Extra Work, Valid Claim: Madras High Court Reaffirms Limits of Section 34 in Infrastructure Arbitration

Introduction

In a significant reaffirmation of arbitral autonomy and judicial restraint, the Madras High Court in Chennai Metropolitan Water Supply & Sewerage Board v. SPML Infra Ltd.[1] has once again underscored the limited scope of interference with arbitral awards under the Arbitration and Conciliation Act, 1996 (“A & C Act”). At the heart of the dispute lay a classic infrastructure conundrum, post-contractual design changes, and the consequential escalation in execution costs. The Court was tasked with evaluating whether compensation awarded for such deviations, arising in a contract governed by FIDIC conditions, could withstand scrutiny under the narrow lens of “public policy.” With meticulous reasoning, the Court not only upheld the arbitral tribunal’s findings but also delivered a strong message on the sanctity of contractual fairness and the evidentiary finality of well-reasoned arbitral awards. This article offers insights for practitioners navigating complex construction disputes in an arbitration-driven regime.

Facts of the Case

In October 1997, the Chennai Metropolitan Water Supply & Sewerage Board (“CMWSSB”) floated a tender for the construction of a permeate conveyance pipeline, which was awarded to SPML Infra Limited (“SPML”) pursuant to a contract executed on 26^th November 1998. The contract, partly funded by Japanese Yen, involved a dual-currency component, ₹18.05 crores and JPY 51.90 crores. The scope of work broadly entailed the construction of a pumping and emergency station at Koyambedu, supply and installation of electro-mechanical and instrumentation equipment, and laying of 1,700 metres of ductile iron pipeline along with all necessary accessories.

The dispute arose from post-contractual changes implemented by CMWSSB in the alignment of the pipeline, which had a cascading effect on the volume and nature of the work required. While the original contract envisaged that only 10 – 15% of the pipeline would be laid underground, the altered alignment necessitated that 47.42% of the actual pipeline laid, approximately 5,637 metres, had to be constructed beneath road surfaces. This was a significant deviation from the originally intended 1,759 metres. In addition, the average excavation depth increased from 2.68 metres to 3.16 metres, representing an 18.65% rise, thereby resulting in greater operational complexity, increased cost, and additional safety and permitting requirements.

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The Arbitration

SPML Infra raised 16 claims before the arbitral tribunal, including compensation for the increased scope of work, while CMWSSB raised a counterclaim alleging delay and seeking liquidated damages to the extent of 10% of the contract price. The arbitration proceedings culminated in a majority award dated 15^th December 2007, wherein the Arbitral Tribunal, after detailed consideration of the contractual terms, correspondence, and execution records, ruled substantially in favour of SPML Infra Limited. The Tribunal rejected CMWSSB’s contention that risks were contractually assumed by SPML under Clauses 8.1[2] and 20[3] of the General Conditions of Contract (“GCC”), and held that those provisions were rendered inapplicable in light of the post-contractual changes initiated by CMWSSB. It further relied on Clause 28 of the GCC, which permits compensation for additional work, and noted that execution of the altered scope was done under explicit written instructions of CMWSSB’s engineers and with day-to-day supervision.

The Tribunal awarded a sum of ₹5,19,57,857 under Claim No. 2[4], being the unpaid balance of the total computed entitlement of ₹9,87,05,340, after adjusting for ₹4.67 crores already paid. The enhanced rate adopted by the Tribunal was based on the CMWSSB’s own rate analysis methodology and justified by site-specific complexities such as deeper excavation, additional de-watering, road cutting, and regulatory compliance. The Tribunal applied a 106% multiplier to the base rate to arrive at the final figure. Additionally, the majority award granted interest at 12% per annum from 1^st September 2003 till the date of payment, with an escalation to 15% per annum if payment was not made within three months from the date of award. A minority award, delivered by one of the arbitrators, awarded a lesser sum (₹1.54 crores plus interest), but notably also rejected the employer’s counterclaim for liquidated damages.

