Section 34 Arbitration Act | Wrongful Termination Justifies Loss of Profit & Performance Bank Guarantee Refund : Bombay HC

The Bombay High Court has affirmed that wrongful termination of a contract by a state-owned entity like ONGC entitles the aggrieved contractor to substantial damages, including refund of encashed performance bank guarantees and compensation for loss of profit. This judgment reinforces the limited scope of judicial interference in arbitral awards under the Arbitration and Conciliation Act, 1996, and clarifies that contractual obligations must be interpreted strictly as written, not by inferred expectations.

Background & Facts

The Dispute

The dispute arose from a turnkey contract awarded by Oil and Natural Gas Corporation Limited (ONGC) to Newton Engineering & Chemicals Ltd. (Newton) for the modernization of the Effluent Treatment Plant (ETP) at ONGC’s Uran Plant in Maharashtra. The contract, executed on 29th March 2016, was for a total value exceeding Rs. 100 crores and required Newton to deliver engineering, procurement, and construction services. Newton had partnered with M/s. UEM India Private Limited (UEM) as its technical collaborator under a separate Technical Collaboration Agreement dated 6th May 2014, but UEM was not a party to the main contract.

Key Facts

• The contract was awarded following Newton’s bid submitted on 7th July 2014.
• The Contract (dated 29.03.2016) explicitly stated it constituted the entire agreement between the parties and superseded all prior communications.
• Clause B.1.2.4(C) of the Contract identified UEM as a technical collaborator but placed full responsibility for execution on Newton.
• The Contract did not contain any clause requiring UEM’s signature or approval on engineering drawings.
• The work breakdown structure, as per the Final Revised Planning Package dated 7th January 2016, allocated only 5% weightage to Engineering (including drawings), 55% to Material Procurement, and 40% to Construction.
• Sludge disposal from the surge pond was identified by Newton as a foundational activity for all civil and mechanical works, but ONGC failed to provide clear guidelines or approvals for its removal.
• Newton had mobilized resources and initiated preliminary activities from August 2015, but progress stalled due to lack of clarity on sludge disposal and non-payment of dues.
• ONGC issued a show cause notice dated 9th May 2017, alleging negligible progress (2.01% against 68.96% scheduled) and citing UEM’s non-involvement as a reason.
• Newton responded on 29th May 2017, asserting that delays were caused by ONGC’s indecision on sludge disposal, failure to approve designs, and refusal to pay pending invoices.
• ONGC terminated the contract on 15th June 2017, effective 7th June 2017, without addressing Newton’s rebuttals.
• ONGC subsequently encashed the performance bank guarantee of Rs. 9,42,99,150/-.

Procedural History

• 07.07.2014: Newton submitted bid for ETP modernization.
• 06.05.2014: Technical Collaboration Agreement executed between Newton and UEM.
• 11.05.2015: Letter of Award issued.
• 29.03.2016: Contract executed between ONGC and Newton.
• 09.05.2017: ONGC issued show cause notice alleging delay and non-compliance.
• 29.05.2017: Newton submitted detailed reply attributing delays to ONGC’s inaction on sludge disposal and approvals.
• 07.06.2017: Contract terminated by ONGC.
• 15.06.2017: Termination formalized via notice.
• 2017: Newton invoked arbitration and filed Section 9 petition seeking injunction against encashment of bank guarantee - injunction denied; guarantee encashed.
• 26.08.2021: Arbitral Tribunal delivered unanimous award in favor of Newton, awarding Rs. 27.43 crores.
• 17.10.2025: Single Judge of Bombay High Court dismissed ONGC’s Section 34 petition challenging the award.
• 01.01.2026: ONGC filed Commercial Arbitration Appeal No. 1 of 2026 under Section 37.
• 30.04.2026: Division Bench of Bombay High Court dismissed the appeal.

The Parties' Positions

ONGC’s Position:

• Newton failed to meet contractual milestones and did not obtain UEM’s approval on engineering drawings, which ONGC claimed was a mandatory precondition.
• The termination was justified under Clause 12.4 of the Contract.
• The Tribunal’s findings were internally contradictory and perverse.
• The award of Rs. 27.43 crores was unsupported by evidence and based on arbitrary assumptions.

Newton’s Position:

• Delays were caused by ONGC’s failure to resolve sludge disposal protocols and provide timely approvals.
• The Contract did not require UEM’s signature on drawings; UEM was merely a technical collaborator, not a contractual party.
• The termination was wrongful and in bad faith.
• The award was well-reasoned, supported by documentary evidence, and within the Tribunal’s domain.

Relief Sought

Newton sought:

• Refund of Rs. 9,42,99,150/- encashed from the performance bank guarantee.
• Payment of Rs. 1,06,91,238/- for work done and payments made to UEM and vendors.
• Rs. 2 crores for loss of revenue from sludge recycling.
• Rs. 14,93,79,332/- for loss of profit.
• Interest and costs.

ONGC sought:

• Setting aside of the arbitral award under Section 34.
• Reversal of all monetary awards.
• Award of Rs. 133.8 crores in counterclaims for delay damages and infructuous expenditure.

The Legal Issue

The central question was whether an arbitral award finding wrongful termination of a contract and awarding loss of profit and refund of a performance bank guarantee can be set aside under Section 37 of the Arbitration and Conciliation Act, 1996, on grounds of alleged internal contradictions or lack of evidence, when the findings are plausible and based on a reasonable interpretation of the contract.

