In a significant ruling on arbitral scrutiny and granting major relief to IGNOU, the Delhi High Court has held that an arbitrator who relies on market enquiries and DSR rates without confronting parties, awards damages without proof of loss, and disregards mandatory contractual deductions, commits a patent illegality warranting interference under Section 34 of the Arbitration Act.
The Court reaffirmed that an Arbitral Tribunal being a creature of contract is bound to act in terms of the contract under which it is constituted, and an award can be said to be patently illegal where the Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract. The Court further held that for awarding damages under Section 73 of the Contract Act, proof of loss or injury is a sine qua non, and the Hudson Formula is not a substitute for proof of damages and can be applied only where actual loss, loss of opportunity, and nexus with the breach are established.
A Single Judge Bench of Justice Avneesh Jhingan observed that the arbitrator’s finding that the work was completed on Nov 30, 2011 was perverse and contrary to the record. The arbitrator failed to consider the series of letters issued by IGNOU, which clearly pointed out the pending works and defects to the respondent. The Court noted that the respondent was still in the process of submitting completion drawings under clause 15 of the Special Conditions of Contract (SCC) as late as June 2012, indicating that the work was not complete on Nov 30, 2011.
The Court further observed that the partial use of the building by IGNOU under clause 17 of the SCC could not be construed as completion of the project, and the pendency of the application for issuance of the completion certificate could not be treated as evidence of completion. Clause 8 of the contract unambiguously provides that the work is not considered complete until the completion certificate is issued by the competent authority.
The Court also observed that the arbitrator relied upon DSR-2007 rates and made his own market enquiries without confronting the material to the petitioner, which violated Sections 18 and 24(3) of the Arbitration Act and the principles of natural justice. The arbitrator awarded the entire claimed amount under claim no.2 (12th RA Bill) without considering the mandatory deductions towards five per cent security deposit under clause 1A of the contract, income tax, VAT, and labour cess. The Performance Bank Guarantee (PBG) was directed to be released despite no completion certificate being issued, contrary to clause 1(ii) of the contract.
As regards claim no.4, the Court noted that the arbitrator travelled beyond the pleadings by awarding damages under Sections 55 and 73 of the Indian Contract Act, 1872, when the respondent had only pleaded escalation under clause 10CC of the contract and had neither pleaded nor proved actual loss or damage suffered. The Court observed that the respondent failed to establish the twin conditions required for awarding damages under Section 73 of the Contract Act, namely breach of contractual conditions and actual loss or damage suffered.
Briefly, Indira Gandhi National Open University (IGNOU) invited bids on March 30, 2009 for the construction of the office of the Vice-Chancellor and a VIP Guest House at its campus. Roshan Real Estates Pvt Ltd emerged as the successful bidder, with the letter of acceptance and the letter of award for a contract value of Rs. 10.67 crores. The work was to commence on Sep 19, 2009 and be completed by Sep 18, 2010, though the respondent claimed to have completed the work only on Nov 30, 2011.
Disputes arose between the parties regarding completion of work, execution of extra work, deviated items, payment for work executed, escalation on account of prolongation of the contract, and other claims. The arbitration was invoked at the instance of the respondent, who raised seventeen claims before the arbitrator. The arbitrator passed a detailed award dated Apr 30, 2018, awarding amounts under various heads including Rs. 2.62 crores towards work executed, Rs. 50.55 lakhs towards the 12th RA Bill, Rs. 1.27 crores towards escalation, Rs. 62 lakhs towards idling losses, Rs. 1.21 crores towards withheld amounts, and Rs. 15 lakhs towards cost of arbitration proceedings.
