An arbitral award that disregards the contract and grants unsupported loss-of-profit damages is patently illegal.

The appellant entered into an MOU with the respondent, DSDA, to construct a market complex. The MOU required the appellant to build at its own cost and recover construction expenditure from prospective stall lessees, but the per-stall rates were left blank.

DSDA stopped and cancelled the work in 2005, after which the appellant invoked arbitration. The arbitrator found DSDA in breach and awarded damages, including loss of expected profit, in addition to other sums; an interim award of Rs. 15 lakh for unfinished work had been made by consent and paid.

DSDA’s Section 34 challenge succeeded before the District Judge, who set aside the award on public-policy grounds. The appellant appealed under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996.

1. Whether the District Judge’s decision to set aside the award was sustainable under the limited scope of review under Section 34, as applicable to the challenge.

2. Whether the award was patently illegal or perverse because it failed to address the MOU’s payment mechanism and awarded damages, including loss of profit, without adequate evidentiary support.

3. Whether the award could be partially severed or required to be set aside in its entirety.

The Court applied Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, and Section 28(3) as it stood when DSDA filed its Section 34 application in 2014. Under that pre-amendment regime, an award could be set aside for conflict with the public policy of India, including patent illegality; patent illegality could arise from contravention of substantive law or the Act, disregard of the contract under Section 28(3), or a finding based on no evidence or one that ignored vital evidence.

A Section 34 court does not sit in appeal, and a plausible arbitral view on evidence is not to be disturbed; Section 37 review is similarly confined (Associate Builders v. Delhi Development Authority; MMTC Ltd. v. Vedanta Ltd.).

An award must give intelligible and adequate reasons (Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.).

Damages under Section 73 of the Contract Act, 1872 compensate loss naturally arising from breach, not impose a penalty; loss-of-profit claims require material supporting the likelihood and amount of the claimed profit (Kailash Nath Associates v. Delhi Development Authority; Unibros v. All India Radio; Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corporation Ltd.).

A.T. Brij Paul Singh v. State of Gujarat does not prescribe an automatic 15% measure of loss of profit for every terminated works contract.

The District Judge impermissibly reassessed the expert evidence and relied on documents that, on the appellant’s unrebutted submission, were not before the arbitrator; the judgment also failed to identify the applicable public-policy ground or the legal provision violated.

Nevertheless, the appellate court could consider grounds raised before the Section 34 court but not decided there.

The award treated the MOU as a conventional works contract with a price payable by DSDA, without addressing its terms requiring the appellant to recover costs from prospective lessees at rates left blank; this disregarded the contract and rendered the award legally deficient.

The loss-of-profit award lacked evidence of stall rates, demand, or the appellant’s likely margin, and the arbitrator did not find that the unexecuted work could lawfully have been completed.

The Court also identified unsupported presumed awards, inconsistent calculations, and a mismatch between the arbitrator’s findings and operative directions.

Because the components were not separable without recomputation on the merits, the award could not be partially preserved.

It set aside both the District Judge’s order and the arbitral award, finding the award inseverable.

The consent interim award of Rs. 15 lakh, already paid and not challenged under Section 34, was unaffected; the appeal was disposed of with no order as to costs.