Prolongation damages require proof of actual loss or that such loss was impossible to establish.

Northern Railway invited tenders on 25 July 2019 for earthwork, construction of minor bridges, buildings and allied works in connection with doubling of the Roza–Sitapur section.

The respondent’s bid was accepted for ₹42,46,24,036.66, and the contract was executed on 14 February 2020.

Although completion was stipulated within eight months, the work was completed on 15 December 2021 after six extensions.

During execution, the contract value was enhanced pursuant to the second amendment and corrigendum.

The respondent invoked arbitration under Clause 64 of the General Conditions of Contract (“GCC”) and claimed ₹1,95,54,587 under various heads, including refunds of deductions arising from variation in quantities, prolongation-related losses and interest.

The arbitral tribunal awarded ₹65,73,261, with interest at 10.5% per annum from receipt of the award if unpaid within forty-five days.

The Union of India challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

The tribunal treated the claim concerning deductions under Schedule ‘B’ as an “excepted matter” and non-arbitrable, but adjudicated the deductions relating to Schedule ‘A’.

It also awarded compensation under claim no. 4 for prolongation of the contract and granted, under claim no. 6, an amount equivalent to interest as damages despite rejecting the claim for pendente lite interest.

1. Whether the tribunal could adjudicate the respondent’s claim for refund of deductions relating to Schedule ‘A’ items, or whether the claim constituted an “excepted matter” under Clause 63 of the GCC?

2. Whether compensation awarded under claim no. 4 for prolongation of the contract was legally sustainable in the absence of evidence of actual loss or a finding that such loss was impossible or difficult to prove?

3. Whether the tribunal could award, under claim no. 6, an amount as damages equivalent to interest after rejecting the respondent’s claim for pendente lite interest, and whether such relief exceeded the scope of the reference?

4. Whether the invalid portions of the arbitral award could be severed and set aside while preserving the valid portion concerning claim no. 1?

The Court applied Section 34 of the Arbitration and Conciliation Act, 1996, under which judicial interference with an arbitral award is limited, but is permissible where the award is patently illegal, contrary to public policy, or deals with matters beyond the scope of the submission; under Section 34(2)(a)(iv) and its proviso, a separable portion relating to matters beyond the reference may be set aside.

Clauses 42.2(i) and 42.4(6) of the GCC provided that, for Schedule of Rates (“SOR”) items, the 25% variation limit applied to the value of the SOR schedule as a whole, and not to individual items.

Section 73 of the Indian Contract Act, 1872 requires proof of actual loss or a showing that the loss was difficult or impossible to prove before damages may be awarded; Section 74 permits only reasonable compensation subject to the contractual ceiling.

The Court relied on Kailash Nath Associates v. DDA, (2015) 4 SCC 136, and State of Rajasthan v. Ferro Concrete Construction (P) Ltd., (2009) 12 SCC 1, for these principles.

NTPC Ltd. v. Mudajaya Corporation, Malaysia Berhad, 2026:DHC:3221, was distinguished because that case contained a finding that assessment of loss was difficult.

Finally, relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., (2025) 7 SCC 1, the Court held that a severable invalid part of an arbitral award may be set aside without invalidating the entire award.

As to claim no. 1, the Court held that the tribunal had correctly distinguished between Schedule ‘B’ deductions made in accordance with the contractual procedure and Schedule ‘A’ deductions made chapter-wise in violation of Clause 42.4(6).

Since the contract required the 25% variation limit for SOR items to be calculated by reference to the SOR schedule as a whole, the petitioner’s chapter-wise deductions were contrary to the agreed terms and could not be protected as an “excepted matter” under Clause 63.

The tribunal’s view was therefore plausible and did not warrant interference under Section 34.

With respect to claim no. 4, although the tribunal found that the delay was attributable to the petitioner—particularly because extensions were granted without imposing penalties—it awarded compensation for prolongation without evidence of actual loss.

The respondent had not established that loss was impossible or difficult to prove.

The Court rejected the attempt to characterise the award as merely a fixed-cost component under Clause 29.4, holding that Clause 29 dealt with price variation and did not provide a basis for prolongation damages.

The award consequently contravened Sections 73 and 74 of the Contract Act.

Regarding claim no. 6, the tribunal calculated interest, rejected the claim for pendente lite interest because of the contractual bar, and nevertheless awarded the same amount as damages.

This relief was beyond the claim submitted for adjudication and was therefore outside the scope of the arbitration agreement and reference.

The Court held the award on this claim to be patently illegal under Section 34(2)(a)(iv).

Since claims nos. 4 and 6 were severable from the valid determination on claim no. 1, only those portions were set aside in accordance with Gayatri Balasamy.

The challenge to claim no. 1 failed, and the tribunal’s award concerning refund of deductions relating to Schedule ‘A’ items was upheld.

The awards under claims nos. 4 and 6 were set aside: claim no. 4 was unsustainable for want of proof of actual loss, while claim no. 6 granted relief beyond the scope of the reference after pendente lite interest had been rejected.

The invalid portions were severed from the award, and the pending application was disposed of.