₹16.64-crore arbitral award set aside after contractor raised ₹13.77-lakh claim to ₹14.58 crore post-hearing without evidence; Patna High Court finds patent illegality

East Central Railway issued Tender Notice No. 28 of 2008–09 for earthwork, construction of minor bridges and allied works between Athmalgola and Barh.

The respondent’s tender was accepted through a Letter of Acceptance dated 27 April 2009, for a total contract value of approximately Rs. 6.95 crore, with the work to be completed within twelve months.

The Railways alleged that the respondent neither furnished the required performance guarantee nor commenced the work adequately, despite repeated notices, and ultimately terminated the arrangement under Clause 62 of the General Conditions of Contract.

The dispute was referred to arbitration.

The sole arbitrator awarded Rs. 16,64,34,132 with 12% annual interest, besides arbitration and secretarial charges, in favour of the respondent on 18 March 2023.

The Railways’ application under Section 34 of the Arbitration and Conciliation Act, 1996 was dismissed by the Commercial Court on 20 February 2026.

The Court applied Sections 18 and 24(3) of the Arbitration and Conciliation Act, 1996, which require equal treatment of parties, a full opportunity to present one’s case, and communication of statements and documents relied upon by the tribunal.

Section 31(3) requires an arbitral award to state the reasons on which it is based, unless the parties have agreed otherwise.

Under Sections 34(2)(a)(iii), 34(2)(b) and 34(2A), an award may be set aside for denial of a fair opportunity, conflict with the fundamental policy of Indian law or public policy, and patent illegality appearing on the face of the award.

The Court relied on Som Datt Builders Ltd. v. State of Kerala, (2009) 10 SCC 259, for the mandatory requirement of reasons; Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, for natural justice and fair opportunity under Section 34; Associate Builders v. DDA, (2015) 3 SCC 49, for perversity and fundamental policy; and Unibros v. All India Radio, 2023 SCC OnLine SC 1366, for the principle that damages and loss of profit cannot be awarded without credible evidence of actual loss.

The Court also applied Section 73 of the Indian Contract Act, 1872, which requires proof of loss before damages can be granted.

The High Court found that the arbitrator relied on an enhanced and newly particularised claim annexed to the claimant’s written submissions after the arbitral hearing had concluded.

The Railways were neither served with the revised claim nor given an opportunity to rebut it, contrary to Sections 18 and 24(3) of the Act.

The increase of the machinery-hire claim from Rs. 13,77,000 to Rs. 14,58,00,000 was not a mere clarification but a material enlargement of the claim without amendment of pleadings.

Further, the claimant produced no invoices, hiring agreements, payment records, wage records, or other evidence to establish that the machinery, labour and alleged expenses had actually been incurred.

The arbitrator nevertheless awarded Rs. 14,58,00,000 under that head and granted substantial damages without explaining the evidentiary or contractual basis for the calculation.

Such findings were unsupported by evidence, ignored material aspects of the record, and were therefore perverse and patently illegal under Section 34(2A).

The Commercial Court failed to examine these specific objections and incorrectly treated them as an attempt to invite a merits review.

The award consequently suffered from perversity, legal infirmity and patent illegality on its face.

The Court set aside the Commercial Court’s order dated 20 February 2026, allowed the Railways’ Section 34 application in Miscellaneous (Arbitration) Case No. 66 of 2023, and set aside the arbitral award dated 18 March 2023 in its entirety.

The commercial appeal was accordingly allowed.