Supreme Court Restores Arbitration Award in Contract Dispute with NHAI

The Supreme Court of India recently delivered a crucial ruling in Somdatt Builders – NCC – NEC (JV) v. National Highways Authority of India (NHAI), addressing key issues related to arbitration, contract interpretation, and the powers of courts to interfere with arbitral awards. The case revolved around a contractual dispute regarding a four-lane highway construction project on NH-2, involving substantial cost escalations and technical disagreements over the applicability of revised rates for increased material quantities.

The appeal arose from a decision of the Delhi High Court, which had set aside an arbitral award favoring the contractor and ruled in favor of NHAI. The Supreme Court, however, overturned the High Court’s judgment and reinstated the arbitral award, reaffirming the principle that judicial intervention in arbitration must be minimal.

Background of the Case

The case originated from a construction contract awarded by NHAI to the appellant for upgrading a section of National Highway-2 (NH-2) in Uttar Pradesh under World Bank loan assistance. The contract was a unit rate contract with a Bill of Quantities (BOQ) specifying estimated material quantities.

Key Dispute

The dispute centered around BOQ Item No. 7.07, which involved reinforced earth (RE) structures, including geogrid material.
The appellant claimed that NHAI had provided incorrect quantity estimates for geogrid material.
When actual execution revealed a significant increase in material requirements, NHAI sought to renegotiate the rates under Clause 52.2 of the contract.
The contractor contended that since the design remained unchanged, the BOQ rates should apply to the increased quantity.

Legal Proceedings

Dispute Resolution Board (DRB) Decision

The matter was first referred to a Dispute Review Board (DRB), which ruled in favor of the contractor, stating that:

The increase in geogrid quantity was not due to a change in design but was an automatic increase necessary to complete the project.
The BOQ rate should apply for the entire quantity.

Arbitration Tribunal Award

NHAI disagreed with the DRB’s recommendation and invoked arbitration. The three-member Arbitral Tribunal, comprised of technical experts, ruled in a 2:1 decision:

The increase in material quantity did not amount to a contractual “variation” requiring rate renegotiation.
Clause 52.2 did not apply since no change in design was involved.
NHAI was directed to pay the contractor at the originally agreed BOQ rates.

High Court Decision

NHAI challenged the arbitration award under Section 34 of the Arbitration and Conciliation Act, 1996. A single judge of the Delhi High Court upheld the award, affirming that the Arbitral Tribunal’s decision was reasonable and within its jurisdiction.

However, on appeal under Section 37, a Division Bench of the High Court set aside the arbitral award, holding that:

Variations in material quantity, whether instructed or not, should be subject to renegotiation.
The arbitrators’ interpretation of contract clauses was unreasonable.
The arbitral award was against public policy as it unfairly burdened NHAI.

Supreme Court’s Judgment

Petitioner’s Arguments

The contractor argued that:

The High Court exceeded its jurisdiction by interfering with the arbitral award.
The DRB and Arbitral Tribunal had correctly interpreted the contract.
Courts should not re-evaluate contractual terms unless the arbitrators’ view was completely irrational.

Respondent’s Arguments

NHAI contended that:

Clause 52.2 of the contract allowed renegotiation of rates for increased material quantities.
The Arbitral Tribunal failed to appreciate that geogrid requirements increased by over 300%.
The arbitrators’ decision was perverse and against public interest.

Supreme Court’s Observations

The Supreme Court, comprising Justices Abhay S. Oka and Ujjal Bhuyan, held that:

The Division Bench of the High Court misinterpreted the contract by treating all quantity increases as “variations.”
The arbitrators’ interpretation was plausible and based on expert technical analysis.
Judicial interference in arbitration should be minimal, as reiterated in previous judgments such as MMTC Ltd. v. Vedanta Ltd. and Ssangyong Engineering v. NHAI.
The High Court wrongly invoked the “public policy” argument, which applies only to cases of fundamental legal violations.

Final Ruling

The Supreme Court allowed the appeal, restoring the original arbitration award and setting aside the High Court’s ruling.

The arbitral award dated 03.06.2005 was reinstated.
The contractor was entitled to payment at BOQ rates for the entire geogrid quantity.
NHAI’s arguments for renegotiation of rates were dismissed.

Implications of the Judgment

This ruling reinforces the principle that courts should not interfere with arbitral awards unless they are manifestly illegal or violate fundamental legal principles. The judgment also clarifies the interpretation of contract clauses related to material quantity increases and reinforces the binding nature of arbitration in commercial disputes.

Petitioner Name: Somdatt Builders – NCC – NEC (JV).
Respondent Name: National Highways Authority of India.
Judgment By: Justice Abhay S. Oka, Justice Ujjal Bhuyan.
Place Of Incident: Kanpur, Uttar Pradesh.
Judgment Date: 27-01-2025.

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