Date of Hearing : 13.08.2025, 22.08.2025, 24.09.2025,
16.10.2025 & 06.11.2025
Judgment reserved : 13.11.2025
Judgment pronounced & uploaded: 10.12.2025
Arbitration and Conciliation Act, 1996 (the Arbitration Act).
2. The facts pertinent for disposal of the present
C-Power House at Mangan. The work had to be completed
done only on 18.02.2008. The work value was initially for
Rs.7,79,33,000. Admittedly, on 28.04.2004 and 09.11.2004
mobilization advances for Rs.1,00,00,000/- and Rs.
94,83,250/- respectively, were paid to the respondent.
said date. According to the respondent, on 16.02.2006, he
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
received Rs.2,76,44,048/- for civil works. Thereafter, for
14.10.2011 and Rs.91,00,000/- on 02.11.2011. According
dated 30.03.2017. The total amount received therefore was
payment. Consequently, the sole Arbitrator was appointed
by this Court vide order dated 08.10.2020 in Arb. P. No. 2 of
2020. After completing the proceedings, the impugned
annum. Aggrieved with the impugned award, the appellant
which was rejected by the learned Commercial Court.
appellant in their statement of defence. The respondent
there was change in specification. The change in alignment
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
and other allied works due to site conditions. There was also
increase in number of culverts. To protect private properties
site, additional walls were also constructed. The respondent
had to execute all such works. For all such reasons, the
appellants. Token work order dated 09.05.2007 was also
issued to complete the work as per the revised estimate.
done at site. Ultimately, revised agreement dated 30.03.2017
was also executed for additional civil and electrical works.
appellants in their office notings dated 26.10.2005. The
18.02.2008. All the additional works were executed which
fact the appellants also admitted. That, against the entire
advances on 28.04.2004 and 19.11.2004 respectively. On
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
civil works. On 14.10.2011 and 02.11.2011,
electrical works. Thereafter, on 31.03.2017, final payment
was received of Rs.3,77,67,688/- totalling to
Rs.11,15,94,986/-. Although the work was completed on
execution of the works. By various letters written from time
suffering losses. Several crores were still due and payable by
the appellants. Due to non-payment, the respondent‟s
financial and debt burden became precarious and daunting.
bankers. Instead of releasing payments, the appellants
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
thus, "12. That the contents of paragraph 1(xii), 1(xiii), 1(xiv),
3. The claim of the respondent before the learned
payment. The learned Arbitrator did not grant the
4. The appellants invoked section 34 of the
(ii) that the award is patently illegal as the respondent did
not produce any document to prove that:
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
a) he had borrowed loans for the purpose of
executing the contract;
b) as to at what cost the equipment/materials were
bought to claim escalation; and
c) he had raised the bills periodically as required
under the terms of the contract and that the
appellant had failed to pay or clear the said bills.
(iii) that the payment was made to the respondent on the
very next day after the revised agreement dated 30.03.2017,
and that the revised agreement does not have any provision
for escalation and interest.
(iv) that the respondent had received the final payment
without any protest or demur and in fact, the respondent, at
no point of time, before or on the date of final payment
raised any plea of escalation and interest.
5. The learned Commercial Court determined
whether the impugned award contravenes the fundamental
policy of Indian law or whether it is patently illegal.
6. The learned Commercial Court noted Explanation
1 to section 34(2)(b)(ii) of the Arbitration Act and held that it
clarifies 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
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
fundamental policy of Indian law; or (iii) it is in conflict with
the most basic notions of morality or justice.
7. The learned Commercial Court also took note of
Explanation 2 to section 34(2)(b)(ii) of the Arbitration Act
which provides that the test as to whether there is
contravention with the fundamental policy of Indian law
shall not entail a review on the merits of the dispute.
Further, section 2A empowers the Court to set aside an
award if it is vitiated by patent illegality appearing on the
face of the award. It mandates that an award shall however,
not be set aside merely on the ground of an erroneous
application of the law or by reappreciation of evidence.
8. The learned Commercial Court opined that the
standard of public policy laid down in Renusagar Power Co.
