Arbitral award interference in contract disputes: interest barred by contract, GST claim unproved, and prolongation damages failed.

In Section 34 proceedings, a severable arbitral award may be interfered with only to the extent it conflicts with the contract or lacks legal support. The High Court upheld release of amounts withheld for missed milestones because the contract contemplated rescheduling and repeated extensions without rescheduling made the withholding unsustainable. It set aside interest on the withheld sums because the contract expressly barred interest on automatic withholding. It corrected the final-bill figure to the admitted amount, rejected the claimed GST differential for want of proof of actual payment, and set aside prolongation damages under Section 73 because actual loss was not established. The refund of penalty for delay in the sample flat was upheld.

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Issues: (i) whether the release of the amount withheld for non-achievement of milestones was liable to be upheld and whether the milestones ought to have been rescheduled; (ii) whether interest could be granted on the amount withheld for non-achievement of milestones; (iii) whether the award relating to the final bill and the claim for three percent difference between the post-GST and pre-GST period could stand; (iv) whether damages awarded for prolongation of the contract under Section 73 of the Indian Contract Act, 1872 and the allied reliefs could be sustained.

Issue (i): whether the release of the amount withheld for non-achievement of milestones was liable to be upheld and whether the milestones ought to have been rescheduled.

Analysis: The contract contemplated both extension of time and rescheduling of milestones. The contractor had in fact sought rescheduling, the request was forwarded, and clause 5.4 made clear that absence of a formal application was not a bar to rescheduling. Repeated extension of time without corresponding rescheduling of milestones rendered the withholding for milestone failure unsustainable on the petitioner's challenge.

Conclusion: The direction for release of the amount withheld for non-achievement of milestones was upheld.

Issue (ii): whether interest could be granted on the amount withheld for non-achievement of milestones.

Analysis: The award contained no reasoning on this head. Clause 2 of the contract provided for automatic withholding and expressly negatived payment of any interest on the withheld amount. In the absence of any contractual exception, the grant of interest conflicted with the bargain between the parties.

Conclusion: The award of interest on the withheld amount was set aside.

Issue (iii): whether the award relating to the final bill and the claim for three percent difference between the post-GST and pre-GST period could stand.

Analysis: The admitted clerical error in the amount relating to the final bill was capable of correction and the figure was reduced to the admitted due amount. On the GST-related claim, the contractual clauses provided reimbursement only for tax actually paid and for future levy properly proved. No evidence established payment of the claimed differential, and the reasoning treating part of the post-GST work as service tax was found untenable.

Conclusion: The final-bill amount was corrected to Rs. 54,44,112/-, and the award of the three percent GST-related difference was set aside.

Issue (iv): whether damages awarded for prolongation of the contract under Section 73 of the Indian Contract Act, 1872 and the allied reliefs could be sustained.

Analysis: Damages under Section 73 required proof of actual loss or damage, or a legally sustainable basis for reasonable assessment where proof was not possible. The only material was a chartered accountant's certificate, which did not establish actual loss suffered because of prolongation. The quantified award rested on assumptions and was therefore unsustainable. By contrast, the penalty refund concerning the sample flat was upheld because the absence of proved loss made the contractual penalty unenforceable on the facts found. The interest and costs, except to the extent specifically interfered with, were left undisturbed.

Conclusion: The damages for prolongation were set aside, while the refund of penalty for delay in the sample flat was upheld and the remaining interest and costs were sustained to the extent not interfered with.

Final Conclusion: The challenge succeeded only in part. The award was severed and interfered with only to the extent of interest on withheld milestone amounts, the GST-related differential claim, the damages for prolongation, and the clerical correction in the final-bill figure, while the remaining reliefs were left intact.

Ratio Decidendi: In proceedings under Section 34 of the Arbitration and Conciliation Act, 1996, a severable part of an arbitral award may be set aside, but damages under Section 73 of the Indian Contract Act, 1872 must rest on proof of actual loss or on a legally sustainable basis for estimation, and contractual terms expressly barring interest on withheld sums must be enforced.

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