This petition under Section 34 of the Arbitration and Conciliation Act, 1996 was filed by the Union of India (Northern Railway) to challenge an arbitral award dated December 4, 2024. The underlying dispute arose from a railway doubling contract awarded to the respondent for earth filling, construction of minor bridges, and service buildings between Roza and Jahanikhera. Though the work was completed following multiple extensions, disputes relating to deductions, price variation, and prolongation costs led to arbitration. The arbitral tribunal partially allowed the respondent’s claims, awarding a total sum of Rs. 65,73,261/- along with interest.
Upon reviewing the challenge, the High Court of Delhi partly allowed the petition. The court upheld the tribunal’s findings regarding the refund of wrongful deductions under Schedule ‘A’ items (Claim No. 1) and minor calculations, noting that the petitioner violated specific contractual thresholds by making chapter-wise deductions instead of cumulative schedule-wide assessments. However, the High Court set aside the damages awarded under Claim No. 4 (prolongation losses) and Claim No. 6 (interest recast as damages). The court held that awarding damages without evidence of actual loss or proof that such loss was impossible to prove violates Section 73 of the Indian Contract Act. Utilizing the doctrine of severability under Section 34(2)(a)(iv) and Supreme Court precedent, the invalid portions were cleanly severed and set aside while preserving the valid parts.
- Contractual Background and Dispute Origin: Northern Railway awarded a contract for earth filling and construction works in connection with the Roza-Sitapur doubling project. The project faced delays, and after six extensions, work was completed on December 15, 2021. The respondent subsequently invoked arbitration under Clause 64 of the General Conditions of Contract (GCC).
- Tribunal’s Award: The arbitral tribunal awarded the respondent Rs. 65,73,261/- in full settlement, which included:
- Claim No. 1: 12,31,922/- for wrong application of tender conditions on USSOR items (Schedule ‘A’).
- Claim No. 3: 6,52,551/- for wrong calculation of Price Variation Clause (PVC).
- Claim No. 4: 36,88,921/- as damages for contract prolongation.
- Claim No. 6: 9,99,867/- awarded as damages in lieu of pre-completion interest.
- Petitioner’s Key Contentions:
- The tribunal erred in granting a refund for Schedule ‘A’ deductions, which petitioner argued fell under ‘excepted matters’ or correct practices.
- The award of damages for prolongation (Claim No. 4) was illegal and unsupported by any proof of actual loss, violating Section 73 of the Contract Act.
- Awarding interest as damages under Claim No. 6—after rejecting standard interest—was completely outside the scope of submission and contract terms.
- Court’s Analysis and Findings:
- Schedule ‘A’ Deductions (Claim No. 1): The court found the tribunal’s view completely plausible. Under GCC Clause 42.4(6), the 25% variation limit for Schedule-A SOR items applies to the schedule as a whole, not chapter-wise. The petitioner’s chapter-wise deductions violated the contract terms, precluding them from invoking the ‘excepted matter’ shield.
- Prolongation Damages (Claim No. 4): Citing Supreme Court benchmarks in Kailash Nath Associates and Ferro Concrete Construction, the court emphasized that proof of actual loss (or impossibility thereof) is a sine qua non for awarding damages under Section 73 of the Contract Act. Because the respondent adduced no evidence of actual loss, Claim No. 4 was patently illegal.
- Interest as Damages (Claim No. 6): The court noted that the tribunal rejected interest per contract terms but paradoxically awarded the same amount as damages, rendering the relief beyond the scope of arbitration and patently illegal.
- Final Order: Invoking the power of severability clarified in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., the High Court upheld Claim Nos. 1 and 3, but severed and set aside Claim Nos. 4 and 6 due to patent illegality and contravention of the Contract Act, thereby partly allowing the petition.
2026 DHC 6217
Union of India Through Dy. Chief Engineer Construction Moradabad v. M/s Pragati Construction Consultants (D.O.J. 03.08.2026)
