Arbitrator Can't Grant Relief Contrary To Terms Of Contract: Rajasthan High Court Sets Aside Award Of Compensation For Delay

Brief Facts

On 08.08.2003, the State of Rajasthan issued a tender for the construction of the Pali Bypass on the Jodhpur–Sumerpur Road on a Build-Operate-Transfer (BOT) basis. The respondent emerged as the successful bidder and was issued a Letter of Acceptance. A concession period of 70 months was agreed upon, including 18 months for construction. The agreement stipulated that land possession was to be handed over within 60 days, extendable to 120 days.

On 18.10.2004, a major portion of the land was handed over, allowing the respondent to begin construction. The remaining land was handed over on 23.03.2006. After completing the construction of the Railway Over Bridge (ROB) on 29.04.2006, the respondent began to collect toll from 03.05.2006.

The Steering Committee granted a 3-month, 10-day extension on 31.05.2006. Disputes arose over the date of commencement of the concession period. The respondent filed an application under Section 9 of the Act. The court disposed of the application, directing that the toll collected by the respondent up to 22.01.2012 would remain subject to the outcome of arbitral proceedings.

The arbitrator passed the award on 23.06.2019, holding that the date of commencement of the project was 23.03.2006. The arbitrator allowed the respondent to retain toll collected until 22.01.2012 and upheld its claims for losses caused due to non-closure of the Level Railway Crossing (LRC). The arbitrator awarded the respondent ₹50.28 crores with interest up to 31.03.2018 and directed payment within 3 months, failing which interest at 12% p.a. would accrue.

The appellants filed objections under Section 34 of the Act, which the Commercial Court dismissed on 09.10.2024. The Appellants filed the appeal under Section 37 of the Act challenging the order dated 09.10.2024.

Submissions

Counsel for the Appellant submitted that physical possession of a major portion of the project site was handed over on 18.10.2004 and the balance on 23.03.2006. Thus, the cause of action accrued in 2006 and the claim was time-barred. He further submitted that the land handed over on 23.03.2006 comprised only a small portion. Therefore, the arbitrator erred in treating 23.03.2006 as the date of commencement.

Counsel contended that there was no clause in the concession agreement permitting either reimbursement of losses or awarding compound interest. The arbitrator, therefore, exceeded his mandate by granting such reliefs, which is patently illegal. Reliance was placed on State of Rajasthan v. Nav Bharat Construction Company and Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd. to contend that the arbitral award cannot travel beyond the terms of the contract.

Counsel further submitted that the respondent failed to prove that the appellant was obligated to permanently close the LRC. The quantification of such loss, it was argued, was without basis and liable to be set aside.

It was submitted that even if the respondent began construction after receipt of the major portion of land, it could not collect toll until 18 months from the commencement date. The arbitrator erred in holding that toll could have been collected from 18.10.2005, thereby erroneously awarding compound interest from that date.

Counsel for the Respondent submitted that the Steering Committee on 31.05.2006, having acknowledged that the delay was attributable to the Appellant, extended the concession period by 3 months and 10 days. It was submitted further that the definition of 'commencement date' did not contemplate or require partial handing over of physical possession.

Observations:

The Court observed that as per the Agreement, the concession period of 70 months was to commence from the "Commencement Date”, which was defined as the date on which the "physical possession of the Project site is delivered by GOR to the concessionaire”. Therefore, the commencement date could only be reckoned from the date of entire possession of the project site and not partial possession.

The Court held that awards passed beyond the terms of the contract come within the teeth of grounds available u/s 37 of the Act for interference. It relied upon State of Rajasthan v. Nav Bharat Construction Co., where the Supreme Court held that “An arbitrator cannot go beyond the terms of the contract between the parties. In the guise of doing justice he cannot award contrary to the terms of the contract”.

The court observed that in absence of terms and conditions in concession agreement for compensation for delay in handing over site, the arbitrator erred in allowing claim for loss. It held that the claim for losses and interest for delay in start of collection of toll had been awarded beyond the terms and conditions and the award was patently illegal. Accordingly, it quashed these parts of the award.

The Court relied upon the judgment of the Supreme Court in Gayatri Balasamy vs. ISG Novasoft Technologies Limited which clarified that under Sections 34 and 37 of the Act, courts have limited power to modify arbitral awards where the valid and invalid parts of an award are severable and not interdependent or intertwined.

The Court held that the award was capable of being partially set aside under Section 34 or 37, as the two heads of claims were distinct and severable. It upheld the portion of the arbitral award granting the claimant the right to collect and retain toll tax up to 22.01.2012. It set aside the award of compensation for losses allegedly incurred due to the non-closure of the LRC as well as the interest awarded for the delay in the commencement of toll collection, on the ground that these were contrary to the terms and conditions of the concession agreement. It also quashed the award of interest.

Thus, the court partly allowed the appeal.

Case Title: The State of Rajasthan, through District Collector Pali. & Ors. vs. Sanwariya Infrastructure Private Limited

Case Number: D.B. Civil Miscellaneous Appeal No. 5302/2024

Citation: 2025 LiveLaw (Raj) 195

For Appellant(s) : Mr. Sandeep Taneja, AAG with Mr. Kartikeya Sharma, Ms. Kinjal Surana, Mr. Aman Bohra & Mr. Aditya Sharma

For Respondent(s) : Mr. R.N. Mathur, Sr. Adv. assisted by Mr. Divyesh Maheshwari & Mr. Yuvraj Mittal

Date of Judgment: 28/ 05/2025