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In the recent case of Satluj Jal Vidyut Nigam, the Hon’ble High Court of Delhi held that an arbitrator cannot decide a case on the basis of a mathematical calculation which is not supported by evidence. The judgment in this case invoked the ever-growing debate on the importance of adaptation of a reasonable duty of care by the arbitrators in deciding a matter, especially one pertaining to a construction dispute, where stakes are undoubtedly very high.

The role of an Arbitrator has been set in law as that of aiding the parties in reaching an amicable resolution of their disputes, thus, the repeated stand of the Hon’ble Courts coupled with a narrow set of circumstances for challenging arbitral awards is a well-thought-out measure of upholding the independence of arbitration proceedings. However, this independence is subject to a number of responsibilities which are a must for an Arbitration Tribunal and the ignorance of which may lead to a patently illegal award.

Brief Facts of the Case

The case pertained to a dispute in relation to the construction of civil works of pressure shafts and power house complex of the ‘Nathpa Jhakri Hydro-Electric project’, in relation to which the parties entered into a contract. Such contract included a Clause 70 which dealt with price adjustment and laid down an arithmetical formula for adjustment of any changes in the costs of labor during the execution of the work.

It was the case of the Respondents/Claimants that during the course of execution of the contract, there was an unforeseen quantum increase in the minimum wages brought in by a series of changes in law. In view of this, it was alleged that the Respondents/Claimants were entitled to the recovery of the extra expenditure incurred for the completion of the contract, which, as per the calculation provided by the Respondent/Claimant, could not be calculated through the formula provided under Clause 70.

In furtherance, the aforementioned party provided the Arbitrator with a slightly amended formula, as per which the total ‘actually paid’ labor cost was coming out to be Rs. 66.03 crores, thereby essentially increasing the claim of the Respondents/Claimants to 77.26 crores, after the interest was added. In terms of the evidence for such additional costs, the Respondent/Claimants submitted that documentary evidence of all the claimed costs could not be produced owing to the fact that a certain amount of work was also executed through sub-contracts, workshops and other sundry workers. However, the Respondents/Claimants were able to submit a few of the muster rolls, which provided evidence of the payment of only Rs. 17.47 crores out of the total claimed additional costs.

It was also alleged by the Respondent/ Claimant that their price escalation formula was also premised on their bid, according to which, the labor component in the breakdown of the costs showcased by them was provided to the tune of 10% of the total work done under the contract.

It is needful to note that while the Tribunal refused to accept the amendment to the formula and held that the basis of the claims to additional costs could not be sustained, two out of the three Arbitrators forming the Tribunal went on to pass an award for the entire amount of 77.26 crores, by justifying the same with the fact that out of the claim, Rs. 35.62 crores was in-built in the BoQ item rates, Rs. 49.83 crores was recovered and Rs. 27.42 crores was occasioned due to the revision of minimum wages. Aggrieved by the said award, the Petitioner approached the Hon’ble High Court of Delhi under Section 34 of the Arbitration and Conciliation Act, 1996.

The Petitioner’s Case

The bone of contention, as raised by the Petitioner lied in the fact that the computation which was placed forth by the Respondent/Claimant failed to take the price escalation amount of Rs.43.19 crores, which was already paid by the Petitioner. Furthermore, it was also alleged that there was an utter absence of any valid grounds or evidence in relation to the escalation costs claimed to have been incurred by the Respondent/ Claimant, for making the payments of skilled and other labors, wherein the evidence submitted only provided for a payment of Rs. 17.47 crores.

Thus, the Petitioner prayed for the setting aside of the impugned arbitral award on the mere grounds of a complete lack of evidence and the failure of the majority bench to comply with their duty of care.

Decision of the Case

In the landmark case of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. 2 , the Hon’ble Supreme Court took a detailed study of the term ‘public policy of India’ as provided under Section 34, and observed that,

“The award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.
….
Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.”

The Hon’ble High Court of Delhi undertook a detailed study of the aforementioned decision alongwith certain other judicial pronouncements in this matter and acknowledged the fact that the award called for an interference by the Court on account of the patent illegality going to its core. It was held that the view taken by the majority bench of the Arbitral Tribunal, was not based out of the contract or on the basis of any available record or evidence. While the general rule limits interference in the award in cases where the arbitrator in question adopts either one of the many possible interpretations to contractual provisions, the Hon’ble Court held that in the present case, the reasoning provided by the Tribunal could not be a reasonable interpretation.

Owing to the fact that the Respondent/Claimant had prima facie failed to provide an evidence of their claimed amount, the Hon’ble Court found no sound reason in the decision of the arbitrators to accept the amount while denying the amended formula and in the absence of supporting proof. Thus, it was held that,

“… the impugned award does not give any reasons for accepting the aforesaid plea of the respondent/claimant. Thus, the award on this count is not only at variance with the pleaded case of the Respondent (Claimant), it is also unreasoned and palpably absurd. There is simply no basis to conclude that although labour escalation is computed and paid on 30% of the contract price, however it must be assumed that out of this 30% percent, only 10% thereof is towards labour costs and 20% is in respect of other heads of cost.”

Analysis – Conclusion

By their basic nature, construction contracts involve a considerable investment of capital coupled with equally high stakes, wherein, disputes relating to either of these factors involve an inconceivably high claim. Thus, in such cases, an Arbitrator is expected to work with a great care, intricate skills and high integrity, due to the fact that a slight bit of variance in calculation of costs may lead to an award, which causes undue injustice of either of the parties. The present case is only an example in the compendium of judgments which lay directions for the Arbitrators to exercise reasonable care in calculating claims.

In fact, even in the present case, the Hon’ble High Court added another layer of directions, providing the need for exceptional care to be exercised in construction arbitrations, by observing that

“…in the context of construction contracts where amounts involved are usually astronomical, any laxity in evidentiary standards and absence of adequate diligence on the part of an arbitral tribunal in closely scrutinizing financial claims advanced on the basis of mathematical derivations or adoption of novel formula, would cast serious aspersions on the arbitral process”.

Provided by the fact that construction arbitrations are not only complicated by their very nature, but are also coupled by a possible loss of revenue, this judgment highlights the dire need for laying down of guidelines in relation to the calculation of claims as well as for derivation of formulae which may lead to the claims.