Aggrieved, CMWSSB filed a petition[5] under Section 34[6] of the A&C Act, and the only issue before the High Court concerned compensation for additional excavation and underground pipeline work. The Single Judge dismissed the Section 34 challenge in 2017, following which CMWSSB preferred an appeal under Section 37[7], culminating in the present judgment rendered by the Division Bench on 21^st March 2025.

Issue Before the High Court

Whether the arbitral award granting compensation to SPML Infra Ltd. for additional work, arising out of post-contractual changes in pipeline alignment and excavation depth, was liable to be set aside under Section 34 of the A&C Act, on the ground of being in conflict with the public policy of India.

The Court’s Observations and the Judgment

The Division Bench of the Madras High Court[8], dismissed the appeal filed under Section 37 of the A&C Act, thereby upholding the learned Single Judge’s decision rejecting the challenge to the arbitral award under Section 34. The Court’s reasoning reflects a faithful application of the settled principles governing judicial restraint in arbitral matters and a firm endorsement of factual finality in construction disputes, notably:

Limited scope of interference under Section 34: The High Court emphasised that under Section 34(2)(b)(ii), an arbitral award may be set aside only if it is in conflict with the public policy of India, and not merely because an alternate view is possible. The Court referred to binding precedents such as Associate Builders v. Delhi Development Authority[9] and Ssangyong Engineering & Construction Co. Ltd. v. NHAI[10], which clarifies that interference is permissible only where the findings are arbitrary, capricious, perverse, or where the conscience of the Court is shocked, or where the illegality goes to the root of the matter.

Findings of fact by the Arbitral Tribunal: The Court found no merit in the appellant’s contention that the award was based on an erroneous interpretation of contractual clauses. On the contrary, the Court noted that the Arbitral Tribunal had returned well-reasoned findings of fact, based on post-contractual realignment of the pipeline; an increase in the underground length of the pipeline; an increase in excavation depth; CMWSSB’s express directions and written approvals of the revised alignment; and jointly signed job cards recording the extent and nature of execution. The Court held that these were not speculative or uncorroborated inferences, but findings rooted in documentary evidence and technical records maintained under the supervision of CMWSSB’s engineers.

Legitimacy of compensation for additional work: The appellant had sought to invoke Clauses 8.1 and 20 of the GCC to argue that the contractor assumed the risk of underground conditions and was not entitled to additional compensation. The High Court, however, upheld the Tribunal’s view that such clauses could not apply in cases involving substantial post-award changes, particularly where:

• The original alignment was significantly altered;
• The extra work was executed with the employer’s concurrence; and
• The claim was computed using the employer’s own rate analysis.

The Court accepted the Tribunal’s reasoning that these changes fundamentally altered the contractual matrix, making the standard risk-allocation clauses inapplicable.

Deference to Arbitral quantification: Notably, the Court accepted the Tribunal’s methodology in adjusting the rate of compensation by 106% over the base estimate, citing that the Arbitral Tribunal is the final judge of the quantity and quality of evidence. It reiterated that even an award based on “little evidence” is not liable to be set aside if it is not perverse or irrational.

Holding that the arbitral award did not suffer from any patent illegality or conflict with public policy, and that it was passed after due application of mind to the evidence on record, the Court dismissed the appeal in its entirety. It further directed the appellant to pay the costs of ₹2,00,000 to SPML.

