Bombay HC Partially Sets Aside Arbitral Award: Liquidated Damages Claim Struck Down for Lack of Reasoning, Other Findings Upheld (S.34 Arbitration Act) - 2025-06-18

Bombay High Court Partially Sets Aside Arbitral Award Over Liquidated Damages, Cites Lack of Reasoning

Mumbai, India – The High Court of Bombay, in a significant ruling, has partially set aside an arbitral award in a dispute between Hindustan Petroleum Corporation Ltd. ( HPCL ) and G. R. Engineering Private Limited (GRE). Justice SomasekharSundaresan found the arbitral tribunal's decision to deny HPCL 's claim for liquidated damages to be "perverse and manifestly arbitrary for want of reasoning," while upholding the award on other contested issues including civil works, insurance, service tax, and customs duty.

The judgment, pronounced on June 18, 2025, allows HPCL and GRE to pursue fresh arbitration specifically on the liquidated damages claim.

Case Background: Disputed LPG Storage Project

The dispute originated from a contract awarded by HPCL to GRE for the construction of twelve "mounded bullets" for storing liquified petroleum gas (LPG) at HPCL ’s Mahul refinery. The project, initially due by December 5, 2007, was completed on February 2, 2010. HPCL subsequently withheld significant sums from GRE's invoices, citing liquidated damages for the delay and alleged deficiencies in civil works, under-insurance, and discrepancies in service tax and customs duty payments.

An arbitral tribunal, in its award dated May 2, 2018, had ruled largely in favour of GRE, directing HPCL to pay approximately Rs. 14.03 crores across various heads, plus interest. HPCL challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, primarily alleging perversity in the tribunal's findings.

Court's Scrutiny of Challenged Claims

Civil Works: M30 Grade Concrete Dispute Upheld

HPCL contended that the civil works did not meet the "M30 grade" RCC standard, that its internal vigilance department's view rendered the dispute non-arbitrable, and faulted the tribunal's reliance on an expert report (Jangid Report) not introduced by HPCL .

The High Court dismissed these challenges, affirming the tribunal’s findings. Justice Sundaresan noted: * HPCL 's internal vigilance department does not qualify as an external "Government agency" under the contract to make the dispute non-arbitrable. * The tribunal was within its rights to consider the Jangid Report (commissioned by HPCL ) for substantial justice, especially as another report ( Sinha Report) also indicated M30 concrete usage. The Court emphasized that "strict rules of procedure in evidence law are not to be expected in arbitration proceedings." * The tribunal’s conclusion that GRE did not cut corners and that the mounded bullets had been in use for seven years without repair, coupled with HPCL 's own certification to safety regulators, made its view "logical and rational and eminently plausible."

Liquidated Damages: Award Struck Down for "Absence of Reasons"

This was the core of HPCL 's successful challenge. HPCL argued it was entitled to Rs. 5.83 crores in liquidated damages due to the significant project delay, asserting that contract extensions were granted without prejudice to its right to claim these damages.

The arbitral tribunal had rejected HPCL 's claim, stating HPCL needed to prove losses "in a more concrete fashion" and had not "seriously urged" its loss of investment.

Justice Sundaresan found the tribunal's reasoning on this count critically deficient: > "The absence of reasons is what manifest arbitrariness is about. Regretfully , despite adopting a light-touch approach and giving full leeway to the Learned Arbitral Tribunal for not being legally trained, I am not convinced that the Impugned Award passes muster on the touchstone of absence of manifest arbitrariness in relation to its handing of liquidated damages."

The Court observed that the tribunal failed to analyze HPCL 's contractual right to liquidated damages, the implications of Kailash Nath Associates vs. DDA (which outlines when proof of actual loss is necessary), or whether proving loss was difficult or impossible in this case. The judgment highlighted, "It was necessary for the Learned Arbitral Tribunal to return a finding on whether it was difficult to prove the damages."

The Court concluded that this part of the award was "perverse and manifestly arbitrary for want of reasoning, and also being contrary to the fundamental policy of the law of India in relation to liquidated damages."

Insurance, Service Tax, and Customs Duty Claims: Tribunal's Findings Affirmed

The Court upheld the arbitral tribunal's decisions regarding claims for under-insurance, service tax, and customs duty variations.

* Insurance: The tribunal rightly found the dispute arbitrable and noted the contract didn't specify the insurance value, which was determined through consultation. HPCL 's withholding of deemed premium was deemed conjectural.

* Service Tax: The tribunal’s reliance on the Supreme Court's ruling in Commissioner, Central Excise and Customs, Kerala vs. L&T Ltd. regarding tax on indivisible works contracts was deemed a "plausible reasonable view."

* Customs Duty: The tribunal's interpretation that the contract didn't require offsetting CENVAT credit against financial implications of new duties was found plausible. The method for computing financial implications was also held to be intelligible.

The Court stated, "On an overall analysis of the Impugned Award, one cannot find fault with the approach to the subject by the Learned Arbitral Tribunal in this regard. There is nothing perverse in this component of the Impugned Award, which is a well-reasoned articulation of an eminently plausible view."

Partial Setting Aside and Future Adjudication

Citing the Supreme Court's constitution bench decision in Gayatri Balasamy vs. M/s ISG Novasoft Technologies Limited , Justice Sundaresan affirmed the power of the Court under Section 34 to partially set aside an arbitral award if the flawed portion is severable.

The Court directed: * The arbitral award is upheld except for the findings on liquidated damages, which are quashed. * The arbitration agreement subsists for the liquidated damages claim, and parties are free to re-arbitrate this specific issue. * Any amounts deposited by HPCL in Court, along with accruals, are to be released to GRE after deducting the liquidated damages component.

No costs were imposed, as each side prevailed on some aspects. The Court concluded by appreciating the concise arguments of the counsel for both parties.