Arbitrator Disregarding Contract Terms Amounts To Jurisdictional Error, Award Liable To Be Set Aside U/S 30 of 1940 Act: Gujarat High Court - 2025-10-06

Gujarat High Court: Arbitrator's Award Disregarding Contract Terms is a Jurisdictional Error

Ahmedabad: The Gujarat High Court, in a significant ruling on arbitration law, has affirmed that an arbitrator who disregards the express terms of a contract commits a jurisdictional error, making the award liable to be set aside under Section 30 of the Arbitration Act, 1940. A division bench of Justice Sangeeta K. Vishen and Justice Mool Chand Tyagi dismissed an appeal filed by P.C. Snehal Construction Co., upholding a City Civil Court judgment that had quashed a portion of an arbitral award against the Municipal Corporation of Ahmedabad.

Background of the Dispute

The case originates from a contract awarded in 1985 by the Ahmedabad Municipal Corporation to P.C. Snehal Construction Co. for the construction of a Terminal Sewerage Pumping Station. The project, slated for completion within 21 months, faced significant delays, which the contractor attributed to the Corporation's failure to make timely payments and provide necessary site materials.

Consequently, the contractor raised 14 claims before an arbitrator, including a substantial claim (Claim No. 1) of over Rs. 1.17 crore for idle overheads, machinery, and labor due to the prolonged project duration. The arbitrator, in his award, partially allowed this claim, granting the contractor Rs. 38.68 lakhs, along with amounts for other claims.

The Municipal Corporation challenged the award before the City Civil Court, Ahmedabad. The court upheld the award for Claims 2 to 4 but quashed Claim No. 1 entirely, prompting the contractor to appeal to the High Court.

Arguments of the Parties

P.C. Snehal Construction Co. (Appellant): The contractor, represented by Senior Counsel Mr. Sudhir I. Nanavati, argued that the City Civil Court had overstepped its limited jurisdiction under Section 30 of the Arbitration Act, 1940. It was contended that an award could only be set aside for specific reasons like arbitrator misconduct or if it was improperly procured, none of which were present. The appellant asserted that the trial court wrongly re-appreciated evidence and that the arbitrator's view, being a plausible one, should not have been interfered with.

Municipal Corporation of Ahmedabad (Respondent): Senior Counsel Mr. Maulin G. Raval, appearing for the Corporation, countered that the arbitrator had committed a clear jurisdictional error by ignoring Clause 31 of the contract. This clause mandated the contractor to submit a monthly account of any claims for additional expenses. Failure to do so barred the consideration of such claims. The Corporation argued that the contractor never complied with this contractual obligation, and therefore, the arbitrator had no authority to entertain Claim No. 1. This, they argued, was not a mere error of fact or law, but a deliberate departure from the contract that the arbitrator was bound to follow.

Court's Analysis and Legal Precedents

The High Court meticulously examined the scope of judicial interference under Section 30 of the 1940 Act. Citing the Supreme Court's judgment in Rajasthan State Mines & Minerals Limited vs. Eastern Engineering Enterprises , the bench reiterated that an arbitrator is a "creature of the contract" and cannot travel beyond its four corners.

The judgment emphasized a crucial distinction:

"The award made by the Arbitrator disregarding the terms of the reference or the arbitration agreement or the terms of the contract would be a jurisdictional error which requires ultimately to be decided by the Court. He cannot award an amount which is ruled out or prohibited by the terms of the agreement."

The court found that Clause 31 of the contract was unambiguous. It placed a clear obligation on the contractor to notify the Corporation of additional expense claims on a monthly basis. The purpose of such a clause, the court noted, was to allow the employer to verify claims and take remedial measures promptly.

Pivotal Excerpts from the Judgment

The High Court endorsed the trial court's reasoning, highlighting the arbitrator's own contradictory findings. While awarding the amount for idle machinery, the arbitrator had noted:

"Claimant should have given sufficient notices with details of his losses to the Respondent... and also acted according to clause 31 of contract agreement so that Respondent could have sufficient time to verify or assess such losses... Claimant has not stated about any efforts made by him to prove that he had tried his best to mitigate his losses..."

The High Court observed that despite these findings, the arbitrator proceeded to award a substantial sum under Claim No. 1 without any basis or evidence of compliance with Clause 31 or mitigation of losses as required by Section 73 of the Indian Contract Act.

The trial court's view, which the High Court upheld, was that:

"The moment the arbitrator entertains such claim, it would directly affect jurisdictional facts and while hearing application u/s.30 of the Arbitration Act, court can examine the same and hence, award passed in disregard of express terms of the contract would amount to jurisdictional error..."

Final Decision and Implications

The High Court concluded that the arbitrator's decision to grant Claim No. 1, despite the contractor's non-compliance with the mandatory Clause 31, was a jurisdictional error and amounted to legal misconduct. The court held that the award was based on no evidence and was patently illegal. Consequently, the appeal was dismissed, and the City Civil Court's decision to quash the award for Claim No. 1 was upheld. The court also affirmed the reduction of the interest rate from 12% (awarded by the arbitrator) to a reasonable 6%, noting that the contract was for a public utility and not purely commercial.