Ltd. vs. General Electric Co.1 has now been incorporated in
Explanation 1 to section 34(2)(b)(ii) of the Arbitration Act
concerning contravention with the fundamental policy of
Indian law. It also held that the concept of patent illegality
was read into section 34 by the case of Oil & Natural Gas
1994 Supp (1) SCC 644
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
Corporation Ltd.2, according to which, a patently illegal award
cannot be enforced and must be set aside.
9. The learned Commercial Court was of the view
that in Associate Builders vs. Delhi Development Authority3, the
principle of patent illegality was explained by the Hon‟ble
Supreme Court of India at paragraph 42 under three sub-
heads: (a) contravention of the substantive law of India
which would result in the death knell of an arbitral award.
Such illegality must go to the root of the matter and cannot
be of a trivial nature; (b) contravention of the Arbitration Act
itself would be regarded as a patent illegality, for example, if
an arbitrator gives no reason for an award; and
(c) contravention of section 28(3) of the Arbitration Act which
mandates that arbitral tribunal to decide in accordance to
the terms of the contract and to take into account trade
usages applicable to the transaction.
10. The learned Commercial Court also took note of
the judgment of the Hon‟ble Supreme Court in Delhi Airport
Metro Express Pvt. Ltd. vs. Delhi Metro Rail Corporation Ltd.4 in
which patent illegality was explained.
(2003) 5 SCC 705
(2015) 3 SCC 49
(2022) 1 SCC 131
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
11. After a clear understanding of the concepts of
contravention of the fundamental policy of Indian law and
patent illegality, the learned Commercial Court examined
the impugned award as to whether it was in violation
thereof. It was noticed that the learned Arbitrator had
framed three issues, viz., (i) Whether the respondent was
entitled to escalation and labour charges?; (ii) Whether the
respondent was entitled to interest?; and (iii) Whether the
claim of the respondent was barred by limitation?
12. The learned Commercial Court noted that the
learned Arbitrator had interpreted section 18 of the
Arbitration Act in a liberal manner by holding that the
provision does not require any particular form of
acknowledgement and it is sufficient if there is an admission
of one‟s liability. The number of official notings,
correspondence and certificates of the appellant‟s
department was taken into account to conclude that the
acknowledgment of the liability to pay dues of the
respondent began from 24.06.2008 and continued till 2017
when the petitioner actually made the payment to the
respondent. The learned Commercial Court noted that the
impugned award refers to several notings from 2014 to 2017
and letter dated 30.10.2011 issued to the Managing
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
Director, State Bank of Sikkim, by the Secretary of the
Power Department requesting for release of the funds in
favour of the respondent. The learned Commercial Court
perused the relevant notings recorded in the concerned files
that admit the liability of the Power Department to clear the
dues of the respondent for the contract work. The learned
Commercial Court noted that the learned Arbitrator had
examined the judgment of J.C. Budhraja vs. Chairman, Orissa
Mining Corporation Ltd. & Another5 and distinguished it. The
learned Arbitrator had relied upon the judgment in Asset
Reconstruction Company (India) Ltd. vs. Bishal Jaiswal &
Another6, in which it was held by the Hon‟ble Supreme Court
that even acknowledgement made in financial statements
and entries in books of accounts amount to
acknowledgement of liability. The learned Commercial Court
therefore opined that the respondent could definitely take it
as acknowledgment of the monies payable by the appellant.
Accordingly, the learned Arbitrator correctly decided issue
no.3 of limitation.
13. With reference to issues no.1 and 2 relating to
entitlement of escalation charges and accrual of interest, the
learned Commercial Court held that the learned Arbitrator
(2008) 2 SCC 444
(2021) SCC OnLine SC 321
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
had analyzed the nature of work involved and arrived at a
conclusion that even in the absence of escalation clause in
the contract, such costs could be considered. It was held
that the learned Arbitrator had kept in mind increase in
rates of material required to be procured by the respondents
for performance of the contract. The learned Commercial
Court did not go into reappreciation of documentary
evidence relying upon the judgment of Ssangyong Engineering
and Construction Company Ltd. vs. National Highways Authority
of India (NHAI)7, which held that reappreciation of evidence
cannot be permitted under the ground of patent illegality
appearing on the face of the order.
