The Bombay High Court has clarified that parties cannot rely on contractual clauses prohibiting price escalation or compensation for idling of resources when their own breach of contract is the root cause of delay. This judgment reinforces the principle that contractual protections are not shields for defaulting parties, and arbitrators may award compensation for consequential losses arising from such breaches.
Background & Facts
The Dispute
The dispute arose from a contract for repair and restoration of 19 minor irrigation tanks in Beed district, Maharashtra, awarded to Hule Constructions Private Limited at an estimated cost of Rs. 29.55 crores. The work order was issued on 17.11.2006 with a completion deadline of 16.11.2007. The contractor alleged that delays were caused by the State’s failure to complete mandatory silt surveys, delayed handover of work sites, irregular release of canal water, and non-payment of running bills. These delays extended the project by over three years.
Procedural History
- 2006: Contract awarded to Hule Constructions
- 2007: Contract deadline missed due to alleged State delays
- 2009: Contractor issued notice under Clause 30(1) of General Conditions of Contract (G.C.C.)
- 2011: Appeals under Clauses 30(2) and 30(3) filed but unaddressed
- 2011: Statutory notice under Section 80 of the CPC issued
- 2012: Civil suit filed for recovery of dues
- 2016: Suit transferred to Commercial Court and referred to arbitration under Section 89 of the CPC
- 2019: Sole Arbitrator awarded Rs. 10.54 crores to contractor on claims for price escalation, overheads, lost productivity, and illegal deductions
- 2022: District Judge dismissed Appellant’s Section 34 application to set aside the award
- 2026: Commercial Arbitration Appeal filed under Section 37 of the Arbitration and Conciliation Act
Relief Sought
The Appellants sought to set aside the arbitral award on grounds of patent illegality, alleged lack of consent to arbitration, and violation of contractual terms prohibiting price escalation and compensation for idling. The Respondent sought confirmation of the award and dismissal of the appeal.
The Legal Issue
The central question was whether arbitrators can award compensation for price escalation and idling costs when the contract explicitly prohibits such claims, if the delay causing those costs is attributable to the party invoking the prohibition.
Arguments Presented
For the Appellant
The Appellants contended that the arbitral award was contrary to the express terms of the contract, particularly Clauses 6(A), 38, 40, 41, and 45, which barred any claim for escalation, compensation for idle machinery, or revision of rates. They argued that the arbitrator exceeded jurisdiction by ignoring these unambiguous contractual limitations. Reliance was placed on Mc Dermott International v. Burn Standard Co. Ltd. and National Highways Authority of India v. ITD Cementation, but they asserted these cases did not override express contractual prohibitions. They further claimed the contractor failed to submit daily progress reports and mobilize machinery before silt survey completion, making the delay attributable to the contractor.
For the Respondent
The Respondent argued that the arbitrator correctly found the Appellants in material breach by failing to complete silt surveys, delaying site handover, and withholding payments. They emphasized that arbitrators are entitled to interpret contracts in light of conduct, and that contractual clauses cannot be invoked by a defaulting party to avoid liability. Reliance was placed on Assam State Electricity Board v. Buildworth Private Limited and P.M. Paul v. Union of India, which recognize that inflation and delay-induced costs are compensable when caused by the other party’s breach. The Respondent also highlighted that the Appellants had waived any objection to the tribunal’s jurisdiction by participating in arbitration without raising Section 16 objections.
The Court's Analysis
The Court examined whether the arbitrator’s award violated the principle that arbitral awards may be set aside only for patent illegality going to the root of the matter, not for mere error in appreciation of evidence. It held that the arbitrator did not ignore contractual terms but interpreted them in context of the Appellants’ conduct.
"Once the breach of the contract is noticed at the instance of the appellants herein, the appellants cannot thus fall back upon the clause of contract which provides that there shall be no escalatory price for delayed work."
The Court emphasized that Clause 6(A), which bars compensation for idle machinery, applies only when delay is not attributable to the department. Here, the delay stemmed from the Appellants’ failure to complete silt surveys until May 2007, followed by monsoon disruption - conditions beyond the contractor’s control. The arbitrator’s finding that the Appellants were responsible for the delay was supported by documentary evidence and was not arbitrary.
The Court further relied on Assam State Electricity Board v. Buildworth Private Limited and K.N. Sathyapalan v. State of Kerala, holding that while parties are generally bound by contract terms, equity and fairness require that a defaulting party cannot use contractual limitations to escape liability for losses directly caused by its own breach. The arbitrator’s award of price escalation and overhead costs was a reasonable application of contract law to rectify the imbalance created by the Appellants’ non-performance.
The Court also rejected the Appellants’ challenge to the tribunal’s constitution, noting that objections under Section 16 must be raised at the earliest opportunity. Their participation in arbitration without challenge amounted to waiver under Narayan Prasad Lohia v. Nikunj Kumar Lohia.
Finally, the Court reiterated that under Section 37, appellate jurisdiction is limited to reviewing whether the Section 34 court acted within its bounds. Reappreciation of evidence or disagreement with the arbitrator’s factual conclusions is impermissible. The award was neither patently illegal nor contrary to public policy.
The Verdict
The Appellants’ appeal was dismissed. The Bombay High Court upheld the arbitral award of Rs. 10.54 crores, holding that a party cannot invoke contractual prohibitions against compensation when its own breach is the cause of the loss. The Court confirmed that arbitrators may award consequential damages for delay-induced costs even in the absence of explicit escalation clauses, provided the breach is established.
What This Means For Similar Cases
Contractual Prohibitions Are Not Absolute Shields
- Practitioners must argue that no-escalation or no-compensation clauses are unenforceable if invoked by a defaulting party
- Evidence of breach must be meticulously documented to defeat such defenses
- Arbitrators may infer equitable liability even where contracts are silent or restrictive
Arbitrators Have Broad Interpretive Authority
- Courts will not interfere with contract interpretation unless it is so unreasonable that no fair-minded person could reach it
- Oral and documentary evidence of conduct can override literal reading of contract terms
- Claims for overhead, lost productivity, and interest remain viable if linked to the other party’s delay
Jurisdictional Objections Must Be Raised Early
- Failure to challenge tribunal constitution under Section 16 during arbitration constitutes waiver
- Post-award objections on jurisdiction are barred unless there is a fundamental absence of arbitration agreement
- Legal teams must file jurisdictional objections in written statements, not in Section 34 applications
