An arbitral award can be set aside if it is patently illegal and contrary to public policy, especially when it exceeds the Arbitrator's jurisdiction by applying rates not stipulated in the contract.

JUDGMENT :

Basant Balaji, J.

1. This Appeal challenges the dismissal of O.P.(Arb.) No.70 of 2020 by the Commercial Court, Ernakulam. The Original Petition, filed by the Appellant (then Petitioner) against the Respondent under Section 34 of the Arbitration and Conciliation Act, 1996, (the Act) sought to overturn an arbitration award dated 26 March 2018.

2. Tenders were floated by the Appellant for the installation of a 200 MM Dia Ductile Iron Pumping Line (Part 1) and road rectification works (Part 2) at various locations within Willington Island. The Appellant’s estimates for these works were Rs.1,61,78,681/- for Part 1 and Rs.27,03,012/- for Part 2. The Respondent submitted the lowest bid for Part 1 at Rs.1,81,73,600/-, which was 12.33% above the estimate. However, for Part 2, the Respondent quoted Rs.9,76,363/-, a figure 63.88% below the estimated cost. A notable discrepancy was observed in the Respondent’s bid for Item No.5 of Part 2, which is the main item, with an estimated value of Rs.8,95,141/-, was quoted at 86.83% below the estimate. Given the contractual payment terms, which allowed for the release of 90% of the quoted amount upon the completion of Part 1, the Appellant became concerned that the Respondent’s low bid for Part 2, particularly for Item No. 5, would render the existing security deposit grossly inadequate to ensure the completion of Part 2 by other agencies in the event of the Respondent’s non-performance. To mitigate this risk, a meeting was convened on 20 April 2015, during which the Respondent unconditionally assented to the retention of a sum equivalent to Rs.12 lakhs or 7% of the quoted amount, whichever was greater. Based on this critical undertaking, the Appellant proceeded to award the work to the Respondent via a work order dated 14 May 2015.

3. The contractual period was subsequently extended on multiple occasions, with the Appellant expressly reserving its right to claim Liquidated Damages (LD) as per Clause 2 of the General Conditions of Contract (GCC). For Part 2 of the works, the Appellant was obligated to supply only granite red stone, as the rubble recovered from the existing soling was to be utilized for the new soling work, with the Appellant supplying only the deficit quantity.

4. During the execution of Part 1 work, the Appellant issued Annex.R6, notifying the Respondent that the extended contract period had expired on 18 April 2016, and directing the immediate completion of road rectification works prior to the monsoon season. In response, the Respondent, via Annex.C12, asserted that Part 2 works would be performed if the rates were enhanced based on DSR 2014 plus 46%, and requested a consent letter to that effect. The Appellant issued another communication, Annex.R7 dated 6 May 2016, demanding completion of the works and cautioning that failure to comply would compel the Appellant to terminate the contract at the Respondent’s risk and cost. The Respondent, in Annex.C13 dated 13 May 2016, reiterated its position, confirming that work would resume upon receipt of a consent letter reflecting the revised DSR 2014 plus 46% rates.

5. On 27 September 2016, through Annex.C8, the Respondent formally requested the Appellant to appoint an Arbitrator in accordance with Clause 25 of the Conditions of Contract, simultaneously advising that all activities were halted pending the proposed arbitration. As a result of the Respondent’s cessation of Part 2 work, the Appellant issued a show cause notice dated 17 October 2016.

6. In its reply, Annex.R53 dated 21 October 2016, the Respondent ag