A notable discrepancy was observed
in the Respondent’s bid for Item No.5 of Part 2, which is the main item,
with an estimated value of ₹8,95,141/-, was quoted at 86.83% below the
estimate. Given the contractual payment terms, which allowed for the
release of 90% of the quoted amount upon the completion of Part 1, the
Appellant became concerned that the Respondent’s low bid for Part 2,
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particularly for Item No. 5, would render the existing security deposit
grossly inadequate to ensure the completion of Part 2 by other agencies
in the event of the Respondent’s non-performance. To mitigate this risk,
a meeting was convened on 20 April 2015, during which the Respondent
unconditionally assented to the retention of a sum equivalent to ₹12
lakhs or 7% of the quoted amount, whichever was greater. Based on
this critical undertaking, the Appellant proceeded to award the work to
the Respondent via a work order dated 14 May 2015.
3. The contractual period was subsequently extended on multiple
occasions, with the Appellant expressly reserving its right to claim
Liquidated Damages (LD) as per Clause 2 of the General Conditions of
Contract (GCC). For Part 2 of the works, the Appellant was obligated to
supply only granite red stone, as the rubble recovered from the existing
soling was to be utilized for the new soling work, with the Appellant
supplying only the deficit quantity.
4. During the execution of Part 1 work, the Appellant issued
Annex.R6, notifying the Respondent that the extended contract period
had expired on 18 April 2016, and directing the immediate completion
of road rectification works prior to the monsoon season. In response, the
Respondent, via Annex.C12, asserted that Part 2 works would be
performed if the rates were enhanced based on DSR 2014 plus 46%, and
requested a consent letter to that effect. The Appellant issued another
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communication, Annex.R7 dated 6 May 2016, demanding completion
of the works and cautioning that failure to comply would compel the
Appellant to terminate the contract at the Respondent’s risk and cost.
The Respondent, in Annex.C13 dated 13 May 2016, reiterated its
position, confirming that work would resume upon receipt of a consent
letter reflecting the revised DSR 2014 plus 46% rates.
5. On 27 September 2016, through Annex.C8, the Respondent
formally requested the Appellant to appoint an Arbitrator in accordance
with Clause 25 of the Conditions of Contract, simultaneously advising
that all activities were halted pending the proposed arbitration. As a
result of the Respondent’s cessation of Part 2 work, the Appellant issued
a show cause notice dated 17 October 2016.
6. In its reply, Annex.R53 dated 21 October 2016, the Respondent
agreed to complete the work, conditional upon the full amount being
released to the Appellant within three days. Due to the non-
commencement of work, the Appellant issued a further letter on 7
November 2016, directing the Respondent to commence the work
within two days and to complete it within 21 days.
7. The Appellant formally appointed the Arbitrator via proceedings
dated 24 October 2016, with the arbitration commencing on 25 October
2016. Despite the initiation of arbitration, the Respondent failed to
commence Part 2 works, compelling the Appellant to terminate the
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contract as evidenced in Annex.R17. During the arbitration, the
Respondent filed an application seeking to enjoin the Appellant from
assigning the remaining work to a third party. The Arbitrator allowed
this application, issuing an injunction order dated 20 December 2016,
restraining the Appellant from re-awarding the work until 21 January
2017. Subsequently, on the same day, the Arbitrator issued a further
order directing the Respondent to complete the work and accept
payment at the agreed contractual rate, while reserving the Respondent’s
right to pursue any additional claims.
8. Following the Arbitrator’s directives, the Respondent completed
the work and submitted Annex.R27, its fifth and final Bill Invoice. After
hearing arguments from both parties, the Arbitrator issued an award on
26 March 2018. Under this award, the Respondent was granted
₹74,59,129.51/-, along with interest at 10% per annum calculated from
the commencement date of the proceedings until the date of the award.
Concurrently, the Appellant’s counter-claim was also upheld, entitling
the Appellant to ₹18,48,775.48/-, with interest accruing at 10% per
annum from the commencement of the proceedings until the date of the
award. Aggrieved by the arbitral award, O.P.(Arb.) No. 70/2020 was
filed by the Appellant before the Commercial Court, Ernakulam, under
Section 34 of the Act. The learned Sub Judge, referencing several
pronouncements by the Apex Court on the limited scope of judicial
interference under Section 34 of the Act, determined that the Appellant
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had not established any valid grounds for setting aside the award.