14. The learned Commercial Court opined that the
interpretation of terms of a contract is within the ambit of
the arbitration jurisdiction and if it is done so in a
reasonable manner, the findings of the arbitrator cannot be
termed as patently illegal. In the considered opinion of the
learned Commercial Court, the learned Arbitrator had
construed the contract document in a sensible way and it
would be an error to interfere under such circumstances. To
hold so, the learned Commercial Court relied upon NTPC Ltd.
(2019) 15 SCC 131
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
vs. Deconar Services Pvt. Ltd.8, wherein it was held that a
challenger to the arbitral award must show that the award
of the arbitrator suffered from perversity or an error of law
or that the arbitrator has otherwise misconducted himself.
Merely showing that there is another reasonable
interpretation or possible view based on material on record,
is insufficient to allow for interference by the Court. The
learned Commercial Court also referred to the judgment of
the Division Bench of this Court in Sikkim Power Development
Corporation Ltd. vs. M/s Amalgamated Transpower (India) Ltd.9.
In that case, it was held that in an application under section
34, the Court is not expected to act as an appellate Court
and reappreciate the evidence and the scope of interference
will be limited to the grounds provided under section 34 of
the Arbitration Act. Resultantly, the learned Commercial
Court declined to interfere with the award on the grounds
canvassed before it.
15. Dissatisfied with the impugned judgment dated
30.05.2024, the appellants have now sought to invoke
section 37 of the Arbitration Act.
(2021) 19 SCC 694
2023:HCS:57-DB
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
16. We notice that the judgment in Delhi Airport Metro
Express Private Limited (supra) referred to by the learned
Commercial Court was interfered with in a curative petition
in the matter of Delhi Metro Rail Corporation Limited vs. Delhi
Airport Metro Express Private Limited10. In that case, it was
held that: in essence, the ground of patent illegality is
available for setting aside a domestic award, if the decision
of the arbitrator is found to be perverse or so irrational that
no reasonable person would have arrived at it; or the
construction of the contract is such that no fair or
reasonable person would take; or, that the view of the
arbitrator is not even a possible view. A finding based on no
evidence at all or an award which ignores vital evidence in
arriving at its decision would be perverse and liable to be set
aside under the head of patent illegality. An award without
reason would suffer from patent illegality. The arbitrator
commits a patent illegality by deciding a matter within his
jurisdiction or violating a fundamental principle of natural
justice.
17. In the said judgment, the Supreme Court also
held that a judgment setting aside or refusing to set aside an
arbitral award under section 34 is appealable in the exercise
(2024) 6 SCC 357
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
of jurisdiction of the Court under section 37 of the
Arbitration Act. That, the Supreme Court had clarified in a
line of precedents that the jurisdiction under section 37 of
the Arbitration Act is akin to the jurisdiction of the Court
under section 34 and restricted to the same grounds of
challenge as section 34.
18. In Sikkim Power Development Corporation Ltd.
(supra), this Court has examined the scope of section 37 and
held:
"Scope of section 37 of the Arbitration &
Conciliation Act, 1996
11.(i) We shall now examine the jurisdiction and scope of
section 37 of the Arbitration Act. In Punjab State Civil
Supplies Corporation Ltd. and Another vs. Ramesh
Kumar and Company and Others11, the Hon„ble Supreme
Court held that the jurisdiction in a first appeal arising
out of a decree in a civil suit is distinct from the
jurisdiction of the High Court under section 37 of the
Arbitration Act arising from the disposal of a petition
challenging an arbitral award under section 34. It was
held that the High Court was required to determine as to
whether the District Judge had acted contrary to the
provisions of section 34 of the Arbitration Act in rejecting
the challenge to the arbitral award.