Practical Takeaways

1. Judicial non-interference with arbitral findings of fact: The judgment reinforces that Arbitral Tribunals are the final adjudicators of factual disputes, especially in technically complex matters like construction contracts. Courts will not re-evaluate evidence or substitute their own views unless the award is shown to be patently illegal, perverse, or shocking to judicial conscience.
2. Post-contract changes can justify extra compensation: Even in contracts with broad risk-assumption clauses (such as Clauses 8.1 and 20 of FIDIC-based GCC), significant post-contractual modifications, particularly those directed by the employer, may disentitle the employer from invoking such clauses to deny payment. Compensation for additional work is legally sustainable when backed by documentation, instructions, and mutual performance.
3. Rate analysis by arbitrators will be respected: The Court’s deference to the 106% adjustment in rate applied by the Arbitral Tribunal reflects a pragmatic acceptance of on-ground realities in project execution. So long as the methodology is logical, evidence-based, and arises from the parties’ own contractual mechanisms, courts will not interfere.
4. Public policy challenge narrowed further: The decision reiterates that challenges under Section 34(2)(b)(ii) on the ground of conflict with public policy must meet a high threshold. The mere possibility of an alternate interpretation, or a more conservative quantification, is not a valid ground for setting aside an award.
5. Clarity for EPC and infrastructure contracts: This ruling provides guidance for contractors and employers alike in engineering, procurement, and construction (EPC) contracts. Deviations from the original scope, especially if approved or directed by the employer, must be properly documented and evaluated. Employers must be cautious in issuing post-award changes without formal variation orders, while contractors must maintain contemporaneous records.

Conclusion

The Madras High Court’s decision in Chennai Metropolitan Water Supply & Sewerage Board v. SPML Infra Ltd. is a clear reaffirmation of the principle that arbitral awards, particularly in technically intensive construction disputes, are entitled to substantial judicial deference. Where an Arbitral Tribunal renders a reasoned award based on contract interpretation, factual records, and established methodology, courts will not interfere merely because another view is possible. The judgment strikes a balanced note between enforcing party autonomy in arbitration and upholding fairness in the face of post-contractual variations. For stakeholders in FIDIC-based and EPC contracts, the decision offers valuable guidance on risk allocation, the limits of standard clauses, and the evidentiary standards expected to sustain claims for additional work.

Foot Notes……………………………………………………………………………………….

[1] OSA No.20 of 2019, decided on 21^st March 2025

[2] Clause 8.1 of the GCC obliges the contractor to be deemed to have conducted a full inspection of the site and its surroundings prior to submitting the tender, including ascertaining the nature of the ground and subsoil, the extent of the work, site conditions, materials required, and all relevant risks or contingencies that may affect execution or entitlements under the contract.

[3] Clause 20 of the GCC places the onus on the contractor to investigate and form his own assessment regarding underground structures and conditions likely to be encountered during execution. It expressly bars any claims for damages arising from errors, omissions, or inaccuracies in site-related information, thereby allocating the risk of subsurface conditions to the contractor.

[4] Claim No. 2 pertained to additional compensation sought by SPML on account of increased excavation depth and extended length of pipeline laid beneath the road surface, both resulting from post-contractual changes in pipeline alignment.

[5] Initially, challenging multiple claims; however, after partial adjudication and withdrawal of some grounds, the sole surviving issue before the High Court was Claim No.2.

[6] “Section 34- Application for setting aside arbitral awards”-Under Section 34, an arbitral award may be set aside only by a court upon limited grounds, such as incapacity of a party, invalidity of the arbitration agreement, procedural unfairness, or the award exceeding the scope of reference. Additionally, an award may be set aside if it is in conflict with the public policy of India, which includes instances of fraud, contravention of fundamental legal policy, or violation of basic notions of justice. In domestic arbitrations (other than international commercial arbitrations), an award may also be set aside if it is vitiated by patent illegality appearing on its face. However, mere errors of law or reappreciation of evidence do not warrant interference

[7] “Section 37- Appealable orders”- Section 37 provides for a limited right of appeal against specific orders, including orders under Section 34 either setting aside or refusing to set aside an arbitral award. It also permits appeals against certain interim measures granted or refused under Sections 9 and 17, and against decisions on jurisdiction under Section 16. No second appeal lies under this provision, except a constitutional appeal to the Supreme Court.

[8] Comprising Chief Justice K.R. Shriram and Justice Mohammed Shaffiq

[9] (2015) 3 SCC 49

[10] AIR 2019 SC 5041