Bombay High Court Upholds ₹32 Crore Arbitral Award Against Solapur Municipal Corporation

The Bombay High Court recently rejected a challenge by the Solapur Municipal Corporation (SMC) against an arbitral award directing it to pay over ₹32 crore to a joint venture contractor.

Justice Sandeep V. Marne, while upholding the award, observed that once it is established that project delays were attributable to the civic body's failures, all subsequent penalties and blacklisting orders against the contractor were rightly set aside. He held that the Award in the present case, dated 18th June 2020, “appears to be unexceptional warranting dismissal of the Arbitration Petition.”

The dispute arose from a 2012 contract awarded by SMC to S.M.C.-G.E.C.P. Ltd (JV) for setting up multiple Sewage Treatment Plants (STPs) and laying sewer pipelines in Solapur. The estimated tender value was Rs. 139.12 crore, with a 24-month completion timeline starting 27 February 2012.

Between September 2012 and September 2013, SMC imposed four successive penalties on the contractor. On 9th December 2013, it terminated the contract and subsequently blacklisted the JV on 11th April 2014.

Aggrieved, the contractor invoked arbitration. On 18th June 2020, the sole arbitrator set aside the penalties, termination, and blacklisting, awarding Rs. 32,15,94,780 to the JV along with interest. Thereafter, cross-petitions were filed under Section 34 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court. The provision allows the Court to set aside an arbitral award.

Senior Advocate M.P. Rao, appearing for SMC, contended that the Tribunal ignored vital evidence and that the JV had failed to prove that the Corporation's acts caused actual stoppage of work. He submitted that the findings were “grossly perverse” and damages were wrongly calculated.

In response, counsel for the JV argued that the Tribunal had examined 15 distinct heads of delay—including land unavailability and delay in approvals—and had rightly found SMC responsible in nearly all of them. He emphasised that a court under Section 34 cannot re-appreciate evidence in proceedings challenging an arbitral award.

The Court examined only the challenge filed by SMC, as the JV chose not to press its own petition contesting portions of the arbitral award.

Justice Marne noted that the issue of delay was “at the fulcrum of the entire controversy between the parties,” and reiterated that under Section 34, an arbitral award can only be interfered with “if the conclusion reached by the Arbitral Tribunal is so grossly irrational that no fair-minded person would ever record the same.”

Reviewing each of the 15 sub-heads, the Court held that the Tribunal had not “eschewed any vital piece of evidence” and that its findings “clearly pass the muster of scrutiny.”

Regarding penalties, the Court held that once the delay was not attributable to the JV, the Municipal Corporation's action in levying penalties automatically stood invalid.

Similarly, on termination, the Court observed that “the only reason for termination of contract was delay in execution of work.” Since that ground failed, it upheld the Tribunal's finding that termination was illegal. The same reasoning applied to blacklisting.

On damages, the Bench noted that the Tribunal had adopted a "broad evaluative approach," awarding 10% of the remaining contract value as loss of profit, calculated conservatively on the original tender value of Rs. 140 crore rather than the accepted bid value of Rs. 210 crore.

Clarifying the law, the Court stated:

“There is a marked difference between the concepts of 'loss of profit' and 'loss of profitability. The former claim of 'loss of profit' arises out of reasonable expectation to earn profits if the contract was not terminated. On the other hand, the latter claim of 'loss of profitability' involves reduction in estimated profit margin due to prolongation of contract.”

The Court explained that once termination is found unjustified, awarding a reasonable percentage of unexecuted work as damages is justified. Noting that the Tribunal followed the same approach, the Court held that "the objection raised on behalf of the Municipal Corporation about absence of any evidence to prove actual cause of loss is misplaced deserving rejection.”

Accordingly, the Court dismissed SMC's challenge. However, it ordered that the return of the JV's bank guarantee and the encashment of the Municipal Corporation's bank guarantee remain stayed for eight weeks.

Appearances:

Mr. M.P. Rao, Senior Advocate for SMC

Mr. Shardul Singh, Advocate for the Contractor