Court’s decision
The Bombay High Court allowed the Petition under Section 34 of the Arbitration and Conciliation Act and set aside the arbitral award, holding that the tribunal had failed to correctly interpret the Engineering, Procurement and Construction (EPC) contract and had rendered findings that were “ex facie unsustainable.” The Court found that the arbitrator disregarded contractual milestones, incorrectly attributed delay to the Petitioner, and relied on assumptions not supported by evidence. It held that the arbitrator travelled beyond the contract, misapplied liquidated damages provisions, and ignored vital correspondence that explained the sequence of events leading to completion of the works.
The Court emphasised that “arbitral tribunals must remain within the four corners of the contract and cannot impose obligations never contemplated by the parties.” It concluded that the arbitrator’s reasoning suffered from perversity, patent illegality, and misapplication of Sections 28(1)(a) and 28(3) of the Arbitration Act. After analysing the EPC terms, the contractual responsibilities, and evidence relating to commissioning delays, the Court held that the award could not be sustained. Accordingly, it set aside the entire arbitral award without remand.
Facts
The Petitioner entered into an EPC contract with the Respondent for supply, installation and commissioning of a large-scale process plant. The contract imposed specific obligations on both parties, including timelines for completion of civil foundations, delivery of equipment, installation, and performance testing. The Petitioner contended that the Respondent delayed completion of civil works, resulting in a cascading delay that impacted erection and commissioning activities.
According to the Petitioner, several letters were issued to the Respondent highlighting incomplete foundations, unavailable access to work fronts, and failure to supply utilities necessary for commissioning. Despite these delays, the Respondent later imposed liquidated damages alleging that the Petitioner failed to complete work within the contractual time. The dispute proceeded to arbitration, where the Respondent claimed entitlement to damages for delay and alleged deficiency in commissioning. The arbitrator allowed substantial parts of the claim, leading to the present challenge.
Issues
The core issues before the Court were:
- Whether the arbitrator ignored evidence showing that delay was attributable to the Respondent’s failure to provide civil foundations, utilities, and timely approvals.
- Whether the arbitrator misinterpreted the EPC contract and imposed obligations inconsistent with its clauses.
- Whether liquidated damages could be awarded despite the Respondent’s contributory delay.
- Whether the arbitrator travelled beyond the contract by presuming implied obligations.
- Whether the findings suffered from patent illegality warranting interference under Section 34.
Petitioner’s arguments
The Petitioner argued that the arbitrator wrongly assumed that the Petitioner was responsible for delay even though the Respondent failed to complete the civil foundations that were a precondition for mechanical erection. The Petitioner submitted that the EPC schedule clearly required the Respondent to hand over fronts progressively, but repeated extensions occurred because foundations were unfinished. The Petitioner also argued that the arbitrator ignored letters documenting missing utilities, delayed approvals, and repeated requests for access.
The Petitioner contended that the arbitrator misapplied the liquidated damages clause because liquidated damages could be imposed only if delay was attributable solely to the Petitioner. The Petitioner asserted that the arbitrator overlooked vital contractual clauses and based conclusions on assumptions rather than evidence. It was argued that the award suffered from patent illegality for violating Sections 28(1)(a) and 28(3), which require the tribunal to apply substantive law and decide in accordance with the contract.
Respondent’s arguments
The Respondent argued that delays were attributable to the Petitioner because the Petitioner allegedly failed to mobilise labour and equipment and did not meet the contractual sequence of installation. The Respondent contended that the EPC contract imposed strict timelines for commissioning and that the Petitioner failed to demonstrate adequate progress. The Respondent relied on internal notes and site reports to claim that the Petitioner had fallen behind schedule.
The Respondent submitted that the arbitrator had carefully evaluated evidence, exercised discretion, and reached findings that should not be disturbed under the limited scope of Section 34. It argued that the Court cannot re-appreciate evidence or substitute its view for the tribunal’s assessment.
Analysis of the law
The Court reaffirmed that although it cannot re-evaluate evidence, it may interfere where an award ignores vital evidence, misinterprets contractual provisions, or relies on findings no reasonable tribunal could reach. The Court noted that Section 28(3) mandates strict adherence to the contractual framework, and any deviation constitutes patent illegality.
On examining the EPC terms, the Court held that the arbitrator had failed to consider essential clauses relating to the Respondent’s obligation to provide access, utilities, and completed foundations before the Petitioner could proceed with installation. The Court found that the arbitrator disregarded material letters and records that showed that the Petitioner was unable to mobilise due to conditions outside its control. Because delay is a question deeply tied to contractual sequencing and responsibility, the Court held that the arbitrator’s findings were unsustainable.
Precedent analysis
The Court relied on established jurisprudence that limits the authority of arbitrators to rewrite contracts. Citing principles from Associate Builders, Ssangyong Engineering, and Dyna Technologies, the Court held that an award must be set aside where:
- the arbitrator ignores critical evidence;
- contractual terms are misinterpreted;
- findings are perverse;
- or conclusions are based on an approach no reasonable tribunal would adopt.
The Court also relied on authorities that prohibit tribunals from attributing exclusive responsibility for delay without considering contributory delay. Liquidated damages cannot be awarded where both parties contributed to the delay or where foundational obligations were not discharged by the claimant.
Court’s reasoning
The Court found that the arbitrator’s findings suffered from fundamental defects. First, the arbitrator failed to assess whether the Respondent had completed the civil foundations, which formed the basis for the entire erection schedule. The Court held that without considering this prerequisite, attributing delay to the Petitioner was legally untenable.
Second, the Court held that the arbitrator misinterpreted the liquidated damages clause by overlooking the requirement that delay must be solely attributable to the Petitioner. Since evidence showed repeated delays by the Respondent, the arbitrator’s conclusion lacked justification.
Third, the Court held that the arbitrator adopted an approach inconsistent with contractual sequencing and obligations. Considering the correspondence documenting delay in providing utilities and approvals, the Court held that the arbitrator’s findings disregarded material evidence, making the award perverse. For these reasons, the Court set aside the entire award.
Conclusion
The Court concluded that the arbitral tribunal’s findings were contrary to the EPC contract and unsupported by the evidence. It held that the arbitrator ignored essential contractual obligations and documentary records, misapplied liquidated damages provisions, and reached conclusions that no reasonable tribunal could endorse. Since the award violated Section 28(3) and suffered from patent illegality, the Court exercised its power under Section 34 to set it aside. No remand was ordered, and the award stood quashed in its entirety.
Implications
This judgment serves as an important reminder that arbitrators must respect contractual sequencing in EPC disputes. It reinforces the principle that liquidated damages cannot be imposed without examining causation and contributory delay. For contracting parties, the decision underscores the importance of maintaining detailed contemporaneous records of site conditions and handover obligations. The ruling also strengthens the jurisprudence limiting arbitral discretion where tribunals overlook material evidence or misconstrue commercial contracts.