Consequently, the petition was dismissed. This present appeal
challenges the aforementioned dismissal.
9. Heard the Senior Counsel Shri.K.Anand and Smt.Latha Anand
assisted by Shri.Vishnu S.Arikkattil for the Appellant and Shri.Sukumar
Nainan Oommen for the Respondent.
10. The learned Senior Counsel for the Appellant primarily contends
that the court below erred by not exercising its jurisdiction under Section
34 of the Act, to set aside the impugned award. The Appellant asserts
that the award, to the extent challenged, is vitiated by patent illegalities,
is opposed to public policy, and directly contravenes the terms of the
contract, thereby violating Section 28(3), 34(2)(b)(ii) and 34(2A) of the
Act. Furthermore, it is argued that the Arbitrator acted beyond the scope
of their jurisdiction and violated the principles of natural justice.
Consequently, the Appellant submits that the award is contrary to the
fundamental policy of Indian law and in conflict with the basic notion
of justice.
11. Conversely, the Respondent’s counsel argued that the
jurisdiction vested in the Commercial Court under Section 34 of the Act
is significantly circumscribed. Accordingly, the Commercial Court
correctly determined that the Appellant failed to present any valid
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grounds for interfering with the arbitral award, based on the specific
criteria enumerated in Section 34 of the Act.
12. The Respondent contended in the light of K.N. Sathyapalan
(Dead) By Lrs. V. State of Kerala and Others1 and MSK Projects(I) (JV)
Ltd v. State of Rajasthan & Anr.2, wherein it was held that the Arbitrator
is empowered to escalate the prices to reach a final settlement and the
judicial order of the Arbitrator is thus beyond the scrutiny of this court.
This dictum is followed by this court in Union of India v. C.M. Abdul
Khader & Others3. Also, it was further advanced relying on Associate
Builders v. DDA4, Punjab State Civil Supplies Corporation v. Samman
Rice Mills5 and various other authorities that this court is not permitted
to consider the Appeal as an Appellate court.
13. The Respondent’s counsel argued that, based on the factual
findings, the Arbitral Tribunal determined that the delay was
attributable to the Appellant. Once such a factual finding is made by the
Arbitrator, the Commercial Court acting under Section 34 of the Act,
lacks the jurisdiction to re-examine these factual aspects and interfere
with the award.
1
2007) 13 SCC 43
2
2011) 10 SCC 573
3
2020(1) KHC 211
4
2015) 3 SCC 49
5
2024) SCC Online SC 2632
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14. The Respondent asserted that it submitted the invoice for the
remaining work at DSR 2014 rates, alongside relevant extracts from DSR
2014, which the Arbitrator inadvertently failed to formally mark in the
proceedings. Crucially, the Appellant accepted this offer at DSR 2014
rates and permitted the Respondent to complete the work.
Consequently, the Respondent argued that the Appellant is now
estopped from contending that DSR 2012 rates, rather than DSR 2014
rates, are applicable, given its voluntary acceptance of the latter. The
Arbitrator, having accepted the rates proposed by the Respondent,
awarded the work accordingly. In such a scenario, the Respondent
emphasized that the Commercial Court’s jurisdiction to intervene is
severely limited, and the Commercial Court correctly exercised its
jurisdiction by dismissing the original petition. The Respondent further
contended that this Court, in exercising its powers under Section 37 of
the Act, can only ascertain whether the Commercial Court has acted in
conformity with Section 34 of the Act. It cannot delve into factual
aspects, and interference is warranted only on the specific grounds
enumerated under Section 34, which are “manifestly absent” in this case.
Therefore, the Respondent prayed for the dismissal of the appeal.
15. Since this is an appeal filed under section 37 of the Act, the
question to be decided is whether the Commercial court has rightly
exercised the jurisdiction vested with it under Section 34 of the Act, i.e.,
the grounds enumerated for setting aside the award. S.34 of the Act
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makes a restraint on the court to set aside the Award on limited grounds
only. The intention of the legislature is to minimise judicial interference
in arbitral awards. But at the same time, power is given on limited
grounds thereby the courts need not blindly accept the arbitral award
and if any of the grounds enumerated under Section 34 is made out by
the petitioner, necessarily the court should interfere and set aside the
award.
