Case Note & Summary
The Petitioner, Union of India through the Postal Department, filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging part of an arbitral award dated 24th July 2019. The dispute arose out of a contract for construction of a postal building. The arbitrator had awarded claims in favour of the Respondent contractor, including claims for idle labour and machinery (claims 7, 8, 9) and loss of profit (claim 12). The Union of India contended that these awards were perverse and patently illegal. The court examined the legal framework under Section 34, noting that interference is limited to grounds of perversity (no evidence or ignoring vital evidence) and patent illegality (contrary to contract terms or law). On claims 7 to 9, the court found that the contractor had not provided any evidence that labour and machinery were actually deployed and kept idle due to the employer's default. The contract required the contractor to give notice and maintain records, which was not done. The arbitrator's award of these claims without evidence was held to be perverse and set aside. On claim 12 for loss of profit, the arbitrator had awarded 10% of the balance work value as loss of profit without any basis or evidence of anticipated profits. The court held this to be patently illegal as it was contrary to the settled principle that loss of profit must be proved. The court also considered the award of interest at 12% per annum from the date of the claim, which was upheld as within the arbitrator's discretion under Section 31(7)(a). The petition was partly allowed, setting aside the award on claims 7, 8, 9 and 12, while upholding the rest of the award.
Headnote
A) Arbitration - Section 34 Challenge - Perversity and Patent Illegality - The court delineated the scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996, holding that an award is perverse if it is based on no evidence or ignores vital evidence, and patent illegality includes a finding that is contrary to the terms of the contract. The court must not reappreciate evidence but can set aside an award that is so unreasonable that no reasonable person would have arrived at it. (Paras 2-20) B) Contract Interpretation - Idle Labour and Machinery Claims - Claims for idle labour and machinery under a construction contract require proof that the contractor was prevented from working due to the employer's default and that the contractor had deployed resources ready for work. The court held that the arbitrator's award of such claims without evidence of deployment or hindrance was perverse and contrary to the contract terms. (Paras 29-34) C) Loss of Profit - Anticipated Profits - Loss of profit on unexecuted work cannot be awarded without evidence that the contractor would have earned profit but for the breach. The court held that the arbitrator's award of 10% loss of profit on the balance work without any basis was patently illegal. (Paras 35-43) D) Interest - Section 31(7)(a) - Pre-award Interest - Under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, an arbitrator may award interest unless otherwise agreed by the parties. The court upheld the arbitrator's award of 12% interest per annum from the date of the claim till the award, finding it within the arbitrator's discretion. (Para 44)
Issue of Consideration
Whether the arbitral award on claims nos. 7, 8, 9 and 12 suffers from perversity or patent illegality warranting interference under Section 34 of the Arbitration and Conciliation Act, 1996.
Final Decision
The petition is partly allowed. The arbitral award on claims nos. 7, 8, 9 and 12 is set aside. The rest of the award is upheld. No order as to costs.
Law Points
- Section 34 of the Arbitration and Conciliation Act
- 1996
- perversity
- patent illegality
- interpretation of contract
- burden of proof
- idle labour and machinery claims
- loss of profit
- escalation costs
- interest under Section 31(7)(a) of the Act
