Section 34 permits setting aside arbitral awards contrary to binding Supreme Court interpretations of contractual terms.

NHAI awarded OSE a contract for rehabilitation and four-laning of NH-25 under Contract Package EW-II (MP/UP-1), pursuant to a Letter of Acceptance dated 27 July 2005 and Contract Agreement dated 29 September 2005.

The contract commenced on 11 October 2005 and was completed on 10 April 2009, approximately one year beyond the scheduled completion date.

OSE raised four claims before a three-member Arbitral Tribunal, including claims for price adjustment based on the contractual variables x, y and z (Claim No. 2), and for exclusion of an additional 7.75% rebate from the price-adjustment computation (Claim No. 3).

The Tribunal unanimously allowed Claim No. 2 and, by majority, allowed Claim No. 3.

NHAI challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. Its challenge to Claims 1 and 4 was subsequently withdrawn, leaving Claims 2 and 3, together with consequential interest, for determination.

Whether the Tribunal’s interpretation of Clause 70.3 of the Conditions of Particular Application, permitting transportation charges, local taxes and allocable overheads to be included while determining the variables x, y and z for price adjustment, was contrary to the contractual scheme and liable to be set aside under Section 34.

Whether the additional 7.75% rebate offered by OSE applied only to the overall bid/contract price or also reduced the BOQ rates forming the basis for price adjustment under Clause 70.

Whether the Tribunal’s award of pre-reference and pendente lite compound interest under Clause 60.8 was legally unsustainable, and whether OSE’s acceptance of interim payment certificates barred or undermined Claim No. 3 on grounds of waiver, acquiescence or limitation.

The Court applied Sections 28(3), 34(2)(b)(ii) and 34(2A) of the Arbitration and Conciliation Act, 1996, holding that an arbitral tribunal must decide disputes in accordance with the contractual terms, while a Section 34 court cannot act as an appellate court or substitute its interpretation merely because another view is preferable.

Relying on Associate Builders v. DDA, Ssangyong Engineering & Construction Co. Ltd. v. NHAI, Delhi Airport Metro Express (P) Ltd. v. DMRC, OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions (India) (P) Ltd. and Gayatri Balasamy v. ISG Novasoft Technologies Ltd., the Court reiterated that interference is warranted only for patent illegality, perversity, jurisdictional error or conflict with public policy, subject to the limited corrective powers recognised in Gayatri Balasamy.

Under Article 141, the Court followed NHAI v. Progressive-MVR (JV), which held that Clause 70’s price-adjustment mechanism operates with reference to base prices and actual material composition, not current landed costs including freight, taxes and overheads.

For Claim No. 3, the Court applied the principle that a reasoned and reasonably possible contractual interpretation by an arbitral tribunal is not open to correction under Section 34, relying additionally on NHAI v. Oriental Structural Engineers Pvt. Ltd. and P.R. Shah v. B.H.H. Securities.

The Court also relied on NHAI v. Ssangyong Engineering & Construction Co. Ltd. for the principle that interim payment certificates are interim in nature and do not necessarily constitute waiver or final abandonment of contractual claims.

As to Claim No. 2, the Tribunal had treated the general definition of “cost” in Clause 1.1(g)(i) of the GCC as controlling the phrase “actual percentage of cost” in Clause 70.3, thereby including freight, taxes and overheads in x, y and z.

The Court held that this interpretation was inconsistent with the self-contained structure of Clause 70 as authoritatively explained in Progressive-MVR: “actual” referred to the actual proportion of specified materials used, while valuation remained anchored to the contractual base-price mechanism.

Loading landed costs into the variables could also cause the residual component for “Other Materials” to become negative, contrary to the formula’s design.

The Tribunal had therefore departed from the contractual methodology, amounting to patent illegality under Section 34(2A).

As to Claim No. 3, the Court distinguished between an impermissible departure from the contract and a permissible process of contractual construction.

The Tribunal had considered the bid, LOA, Contract Agreement, document hierarchy and Clause 70, and reasoned that the 5% rebate applied to quoted rates whereas the additional 7.75% rebate was offered over the overall quoted bid price.

The Division Bench’s decision concerning materially identical contractual provisions further supported treating the issue as one of permissible interpretation rather than jurisdictional error.

Acceptance of IPCs did not, by itself, establish waiver or limitation because IPCs were interim and the claim could be raised subsequently.

The contractual provision for 10% compound interest was also upheld, particularly as NHAI had accepted the same interest treatment for Claim No. 1 and the interest was traceable to Clause 60.8 and the Appendix to Bid.

The award of Rs. 4,05,95,805/- under Claim No. 2, together with consequential interest, was set aside because the Tribunal’s methodology conflicted with Clause 70 as interpreted by the Supreme Court in Progressive-MVR.

The award of Rs. 7,87,76,490/- under Claim No. 3, including the pre-reference, pendente lite and future interest awarded thereon, was upheld because the Tribunal had adopted a reasoned and legally permissible interpretation that the additional 7.75% rebate did not apply to price-adjustment amounts.

The remaining findings and directions in the award were left undisturbed; the parties were directed to bear their own costs, and pending applications were disposed of.