Source: Rajasthan High Court

Why in News? 

A bench of Justice Bhuwan Goyal and Justice Avneesh Jhingan refused to interfere with the arbitrator’s direction to refund the damages and reiterated the limited scope of appellate intervention under Section 37 of Arbitration and Conciliation Act. 1996 

• The Rajasthan High Court held this in the case of Rajasthan Urban Infrastructures Development Project v. M/s National Builders (2025). 

What was the Background of Rajasthan Urban Infrastructures Development Project v. M/s National Builders (2025) Case?   

• The appellant filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (A & C Act), challenging the dismissal of their application under Section 34 of the Act. 
• The appellant had issued a work order to the respondent, and both parties entered into a contract on February 3, 2003. 
• The project involved widening and strengthening of National Highway Beawar Road in Ajmer from Ramganj to Transport Nagar and erecting a ramp on one side. 
• The work was scheduled to be completed by February 2, 2004, but was actually completed on May 10, 2005, resulting in a delay of 463 days. 
• Disputes arising during the contract performance were referred to an arbitrator, who passed an award on August 30, 2010. 
• The arbitrator directed the appellant to pay Rs. 41,54,511/- to the respondent and Rs. 1,01,500/- towards arbitration costs. 
• The arbitrator also awarded interest under Section 31(7)(a) amounting to Rs. 15,87,957/- and 18% per annum under Section 31(7)(b) on the awarded amount from the date of award until payment. 
• The appellant's application under Section 34 was dismissed by the Commercial Court on July 11, 2019, leading to the present appeal. 
• The appellant raised five main issues: recovery of interest on mobilization advance, recovery of excise duty, recovery for non-submission of video cassette and documents, claims for escalated prices, and the imposition of liquidated damages. 
• The respondent argued that there was no clause for charging interest on mobilization advance, exemption of Light Diesel Oil was legally availed, required documentation was submitted, clause 41 regarding price escalation was deleted, and the delay was primarily attributable to the appellant. 
• A Higher Powered Committee had determined that of the 463 days of delay, 458 days were attributable to the appellant, not the respondent. 

What were the Court’s Observations? 

• The court dismissed the appeal, upholding the arbitrator's decision in favor of the respondent. 
• The appellant had paid interest-free mobilization advances to the respondent, which were to be repaid within ten months through deductions from interim payments. 
• The arbitrator found that the appellant failed to make deductions from interim bills despite having the right to do so. 
• The respondent had requested deduction of advances (90% in November 2003 and 10% in December 2003) via letter dated 03.12.2003. 
• The court rejected the appellant's recovery of Rs. 2,09,760 in excise benefits claimed by the respondent for use of LDO, as exemption eligibility was to be determined by the excise department. 
• The court found no evidence that the excise department had objected to the exemption claimed by the respondent. 
• The court upheld the refund of Rs. 1,00,000 recovered for alleged violation of clause 85, as this clause had been deleted by clause 126. 
• The respondent's claim for price escalation was valid despite the appellant's objections, as clause 41 had been deleted and clause 38 allowed for price adjustment. 
• The appellant had itself made partial payments for price escalation, which contradicted its position in court. 
• A Higher Powered Committee had attributed 458 days of the 463-day delay in completion to the appellant, with only 5 days attributable to the respondent. 
• The court upheld the arbitrator's decision to set aside liquidated damages imposed on the respondent, given that the majority of the delay was caused by the appellant.

What are Liquidated Damages?

• Liquidated damages clauses are common features in commercial contracts including construction, engineering, equipment supply, purchase, and service agreements. 
• These clauses are particularly useful in contracts with strict timelines, allowing parties to estimate damages payable in case of breach. 
• Liquidated damages promote commercial certainty by pre-determining compensation, enabling parties to undertake a "defined risk." 
• In India, as in the United Kingdom, liquidated damages clauses are enforceable only if they don't possess characteristics of a penal clause and are reasonable. 
• Liquidated damages must pre-estimate a reasonable amount as compensation for breach of contract. 
• Three key principles differentiate liquidated damages from penalties: liquidated damages constitute a pre-estimate of losses while penalties are punitive; the pre-estimated sum must be reasonable; and the sum fixed in the liquidated damages clause serves as the upper limit on damages payable. 
• The Supreme Court of India in Oil and Natural Gas Corporation Ltd v. Saw Pipes (2003) emphasized examining the terms and language of the contract when determining the nature of such clauses. 
• The Court held that when parties explicitly consent to a genuine pre-estimated liquidated damages amount as compensation, and the amount is not penal in nature, courts should grant the compensation.

What is Section 37 of A & C Act?

• Section 37 of A & C Act provides for appealable orders. 
  • Section 37 specifies the limited set of orders from which appeals can be made to the court authorized to hear appeals from original decrees. 
  • Notwithstanding any other law in force, appeals can be filed against orders refusing to refer parties to arbitration under section 8. 
  • Appeals are permitted against orders granting or refusing to grant any measure under section 9. 
  • Orders setting aside or refusing to set aside an arbitral award under section 34 are appealable. 
  • Appeals can also be made against orders of the arbitral tribunal that accept pleas referred to in sub-section (2) or sub-section (3) of section 16. 
  • Orders of the arbitral tribunal granting or refusing to grant an interim measure under section 17 are appealable. 
  • No second appeal is permitted from an order passed in appeal under this section. 
  • The section preserves the right to appeal to the Supreme Court, which remains unaffected. 
• The important judgments in this regard are as follows: 
  • MMTC Limited vs. Vedanta Limited (2019) 4 SCC 163:  
    • The Supreme Court held that interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. 
    • The court cannot undertake an independent assessment of the merits of the award when hearing an appeal under Section 37. 
    • The appellate court must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. 
    • If an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, the Supreme Court must be extremely cautious and slow to disturb such concurrent findings. 
  • Punjab State Civil Supplies Corporation Limited & Anr. vs. M/s Sanman Rice Mills & Ors. (2024) 
    • The appellate power under Section 37 is limited within the domain of Section 34 of the Act. 
    • The appellate power is exercisable only to determine if the court under Section 34 has acted within its prescribed limits or has exceeded or failed to exercise its conferred power. 
    • The Appellate Court has no authority to consider the merits of the dispute as if sitting in an ordinary court of appeal. 
    • The appellate court can step in only where the court exercising power under Section 34 has failed to exercise its jurisdiction or has exceeded its jurisdiction. 
    • The power under Section 37 is more akin to superintendence as vested in civil courts while exercising revisionary powers.