16. Section 34 of the Act is extracted below:
“34. Application for setting aside arbitral award
(1) Recourse to a Court against an arbitral award may be made
only by an application for setting aside such award in accordance
with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the Court only if-
(a) the party making the application [establishes on the basis
of the record of the arbitral tribunal that]-
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law
to which the parties have subjected it, or failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case; or
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration:
PROVIDED that, if the decisions on matters
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submitted to arbitration can be separated from those not
so submitted, only that part of the arbitral award which
contains decisions on matters not submitted to
arbitration may be set aside; or
(v) the composition of the arbitral Tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement was in
conflict with a provision of this Part from which the
parties cannot derogate, or, failing such agreement, was
not in accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time
being in force; or
(ii) the arbitral award is in conflict with the public
policy of India.
[Explanation 1: For the avoidance of any doubt, it is
clarified that an 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.
Explanation 2: For the avoidance of doubt, the test as
to whether there is a contravention with the
fundamental policy of Indian law shall not entail a
review on the merits of the dispute.]
[(2A) An arbitral award arising out of arbitrations other than
international commercial arbitrations, may also be set aside by
the Court, if the Court finds that the award is vitiated by
patent illegality appearing on the face of the award:
PROVIDED that an award shall not be set aside merely on
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the ground of an erroneous application of the law or by
reappreciation of evidence.]
(3) An application for setting aside may not be made after three
months have elapsed from the date on which the party making
that application had received the arbitral award or, if a request
had been made under section 33, from the date on which that
request had been disposed of by the arbitral Tribunal:
PROVIDED that if the Court is satisfied that the
applicant was prevented by sufficient cause from
making the application within the said period of
three months it may entertain the application
within a further period of thirty days, but not
thereafter.
(4) On receipt of an application under sub-section (1), the
Court may, where it is appropriate and it is so requested by a
party, adjourn the proceedings for a period of time determined
by it in order to give the arbitral Tribunal an opportunity to
resume the arbitral proceedings or to take such other action as in
the opinion of arbitral Tribunal will eliminate the grounds for
setting aside the arbitral award.
[(5) An application under this section shall be filed by a party
only after issuing a prior notice to the other party and such
application shall be accompanied by an affidavit by the applicant
endorsing compliance with the said requirement.
(6) An application under this section shall be disposed of
expeditiously, and in any event, within a period of one year from
the date on which the notice referred to in sub-section (5) is
served upon the other party.]”
17. When this court exercises the power under Section 37 of the Act,
it has to look into the aspect whether the Commercial court has exercised
jurisdiction under Section 34 and for that fact, necessarily the award of
the Tribunal has to be looked into. At this juncture patent illegality
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appearing on the face of the award enumerated in Section 34 (2A) is the
central question for analysis.
18. The precise scope of the term ‘patent illegality’ as articulated by
the Supreme Court in Oil and Natural Gas Corporation Limited v. SAW
Pipes Ltd.,6 refers to an illegality that goes to the root of the matter. An
arbitral award may also be set aside if its unfairness or unreasonableness
is such that it shocks the conscience of the Court. Furthermore, it is
established that a court is empowered to examine whether an award
contravenes the specific terms of the contract, and if such a
contravention is found, to interfere with the award on the grounds that
it is patently illegal and opposed to the public policy of India.
19. The Hon’ble Supreme Court has consistently interpreted the
concept of “patent illegality” in numerous pronouncements.
Accordingly, an arbitral award can be set aside on grounds of patent
illegality if it is found to be:
• (a) In contravention of the fundamental policy of
Indian law, without necessitating a review on the merits of
the dispute;
• (b) In conflict with the most basic notions of morality
or justice;
6
[(2003) 5 SCC 705]
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• (c) Based on no evidence, or if it demonstrably ignores
vital evidence; or
• (d) One where the arbitrator has re-written the
contract between the parties, rendering the award arbitrary,
perverse, or irrational.
