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Issues: (i) Whether an arbitral award can be set aside under section 34 if it is contrary to the Act, substantive law governing the parties, or the terms of the contract, and whether such illegality may amount to conflict with the public policy of India; (ii) Whether, on the facts, the award allowing refund of liquidated damages was sustainable when the contract treated delayed delivery damages as a genuine pre-estimate and the Tribunal insisted on proof of actual loss; (iii) Whether interest could be awarded on amounts deducted as liquidated damages when the contract barred interest on disputed claims.
Issue (i): Whether an arbitral award can be set aside under section 34 if it is contrary to the Act, substantive law governing the parties, or the terms of the contract, and whether such illegality may amount to conflict with the public policy of India.
Analysis: Section 34 was construed with the other provisions of the Act to mean that the court is not confined to patent fraud or corruption alone. The expression "public policy of India" was held to include fundamental policy of Indian law, the interests of India, justice or morality, and also patent illegality. An award made in breach of mandatory procedure, beyond jurisdiction, or in contravention of the Act or substantive law, was treated as liable to be set aside. The award could also be interfered with where it was contrary to the terms of the contract, because the tribunal must decide the dispute in accordance with the contractual stipulation and the governing legal framework.
Conclusion: Such an award is liable to be set aside under section 34 if it is in contravention of the Act, substantive law, the contract, or the public policy of India, including patent illegality.
Issue (ii): Whether, on the facts, the award allowing refund of liquidated damages was sustainable when the contract treated delayed delivery damages as a genuine pre-estimate and the Tribunal insisted on proof of actual loss.
Analysis: The contract expressly made time of delivery the essence, provided for recovery of liquidated damages on delayed supply, described the amount as a genuine pre-estimate and not a penalty, and permitted recovery from bills. Reading sections 73 and 74 of the Indian Contract Act together, the Court held that where parties have fixed a genuine pre-estimate of damages and the stipulation is not shown to be unreasonable or penal, proof of actual loss is not indispensable. The Tribunal, by requiring proof of actual loss despite the contractual clause and by disregarding the clear contractual allocation of risk, acted contrary to section 28(3) of the Act and committed patent illegality.
Conclusion: The refund award on account of liquidated damages was unsustainable and was set aside.
Issue (iii): Whether interest could be awarded on amounts deducted as liquidated damages when the contract barred interest on disputed claims.
Analysis: The amount claimed back by the contractor was disputed because the deduction was made under an express contractual entitlement to levy liquidated damages. Once the principal deduction itself was contested under the contract, the claim could not be treated as an undisputed claim. Clause 34.4 barred interest on disputed claims, and the award granting interest therefore ran contrary to the contractual terms and section 28(3) of the Act.
Conclusion: The award of interest was unsustainable and was set aside.
Final Conclusion: The award was interfered with because it disregarded the contractual liquidated-damages clause and the governing legal standards under the Arbitration and Conciliation Act, 1996 and the Indian Contract Act.
Ratio Decidendi: An arbitral award may be set aside under section 34 when it is contrary to mandatory provisions of the Act, the substantive law governing the parties, or the express terms of the contract; where damages are contractually fixed as a genuine pre-estimate and are not shown to be penal or unreasonable, proof of actual loss is not required, and an award ignoring that stipulation is patently illegal.
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