Arbitration Dispute in Construction Contracts: Supreme Court’s Verdict on Award Calculation

The Supreme Court of India, in the case of Chandigarh Construction Co. Pvt. Ltd. v. State of Punjab & Anr., addressed a dispute related to an arbitration award under the Arbitration Act, 1940. The judgment focused on whether the award granted by the arbitrator was justified, especially concerning the premium rates applied to additional work performed by the contractor.

Background of the Case

The appellant, Chandigarh Construction Co. Pvt. Ltd., had entered into a contract with the State of Punjab on February 5, 1985, for the construction of the Sutlej-Yamuna Link Canal. The contract covered various tasks such as earthwork, drainage, and cement concrete lining for a specified reach of the canal.

The original contract amount was Rs. 59,86,732, with an estimated project cost of Rs. 31 lakhs. However, during execution, the contractor claimed that the scope of work increased significantly due to unforeseen factors such as sloughing of banks and variations in soil strata. The contractor requested additional payment, which was disputed by the State of Punjab, leading to arbitration.

Key Legal Issues

• Was the arbitration award correctly calculated based on the contract terms?
• Did the arbitrator err in awarding a 93.12% premium on additional work?
• Should the arbitration award have included a detailed reasoning?
• Did the High Court and the First Appellate Court err in modifying the award?

Arguments by the Parties

Arguments by the Appellant (Chandigarh Construction Co. Pvt. Ltd.)

• The contract allowed additional payment at a premium rate of 93.12% for extra work.
• The arbitrator correctly awarded the premium rate, and the First Appellate Court erred in rejecting it.
• The additional work performed due to unexpected site conditions justified the awarded amount.
• The arbitrator’s decision should not have been modified as it was based on contract provisions.

Arguments by the Respondent (State of Punjab)

• The arbitrator did not provide sufficient reasons for awarding the 93.12% premium.
• Clause 63 of the contract mandated that arbitration awards exceeding Rs. 1 lakh must include reasoning, which was missing.
• The actual agreed premium was 35.02%, as per communication dated January 5, 1987.
• The First Appellate Court correctly reduced the premium and interest rates.

Supreme Court’s Observations

The Supreme Court, comprising Justices R. Banumathi and A.S. Bopanna, reviewed the arbitration award, contract terms, and judicial precedents before delivering its verdict.

1. Lack of Reasoning in Arbitration Award

The Court emphasized that Clause 63 of the contract required arbitration awards exceeding Rs. 1 lakh to include reasons. The arbitrator’s award lacked detailed reasoning for granting a 93.12% premium. The Court stated:

“When the contract explicitly mandates that an arbitration award must include reasoning, failure to do so renders the award unsustainable.”

2. Excessive Premium on Additional Work

The Court found that the agreed premium for additional work was 35.02%, as per the communication dated January 5, 1987. The arbitrator’s decision to award a 93.12% premium was unjustified. The Court observed:

“The premium rate should be based on the contract terms and official communications. A unilateral increase to 93.12% is not supported by evidence.”

3. Modification Instead of Remand

The Court acknowledged that normally, an award lacking reasoning would be remanded for fresh consideration. However, given the long pendency of the case (since 1994), the Court decided to modify the award instead. The Court ruled:

“Since the project was executed decades ago, remanding the case for fresh arbitration would be impractical. The claim should be recalculated at the 35.02% premium.”

4. Interest on Awarded Amount

The original award granted 18% interest, which the First Appellate Court reduced to 12%. The Supreme Court upheld the reduction, stating:

“In the absence of an explicit contract clause specifying interest rates, a rate of 12% is reasonable.”

Final Judgment

The Supreme Court modified the arbitration award and ordered the following:

• The premium rate for additional work under Claims 2, 3, 8, and 12 is fixed at 35.02%.
• The awarded amount shall be recalculated based on this rate.
• Interest on the revised amount is set at 12% per annum.
• The respondent (State of Punjab) must pay the revised amount within six weeks, failing which it will accrue interest at 18% per annum.

Key Takeaways

• Arbitration awards must include reasons when required by contract.
• Contractual premium rates cannot be arbitrarily increased by the arbitrator.
• Long-pending disputes may be resolved through modification rather than remand.
• Interest rates in arbitration awards should be reasonable and based on contract terms.

Conclusion

The Supreme Court’s ruling in Chandigarh Construction Co. Pvt. Ltd. v. State of Punjab & Anr. reinforces the importance of contractual compliance in arbitration awards. By modifying the award instead of remanding it, the Court ensured a fair and efficient resolution of a long-pending dispute while upholding contractual obligations.

Petitioner Name: Chandigarh Construction Co. Pvt. Ltd..
Respondent Name: State of Punjab & Anr..
Judgment By: Justice R. Banumathi, Justice A.S. Bopanna.
Place Of Incident: Punjab.
Judgment Date: 14-02-2020.

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