Nandi Infratech PVT. LTD. vs. R K Bararia & Anr.

Facts

M/s Nandi Infratech Pvt. Ltd. (NIPL), the appellant, filed an appeal under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996, challenging a judgment that rejected its application to set aside an arbitral award. The award, passed by a sole arbitrator, directed NIPL to pay M/s R.K. Bararia & Anr. (RKB), the respondent, an aggregate sum of ₹1,44,02,313/- plus future interest and costs. The dispute arose from a Work Order dated 18.04.2018 (VDF Contract) for Vacuumed Dewatering Flooring work, valued at ₹1,84,19,500/-, which was to be completed within 60 days. RKB claimed it executed the work but NIPL refused payment and insisted on using NIPL-supplied materials. NIPL terminated the contract on 09.12.2018, alleging RKB's failure to perform. RKB submitted bills totaling ₹1,45,05,142/-, claiming no payment was received, while NIPL claimed an ad-hoc payment of ₹6,00,000/- and debited materials worth ₹58,99,539.10.

Held

The Court held that the Arbitral Tribunal's award of compensation for overhead losses and loss of profit was vitiated by patent illegality. The Tribunal relied on Hudson's Formula for calculating overhead losses without sufficient evidence, which is contrary to the Supreme Court's decision in McDermott International (supra). The Court noted that Section 28(1)(a) mandates adherence to substantive Indian law, and Section 28(3) requires consideration of contract terms and trade usages. The Tribunal cannot act as amiable compositeur under Section 28(2) without express authorization. The award of compensation for claims 2 and 3 was based on a misconceived premise that Hudson's Formula is invariably applied, despite the absence of evidence. Therefore, the Arbitral Tribunal's decision to award compensation for prolongation of works and loss of profits was set aside. However, the Court found no merit in NIPL's challenge to the award of interest, considering the 14% interest rate not unreasonable and the future interest at 10% per annum requiring no interference. The award of costs was also upheld as RKB substantially succeeded. The appeal was partially allowed, setting aside the award for Claims No. 2 and 3.

Key Issues

1. To what amount is the claimant (RKB) entitled against Claim No. 1 of ₹83,98,080/- and GST on ₹1,43,05,610/- amounting to ₹25,75,010/-, as per Section 28(1)(a) and 28(3) of the Arbitration and Conciliation Act, 1996? 2. Whether the claimant is entitled to damages on account of prolongation of the contract, as per Section 28(1)(a) and 28(3) of the Arbitration and Conciliation Act, 1996? 3. Whether the claimant is entitled to loss of profit on the balance remaining work, as per Section 28(1)(a) and 28(3) of the Arbitration and Conciliation Act, 1996? Petitioner's (NIPL) contention: NIPL argued that the Arbitral Tribunal's award was vitiated by patent illegality, particularly concerning the award of compensation for overhead losses and loss of profit. NIPL contended that the Arbitrator relied on Hudson's Formula without sufficient evidence, which is contrary to the law laid down in McDermott International (supra). NIPL also challenged the award of interest as patently illegal. Respondent's (RKB) contention: RKB claimed entitlement to the amounts awarded by the Arbitral Tribunal, including compensation for work done, GST, damages for prolongation, and loss of profit. RKB also sought interest and costs.