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 is the root cause of project delays. This judgment reinforces the principle that contractual protections are not shields for defaulting parties, and arbitrators may award damages 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, with an estimated value of Rs.29.55 crore. The contract stipulated a 12-month completion period ending on 16.11.2007. The contractor, Hule Constructions, claimed that delays caused by the Command Area Development Authority - including failure to complete silt surveys, delayed handover of work sites, irregular water releases, and late payment of running bills - led to prolonged execution, idle machinery, and increased overheads.
Procedural History
- 17.11.2006: Work order issued with 12-month completion deadline.
- 16.02.2009: Contractor issued notice under Clause 30(1) of General Conditions of Contract (G.C.C.) for dispute resolution.
- 01.10.2011: Appeal filed before Chief Engineer under Clause 30(2); no decision rendered.
- 31.10.2011: Further appeal filed before Secretary, Water Resources Department under Clause 30(3); no resolution.
- 19.12.2011: Statutory notice issued under Section 80 of the CPC.
- 2012: Special Civil Suit No.26 filed for recovery of dues.
- 2016: Suit transferred to Commercial Court as Special Civil Suit No.6 of 2016.
- 24.08.2017: Court referred matter to arbitration under Section 89 of the CPC with consent of parties.
- 02.02.2019: Sole Arbitrator awarded Rs.10.54 crore to contractor on claims for price escalation, overhead loss, idle machinery, delayed payment interest, and illegal deductions.
- 12.04.2022: District Judge dismissed Appellant’s Section 34 application to set aside the award.
- 2022: Commercial Arbitration Appeal No.2 of 2022 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 delay. The Respondent sought confirmation of the award and dismissal of the appeal.
The Legal Issue
The central question was whether contractual clauses prohibiting price escalation and compensation for idling of machinery can be invoked by a party whose own breach caused the delay, thereby rendering such clauses inapplicable to shield it from liability.
Arguments Presented
For the Appellant
The Appellants contended that the arbitral award was contrary to the express terms of the contract. They relied on Clauses 6(A), 40, 41, and 38 of the G.C.C., which explicitly barred compensation for delays caused by departmental inaction, water in borrow pits, or any escalation of rates. They argued that the arbitrator exceeded jurisdiction by granting price escalation and overhead costs despite these prohibitive clauses. They further claimed that the contractor failed to submit daily progress reports and mobilize machinery as required, making the delay attributable to the contractor. Reliance was placed on Mc Dermott International v. Burn Standard Co. Ltd., National Highways Authority of India v. ITD Cementation, and Assam State Electricity Board v. Buildworth Private Limited to argue that arbitrators cannot override clear contractual terms.
For the Respondent
The Respondent argued that the arbitrator correctly found the Appellants in material breach by failing to complete silt surveys, delaying site handovers, and withholding payments. They emphasized that Clauses 6(A) and 41 only apply where the contractor bears no fault, and that the Supreme Court in Assam State Electricity Board and P.M. Paul has held that inflationary cost increases are a normal incident of delayed contracts. They further contended that the Appellants had waived any objection to the tribunal’s jurisdiction by participating in arbitration without raising Section 16 objections. The District Judge’s detailed review of evidence under Section 34 precluded re-appreciation by the High Court under Section 37.
The Court's Analysis
The Court examined whether the arbitrator’s award violated the principle of contractual autonomy or constituted patent illegality warranting interference under Section 34. It held that while arbitrators must respect contractual terms, they are not bound to enforce them mechanically when one party’s breach renders such terms inequitable.
"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 the delay is attributable to the contractor. Here, the Appellants’ failure to complete silt surveys until May 2007 - six months into the contract period - and the subsequent monsoon disruption were squarely attributable to them. The arbitrator’s finding that the Appellants’ breach triggered the delay was supported by documentary evidence and oral testimony.
The Court further relied on Assam State Electricity Board v. Buildworth Private Limited and P.M. Paul v. Union of India, affirming that in an inflationary economy, price escalation is a foreseeable consequence of unreasonable delay caused by the employer. The arbitrator’s interpretation of the contract was not unreasonable but rather a balanced application of equitable principles to rectify the imbalance created by the Appellants’ default.
The Court also rejected the Appellants’ challenge to the tribunal’s jurisdiction, noting that Section 16 objections must be raised at the earliest opportunity. Their participation in arbitration without objection amounted to waiver under Narayan Prasad Lohia v. Nikunj Kumar Lohia and Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy.
Finally, the Court reiterated that Section 37 does not permit re-appreciation of evidence. The District Judge’s detailed analysis under Section 34 precluded the High Court from substituting its own view on factual findings. The award did not suffer from patent illegality, as the arbitrator’s reasoning was grounded in contract interpretation and evidence, not arbitrariness.
The Verdict
The Appellants’ appeal was dismissed. The Court upheld the arbitral award of Rs.10.54 crore, holding that a defaulting party cannot invoke contractual no-compensation clauses to avoid liability for losses caused by its own breach. The interim stay granted in Civil Application No.10992 of 2022 was vacated.
What This Means For Similar Cases
Contractual Protections Are Not Absolute
- Practitioners must argue that no-escalation or no-compensation clauses are inapplicable when the employer’s breach triggers delay.
- Arbitrators may award consequential losses even if the contract purports to bar them, provided the breach is established.
- Drafting contracts with absolute exclusion clauses will not automatically shield defaulting parties from liability.
Evidence of Breach Is Critical
- To succeed in claiming escalation or idle costs, claimants must document: (i) timelines of departmental delays, (ii) communications requesting site handover or survey completion, and (iii) financial impact of idling.
- Oral testimony alone is insufficient; contemporaneous letters, site diaries, and progress reports are essential.
Jurisdictional Objections Must Be Timely
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Any challenge to the validity of the arbitration agreement or tribunal constitution must be raised under Section 16 at the first opportunity.
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Failure to object during arbitration constitutes waiver and bars later challenges under Section 34.
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Parties must not assume that silence during arbitration proceedings preserves their right to challenge jurisdiction post-award.
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Legal teams should include a dedicated Section 16 objection in the written statement before the arbitrator, even if the arbitration clause appears valid.
