An arbitral award is patently illegal when it ignores contractual terms and exceeds the reference.

IGNOU invited bids on 30 March 2009 for construction of the Vice-Chancellor’s office and VIP Guest House. Roshan Real Estates Pvt. Ltd. was awarded the contract for ₹10,67,38,025, with work scheduled from 19 September 2009 to 18 September 2010.

The respondent claimed completion on 30 November 2011, after which disputes arose concerning unpaid work, extra and deviated items, escalation, withheld amounts, taxes, materials, and prolongation-related losses.

Pursuant to the arbitration clause, the respondent raised seventeen claims. The arbitrator awarded, inter alia, ₹2,62,36,935 under Claim 1, ₹50,55,912 under Claim 2, ₹1,27,27,431 towards escalation under Claim 4, ₹62,00,000 under Claims 6 and 7, and ₹15,00,000 towards arbitration costs.

IGNOU challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, contending that the arbitrator had ignored contractual terms and material evidence, relied on material without disclosure, awarded amounts without adequate reasons, and travelled beyond the scope of reference.

1. Whether the arbitrator’s finding that the contractual work was completed on 30 November 2011 was contrary to the contract and the evidence on record?

2. Whether the award of amounts under Claim 1 for extra, deviated and substituted items was vitiated by reliance on undisclosed market enquiries, DSR rates and moderation formulas, and by absence of adequate reasons?

3. Whether the award under Claim 2 of the entire amount of the 12th RA Bill was contrary to the contractual provisions concerning security deposit, deductions and performance bank guarantee?

4. Whether the arbitrator could award damages for escalation under Sections 55 and 73 of the Contract Act after holding that Clause 10CC was inapplicable, when the respondent had claimed escalation under Clause 10CC and had neither pleaded nor proved actual loss?

5. Whether the joint consideration of Claims 6 and 7 violated Clause 25 of the contract requiring a separate award for each dispute or claim?

Section 34 of the Arbitration and Conciliation Act, 1996 permits interference where an award is patently illegal, perverse, contrary to public policy, deals with matters beyond the scope of submission, or denies a party a full opportunity to present its case under Section 34(2)(a)(iii) and (iv) and Section 34(2A).

Sections 18 and 24(3) require equal treatment of parties and communication of documents, information and expert material relied upon by the tribunal.

Section 31(3) requires an intelligible and adequately reasoned award, as explained in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.

An arbitral tribunal, being a creature of contract, must act within the contractual framework and cannot ignore or rewrite contractual terms, as held in PSA SICAL Terminals (P) Ltd. v. Board of Trustees, Ssangyong Engineering & Construction Co. Ltd. v. NHAI and Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum.

Damages under Sections 55 and 73 of the Contract Act require proof of breach and actual loss, or proof that such loss is incapable of precise proof; a formula may quantify an established loss but cannot substitute proof of loss, as recognised in Kailash Nath Associates v. DDA, State of Rajasthan v. Ferro Concrete Construction (P) Ltd. and McDermott International Inc. v. Burn Standard Co. Ltd.

The Court held that the finding of completion on 30 November 2011 ignored the respondent’s own pleadings and IGNOU’s contemporaneous letters identifying pending defects, incomplete fire-fighting work, non-submission of completion drawings and outstanding statutory approvals.

Clauses 8, 8B and 15 required completion certification and submission of specified plans and drawings; use of portions of the building under Clause 17 did not establish completion of the entire work.

In relation to Claim 1, the arbitrator rejected IGNOU’s rate analysis but relied on DSR-2007 rates, moderated rates and undisclosed market enquiries without giving IGNOU an opportunity to respond. The resulting awards for several items lacked a reasoned evidentiary basis and violated Sections 18, 24(3) and 31(3).

Regarding Claim 2, the arbitrator awarded the entire RA Bill despite Clause 1A permitting five per cent security-deposit deductions and Clause 1(ii) requiring extension and return of the performance guarantee only after the competent authority recorded completion.

As to Claim 4, the respondent had claimed escalation under Clause 10CC, which the arbitrator found inapplicable. The arbitrator nevertheless awarded damages under Sections 55 and 73 without an independent claim, proof of actual loss, or evidence that loss was incapable of proof, thereby exceeding the scope of reference under Section 34(2)(a)(iv).

The challenge to the joint consideration of Claims 6 and 7 failed because both claims arose from the same alleged prolongation and relied on common evidence; their joint consideration did not, by itself, violate Clause 25.

The Court also rejected the challenge to VAT and labour cess.

The challenge to the joint consideration of Claims 6 and 7 was rejected, and the VAT and labour-cess determination was not interfered with.

Nevertheless, finding that the award as a whole fell within the grounds of patent illegality, perversity and jurisdictional error under Section 34, the Court allowed the petition, set aside the impugned arbitral award, and disposed of all pending applications.