Revival of Arbitral Authority: Calcutta High Court Reaffirms Limited Interference Under Section 34 of the Arbitration Act

In a significant pronouncement of 24^th July 2025, the Calcutta High Court in M/s B.B.M. Enterprise v. State of West Bengal[1] reaffirmed the judiciary’s restrained role in arbitral matters under Section 34[2] of the Arbitration Act and Conciliation Act, 1996 (“A&C Act”). The Court set aside the earlier judgment of the trial court[3], which had interfered with the arbitral award rendered in favour of the contractor, B.B.M. Enterprise. The High Court’s judgment provides critical guidance on the interpretation of contract clauses, the boundaries of judicial review in arbitration, and the treatment of loss of profit claims.

Brief Facts and the Arbitration Dispute

The dispute stemmed from a government construction contract awarded to M/s B.B.M. Enterprise (“BBM”) by the State of West Bengal (“State”). The contract was prematurely terminated by the State in 2012, following a show-cause notice dated 17^th April 2012 issued under Clause 2[4] of the General Conditions of Contract (“GCC”), citing delay and inefficiency, by the Executive Engineer, P.W.D., Tamluk Division. However, under Clause 2 of the GCC, only the Superintending Engineer is vested with the authority to impose compensation for delay.

BBM initiated arbitration in accordance with Section 11[5] of the A&C Act, asserting that the termination was wrongful. In its statement of claim filed before the Sole Arbitrator[6], BBM advanced a composite monetary claim amounting to Rs.3,05,72,488, structured under five distinct heads:

1. Approximately Rs.1.97 crores for executed work allegedly not billed;
2. Rs.1.10 lakhs towards compensation for idle manpower;
3. Rs.29.76 lakhs on account of loss of profit arising from the premature termination of the contract;
4. Rs.5 lakhs claimed as compensation for reputational loss and loss of goodwill; and
5. Approximately Rs.72.12 lakhs towards interest on delayed payment of dues.

Conversely, the State raised counterclaims aggregating to approximately Rs.56.33 lakhs. These included:

12. Rs.12.50 lakhs representing forfeiture of the fixed security deposit under Clause 3 of the tender agreement;
13. Rs.42.23 lakhs as compensation for the period from 23^rd April 2012 to 15^th June 2012, calculated at 0.85% of the tender amount; and
14. Rs.1.50 lakhs towards ancillary expenditure incurred in issuing a fresh tender for the balance work.

The Sole Arbitrator allowed only Claim No. 3, pertaining to loss of profit, in favour of BBM, while rejecting the remaining four heads of claim advanced by the contractor. The counterclaims raised by the State were dismissed in their entirety.

Aggrieved by the partial award, the State filed an application under Section 34 of the A&C Act, seeking to set aside the award insofar as it allowed BBM’s claim for loss of profit. The State questioned the methodology adopted by the Arbitrator, who accepted the State’s own quantification of the unexecuted work to calculate the loss at 15%, in line with the Supreme Court ruling in A.T. Brij Paul Singh v. State of Gujarat[7]. Simultaneously, BBM also filed an application under Section 34, challenging the award to the extent it disallowed its other claims.

By a judgment and order dated 9^th August 2019, the District Judge allowed the State’s application and set aside the arbitral award rendered in favour of BBM. Consequently, BBM preferred FMA 1409 of 2022 before the Calcutta High Court. Thereafter, by a separate judgment and order dated 4^th January 2020, the Trial Court dismissed BBM’s challenge to the rejection of its other claims. As a result, BBM also filed FMA 1419 of 2022, impugning the said order. Therefore, BBM appealed under Section 37[8] of the A&C Act.

This blog is a part of our Global Arbitration Services.

Issues Before the High Court

The Division Bench[9] of the Calcutta High Court was called upon to determine:

1. Whether the learned trial court exceeded the scope of review permissible under Section 34 of the A&C Act;
2. Whether the Arbitrator’s award of an amount exceeding the claim for loss of profit[10] was perverse;
3. Whether the termination of the contract based on a show-cause notice dated 17^th April 2012, issued by an incompetent authority, was rightly held to be illegal by the Arbitrator;
4. Whether the Arbitrator’s interpretation of Clauses 2 and 3[11] of the contract was sustainable in law.

