Isabella Mariam

The High Court of Jharkhand at Ranchi, Single Bench of Justice Gautam Kumar Choudhary, set aside an arbitral award passed in favour of a private contractor on grounds of lack of evidentiary support and findings being perverse to the terms of contract. The appeal was decided under Section 37 of the Arbitration and Conciliation Act, 1996, reversing the lower court’s affirmation of the arbitral award.

The Court observed that the arbitrator acted beyond the bounds of contractual provisions and awarded damages without sufficient evidence. The arbitral award, originally made on 12.03.2010 in favour of M/s Encon Builders (I) Pvt. Ltd., had granted compensation under multiple heads, including idling charges and loss of profit.

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The appellate court concluded that the respondent had failed to execute the contract as agreed, and the justification of short supply of explosives was not backed by any documentary or oral evidence.

The matter arose from an agreement dated 17.03.1992 between Bihar State Mineral Development Corporation Limited (now Jharkhand State Mineral Development Corporation Limited) and M/s Encon Builders (I) Pvt. Ltd. The agreement concerned the hiring of heavy earth moving machinery for excavation and stacking of coal, soil, and related materials.

The contract spanned from 17.03.1992 to 01.08.1994 and required the agency to maintain an average output of 10,000 MT of coal per month. As per Clause 18, the Corporation held discretion to alter the output and terminate the agreement in the event of performance shortfall attributable to the contractor, including forfeiture of the earnest and security amounts.

Subsequent to a shortfall in coal production amounting to 1,06,747 MT, the contract was terminated. The respondent-initiated Money Suit No. 92/1995 seeking a decree of Rs. 87,71,018/-, while the Corporation filed a counterclaim amounting to Rs. 1,83,33,797.25/-.

The parties consented to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The arbitrator awarded Rs. 44,51,932.21/- under five heads:

1. 20,69,760/- for loss due to idling of man and machinery

2. 17,27,936/- for loss of profit

3. 6,59,237.21/- for refund of security deposit

4. 2,00,000/- as arbitration costs

5. Interest at 18% per annum w.e.f. 01.09.1994

The Court below dismissed the Corporation's objections under Section 34 of the Act, upholding the award.

Arguments for the Appellants:

The Corporation contended that the respondent was responsible for the breach of contract and hence not entitled to any damages. It was argued that:

• Clause 18 of the agreement explicitly barred idling charges.

• The respondent failed to meet the monthly target and deployed insufficient and substandard machinery.

• The respondent never requisitioned the explosives formally, as required by Clause 29.

• The arbitrator made findings based on no evidence, particularly in concluding that only 36% of explosives were supplied.

• Calculations regarding idling losses were made post-hearing based on written submissions, which the Corporation had no opportunity to challenge.

It was also submitted that the award of profit loss lacked evidence, and no valid ground under Section 73 of the Indian Contract Act, 1872, supported such damages.

The Corporation also claimed that its counterclaim was erroneously rejected as an afterthought, without detailed judicial reasoning.

Arguments for the Respondent:

M/s Encon Builders argued that the production shortfall occurred due to failure on part of the Corporation to supply adequate explosives, electricity, and timely payments. It claimed only 21,475 Kg of explosives were supplied against a required 1,65,140 Kg.

The respondent cited oral evidence from the Mine Manager during cross-examination, which referenced the project report to substantiate explosive requirements.

It defended the award of loss of profit, stating that since it was not at fault, compensation for unexecuted work was legitimate. It also maintained that refund of the security deposit was justified.

Regarding the counterclaim, the respondent argued that no contractual notices were served during the contract period regarding non-performance.

It further submitted that the appellate jurisdiction under Section 37 was limited and should not involve reappraisal of evidence. Reliance was placed on the Supreme Court judgment in Somdatt Builders-MCC-NEC-NEC(JV) v. National Highway Authority of India, 2025 SCC OnLine SC 170, which stated that interference under Section 37 should not be based solely on broad terms like "patent illegality" or "public policy."

The Court reaffirmed the limited scope under Section 37 but clarified that where arbitral adjudication is “perverse or without any evidence,” it invites judicial correction. It recorded:

"An arbitrator is a creature of contract between the parties and if he ignores the specific term of the contract, it would be a question of jurisdictional error."

"In the present case it is not in dispute that respondent company failed to meet the production target..."

The Court found the arbitrator’s conclusion regarding insufficient explosives to be unsupported. It stated:

"There is not a chit of paper to remotely suggest that the respondent ever made any correspondence in this regard with the appellant company."

It further recorded:

"Explosives are not like any common building materials, but has to be dispatched on specific requisition... Everything needs documentation."

The Court deemed the arbitrator’s reliance on the project report, without any evidence of actual requisition, as legally unsustainable:

"It is perverse to contend that entire explosives should have been supplied at the inception of work without any requisition."

On the issue of idling charges, the Court quoted Clause 18, stating:

"Agency will not be entitled for any idling charges for men, plant and machineries..."

It found the arbitrator's handwritten addition at the award's end—that calculations were provided in written submissions unchallenged by the Corporation—procedurally unfair:

"Making assessment in this manner at this stage, deprived it the opportunity to rebut calculations put forward by the respondent."

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Regarding loss of profit, the Court noted that the arbitrator had fixed 15% of the unexecuted work value without specific reasoning or contractual basis. It stated:

"Such loss of profit was not admissible under Section 73 of the Contract Act, 1872."

The Court cited decisions including Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd. (2024) 2 SCC 375, SAIL v. J.C. Budharaja (1999) 8 SCC 122, and Associate Builders v. DDA (2015) 3 SCC 49.

It concluded:

"The finding that breach of contract was on account of non-supply of explosive is perverse to the core."

"The impugned Arbitral Award and Judgment passed by the learned Arbitrator and the Court below is not sustainable and is, accordingly, set aside."

The Court issued the following order:

"Without going further, for the reasons discussed above this Court is of the view that breach of contract was on the part of the respondent and, therefore, the impugned Arbitral Award and Judgment passed by the learned Arbitrator and the Court below is not sustainable and is, accordingly, set aside."

"Arbitration Appeal is accordingly allowed. Pending I.A, if any, stands disposed of."

Advocates Representing the Parties:

For Appellants: Mr. Sachin Kumar, Advocate, M/s Niti, Advocate

For Respondent: M/s Ajit Kumar, Senior Adv, Rohit Roy & Vibhor Mayank, Advocates

Case Title: Bihar State Mineral Development Corporation Limited & Anr vs M/s Encon Builders (I) Pvt. Ltd.
Case Number: Arbitration Appeal No. 16 of 2011
Bench: Justice Gautam Kumar Choudhary

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