11.(ii) In Haryana Tourism Ltd. vs. Kandhari Beverages
Ltd.12, the Hon„ble Supreme Court held that the award
can be set aside under section 34/37 of the Arbitration
Act, if the award is found to be contrary to (a)
fundamental policy of Indian law; or (b) the interest of
India; or (c) justice or morality; or (d) if it is patently
illegal. It also held that the High Court while deciding an
appeal under section 37 cannot enter into the merits of
the claim.
2021 SCC OnLine SC 1056
(2022) 3 SCC 237
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
11.(iii) In Dr. A. Parthasarathy and Others vs. E. Springs
Avenues Pvt. Ltd. and others13, the Hon„ble Supreme Court
reiterated that under section 37 of the Arbitration Act, the
C ourt cannot remand the matter to arbitrator for fresh
decision unless it is consented by both the parties
following the law laid down in Kinnari Mullick vs.
Ghanshyam Das Damani14 and I-Pay Clearing Services
Pvt. Ltd. vs. ICICI Bank Ltd.15 It held that only two
options are available to the Court considering the appeal
under section 37 of the Arbitration Act. The High Court
may either relegate the parties for fresh arbitration or to
consider the appeal on merits on the basis of the material
available on record within the scope and ambit of the
jurisdiction under section 37 of the Arbitration Act."
19. The learned Additional Advocate General
representing the appellant relied upon paragraph 12 of Pam
Developments Private Limited vs. State of West Bengal &
Another16, in which it was held:
"12. This submission is persuasive, but the contract
clauses speak for themselves. In fact, the High Court did what
the arbitrator should have done. Examine what the contract
provides. This is not even a matter of interpretation. It is the
duty of every Arbitral Tribunal and court alike and without
exception, for contract is the foundation of the legal
relationship. Having considered the above referred clauses in
the contract the High Court came to the conclusion that
awarding any amount towards idle, machinery, etc. is
prohibited under the "Special Terms and Conditions" of the
contract. The arbitrator did not even refer to the contractual
provisions and the District Court dismissed the objections
under Section 34 with a standard phrase as extracted
hereinabove. The High Court exercising jurisdiction under
Section 37 did its duty and we are of the opinion that the
conclusions of the High Court are correct and cannot be
interfered with."
20. The learned Additional Advocate General referred
to „clause 4(h)‟ under the head "General Terms & Conditions
(2022) SCC Online SC 719
(2018) 11 SCC 328
(2022) SCC OnLine SC 4
(2024) 10 SCC 715
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
of Erection, Testing & Commissioning" and sub-head
"General Terms & Conditions" which reads, "h. The contract
price as indicated in the Price Schedule shall remain firm
during the tenure of the entire execution period of the work.
No escalation on whatsoever ground shall be admissible."
The contract ageement dated 24.02.2004 defines the word
"contract" to include the tender documents as well. The
learned Additional Advocate General therefore submitted
that „clause 4h‟ prohibited escalation cost.
21. The learned Counsel for the respondent submitted
that an award cannot be set aside based on contentions
which were not urged before the learned Arbitrator. That,
the Court under section 37 of the Arbitration Act cannot
reinterpret the terms of the contract on the ground that the
learned Arbitrator or the learned Commercial Court failed to
give effect to all its clauses. He relied upon the judgments of
the Supreme Court in State of Rajasthan & Another vs. Nav
Bharat Construction Co.17, Konkan Railway Corporation vs.
Chenab Bridge Project Undertaking18; MMTC Limited vs. Vedanta
Limited19, to buttress his submissions.
(2002) 1 SCC 659
(2023) 9 SCC 85
(2019) 4 SCC 163
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
22. The new plea relying upon „clause 4h‟ above by
the learned Aditional Advocate General for the first time
before this Court is a plea contrary to their own stand before
the learned Arbitrator as well as the learned Commercial
Court. We are of the view that the award cannot be set aside
on such a plea.
23. Even otherwise, we notice that the learned
Arbitrator has proceeded on the basis that there was no
escalation clause in the contract as admitted by both the
appellants as well as the respondent before him. The learned
Commercial Court has accepted the interpretation of the
learned Arbitrator. Therefore, there is no room for revisiting
the impugned judgment on the ground of wrong
interpretation of the contract.
