Chhattisgarh High Court: In an appeal filed under Section 37, Arbitration and Conciliation Act, 1996 (Arbitration and Conciliation Act) by Bharat Sanchar Nigam Ltd. (BSNL) challenging an arbitral award in favour of Talat Construction (contractor), a Single Judge Bench of Bibhu Datta Guru, J., held that the award granting damages for loss of profit and interest was vitiated by patent illegality and contrary to public policy. The Court emphasised that in the absence of a work order and cogent evidence of actual loss or any alternative profit-making opportunity, the contractor’s claim for loss of profit rested on conjectures and surmises. Accordingly, the arbitral award and the District Judge’s order were set aside, with directions to BSNL to refund the security deposit of Rs 62,500 to the contractor without interest, thereby allowing the appeal to that extent.
Background
BSNL acting as the tendering authority, invited tenders for laying underground cables with an estimated cost of Rs 25,00,000. The contractor emerged as the lowest bidder and was awarded the tender. An agreement was executed between the parties. The contractor asserted that only work worth Rs 62,388 was carried out, that bills for this work were not paid, and that the security deposit of Rs 62,500 was not refunded. On this basis, he raised a claim for loss of profit calculated at fifteen per cent of the balance work, amounting to Rs 6,59,337, together with interest.
BSNL admitted the existence of the agreement but denied that any work order had been issued beyond the limited portion of work that was executed. They contended that no enforceable right accrued to the contractor for execution of the entire contract, argued that the security deposit had already been refunded, and explained that the non-award of further work was due to a vigilance enquiry.
In the appeal, BSNL argued that the arbitral award was vitiated by patent illegality, perversity, and disregard of contractual terms. They maintained that in the absence of a work order, no enforceable contractual right existed, and therefore damages for loss of profit were unsustainable. They further submitted that the award of interest was contrary to Clause 8.1 of the tender document, which expressly barred payment of interest on the security deposit.
However, the contractor countered these submissions by pointing out that the arbitral proceedings had commenced in 2013, prior to the coming into force of the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment Act), and therefore Section 29-A, Arbitration and Conciliation Act was inapplicable.
Analysis
The Court emphasised that to sustain a claim for loss of profit, the contractor must establish, by leading cogent and convincing evidence, the existence of a viable opportunity whereby it could have utilised its resources elsewhere and earned profit, and in the absence of such evidence, the claim for loss of profit cannot be sustained. The Court noted that the contractor had neither laid any specific pleadings with regard to loss of profit nor led any evidence to substantiate the same. Further, no material was placed on record to demonstrate that the contractor had suffered any actual loss or that any alternative profitable opportunity was lost, and thus the award of loss of profit by the arbitrator was based on mere conjectures and surmises.
The Court observed that the arbitrator had also failed to consider the terms and conditions of the contract governing the parties, which did not guarantee allotment of the entire work to the contractor. By awarding loss of profit in the absence of any contractual or evidentiary basis, the arbitrator travelled beyond the scope of the contract. The Court noted that such an award, being based on no evidence, would squarely fall within the ground of “patent illegality” under Section 34(2-A), Arbitration and Conciliation Act and would also be liable to be set aside as being in conflict with the public policy of India.
The Court observed that the payment of interest on the security deposit was expressly barred, and in spite of such a stipulation, the arbitrator proceeded to award interest in favour of the contractor, which was clearly contrary to the contractual provisions governing the parties. Therefore, the award of interest, being in the teeth of the contractual bar, could not be sustained and was liable to be set aside.
The Court emphasised that it was an admitted position that the arbitral proceedings commenced on 23 August 2013 and concluded with the passing of the award on 15 April 2017, i.e., well before the coming into force of the amended regime. Accordingly, the provisions of Section 29-A(1), Arbitration and Conciliation Act were not attracted to the proceedings.
The Court noted that since the arbitral proceedings were initiated prior to the enforcement of the 2015 Amendment Act, the provisions of Section 29-A, Arbitration and Conciliation Act were clearly inapplicable and the objection raised by BSNL on that count did not merit acceptance. However, upon examining the award on the touchstone of Section 34, Arbitration and Conciliation Act, the Court observed that it became evident that the impugned arbitral award suffered from patent illegality going to the root of the matter and was also contrary to the public policy of India.
The Court emphasised that the arbitrator acted in disregard of the contract, which did not guarantee allotment of the entire work to the contractor and by granting relief dehors the contract, the arbitrator exceeded his jurisdiction. It was further noted that the award of interest was equally unsustainable which was granted despite an express bar against payment on the security deposit. The Court highlighted that an Arbitral Tribunal, being a creature of contract, was bound by its terms and cannot grant relief in contravention thereof.
The Court also noted that the District Judge, while exercising jurisdiction under Section 34, failed to examine these infirmities and dismissed the application mechanically, without appreciating that the case fell within recognised exceptions warranting judicial intervention.
Decision:
Consequently, the order dated 11 September 2018 passed by the District Judge and the award dated 15 April 2017 were set aside. The Court directed BSNL to refund the security deposit of Rs 62,500 to the contractor within thirty days, but without interest in view of Clause 8.1 of the notice inviting tender (NIT).
Accordingly, the appeal under Section 37, Arbitration and Conciliation Act stands allowed to the extent indicated with no order as to costs.
[Bharat Sanchar Nigam Ltd. v. Talat Construction Kharasia Naka, ARBA No. 40 of 2018, decided on 16-4-2026]
Advocates who appeared in this case:
For the Appellant: Sandeep Dubey and Manas Vajpai, Advocates
For the Respondent: Hamida Siddiqui and Astha Patel, Advocates
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