Arbitrator as 'Creature of Contract': Bombay High Court Tosses Out Rs 173 Crore Damages Award

In a stinging rebuke to arbitral oversight, the Bombay High Court has set aside a massive Rs 173.72 crore damages award, characterizing the underlying tribunal's decision as "perverse" and "patently illegal." Justice R.I. Chagla, presiding over the Commercial Arbitration Petition, underscored that an arbitrator, while being the final authority on facts, cannot operate in a vacuum by disregarding vital evidence or omitting to provide reasoned findings on fundamental issues.

A Disputed Takeover: The Core of the Conflict

The dispute stems from a high-stakes turnkey contract between energy solutions provider Thermax Limited and public sector heavyweight Rashtriya Chemicals & Fertilizers Ltd. (RCF) . The contract involved setting up twin Gas Turbine Generators (GTGs) at RCF’s facility in Thal.

Following the successful commissioning of the plant and its subsequent operation for over 7,000 hours, the GTGs suffered a breakdown in March 2019. RCF, having issued a Preliminary Acceptance Certificate (PAC) only days before the failure, pinned the liability on Thermax. The resulting arbitration saw RCF walk away with a significant award for damages, justified by the tribunal on the strict interpretation of the "PAC issuance" date.

Arguments: Control vs. Contractual Timeline

Thermax argued that RCF had effectively forced a "takeover" of the plant in March/April 2018, operating it for commercial gain a full year before the official PAC issuance. They contended that RCF’s failure to act on filter alarms—which had triggered hundreds of times—constituted a breach of the O&M manual, making RCF solely responsible for the compressor breakdown.

RCF, conversely, maintained that until the PAC was signed in March 2019, the plant remained under Thermax’s contractual risk. They argued that the breakdown was the result of inherent manufacturing defects in the GTGs, relying on expert reports to support their claim that the machines were faulty from the start.

Legal Analysis: The Limits of Arbitral Discretion

Justice Chagla’s ruling emphasizes three recurring themes in Indian arbitration law: the duty to provide reasoned findings, the sanctity of evidentiary burden, and the exclusionary effect of contractual clauses.

The court noted that the Arbitrator had fundamentally failed to address whether the "Take Over" clauses had effectively been rendered redundant by RCF’s own commercial use of the plant. Furthermore, the tribunal’s acceptance of damages for "additional power expenditure" was found to have bypassed the contractual exclusion clause (Clause 32.2(a)), which barred recovery for consequential or indirect losses—a category that the court observed clearly included the costs of procuring power from external grid sources.

Crucially, the Court flagged the issue of evidence. The tribunal accepted financial figures from a witness based on unproven Chartered Accountant certificates that were neither produced properly nor supported by underlying electronic data, effectively allowing "hearsay" evidence to support a multimillion-rupee claim.

Key Observations

The judgment serves as a stern reminder of the boundaries of arbitral authority:

> "The learned Arbitrator has side-stepped one of the principal issues that arose for consideration, viz. the fact that RCF had taken over the plant from Thermax and was using the plant for commercial purposes for approximately eleven months... In the impugned Award, this entire evidence has been completely disregarded."

> "The findings of the learned Arbitrator in Paragraph 75 of the Award... that Mr. Shivkumar [the witness] had deposed to these figures on his personal knowledge... is rendered without any supporting reasons and is contrary to the answers given... which ex-facie shows that he has admitted his lack of knowledge."

> "The learned Arbitrator would firstly have to determine what would be the normal measure of damages in a case like the present case; and secondly, whether the claim for damages of RCF was beyond the normal measure of damages and would therefore constitute an 'indirect loss' or 'consequential loss'."

The Ruling and Its Impact

By setting aside the award, the High Court has directed RCF to refund the substantial deposit of Rs 218.45 crore plus interest to Thermax. The decision provides a significant precedent for project contractors facing similar disputes, reaffirming that: 1. Evidence Standards Apply: Even in arbitration, the best evidence rule and the necessity of proving documents cannot be waived to support large-value claims. 2. Contractual Bars are Binding: If a contract excludes "consequential losses," an arbitrator cannot circumvent this by simply labeling them "direct losses" without deep legal justification. 3. Conduct Trumps Paperwork: When a public entity treats an asset as fully operational for depreciation and tax purposes, they cannot later rely on a formalistic interpretation of a "Taking Over" clause to shift liability to a contractor.

As of the date of the order, the Court has granted a four-week stay, allowing RCF to pursue potential appellate remedies, leaving the final chapter of this industrial saga yet to be written.