Arguments Presented

For the Appellant

Mr. Navroz Seervai, Senior Advocate for ONGC, contended that the arbitral award suffered from internal contradictions, particularly regarding the role of UEM. He argued that while the Tribunal acknowledged UEM’s critical involvement in securing the contract, it simultaneously held that UEM’s approval was not contractually required - a contradiction rendering the award perverse. He further submitted that the Tribunal erred in assigning only 5% weightage to engineering drawings, thereby downplaying their foundational importance. He challenged the award of Rs. 14.94 crores for loss of profit as arbitrary, unsupported by actual loss evidence, and premised on a flawed finding of wrongful termination. He relied on Morgan Securities & Credits Pvt. Ltd. v. Samtel Display Systems Ltd., McDermott International Inc. v. Burn Standard Ltd., and NAFED v. Roj Enterprises to argue that courts may set aside awards with internal inconsistencies or where the arbitrator fails to address material submissions.

For the Respondent

Mr. Mayur Khandeparkar for Newton argued that the Tribunal’s findings were consistent and grounded in the express terms of the Contract, which placed full responsibility on Newton and did not require UEM’s involvement. He emphasized that the Tribunal correctly identified ONGC’s failure to resolve sludge disposal as the primary cause of delay, and that the award of loss of profit followed established principles under M/s. A.T. Brij Paul Singh & Ors. v. State of Gujarat and Mohd. Salamatullah v. Government of Andhra Pradesh. He contended that the award was supported by invoices, bank statements, and correspondence, and that the Tribunal’s interpretation was a plausible one within its domain. He relied on OPG Power Generation v. Enexio Power Cooling Solutions and Ramesh Kumar Jain v. BALCO to assert that courts cannot re-appreciate evidence or substitute their view for that of the arbitrator under Section 37.

The Court's Analysis

The Bombay High Court, in a detailed analysis, held that the arbitral award was not vitiated by internal contradictions. The Court examined paragraphs 124 and 163 of the award, which ONGC claimed were inconsistent, and found that the Tribunal had drawn a clear distinction between UEM’s role as a technical collaborator under a separate agreement and its non-role under the main contract. The Court emphasized that the Contract, drafted by ONGC, made Newton solely responsible for performance and contained no clause requiring UEM’s signature on drawings.

"The Contract does not provide that UEM should sign all drawings. UEM has no role in the Contract. The Contract only makes Claimant liable and responsible."

The Court noted that the Tribunal’s conclusion was supported by Recitals B and C of the Contract, which listed the documents forming part of the agreement and did not include UEM’s approval as a condition. The Court further held that the 5% weightage assigned to engineering in the work breakdown structure was a relevant factor in assessing contractual priorities, and that the Tribunal’s view was reasonable.

Regarding sludge disposal, the Court found that the Tribunal had correctly identified it as a foundational activity, given that civil, mechanical, and instrumentation works were contingent upon site clearance. The Court held that ONGC’s failure to respond to Newton’s detailed rebuttal in its termination notice rendered the termination arbitrary and unjustified.

On the award of loss of profit, the Court affirmed that once wrongful termination is established, compensation on a reasonable basis - including percentage-based estimation - is permissible under Indian law. The Tribunal’s use of a 15% profit margin was not arbitrary but aligned with precedents in A.T. Brij Paul Singh and Salamatullah. The Court also upheld the refund of the performance bank guarantee as a direct consequence of wrongful termination.

The Court rejected ONGC’s reliance on Morgan Securities and NAFED, distinguishing them on facts: Morgan involved a direct numerical contradiction in valuation, while NAFED concerned judicial failure to address submissions - neither of which applied here. The Court reiterated that under the 2015 Amendment to the Arbitration Act, judicial interference is permissible only for patent illegality or perversity, not for mere errors in appreciation of evidence.

The Verdict

The appeal was dismissed. The Court upheld the arbitral award dated 26th August 2021 in its entirety. Newton is entitled to:

• Refund of Rs. 9,42,99,150/- encashed from the performance bank guarantee;
• Rs. 1,06,91,238/- for work done and payments to vendors;
• Rs. 2 crores for loss of revenue from sludge recycling;
• Rs. 14,93,79,332/- for loss of profit;
• Interest and costs as awarded by the Tribunal;
• All counterclaims by ONGC are rejected.

No order as to costs was made on the appeal.

What This Means For Similar Cases

Contractual Language Trumps Expectations

• Practitioners must argue that where a contract is silent on third-party involvement (e.g., technical collaborators), no obligation can be inferred - even if the collaborator was instrumental in securing the contract.
• Drafting parties (typically state entities) bear the risk of ambiguous or incomplete clauses; courts will not rewrite contracts to favor the drafter.

Loss of Profit Is Recoverable on Reasonable Estimation

• In cases of wrongful termination, loss of profit need not be proven with exact accounting; a percentage-based estimate grounded in industry norms and contract value is sufficient.
• The 15% benchmark used here is likely to be cited in future arbitrations as a reasonable proxy for profit margin in engineering contracts.

Arbitral Awards Are Shielded from Re-appreciation

• Courts will not interfere with arbitral findings on factual disputes, including delay attribution, even if another view is possible.
• Alleged contradictions must be material and irreconcilable - not merely interpretive differences.
• The burden is on the challenging party to show patent illegality or perversity, not just error.

Sludge and Environmental Compliance Are Contractual Factors

• In infrastructure projects involving hazardous waste, failure by the employer to define disposal protocols may constitute a material breach.
• Contractors may successfully argue that environmental approvals are foundational to execution, shifting liability for delays to the employer.

Documentary Evidence Prevails Over Oral Testimony

• Bank statements, invoices, and correspondence are sufficient to substantiate claims in arbitration, even if they do not strictly comply with the Bankers’ Books Evidence Act.
• Arbitrators are not bound by strict rules of evidence - a critical advantage for claimants in complex commercial disputes.