20. ‘The fundamental policy of Indian law ‘ is expounded in Associate
Builders v. Delhi Development Authority7, wherein the apex court in
paragraph No.28 held as follows:
“28. In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd., this Court added three other distinct and
fundamental Juristic principles which must be understood as a
part and parcel of the fundamental policy of Indian law. The
Court held: (SCC pp. 278-80, paras 35 & 38-40)
“35. What then would constitute the
‘fundamental policy of Indian law’ is the question. The
decision in ONGC does not elaborate that aspect. Even
so, the expression must, in our opinion, include all such
fundamental principles as providing a basis for
administration of justice and enforcement of law in this
country. Without meaning to exhaustively enumerate
the purport of the expression “fundamental policy of
Indian law’, we may refer to three distinct and
fundamental juristic principles that must necessarily be
understood as a part and parcel of the fundamental
policy of Indian law. The first and foremost is the
principle that in every determination whether by a
court or other authority that concerned is bound to
adopt what is in legal parlance called a ‘Judicial
approach’ in the matter. The duty to adopt a judicial
approach arises from the very nature of the power7
[(2015) 3 SCC 49]
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exercised by the court or the authority does not have to
be separately or additionally enjoined upon the fora
concerned. What must be remembered is that the
importance of a Judicial approach in judicial and quasi-
judicial determination lies in the fact that so long as the
court, tribunal or the authority exercising powers that
affect the rights or obligations of the parties before them
shows fidelity to judicial approach, they cannot act in
an arbitrary, capricious or whimsical manner. Judicial
approach ensures that the authority acts bona fide and
deals with the subject in a fair, reasonable and objective
manner and that its decision is not actuated by any
extraneous consideration. Judicial approach in that
sense acts as a check against flaws and faults that can
render the decision of a court, tribunal or authority
vulnerable to challenge.
xxx xxxx xxx
38. Equally important and indeed
fundamental to the policy of Indian law is the
principle that a court and so also a quasi-judicial
authority must, while determining the rights and
obligations of parties before it, do so in accordance
with the principles of natural justice. Besides the
celebrated audi alteram partem rule, one of the facets
of the principles of natural justice is that the
court/authority deciding the matter must apply its
mind to the attendant facts and circumstances while
taking a view one way or the other. Non-application
of mind is a defect that is fatal to any adjudication.
Application of mind is best demonstrated by
disclosure of the mind and disclosure of mind is best
done by recording reasons in support of the decision
which the court or authority is taking. The
requirement that an adjudicatory authority must
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apply its mind is, in that view, so deeply embedded
in our jurisprudence that it can be described as a
fundamental policy of Indian law.”
Therefore, it can be regarded as a cardinal principle of law that the
decisions reached by the judicial or quasi-judicial authority must not be
in a whimsical or capricious manner and it must certainly bear reasons
for the same, and if not, it is to be rendered illegal.
21. Section 34(2A) of the Act specifically permits setting aside a
domestic arbitral award if the court determines it is “vitiated by patent
illegality appearing on the face of the award.” However, a crucial proviso
to this sub-section stipulates that “an award shall not be set aside merely
on the ground of an erroneous application of law or by reappreciation of
evidence.” This unequivocally reinforces that the court’s role is not to
delve into the merits of the dispute or function as a second appellate
forum. While this Court remains committed to the principle of minimal
judicial intervention in arbitral awards, intervention becomes imperative
when an award suffers from a patent illegality that strikes at the very root
of the matter.
22. It is also pertinent to note that the Arbitrator is bound to follow the
statutory provision contained in section 28(3) of the Act. The extract of
the said section is excerpted herein for reference.
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” 28. Rules applicable to substance of dispute
xxxx xxxxx xxxx xxxxx
(3) While deciding and making an award,
the arbitral tribunal shall, in all cases, take into
account the terms of the contract and trade usages
applicable to the transaction.”
23. Apart from being patently illegal and against the terms of the
contract, the said award also stands against the public policy of India
falling under section 34(2)(b)(ii) of the Act. The dimensions of the term
‘public policy of India’ as explicated in the decision ONGC (Supra) is
extracted herein for reference.
“31. Therefore, in our view, the phrase ‘Public Policy of
India’ used in S.34 in context is required to be given a wider
meaning. It can be stated that the concept of public policy connotes
some matter which concerns public good and the public interest.
