Arbitral business-loss awards cannot be reviewed on merits under Section 34 absent public-policy violations.

The appellants, Union of India and others, challenged the order dated 15 March 2016 passed by the Fifth Additional District Judge, Jabalpur, in M.J.C. No. 05/2008, whereby their application under Section 34 of the Arbitration and Conciliation Act, 1996 was rejected.

The arbitral tribunal consisted of three arbitrators; the majority awarded compensation to the respondent-contractor under the head of “Business Loss with cascading effect due to non-issuance of certificate of completion,” while one arbitrator dissented.

The contract was executed on 25 February 2003 with an original completion period of six months, ending on 30 July 2003. Three extensions were thereafter granted, with the final extension up to 30 April 2004.

The majority found that completion was delayed due to defaults attributable to the Railway authorities, including non-availability of approved drawings for certain works. The claimant also extended the bank guarantee twice at the respondents’ request, up to 5 February 2005 and 5 August 2005.

Whether the majority award granting compensation for business loss or loss of profit was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 merely because the award was based on a majority opinion and was allegedly unsupported by adequate proof?

Whether the appellants established any ground under Section 34(2)(b)(i) or Section 34(2)(b)(ii), read with Explanation 1, warranting interference with the arbitral award?

Whether the High Court, in proceedings under Section 37, could reappreciate the merits or evidence underlying the arbitral tribunal’s determination?

The Court applied Section 34(2)(b)(i) and (ii) of the Arbitration and Conciliation Act, 1996, under which an arbitral award may be set aside if the subject matter is not arbitrable or if the award conflicts with the public policy of India.

Explanation 1 limits conflict with public policy to circumstances involving fraud or corruption or violation of Sections 75 or 81, contravention of the fundamental policy of Indian law, or conflict with the most basic notions of morality or justice.

Explanation 2 expressly provides that determining contravention of the fundamental policy of Indian law does not permit a review on the merits of the dispute.

The Court also considered the principle stated in Unibros v. All India Radio, 2023 SCC OnLine SC 1366, that loss of profit cannot be awarded merely by applying a structured formula and must be supported by proof of the relevant facts.

The Court found that the majority arbitrators had relied on the contractual history and material before them, including the repeated extensions, the delay attributable to the Railway authorities, the non-availability of approved drawings, and the documentary evidence produced by the claimant.

On these facts, the award of compensation for business loss was considered justified.

Although the appellants challenged the award of loss of profit and relied on Unibros, they did not establish that the award was based solely on an impermissible formula or that it suffered from fraud, corruption, violation of fundamental legal policy, or conflict with basic notions of morality or justice.

The Court held that the grounds under Section 34(2)(b)(i) and (ii) had neither been properly pleaded nor proved. In view of Explanation 2, the Court declined to undertake a merits-based reassessment of the tribunal’s factual conclusions.

It further observed that the appellants’ failure to properly contest the claim before the arbitral tribunal did not justify an appeal on frivolous grounds.

The majority award granting compensation for business loss was not shown to be contrary to the public policy of India, and the Court could not reappreciate the merits of the arbitral tribunal’s findings in the Section 37 proceedings.

The arbitration appeal was accordingly dismissed.