Court Rules Arbitral Tribunal Erred in Treating Incomplete MOU as Conventional Contract, Awards Patently Illegal and Perverse; Expert Evidence Re-appreciation by Lower Court Not Permissible
In a significant judgment delivered on October 6, 2026, the Calcutta High Court (Division Bench comprising Justices Debangsu Basak and Aryak Dutt) set aside an arbitral award relating to a dispute between Friends Engineering Co-operative Society Limited and the Digha Shankarpur Development Authority (DSDA). The dispute arose from the construction of a two-storied market complex at Sector B-7, New Digha Township, involving about 690 stalls.
The background reveals that DSDA, a statutory authority of the Government of West Bengal, had issued a tender and entered into a Memorandum of Understanding (MOU) with Friends Engineering Co-operative Society (the appellant) on November 25, 2004. Under the MOU, the appellant was to construct the complex at its own cost and recover expenditure from prospective stall lessees. However, the per-stall rates, which were essential for cost recovery, were left blank in the agreement. The construction was suspended and subsequently cancelled by DSDA in 2005 due to alleged non-compliance with Coastal Regulation Zone (CRZ) norms and lack of environmental clearances.
Following the cancellation, the appellant invoked arbitration, and the sole arbitrator, Justice Samaresh Banerjea (Retd.), delivered an award on February 14, 2014. The award held DSDA liable for arbitrary termination, granted compensation based on a full contract value as if it were a conventional works contract, and awarded damages including loss of expected profit calculated at 15% of the unexecuted contract value.
DSDA challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, leading to its setting aside by the District Judge on grounds that the expert report on CRZ status was unreliable and that the tribunal failed to consider certain departmental memos and Ministry of Environment letters. DSDA argued that the MOU was incomplete and at best a quasi-contract, limiting its liability to the value of work executed rather than loss of profit.
On appeal, the Calcutta High Court thoroughly analyzed the scope of judicial interference under Sections 34 and 37 of the Arbitration and Conciliation Act. The Court reaffirmed that a Section 34 court cannot act as an appellate body to re-appreciate evidence or consider documents not part of the arbitral record. The expert appointed by mutual consent had inspected the site with GPS and concluded that the structure lay outside the prohibited 500-metre CRZ boundary, a finding within the tribunal's discretion. The Court noted that the lower court's substitution of its own assessment for the tribunal's was impermissible re-appreciation.
However, the Court found the arbitral award patently illegal and perverse on other grounds:
- - The tribunal treated the MOU, which left critical terms such as stall rates blank, as a conventional contract with a fixed contract price payable by DSDA. This was a failure to decide disputes in accordance with the contract terms as required under Section 28(3) of the Act.
- - The award's largest component was damages for loss of expected profit based on an inflexible 15% rule from prior case law. The Court clarified that such a rule is not absolute and damages for loss of profit must be supported by evidence showing the profit would have been earned. Here, no material on rates, demand, profit margins, or lawful feasibility of completion was produced, making the award rest on no evidence.
- - The award contained self-contradictory quantifications and unintelligible operative directions, including differences in figures between the body and operative part of the award.
- - The tribunal made presumptive awards for advances to suppliers and labor gangs without documentary proof, which is impermissible.
- - The award was not severable; excision of flawed parts would require recomputation of others, making the entire award liable to be set aside.
Consequently, the Court set aside the arbitral award dated February 14, 2014, in its entirety but left undisturbed the interim award of Rs. 15,00,000 made on consent and already paid. The appeal was disposed of without any order as to costs.
This judgment underscores the limited role of courts in interfering with arbitral awards, emphasizing that re-appreciation of evidence is prohibited but that awards ignoring contract terms or resting on no evidence can be set aside. It also highlights the necessity for arbitral tribunals to give reasoned awards based on contractual terms and supported by evidence, particularly in complex construction disputes involving environmental regulations.
Bottom Line:
Arbitration and Conciliation Act, 1996 - Scope of interference under Sections 34 and 37 - Court under Section 34 cannot re-appreciate expert evidence or rely on documents not forming part of arbitral record - However, arbitral award can still be set aside if it ignores terms of contract, grants damages on no evidence, contains contradictory quantification and is patently illegal and perverse.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Sections 26, 28(3), 34, 37; Commercial Courts Act, 2015 Section 13(1A)