What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied
from time to time. However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be said to be in
public interest. Such award / judgment / decision is likely to adversely
affect the administration of justice. Hence, in our view in addition to
narrower meaning given to the term ‘public policy’ in Renu Sagar’s
case (supra) it is required to be held that the award could be set aside
if it is patently illegal. Result would be–award could be set aside if it
is contrary to: –
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.”
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24. In the present case, the Arbitral Tribunal manifestly exceeded its
jurisdictional mandate by effectively re-writing the underlying contract,
thereby contravening the mandatory provisions of Section 28(3) of the
Act, which obligates the Tribunal to consider the terms of the contract
and applicable trade usages. Further, the award of ‘Part 2 work’ to the
Respondent solely based on an interim application constitutes an
exercise of authority ultra vires the Tribunal’s powers. Consequently, the
impugned award is patently illegal and against the fundamental policy of
Indian law, rendering it liable to being set aside under Section 34 of the
Act as being in conflict with the public policy of India.
25. The arbitration commenced with the claimant’s letter dated 27
September 2016, which invoked the arbitration clause to resolve the
disputes specified therein. As far as part 1 of the contract is concerned,
there is no dispute and the payment to the same has already been
effected. The dispute is only in respect of part 2 work. Crucially, while
these proceedings were ongoing, the Respondent ceased all work and
abandoned the site. Consequently, the Appellant was compelled to
terminate the contract and re-tender the remaining work. At this
juncture, the Respondent moved an application before the Arbitrator,
seeking to restrain the Appellant from awarding the work to the lowest
tenderer. Pursuant to an order dated 21 January 2017, the Arbitrator
directed the Appellant to award the outstanding work to the
Respondent, noting that only 5% of the work remained incomplete.
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Thus, in the absence of an existing contract between the parties, the
Arbitrator lacked the authority to direct the Respondent to complete the
work.
26. Concerning Part 2 work road rectification, Clause 6.10.1 of the
contract stipulates that the Department (Appellant) will supply the
required granite stone free of cost. It further provides that rough stone
recovered from dismantling the existing soling can be utilized for the
new soling. However, the Arbitrator’s award concluded that the
Appellant failed to provide a prompt supply of rubble for the road
rectification work. The Appellant disputes this, citing evidence of
prompt supply: 130 tonnes were supplied on 4 August 2016, upon
completion of Part 1, with an additional 130 tonnes supplied on 24
August 2016, thereby facilitating work progress.
27. The Arbitrator’s award of enhanced rates for Part 2 work, based
on DSR 2014, is contrary to the terms of the contract, more particularly
when DSR 2014 is not part of the contract. The Arbitrator awarded an
enhanced rate for Part 2 based on DSR 2014, a schedule of rates that was
never incorporated into the agreement between the parties. Schedule F
of the contract, under the subheading ‘Definitions’, explicitly designates
the CPWD DSR 2012 plus 36% cost index as the standard schedule of
rates. Furthermore, Clause 12, which governs the determination of rates
for additional, altered, or substituted items not covered by Clauses
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12.1.2.(i) & (ii), also specifies CPWD DSR 2012 plus 36% cost index.
Thus the Arbitrator exceeded his authority by directing payments based
on DSR 2014 rates, given that this particular rate schedule was not
applicable to the present contract.
28. Ext.R2, a letter dated 4 May 2015, records the Respondent’s
unconditional agreement that the Port Trust would withhold ₹12 lakhs
or 7% of the quoted amount for Part 1 work from payments due to the
contractor for the subject work. Furthermore, this document stipulates
that a total of ₹30 lakhs, inclusive of the security deposit, would remain
with the Port Trust, with the understanding that this sum (excluding the
security deposit itself) would be released only upon the satisfactory
completion of Part 2 work. Part 1 work was completed on 4 August
2016. It is pertinent to note that Part 2 work could not commence prior
to the completion of Part 1. However, as early as 27 April 2016, the
Respondent, via Annexure C12 (a response to Annexure R6), informed
the Appellant of its willingness to execute the Part 2 road rectification
work if the rates were revised to DSR 2014 plus 46%. This demand was
reiterated in Annexure C13, another letter from the Respondent to the
Appellant dated 13 May 2016, again requesting revised rates for Part 2
under the DSR 2014 plus 46% basis. The Appellant contends that these
subsequent demands for rate revision are contrary to the unconditional
undertaking provided by the Respondent in Annexure R2 as well as the
conditions of contract.
