Contractor Entitled to Refund of Wrong Deductions, but Not Damages Without Proof of Loss, Rules Delhi High Court
Facts
Northern Railway invited tenders in July 2019 for doubling the Roza–Sitapur railway section. The contract, valued at over ₹42.46 crore, was awarded to M/s Pragati Construction Consultants and executed on 14 February 2020.
The contractor was required to complete the work within eight months, but owing to delays, the Railway granted six extensions and the project was ultimately completed on 15 December 2021. During execution, amendments increased the contract value.
Disputes arose regarding deductions made by the Railway, prolongation of the project, and other contractual claims. The contractor invoked arbitration seeking approximately ₹1.95 crore. The Arbitral Tribunal awarded ₹65.73 lakh with post-award interest. Aggrieved, the Union of India filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 seeking to set aside the award.
Issues
- Whether deductions made by the Railway from Schedule ‘A’ items were arbitrable or constituted “excepted matters” under the General Conditions of Contract (GCC).
- Whether the Arbitral Tribunal could award damages for prolongation of the contract without proof of actual loss.
- Whether the Tribunal could award damages equivalent to pendente lite interest after holding that interest itself was contractually barred.
- Whether only part of the arbitral award could be set aside under Section 34 of the Arbitration and Conciliation Act.
Petitioner’s Arguments
The Union of India contended that:
- The dispute regarding deductions fell within “excepted matters” under Clause 63 of the GCC and was therefore beyond the Tribunal’s jurisdiction.
- The contractor had accepted the payments without protest.
- Damages for prolongation of work were awarded without any evidence of actual loss and despite the contractor already receiving Price Variation Compensation (PVC).
- The Tribunal illegally granted damages equal to pendente lite interest after expressly rejecting the claim for interest, thereby granting relief beyond the pleadings and contrary to the contract.
Respondent’s Arguments
The contractor argued that:
- Judicial interference under Section 34 is extremely limited and the Tribunal had adopted a plausible interpretation of the contract.
- Under Clauses 42.2(i) and 42.4(6) of the GCC, the 25% variation limit applied to the Schedule of Rates (SOR) as a whole and not chapter-wise or item-wise as adopted by the Railway.
- The Tribunal correctly directed refund of the wrongful deductions.
- Compensation for prolongation represented recovery of fixed costs incurred due to delay attributable to the Railway.
- The respondent fairly conceded that damages awarded in lieu of pendente lite interest under Claim No. 6 could not legally be sustained.
Analysis of the Law
The Court examined:
- Section 34 of the Arbitration and Conciliation Act, 1996.
- Sections 73 and 74 of the Indian Contract Act, 1872.
- Clauses 42.2(i), 42.4(6), 63 and 29 of the General Conditions of Contract.
The Court reiterated that:
- Courts exercising jurisdiction under Section 34 do not sit in appeal over arbitral awards.
- However, awards suffering from patent illegality or violating public policy are liable to be set aside.
- Damages under Section 73 require proof of actual loss unless proving such loss is impossible or inherently difficult.
- Arbitrators cannot grant relief beyond the scope of claims referred to arbitration or contrary to contractual stipulations.
Precedent Analysis
The Court relied upon:
- Kailash Nath Associates v. DDA (2015) 4 SCC 136 — actual loss is ordinarily required before damages can be awarded under Section 74 unless such proof is impossible.
- State of Rajasthan v. Ferro Concrete Construction (P) Ltd. (2009) 12 SCC 1 — damages cannot be awarded merely on assertions without supporting evidence.
- NTPC Ltd. v. Mudajaya Corporation Malaysia Berhad — distinguished because in that case the arbitrator had expressly found that quantification of actual loss was difficult.
- Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025) 7 SCC 1 — reaffirmed that while courts cannot modify arbitral awards under Section 34, they may sever and set aside only the invalid portions of an award if they are separable.
Court’s Reasoning
The Court upheld the Tribunal’s finding regarding wrongful deductions from Schedule ‘A’ items.
It held that the Railway had itself acted contrary to Clause 42.4(6) of the GCC by applying variation limits chapter-wise instead of to the SOR schedule as a whole. Having violated the contractual terms, the Railway could not invoke the “excepted matter” clause to avoid arbitration. The Tribunal’s interpretation was a plausible contractual interpretation warranting no interference under Section 34.
However, the Court found the award of damages for prolongation legally unsustainable. Although the delay was attributable to the Railway, the contractor had neither produced evidence of actual loss nor established that such proof was impossible. The Tribunal therefore violated Section 73 of the Contract Act by awarding damages solely on the basis of fixed cost calculations.
The Court further held that the Tribunal committed patent illegality by rejecting pendente lite interest under the contract but then awarding the identical amount as damages. This amounted to granting relief beyond the pleadings and beyond the scope of the reference.
Since Claims 4 and 6 were independent and severable from the remaining award, they could be set aside without disturbing the rest of the award.
Conclusion
The Delhi High Court partly allowed the petition.
It upheld the arbitral award directing refund of wrongful deductions relating to Schedule ‘A’ items, holding that the Railway had acted contrary to the contractual provisions and could not invoke the “excepted matter” clause.
However, the Court set aside the awards under Claim Nos. 4 and 6, holding that damages for prolongation were unsupported by evidence of actual loss and that awarding damages in place of contractually barred interest constituted patent illegality.
Case Details
Case: Union of India through Dy. Chief Engineer Construction Moradabad v. M/s Pragati Construction Consultants
Court: Delhi High Court
Case Number: O.M.P. (COMM) 153/2025
Judge: Hon’ble Mr. Justice Avneesh Jhingan
Date: 03 August 2026
Result: Petition partly allowed. Award directing refund of wrongful deductions (Claim No. 1) upheld; awards under Claim Nos. 4 and 6 set aside as patently illegal; remaining arbitral award sustained.
