Arbitral Award Based on 'No Evidence' is Perverse & Patently Illegal; Can Be Set Aside Under S.34 Arbitration Act: Orissa High Court - 2025-07-30

Orissa High Court Upholds Partial Setting Aside of Arbitral Award, Clarifies Scope of 'Patent Illegality'

CUTTACK, ODISHA – The Orissa High Court, in a significant ruling on the scope of judicial review under the Arbitration and Conciliation Act, 1996, has held that an arbitral award based on "no evidence" is perverse, patently illegal, and liable to be set aside by a court under Section 34.

Upholding a District Judge's decision to partially nullify a ₹1.48 crore award, a single-judge bench of Dr. Justice S.K. Panigrahi dismissed cross-appeals filed by both the State of Odisha and the contractor, Mahendra Swain. The Court clarified the fine line between impermissible re-appreciation of evidence and the court's duty to intervene when an award is unsupported by any evidence and shocks the judicial conscience.

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Background of the Dispute

The case originated from a 2002 contract for the repair of cyclone-damaged roads in Ganjam District, awarded to contractor Mahendra Swain. The project was delayed, leading to the State retrospectively terminating the contract in February 2005. The contractor invoked arbitration, leading to the appointment of a Sole Arbitrator.

In 2010, the Arbitrator passed an award of ₹1,48,60,263 in favour of the contractor, finding the termination illegal and allowing several claims for unpaid work, compensation, and prolongation costs.

The State challenged this award before the District Judge, Berhampur, under Section 34 of the Arbitration Act. In 2015, the District Judge partially set aside the award, reducing the total payable amount to ₹1,06,76,616. Specifically, the court reduced the amount for unpaid work (Claim 1) and completely set aside claims for compensation for borrowing earth from private lands (Claim 4: ₹10 lakh) and for overhead costs due to project prolongation (Claim 6: ₹29.43 lakh), citing a lack of evidence. Both the contractor and the State appealed this decision to the High Court under Section 37.

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Arguments Before the High Court

The Contractor's Stance: Senior Advocate Ms. Pami Rath, representing the contractor, argued that the District Judge had exceeded his jurisdiction under the narrow scope of Section 34. She contended that the judge had impermissibly acted as an appellate court by re-assessing the evidence and substituting his own findings for the Arbitrator's, which is contrary to established legal principles laid down by the Supreme Court in cases like Associate Builders v. DDA .

The State's Position: Mr. P. P. Behera, Additional Standing Counsel for the State, defended the District Judge's order. He argued that the claims set aside were not just weakly supported but were based on no evidence at all. He submitted that awarding substantial sums for alleged compensation to landowners (Claim 4) and prolongation costs (Claim 6) without any receipts, accounts, or proof of actual loss was perverse, arbitrary, and against the public policy of India, justifying judicial intervention.

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Court's Analysis: Distinguishing Re-Appreciation from 'No Evidence'

Dr. Justice S.K. Panigrahi meticulously analyzed the settled law on judicial intervention in arbitral awards, reaffirming that a court cannot sit in appeal over an arbitrator's findings. However, he emphasized the crucial exception carved out for awards that are patently illegal or perverse.

Citing the Supreme Court in Associate Builders and Unibros v. All India Radio , the judgment highlighted that perversity includes findings based on "no evidence," ignoring vital evidence, or arriving at a decision no reasonable person would make.

The High Court then examined the specific claims modified by the District Judge:

• Claim 4 (₹10 lakh for earth borrowing): The Court noted the complete absence of any proof—no landowner testimony, receipts, or agreements—to substantiate the contractor's claim of having paid for earth from private lands.

• The judgment stated: > "When an arbitrator makes an award that is entirely untethered from the evidence on record, the court is empowered to intervene, since such an award betrays an arbitrary approach rather than a judicial one... Awarding a substantial like ₹10,00,000/- on a claim that was not supported by any proof falls within that description, it amounts to a windfall based on speculation, which offends the fundamental policy of Indian law..."

• Claim 6 (₹29.43 lakh for prolongation costs): The Court found this claim, calculated at a daily rate of ₹7,548 for 390 days, to be equally unsubstantiated. The contractor failed to produce any accounts, wage registers, or financial documents to prove that such overheads were actually incurred.

• The Court observed: > "Jurisprudence is clear that damages or compensation in the nature of losses due to delay must be proved with a reasonable degree of certainty... The ₹29.43 lakh awarded here is akin to a general damages for prolongation calculated on a notional daily overhead, yet the claimant failed to establish any actual loss or expenditure corresponding to that period."

The Court concluded that the District Judge's intervention was not an impermissible re-appreciation of evidence, as there was "no evidence to weigh in the first place." Instead, it was a "rightful rejection of a baseless monetary claim."

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Final Decision

The High Court found no merit in either appeal and dismissed them, affirming the District Judge's judgment. The Court held that the District Judge had correctly identified and set aside only those portions of the award that suffered from patent illegality due to a complete lack of evidentiary support.

The final result is that the contractor is entitled to ₹1,06,76,616 along with interest as originally awarded by the Arbitrator, with the unsubstantiated claims for ₹10 lakh and ₹29.43 lakh remaining set aside.