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29. Following the commencement of arbitration proceedings, and
subsequent to the Respondent’s failure to complete the work and
abandonment of the site, the Appellant terminated the contract and
initiated a re-tender process. At this juncture, the Respondent sought
and obtained an injunction from the Arbitrator, preventing the
Appellant from awarding the remaining work to a new tenderer. During
this interim period, the Respondent proposed to complete the
outstanding work at a rate 2.5% below the rate offered by the lowest
bidder in the re-tender. Acting upon this proposal, the Arbitrator issued
an order on 21 January 2017, directing the Respondent to complete the
balance work. The Respondent subsequently resumed work on 6
February 2017, and successfully completed the project thereafter.
30. The Arbitrator applied DSR 2014 rates and determined the
award amount attributing the delay to the Appellant. Furthermore, the
Appellant disputes the award of interest from the commencement of
proceedings until the date of the award. It is undisputed that the
Respondent ceased work and abandoned the site, only resuming work
on 21 January 2017, under the Arbitrator’s specific direction.
31. The Arbitral Tribunal, in the absence of a specific agreement
between the parties regarding the rate of interest, awarded 10% per
annum interest on both the claim and counter-claim. This interest was
calculated from the commencement of arbitral proceedings on 25
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October 2016, until the date of the award and also until actual
realization, purportedly relying on Section 31(7)(a) and (b) of the Act.
32. The Respondent abandoned Part 2 work on 26 August 2016, only
resuming it on 6 February 2017, and completing it thereafter. Payment
for Part 2 work would naturally become due only upon its completion
and the submission of the final bill. Moreover, the contract itself was
terminated on 24 November 2016, and the Respondent recommenced
Part 2 work solely under the Tribunal’s specific orders. Given these
circumstances, the Tribunal was not justified in granting interest from
the date of commencement of proceedings until realization.
33. In the present case, the Arbitrator’s finding, on its face, constitutes
a re-writing of the contract, which is a recognized facet of patent
illegality. The Arbitrator’s interpretation is not merely an “erroneous
application of law” or a different “appreciation of evidence”; rather, it
represents a clear departure from the express terms agreed upon by the
parties, thereby rendering the award patently illegal. The parties to a
contract are strictly bound by its terms and must not, under any
circumstances, exceed them. Moreover, the Arbitrator’s own order dated
21 January 2017, explicitly directed that payments be made “according
to the terms of the contract.”
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34. However, the Arbitrator, without DSR 2014 being part of the
contractual record, awarded compensation to the Respondent based on
these rates. This action is a clear contravention of the terms of contract.
By granting an arbitral award under DSR 2014 rates, the Arbitrator
effectively re-wrote the contract, resulting in an award that is patently
illegal. This illegality is evident on the face of the award, thereby
warranting interference under Section 34(2A) of the Act.
35. Even under the provisions of Section 34(2A), strict
adherence to the terms of the contract is obligatory when rendering an
arbitral award. It is clear that the Arbitrator allowed the Respondent to
realize the value of the work performed at an exorbitant rate, significantly
exceeding the previously agreed contractual rate between the parties.
This action renders the award both perverse and patently illegal.
36. The Arbitrator, in the order dated 21 January 2017, in I.A. Nos. 1
and 4 of 2016 in Arbitration Proceedings No. 11/2016, also directed that
payments “shall be made based on the terms of contract,” which
undisputedly refers to the original agreement between the parties.
Therefore, it is unquestionable that the Respondent was fully aware that
DSR 2014 rates were inapplicable to the subject matter.
