Arbitral Award Ignoring Vital Evidence and Lacking Reasons Liable to be Set Aside: Bombay High Court

In a significant judgment delivered on December 9, 2025, the High Court of Judicature at Bombay, presided over by Justice R.I. Chagla, has set aside an arbitral award in a high-stakes commercial dispute between Thermax Limited and Rashtriya Chemicals and Fertilizers Ltd. (RCF). The court emphasized that when an arbitral tribunal ignores vital documentary evidence and fails to provide adequate reasoning, the resulting award suffers from patent illegality and perversity.

Case Background: A Disputed Turnkey Contract

The dispute arose from a Lump Sum Turnkey contract awarded to Thermax Limited in 2016 for setting up two 25 MW Gas Turbine Generators (GTGs) at RCF’s factory in Thal, Maharashtra. The project involved a rigorous timeline and specific contractual milestones for issuing a Preliminary Acceptance Certificate (PAC).

The core conflict centered on the usage of the GTGs. While the PAC was issued in March 2019, RCF had allegedly been utilizing the turbines for commercial operations since early 2018. Following a breakdown of the equipment in 2019, RCF sued for damages, while Thermax filed a counterclaim, citing the unauthorized unilateral deduction of Mutually Agreed Damages (MAD) and arguing that RCF’s own operational negligence—specifically ignoring filter maintenance alarms—caused the turbine failure.

Arguments: The Battle of Liability

Thermax Limited, represented by Senior Counsel Janak Dwarkadas, contended that the arbitral award was fundamentally flawed. They argued that RCF had effectively "taken over" the plant long before the formal PAC, thereby assuming operational risk. Furthermore, Thermax highlighted that RCF had received 269 filter alarms for one turbine and 52 for another without taking remedial action, as mandated by the O&M manual.

Conversely, RCF argued that the contract was clear-cut: until a PAC was issued, Thermax remained responsible for the plant. RCF insisted that the GTGs were inherently defective and that the damages claimed—totaling ₹173.72 crore for power procurement during the downtime—were a direct consequence of Thermax's failure.

Legal Analysis: The "Patent Illegality" Standard

Justice Chagla’s analysis focused on the standard of intervention under Section 34 of the Arbitration and Conciliation Act, 1996. The court noted that while Section 34 does not allow for a full-scale appellate review of facts, it does empower the court to intervene if an award is premised on a total disregard of evidence or if the reasoning is unintelligible.

One of the most critical aspects of the decision was the evidentiary standard for awarding damages. The court found that RCF had failed to prove its claim for ₹173.72 crore through primary evidence. The reliance on Chartered Accountant certificates without the testimony of the authors, and the reliance on extrapolated data from an SAP-ERP system without producing the supporting electronic records, rendered the award of these damages perverse.

The court further ruled that the Arbitrator had failed to determine whether the damages claimed were "consequential" and thus barred by Clause 32.2(a) of the contract, which expressly excluded claims for indirect or consequential loss.

Key Observations

• On the duty to consider evidence: "The learned Arbitrator has, in the impugned Award, exclusively based her findings on the aforementioned fundamental issue by taking shelter behind a contractual provision of PAC and the term 'Taking over'."
• On evidentiary failure: "The learned Arbitrator by failing to deal with and/or disregarding the evidence of Thermax in particular, the testimony of RW-2 regarding the repeated warnings from air intake filter alarms, makes the impugned Award vulnerable to being set aside."
• On damages: "The claim for additional expenditure on account of power sourced from other sources cannot and would not fall within the normal measure of damages nor has there been any consideration nor finding on this aspect by the learned Arbitrator."
• On patent illegality: "The learned Arbitrator has not given any reasons for rejecting the submissions of Thermax; the findings of the learned Arbitrator are based on no evidence."

Implications of the Decision

The Bombay High Court’s decision serves as a stern reminder that arbitral tribunals are not immune to the requirements of judicial rigor. By allowing the petition and setting aside the award, the court has underlined the importance of the principle that an arbitrator cannot pick and choose evidence while ignoring material facts that contradict their final conclusion. Furthermore, for commercial entities, the judgment underscores that breach of an exclusion clause regarding "consequential loss" is a matter courts will scrutinize closely, preventing tribunals from awarding damages that parties have consciously opted to waive.

The court has ordered RCF to refund the deposited amount of over ₹218 crore, marking a decisive end to this phase of the litigation while setting a significant precedent for the interpretation of commercial contracts and the limits of arbitral discretion.