Recently, the Delhi High Court addressed a contentious dispute arising from a National Highway EPC contract, where the Arbitral Tribunal had relied on equitable considerations to grant monetary relief. The Court’s analysis centred on whether an arbitral tribunal can traverse beyond the contract and invoke equity in the absence of express authorisation from the parties. Read on to explore how the Court delineated the fine line between contractual fidelity and arbitral overreach.
Brief Facts:
The case stemmed from disputes arising under an Engineering Procurement and Construction (EPC) Agreement between a public authority and a contractor for the six-laning of a national highway stretch and the construction of a major bridge in Gujarat. The contractor raised claims before the Arbitral Tribunal alleging delays in handing over the Right of Way, additional expenses, and prolongation costs, while the authority filed counterclaims for project delays and loss of toll revenue. The Tribunal partly allowed the contractor’s claims, awarding compensation for delay and prolongation along with interest, while rejecting the authority’s counterclaims. Aggrieved, the authority challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, leading to adjudication before the Delhi High Court.
Contentions of Petitioner:
The Petitioner contended that the arbitral award granting compensation for delay and prolongation was unsustainable, as it was based on conjecture and lacked cogent reasoning. It was argued that the contractor’s claim for damages arising from the delay in handing over the Right of Way had been erroneously allowed despite clear contractual limitations. The Petitioner submitted that, under the relevant clauses of the EPC Agreement, the contractor was entitled only to liquidated damages, and the contract expressly capped such compensation at 1% of the contract value. Therefore, the grant of Rs. 15 crores towards both delay and prolongation was contrary to the agreed terms and ex facie perverse. It was further urged that the award of prolongation and acceleration costs was in direct conflict with the contract, which excluded the possibility of unliquidated damages for such breaches. The Petitioner maintained that the award was patently illegal and liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.
Contentions of Respondent:
The Respondent contended that the delay in project execution was primarily due to the incomplete handing over of the Right of Way and other site-related hindrances. It was argued that the authority had itself acknowledged these delays when its engineer recommended an extension of time for various project components, which was subsequently accepted, thereby amounting to an admission of responsibility. To substantiate the claim, the Respondent submitted that substantial costs had been incurred towards labour, plant, and machinery during the extended period of work. It was further asserted that compensation was justified based on actual expenditure and loss suffered due to the prolongation of the contract period. However, it was also noted that no claim could arise for the value of sub-contracted works unless it was demonstrated that additional payments had been made to subcontractors as a direct consequence of the delay.
Observation of the Court:
The Court observed that, “Once the Arbitral Tribunal comprehensively rejected the basis on which monetary compensation was sought by the respondent/claimant, it was clearly impermissible for the Arbitral Tribunal to embark upon an exercise of constructing an altogether new claim, which was not found in the pleadings of the parties and without even putting the parties to notice as regards thereto.” It further held that, “Awarding an amount dehors the pleadings and evidence adduced before the Tribunal, clearly falls within the ambit of patent illegality as encompassed within the scope of Section 34(2)(a)(iii) of the A&C Act.”
Relying on its earlier decision in Delhi Development Authority v. Sportina Payce Infrastructure Pvt. Ltd., the Bench clarified that while limited “guesswork” may be permissible in quantifying damages, an arbitral tribunal cannot “rely on a wholly extraneous basis for awarding compensation without notice to the parties.” It endorsed that, “when arbitral tribunal seeks to adopt a completely extraneous basis for assessing and awarding damages, at the very least, the award must mention (i) reasoning for rejecting the computation/data furnished by the claimant; (ii) rationale for adopting the alternative methodology; and (iii) adequately explain the alternative methodology.”
Reinforcing the principles of arbitral fairness, the Court added that “it is impermissible for an arbitral tribunal to spring a surprise on the parties by making an arbitral award on the basis of methodology which does not form part of the pleaded case at all and on which no submissions have been made by the respondent/claimant… This is essential to meet minimal requirements of natural justice and to ensure that the award does not hit by Section 34(2)(a)(iii) of the A&C Act.”
The Court concluded that the award was vitiated by patent illegality and procedural unfairness, remarking that “by not even giving an inkling to the parties as to the methodology proposed to be adopted by the Arbitral Tribunal (dehors the pleaded case of the respondent/claimant), the petitioner was, in effect, ‘unable to present its case,’ and resultantly, the award is hit by 34(2)(a)(iii) of the A&C Act.” It further held that “The Arbitral Tribunal was not authorised to decide the claim ex aequo et bono or act as an amiable compositeur since the parties had never authorised it to do so under Section 28(2) of the A & C Act.”
Accordingly, the Court found the impugned award to be patently illegal and contrary to the principles of natural justice, setting aside the portion granting Rs. 15 crores for lack of jurisdiction, fairness, and legal basis.
The decision of the Court:
In the light of the foregoing discussion, the Court partly allowed the petition, setting aside the arbitral award only to the extent it was found patently illegal and violative of natural justice. The remainder of the award, including the portion relating to monetary compensation duly established on evidence, was upheld. Consequently, the Court permitted enforcement of the valid portions of the award and directed the judgment-debtor to remit the awarded amount with up-to-date interest within eight weeks, while declining execution of the portion that had been set aside.
Case Title: National Highways Authority of India Vs. Laresen And Tourbo Limited
Case No: O.M.P. (COMM) 363/2022
Coram: Hon'ble Mr. Justice Sachin Datta
Advocate for Petitioner: Advs. Manish K. Bishnoi, Ila Shikhar Sheel, Khubaib Shakeel and Pallavi Singh
Advocate for Respondent: Adv. P.V. Amarnadha Prasad
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