Arbitrator’s ‘Expertise’ Cannot Override Contractual Terms Or Lack Of Evidence: Bombay High Court Upholds Partial Setting Aside Of Award U/S 34 - 2025-08-11

Arbitrator's Expertise Cannot Override Contractual Terms or Lack of Evidence: Bombay HC Upholds Setting Aside of Award

Mumbai, Maharashtra – The Bombay High Court, in a significant ruling on the scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996, has held that an arbitrator's technical expertise cannot be a substitute for evidence or a justification for ignoring the explicit terms of a contract.

A Division Bench comprising Chief Justice Alok Aradhe and Justice Sandeep V. Marne dismissed cross-appeals filed by Larsen & Tourbo Limited (L&T) and Hindustan Petroleum Corporation Limited (HPCL), thereby upholding a 2005 decision of a Single Judge that had partially set aside a multi-crore arbitral award.

Case Background

The dispute originated from a 1996 contract where HPCL awarded L&T the work of laying a 350-kilometer pipeline from Vishakhapatnam to Vijaywada for a contract price of over Rs. 53 crore. After the project's completion, disputes arose concerning payments for additional work, delays, and other issues.

L&T invoked arbitration, and in July 2003, a sole arbitrator awarded L&T approximately Rs. 7.43 crore against its total claims of Rs. 27.82 crore. HPCL challenged this award under Section 34 of the Arbitration Act. In November 2005, a Single Judge of the High Court substantially set aside the award, finding many of the claims to be perverse and contrary to the contract. The judge, however, upheld the arbitrator's decision on Claim No. 19, which directed HPCL to release Rs. 2.01 crore wrongly withheld as liquidated damages.

Both parties filed appeals against the Single Judge's order, leading to a prolonged legal battle that even reached the Supreme Court, which ultimately remanded the matter back to the Division Bench for a fresh hearing.

Key Arguments

• L&T's Contentions: L&T, represented by Advocate Kedar Wagle, argued that the Single Judge had overstepped the limited jurisdiction under Section 34 by re-appreciating evidence and interfering with the findings of an expert arbitrator. They contended that contract interpretation is the arbitrator's domain and the award should be supported if it represents a plausible view.
• HPCL's Contentions: Advocate Javeed Hussein, for HPCL, supported the Single Judge's decision to set aside the claims. He argued that the arbitrator had awarded claims contrary to explicit contractual clauses, particularly Clause 5.j, which made the Engineer-in-Charge's decision on additional works final and binding. He submitted that several claims were awarded based on "mere guesswork" and in the complete absence of evidence. On the other hand, HPCL challenged the part of the order upholding the refund of liquidated damages, arguing the delay was correctly calculated.

High Court's Analysis and Findings

The Division Bench conducted a claim-by-claim analysis and concurred with the reasoning of the Single Judge. The court found that the arbitrator had committed manifest and patent illegality by awarding claims that were either contractually barred or entirely unsupported by evidence.

On Arbitrator's Expertise vs. Contractual Terms: The court rejected L&T's argument that the arbitrator, being a technical expert (a former General Manager of HPCL), could use his specialized knowledge to grant claims. In a pivotal observation regarding a claim for Rs. 4.13 crore for pipe coating repairs, the Bench stated:

"Mere alleged expertise of the Arbitrator in the technical field does not mean that he was empowered to award amounts in favour of L&T contrary to the contractual terms and in absence of any evidence... Mere technical background of the Arbitrator would not empower him to award claims contrary to the contractual terms and/or in absence of any evidence on record."

On Claims Awarded Without Evidence: The court noted several instances where the arbitrator awarded substantial sums despite acknowledging a lack of evidence from the claimant. For a claim on additional tree cutting, the arbitrator justified the award by stating, "The claim is not a very large claim and I am not inclined to question the lack of evidence on the sum claimed." The High Court deemed this reasoning "completely perverse."

On Liquidated Damages (Claim No. 19): The Bench upheld the arbitrator's and the Single Judge's decision to refund Rs. 2.01 crore in liquidated damages to L&T. The arbitrator had found as a matter of fact that although the formal completion certificate was issued on August 20, 1998, HPCL had already started using the pipeline to transport its product on May 11, 1998. The court held that HPCL could not claim damages for a period when it was already deriving commercial benefit from the project. Since HPCL failed to challenge this factual finding in its Section 34 petition, the court saw no reason to interfere.

On Severability of Award: The Court implicitly applied the doctrine of severability, recently clarified by the Supreme Court in Gayatri Balasamy . By setting aside specific, independent claims while upholding another, the court severed the invalid portions of the award from the valid ones without modifying the award's core components.

Final Decision

The High Court dismissed both appeals, affirming the Single Judge's order from 2005. The final outcome is that L&T is entitled only to the amount awarded under Claim No. 19 (release of liquidated damages), while the awards for all other disputed claims remain set aside. The judgment reinforces the principle that while judicial interference in arbitral awards is limited, courts will not hesitate to set aside awards that are perverse, contrary to the contract, or based on no evidence.