24. However, we are of the opinion that even if we
accept the plea of the learned Additional Advocate General,
it does not affect the inevitable outcome of the case. Clause
„h‟ quoted above would only mean that the contract price as
indicated in the price schedule shall remain firm during the
four months execution period of the work as time was the
essence of the contract. What was further agreed upon,
therefore, was that no escalation on whatsoever ground shall
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
be admissible if the work was completed within four months
firmed up as the execution period. The facts, however,
reflected something else. The learned Arbitrator agreed with
the respondent that it was because of the appellants that
the work could not be completed within the four months
execution period. The learned Arbitrator came to a finding
that the delays caused by the appellants led to the
completion of the work only on 18.02.2008. The learned
Arbitrator held that once it is found that there was delay in
the execution of the contract due to the conduct of the
appellants, they would be liable for the consequences of the
delay, namely increase in prices. It was further held that in
fact, the claim for escalation was not outside of the purview
of the contract and arose as an incidence of the contract.
The view taken by the learned Arbitartor is both legal and
logical. It is not faulted by perversity or patent illegality. It
would have been completely illogical to bind the respondent
to the prices agreed in the year 2004 as the work was
completed in the year 2008 due to the faults of the
appellants and even then, substantive payment was made
only in the year 2017.
25. On a query made by this Court to point out the
price schedule mentioned in „clause 4h‟, the learned
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
Additional Advocate General submitted that it does not exist.
The learned Counsel for the respondent confirmed this
statement.
26. The learned Arbitrator has awarded the escalation
charges on a reasoned award which has been tested before
the learned Commercial Court. The learned Commercial
Court has come to the conclusion that grant of the
escalation charges by the learned Arbitrator did not result in
patent illegality.
27. Therefore, the facts of the present case would be
completely distinguishable from the facts that were before
the Supreme Court in Pam Developments Private Limited
(supra) where there was a specific clause prohibiting any
amount towards idle machinery, etc.
28. The learned Additional Advocate General also took
another plea which was neither agitated before the learned
Arbitrator nor before the learned Commercial Court. It was
submitted that after entering into the agreement dated
24.02.2004, the work was completed on 18.02.2008 and
thereafter, the second agreement was entered into on
30.03.2017. This agreement quantified the total amount
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
payable to the respondent by the appellant as Rs.1129.94
lakhs only, and therefore, having agreed to the payment of
the said amount the respondent is precluded from seeking
any further amount either on account of interest on delayed
payment or for escalation cost.
29. It is noticed that the appellants had infact
admitted the facts stated by the respondent as to how the
cost increased and why the agreement dated 30.03.2017
was entered into. With these admitted facts, the parties
decided to resolve their disputes through the process of
arbitration. Before the learned Arbitrator, the respondent
made his claims and the appellants filed their statement of
defence. The learned Arbirator examined all these facts,
framed relevant issues and decided them. The agreement
dated 30.03.2017 does not even indicate that it was a full
and final settlement as argued by the learned Additional
Advocate General. A holistic reading of the agreement dated
30.03.2017 suggests that the parties thereto agreed to revise
the schedule of rates agreed upon in the year 2004 which
increased the total amount payable for works from
Rs.7,79,33,000/- to Rs.1129.94 lakhs. The agreement dated
30.03.2017 also does not prohibit interest on delayed
payment or escalation cost. Therefore, the appellants are
State of Sikkim & Ors. vs. Chhabil Dass Agarwal
precluded from stating anything contrary at the stage of an
appeal under section 37 of the Arbitration Act.
30. We find that there is, in fact, no scope of
interference under section 37 of the Arbitration Act. The
impugned judgment is a reasoned one, which has correctly
appreciated the limited scope of interference under section
34 of the Arbitration Act. Accordingly, the appeal stands
dismissed. Parties to bear their respective costs.
(Bhaskar Raj Pradhan) (Biswanath Somadder)
Judge Chief Justice
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