Kerala High Court
Cochin Port Trust vs East India Engineers on 25 July, 2025
1
Arb.A.No.9/2022
2025:KER:56076
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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Arb.A.No.9/2022
2025:KER:56076
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, 3 Arb.A.No.9/2022 2025:KER:56076 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 4 Arb.A.No.9/2022 2025:KER:56076 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 5 Arb.A.No.9/2022 2025:KER:56076 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 6 Arb.A.No.9/2022 2025:KER:56076 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 7 Arb.A.No.9/2022 2025:KER:56076 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.
12007) 13 SCC 43 2 2011) 10 SCC 573 3 2020(1) KHC 211 4 2015) 3 SCC 49 5 2024) SCC Online SC 2632 8 Arb.A.No.9/2022 2025:KER:56076
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 9 Arb.A.No.9/2022 2025:KER:56076 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 10 Arb.A.No.9/2022 2025:KER:56076 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 11 Arb.A.No.9/2022 2025:KER:56076 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 12 Arb.A.No.9/2022 2025:KER:56076 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] 13 Arb.A.No.9/2022 2025:KER:56076 • (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 power 7 [(2015) 3 SCC 49] 14 Arb.A.No.9/2022 2025:KER:56076 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 15 Arb.A.No.9/2022 2025:KER:56076 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.
16 Arb.A.No.9/20222025:KER:56076 " 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."17 Arb.A.No.9/2022
2025:KER:56076
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.
18 Arb.A.No.9/20222025:KER:56076 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 19 Arb.A.No.9/2022 2025:KER:56076 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 21 Arb.A.No.9/2022 2025:KER:56076 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 23 Arb.A.No.9/2022 2025:KER:56076 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 24 Arb.A.No.9/2022 2025:KER:56076 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 also 8 (2025 SCC OnLine SC 986) 25 Arb.A.No.9/2022 2025:KER:56076 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/