Supreme Court Partially Modifies Arbitration Award in Construction Dispute

The case of State of Haryana vs. M/s Shiv Shankar Construction Co. & Anr. concerns a contractual dispute arising from the strengthening and upgradation of a road in Haryana. The dispute led to arbitration proceedings, and the Supreme Court was asked to examine whether the arbitrator exceeded its jurisdiction in awarding damages beyond the scope of the claim. The Court ultimately modified the arbitral award by reducing the compensation granted beyond the valid time period.

Background of the Case

The dispute originated from a contract awarded to M/s Shiv Shankar Construction Co. for the maintenance and upgradation of a road from Palwal to Hasanpur. The contract was valued at Rs. 5,26,59,688/- and was set to last until May 31, 2010. The project’s specifications were based on a projected traffic intensity of 3,364 PCUs (Passenger Car Units) per day.

However, due to the closure of the Palwal-Aligarh Road on March 5, 2005, heavy traffic was diverted to the road under construction. This diversion led to an actual traffic intensity of 24,418 PCUs per day, significantly exceeding the design specifications and causing rapid deterioration of the road. As a result, the contractor claimed additional expenses for repairs and maintenance.

Legal Proceedings

When disputes arose over the additional expenses, the contractor invoked the arbitration clause and sought compensation under claim Nos. 1 and 8. The case proceeded as follows:

The High Court of Punjab and Haryana appointed a sole arbitrator.
The arbitrator awarded a total sum of Rs. 1,51,95,400/- for claim Nos. 1 and 8.
The State of Haryana challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed.
The State further appealed under Section 37 of the Act, but the High Court upheld the award.
The State then approached the Supreme Court, arguing that the arbitrator had exceeded its jurisdiction.

Arguments Before the Supreme Court

State of Haryana (Appellant)

The State contended that:

The arbitrator awarded Rs. 48,45,137/- in excess of the claim, which was restricted to Rs. 1,03,50,263/- in the contractor’s statement of claim.
The arbitrator exceeded the scope of reference by granting compensation for the period beyond January 2008, even though the diversion of traffic had ceased.
The arbitrator rewrote the contract by awarding compensation at Rs. 45,000/- per km per month instead of the agreed Rs. 1,000/- per km per month.

Contractor (Respondent)

The contractor argued:

The claim amount was not fixed, and additional expenditures were presented during hearings.
The traffic diversion continued until January 2008, justifying compensation for the increased maintenance costs.
The contract terms were drafted for normal traffic conditions, but the actual circumstances changed, warranting higher compensation.

Supreme Court’s Judgment

Excessive Award Beyond the Claim

The Court ruled that the arbitrator erred in awarding compensation exceeding the claimed amount. It held:

“The arbitrator cannot award an amount in excess of what was claimed unless the claim is formally modified.”

Limiting the Compensation Period

The Court found that traffic diversion had ceased by January 2008, yet the arbitrator awarded compensation until May 2010. It ruled:

“The award beyond January 2008 is perverse and unjustified. Compensation must be limited to the actual period of increased traffic.”

Rewriting the Contract Terms

The Court rejected the argument that the arbitrator had rewritten the contract by increasing the compensation rate, stating:

“The contract was based on estimated traffic. The increased burden due to unforeseen circumstances justifies deviation from the original rate.”

Final Judgment

The Court confirmed compensation up to January 2008.
It quashed the award for the period from February 2008 to May 2010.
The total payable amount was reduced accordingly.

Key Takeaways from the Judgment

Arbitrators cannot exceed claim amounts: Any award beyond the stated claim requires formal modification.
Compensation must align with factual timelines: Damages should only be awarded for the period during which the breach or additional burden occurred.
Commercial contracts require flexibility: Courts recognize changes in conditions that justify deviations from original contract rates.
Judicial review of arbitral awards is limited: Courts will not interfere unless awards are perverse or outside the reference scope.

Conclusion

This ruling underscores the importance of adhering to claim limits and factual circumstances in arbitration cases. By modifying the award rather than nullifying it entirely, the Supreme Court balanced fairness and contractual obligations, setting a precedent for future arbitration disputes.

Petitioner Name: State of Haryana.
Respondent Name: M/s Shiv Shankar Construction Co. & Anr..
Judgment By: Justice M. R. Shah, Justice B. V. Nagarathna.
Place Of Incident: Haryana.
Judgment Date: 14-12-2021.

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