Refund Of Liquidated Damages Imposed By Party Responsible For Delay In Work Can't Be Interfered With U/S 37 Of Arbitration Act: Rajasthan High Court

Brief Facts:

Rajasthan Urban Infrastructures Development Project (Appellant) issued a work order to the respondent for widening and strengthening Beawar Road, Ajmer, under a contract dated 03.02.2003. The work, scheduled for completion by 02.02.2004, was completed on 10.05.2005. Disputes arising during execution were referred to arbitration.

On 30.08.2010, the arbitrator awarded Rs.41,54,511/- to the respondent, Rs.1,01,500/- as arbitration costs, interest of Rs.15,87,957/- under Section 31(7)(a) of the Arbitration Act, and 18% p.a. under Section 31(7)(b) from the date of award until payment.

The appellant's application under Section 34 of the Arbitration Act was dismissed by the Commercial Court on 11.07.2019.

Against the above order, the present appeal under section 37 of the Arbitration Act has been filed.

Contentions:

The appellant submitted that the arbitrator committed errors in passing the award by disregarding the terms of the contract. The interest amounting to Rs.1,37,400/-, charged due to the delay in adjustment of the mobilization advance, was wrongly set aside by the arbitrator.

It was further submitted that the recovery of excise duty was in strict consonance with Clause 14.5 of the contract and, therefore, could not have been disallowed. Additionally, the deduction made for non-submission of the required video cassette and relevant documents was justified and in line with the contractual obligations of the respondent.

It was also argued that the arbitrator exceeded his jurisdiction by granting an escalated price contrary to Clause 41 of the agreement.

Lastly, it was submitted that the imposition of liquidated damages, despite granting an extension of time for completion of work, was valid and appropriate under the terms of the contract.

Per contra, the Respondent submitted that the exemption of Light Diesel Oil (LDO) was availed as per the law. The excise department had neither objected nor initiated proceedings against exemption claimed, yet the appellant recovered the excise duty on LDO.

It was further submitted that the claim for escalation price is objected to relying upon clause 41 of the contract which was deleted as a whole.

Observations:

The court at the outset discussed the scope of interference under section 34 and 37 of the Arbitration Act and observed that sub-section 2A in Section 34 of the Arbitration Act, was inserted wherein the ground of patent illegality on the face of award was added as a ground for interference in the award. But the proviso thereto stipulates that erroneous application of law or on re-appreciation of evidence the award cannot be set-aside.

The Supreme Court in Punjab State Civil Supplies Corpo ration Limited & Anr. vs. M/s Sanman Rice Mills & Ors.(2024) held that the role of the Appellate court under section 37 of the Arbitration Act is not to determine whether the arbitral tribunal's decision is right or wrong, but merely to ensure that the decision under Section 34 was rendered within the statutory framework. The appellate court may interfere only if the court under Section 34 either overstepped its jurisdiction or failed to exercise it altogether. This supervisory power is comparable to the revisional jurisdiction of civil courts.

The Apex Court further held that therefore, an arbitral award cannot be set aside simply because an alternative view, even if arguably better, exists; it must be shown that the award meets the specific grounds for interference outlined in the Act.

Based on the above, the court noted that as per Clause 44 of the contract, the appellant had extended interest-free mobilization advances to the respondent, which were to be repaid within ten months from the commencement date of the work through deductions from interim payments.

It further noted that upon analyzing the clause, the arbitrator concluded that although the appellant had the liberty to recover the advance through deductions from interim bills, it failed to exercise this option. Notably, the respondent, by a letter dated 03.12.2003, had requested that 90% of the advance be deducted in November 2003 and the remaining 10% in December 2003. It was also recorded as a finding of fact that the 8th running bill was submitted on 29.11.2003.

Having noted the facts of the case, the court held that the first contention raised by the appellant's counsel is without merit therefore rejected.

The court further observed that the question of exemption on LDO falls within the jurisdiction of the excise department. The respondent had sought such exemption via a letter dated 17.04.2004 to the Assistant Commissioner, and there is no evidence that the department objected to the claim. Hence, no ground is made out to interfere with the arbitrator's direction to refund the recovered excise duty.

It further said that even after deletion of clause 41 the claim for price adjustment could be made under clause 38. Moreover, the appellant itself had allowed the partial claim for price escalation. The claim awarded by the arbitrator was upheld.

The court concluded that the appellant imposed liquidated damages while granting an extension to complete the work. However, since 458 out of 463 days of delay were attributable to the appellant, the arbitrator rightly set aside the imposition of such damages.

Accordingly, the present appeal was dismissed.

Case Title: Rajasthan Urban Infrastructures Development Project Versus M/s National Builders

Case Number: Civil Miscellaneous Appeal No.5151/2019

Citation: 2025 LiveLaw (Raj) 176

Judgment Date: 01/05/2025

For Appellant(s) : : Mr. R. P. Garg with Mr. Vikram Yadav

For Respondent(s) Mr. Sunil Nath with Ms. Shruti Jain

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