Rajasthan High Court sets aside arbitral award for deciding disputed claims without framing issues or recording evidence

The appellant-State issued a work order valued at ₹6,35,43,815 to M/s Trimurti Construction on 15.05.2013.

The contractor alleged that local residents and villagers obstructed commencement of the work, causing labour, staff, and machinery to remain idle; the work was subsequently withdrawn by the appellant.

The contractor raised several claims before the Arbitral Tribunal, including ₹12,49,665 for idling of labour and staff and ₹19,56,000 for idling of machinery.

The appellant contested the claims, specifically denying the engagement of the alleged labour and disputing the contractor’s assertions regarding men and machinery at the site; it also relied on communications stating that the land dispute had to be resolved before commencement of work.

The Tribunal allowed the contractor’s claims without framing contested issues, recording evidence, or obtaining the appellant’s admission or denial of the claimant’s documents.

The appellant’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996 was dismissed by the Commercial Court, Ajmer, on 03.06.2023, leading to the present appeal.

1. Whether an arbitral award based solely on pleadings, without framing disputed issues or recording and evaluating oral or documentary evidence, violates the principles of natural justice and is in conflict with the public policy of India under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996?

2. Whether the Commercial Court erred in dismissing the Section 34 challenge on the ground that the court could not re-appreciate evidence, despite the appellant having raised specific factual disputes before the Tribunal?

3. Whether the arbitral award granting the contractor’s claims could be sustained in the absence of adequate evidence substantiating the alleged loss and claims?

Section 34(2)(b) of the Arbitration and Conciliation Act, 1996 permits setting aside an arbitral award where it is in conflict with the public policy of India, including where it contravenes the fundamental policy of Indian law or the most basic notions of morality or justice; Explanation 2 clarifies that this ground does not ordinarily permit a review on the merits.

In ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, the Supreme Court held that an award patently violating statutory provisions or the public interest may be contrary to public policy.

Bharat Coking Coal Ltd. v. L.K. Ahuja, (2004) 5 SCC 109, establishes that claims for loss of profit or similar monetary loss require adequate supporting evidence and cannot be granted merely on assertion.

In M/s Unibros v. All India Radio, 2023 SCC OnLine SC 1366, the Supreme Court held that an award based on no evidence and therefore perverse may constitute patent illegality and conflict with the public policy of India under Section 34(2)(b).

The Court further applied the principle that adjudication of seriously disputed facts without identifying the issues, allowing a fair opportunity to lead evidence, and evaluating the evidence violates natural justice and fundamental principles of justice.

The appellant had raised specific and material factual disputes concerning whether labour, staff, and machinery were actually deployed at the site and remained idle, whereas the contractor claimed substantial compensation under those heads.

These disputes could not properly be resolved merely from the contractor’s pleadings.

Nevertheless, the Tribunal neither framed the contested questions of fact nor recorded evidence or secured the appellant’s admission or denial of the supporting documents.

Consequently, the award was founded substantially on the claim petition rather than a procedurally fair determination supported by evidence.

This omission amounted to a denial of natural justice and rendered the award contrary to the fundamental policy of Indian law and the basic notions of justice under Section 34(2)(b).

The Commercial Court incorrectly treated the appellant’s challenge as an impermissible request for re-appreciation of evidence; the High Court held that examining whether disputed claims were adjudicated through a fair procedure and supported by evidence was a permissible Section 34 review, not a re-trial on merits.

It held that the Tribunal’s failure to frame issues, record evidence, and fairly adjudicate the disputed factual claims rendered the award contrary to public policy and principles of natural justice under Section 34(2)(b).

The appeal was allowed; the Commercial Court’s order dated 03.06.2023 dismissing the Section 34 application was set aside, and the arbitral award dated 11.03.2016 in favour of M/s Trimurti Construction was also set aside.

The stay application and all pending applications were disposed of accordingly.