Award Cannot Be Sustained Where Reasoning Is Skimpy And Arbitrary | Bombay High Court Sets Aside Delay Compensation But Upholds Remaining Arbitral Findings
Isabella Mariam
The High Court of Judicature at Bombay, Single Bench of Justice Somasekhar Sundaresan, held that the portion of an arbitral award dealing with liquidated damages suffered from "manifest arbitrariness" and was devoid of adequate reasoning. The Court directed that this portion of the award be quashed while upholding the remaining components. The Court concluded that the findings relating to the Civil Works, insurance compliance, service tax reimbursement, and customs duty adjustments were well-reasoned and did not warrant interference under Section 34 of the Arbitration and Conciliation Act, 1996. The impugned arbitral award, dated May 2, 2018, was thus set aside partially in respect of liquidated damages.
The matter arose from a contract awarded by the petitioner, Hindustan Petroleum Corporation Ltd. (HPCL), to the respondent, G.R. Engineering Private Limited (GRE), for the construction of twelve mounded bullets for the storage of liquefied petroleum gas at HPCL’s Mahul refinery. The stipulated contractual deadline for completion was December 5, 2007; however, the project was completed only by February 2, 2010. Disputes between the parties led to arbitral proceedings, culminating in an award that was challenged by HPCL under Section 34 of the Act.
HPCL contested the arbitral tribunal's direction to pay GRE withheld sums under various heads, including civil works conformity, under-insurance, service tax, customs duty variation, and liquidated damages
Interest at 7% per annum from the date of filing the claim (September 6, 2012) until the date of actual payment was also awarded.
HPCL raised specific objections under the Civil Works head, arguing that the structure failed to meet the M30 concrete grade requirement and that the dispute was non-arbitrable under Clause 8.b of the GCC, which restricted disputes if recoveries were recommended by a government agency. However, the Court found that no such recommendation was made by any government agency and that HPCL’s internal vigilance department could not be treated as such. Further, the Jangid Report from IIT Mumbai, initially commissioned by HPCL but later submitted by GRE, was validly considered by the tribunal. The tribunal also considered the Sinha and Sinha-Goyal Reports submitted by HPCL and found that the Civil Works met the required M30 standard.
As to liquidated damages, HPCL argued that the project delay entitled it to recover damages at 0.5% of the total contract value per week, capped at 5%, under Clauses 5.d and 10 of the GCC. Extensions granted to GRE were stated to be without prejudice to these clauses. GRE contended, and the arbitral tribunal held, that no actual loss was proven by HPCL and therefore no liquidated damages were payable.
The Court observed that "there was no specific government agency that made any recommendation for withholding of the amount under the head of Civil Works." It recorded, "HPCL seeks to attribute the withholding of amounts to a view taken by HPCL's own vigilance department invoking its reporting relationship with the Central Vigilance Commission (CVC)," but held that this was not sufficient to trigger Clause 8.b of the GCC.
Justice Sundaresan stated, "The Jangid Report—in fact, the first report from IIT, Mumbai—was inconvenient and not acceptable to HPCL... The Learned Arbitral Tribunal cannot be faulted for taking into consideration the contents of the same." He further noted, *"The Sinha Report, in Chapter 2 titled 'Structure Description' explicitly states that 'the tank mound has been constructed using M30 concrete.'"
The Court concluded, "The holistic view of the Learned Arbitral Tribunal in relation to the Civil Works is logical and rational and eminently plausible and defensible." As such, the findings related to Civil Works were upheld.
However, on liquidated damages, the Court found, "the articulation of the analysis by the Learned Arbitral Tribunal is skimpy," and "there is hardly any deliberation in relation to liquidated damages." Justice Sundaresan observed, "The absence of reasons is what manifest arbitrariness is about."
He further stated, "It was necessary for the Learned Arbitral Tribunal to return a finding on whether it was difficult to prove the damages," referring to the legal position clarified in Kailash Nath Associates v. DDA (2015) 4 SCC 136.
The Court held, "Regretfully, I am constrained to set aside this portion of the Impugned Award as being perverse and manifestly arbitrary for want of reasoning, and also being contrary to the fundamental policy of the law of India in relation to liquidated damages."
The Court concluded, "The Impugned Award calls for no interference except insofar as it relates to the element of liquidated damages i.e. essentially the contents of Paragraph 7 (under the heading 'Findings and Conclusions') dealing with the issue of Liquidated Damages, which is quashed and set aside for being devoid of reasons."
It further directed, "The arbitration agreement between the parties subsists insofar as it relates to liquidated damages and the parties are free to have this element subjected to dispute resolution afresh by way of arbitration."
The Court held, "No fault can be found with the findings returned on the facets of Civil Works, under-insurance, Service Tax and Customs Duty. Nothing contained in relation to these facets calls for any interference by this Court in exercise of the jurisdiction under Section 34 of the Act."
It was ordered, "Any amounts deposited in this Court along with accruals shall be released to GRE after deducting the element of liquidated damages forthwith, and in any event within a period of four weeks from today."
The Court disposed the Petition in the aforesaid terms without imposing costs, and acknowledged, "Before parting, I must record my appreciation for the efforts of Learned Advocates and Learned Senior Counsel for both sides... This approach has been of immense assistance in allocation of judicial time."
Advocates Representing the Parties:
For the Petitioners: Mr. Zal Andhyarujina, Senior Advocate with Mr. Vijay Purohit, Ms. Ishani Khanwilkar, Ms. Nitika Bangera, and Ms. Niyati Bogayta, instructed by P & A Law Offices.
For the Respondents: Mr. Haresh Jagtiani, Senior Advocate with Mr. Suprabh Jain, Mr. Pushpvijay Kanoji, and Mr. Pranay Kamdar, instructed by Suprabh Jain, Advocate.
Case Title: Hindustan Petroleum Corporation Limited v. G.R. Engineering Private Limited
Neutral Citation: 2025: BHC-OS:8905
Case Number: Commercial Arbitration Petition No. 984 of 2018
Bench: Justice Somasekhar Sundaresan
[Read/Download order]