37. It is unequivocally clear that the applicable rate at the time of
the tender invitation was DSR 2012, and the rate quoted by the
Respondent was significantly lower than this standard. Based on this, the
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Tribunal’s finding is patently illegal, as the DSR 2014 rates were awarded
without any contractual or factual basis. Furthermore, as stated earlier
Clause 12 of Schedule F of the Agreement provides specific directions
for determining rates in cases of adding, substituting, or altering items,
explicitly stating the application of CPWD DSR 2012 plus 36% Cost
Index. Thus, the Arbitrator’s mechanical award of DSR 2014 rates,
without adhering to the express terms of the agreement, renders the
finding wholly perverse, irrational and patently illegal on its very face.
38. This Court acknowledges that its authority under Section 37
of the Act is not that of an appellate court, and thus, the scope of
interference with arbitral awards is narrow, confined strictly to the
grounds enumerated in Section 34(2) and Section 34(2A) of the Act.
However, despite the legislative intent to ensure minimal judicial
intervention in arbitral awards–thereby respecting party autonomy and
the finality of the arbitral process–the demonstrable infirmities within
the present award necessitate intervention.
39. As per the arbitral award, the Claimant is permitted to realize
₹74,59,129.51/- with accrued interest, while the Appellant is entitled to
realize ₹18,48,775.48/- also with interest. Notably, the Respondent has
not challenged the granting of the counter-claim amount under Section
34 of the Act, rendering that portion of the award final. The application
filed under Section 34 seeks to set aside only the petitioned portion of
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the award. So, this court has power under Section 37, read with Section
34, to separate the decision entered into by the Tribunal in respect of the
claim as well as the counter claim in view of the decision rendered by the
apex court in Gayatri Balasamy v. ISG Novasoft Technologies Limited 8.
The material extract of the dictum is as follows;
“32. In the present controversy, the proviso to Section
34(2)(a)(iv) is particularly relevant. It states that if the decisions on
matters submitted to arbitration can be separated from those not
submitted, only that part of the arbitral award which contains
decisions on matters non-submitted may be set aside. The proviso,
therefore, permits courts to sever the non-arbitrable portions of an
award from arbitrable ones. This serves a two-fold purpose. First, it
aligns with Section 16 of the 1996 Act, which affirms the principle
of kompetenzkompetenz — that is, the arbitrators’ competence to
determine their own jurisdiction. Secondly, it enables the court to
sever and preserve the “valid” part(s) of the award while setting aside
the “invalid” ones. Indeed, before us, none of the parties have
argued that the court is not empowered to undertake such a
segregation.
33. We hold that the power conferred under the proviso to
Section 34(2)(a)(iv) is clarificatory in nature. The authority to sever
the “invalid” portion of an arbitral award from the “valid” portion,
while remaining within the narrow confines of Section 34, is
inherent in the court’s jurisdiction when setting aside an award.
34. To this extent, the doctrine of omne majus continet in se
minus–the greater power includes the lesser–applies squarely. The
authority to set aside an arbitral award necessarily encompasses the
power to set it aside in part, rather than in its entirety. This
interpretation is practical and pragmatic. It would be incongruous to
hold that power to set aside would only mean power to set aside the
award in its entirety and not in part. A contrary interpretation would
not only be inconsistent with the statutory framework but may also8
(2025 SCC OnLine SC 986)
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result in valid determinations being unnecessarily nullified.
35. However, we must add a caveat that not all awards can be
severed or segregated into separate silos. Partial setting aside may not
be feasible when the “valid” and “invalid” portions are legally and
practically inseparable. In simpler words, the “valid” and “invalid”
portions must not be inter-dependent or intrinsically intertwined. If
they are, the award cannot be set aside in part.”
40. To encapsulate, the Commercial Court failed to exercise the
jurisdiction vested in it as the discussions made above would
demonstrably prove beyond doubt that the award is patently illegal,
against the public policy of India and was passed on the basis of
documents which were not part of the contract or on record. This renders
the award, to the extent it grants amounts based on DSR-2014 rates,
patently illegal, absurd, and therefore, subject to being set aside.
41. Hence, invoking the jurisdiction under Section 37 of the Act and
the established principle of severability, the appeal is partly allowed,
segregating and setting aside only the invalid portion of the arbitral
award, specifically the grant of an additional claim for Part 2 works
amounting to ₹47,98,857.51 with interest.
Sd/-
NITIN JAMDAR
CHIEF JUSTICE
Sd/-
BASANT BALAJI
JUDGE
dl/