The High Court’s Observations and Judgment

1. Scope of review under Section 34: The Court underscored the principle that Section 34 of the Arbitration Act is not an appellate provision. Courts may interfere only if the award is:

• Contrary to the fundamental policy of Indian law,
• In conflict with public policy,
• Vitiated by patent illegality on the face of the award.

Mere errors in appreciation of evidence or contractual interpretation do not suffice.

2. Authority of the Arbitrator on interpretation and quantum: The Court observed that the Arbitrator’s decision to rely on the State’s own figure for the unexecuted portion of the work (Rs.3.96 crores) was not only justified but prudent. It reiterated that an award of a higher quantum than claimed is not perverse if the basis is acknowledged by the opposing party. Quoting Srinivas Ram Kumar Firm v. Mahabir Prasad[12], the Court held that granting relief based on the defendant’s own admissions is valid.

3. Wrongful termination and validity of the show-cause notice: The High Court upheld the Arbitrator’s finding that the Executive Engineer lacked authority under Clause 2 to issue the termination notice, only the Superintending Engineer was competent. Further, even if the clause did not explicitly require a show-cause, the principles of natural justice necessitated notice by a competent authority before terminating a contract with civil consequences.

4. Loss of profit and the 15% formula: The Arbitrator awarded 15% of the value of the unexecuted portion as loss of profit, based on the Supreme Court-approved formula in Brij Paul Singh. The Arbitrator determined the value of the unexecuted portion of the contract to be Rs.3,96,73,545, based on the State’s own admission that BBM had executed work worth only Rs.26,59,062 against the total tender value of Rs.4,23,32,607. Applying the 15% standard rate for loss of profit to the unexecuted portion (i.e., Rs.3,96,73,545 × 15%), the Arbitrator awarded Rs.59,51,032 under this head. This method of computation was found to be consistent with established jurisprudence and not arbitrary. The trial court’s view that such an award shocked judicial conscience was held to be misplaced. The High Court noted that the Arbitrator was an Engineer, and therefore his technical evaluation deserved deference.

Key Precedents Discussed

• Associate Builders v. DDA[13] – Judicial restraint in interfering with arbitral awards
• T. Brij Paul Singh v. State of Gujarat – 15% formula for loss of profit
• Ssangyong Engineering v. NHAI[14] – Patent illegality test
• Hindustan Construction Co. Ltd. v. NHAI[15] – Arbitrator’s interpretation must not be supplanted unless perverse
• OPG Power Generation v. Enexio Power[16] – Award contrary to the terms of the contract is illegal, but interpretation falls within the Arbitrator’s domain

KEY TAKEAWAYS

1. Section 34 review is not appellate in nature. The High Court reaffirmed that arbitral awards must be interfered with only on narrow, statutorily prescribed grounds.
2. Award in excess of claimed amount is permissible, especially when supported by the respondent’s own pleadings; such awards are not perverse.
3. Technical Arbitrators deserve deference. The background and expertise of the Arbitrator add legitimacy to the quantification of damages in technical matters.
4. Natural justice prevails over contractual silence, even where a contract does not mandate a show-cause notice; one must be issued by a competent authority to satisfy fairness.
5. Calculation of loss of profit recognised by the Supreme Court, use of 15% of the unexecuted portion as loss of profit remains a valid and reasonable standard.

Conclusion

The Calcutta High Court’s decision in M/s B.B.M. Enterprise v. State of West Bengal offers timely reaffirmation of the judiciary’s restrained role in arbitral matters and underscores the sanctity of arbitral autonomy. The judgment reinforces that arbitral tribunals are empowered to interpret contracts, assess evidence, and award damages, so long as the view taken is plausible and not perverse. It reiterates that courts, particularly under Sections 34 and 37 of the A&C, are not appellate forums and must resist the temptation to substitute their own views on merits or contract interpretation. Equally significant is the Court’s acknowledgment of procedural fairness and statutory compliance, particularly in relation to the competence of authorities issuing termination notices. The Court’s approach balances legal precision with commercial sensibility, recognizing that loss of profit is a legitimate head of claim when a contractor is wrongfully prevented from completing its scope of work.

For contracting parties, particularly in public infrastructure projects, this ruling serves as a cautionary note: deviation from the contractually stipulated processes, especially by unauthorised officers, may render consequential actions such as termination legally vulnerable. For practitioners, the judgment provides clear jurisprudential guidance on the contours of judicial interference, reinforcing core principles of finality, party autonomy, and minimal court intervention in arbitration. In a landscape where arbitration is increasingly the preferred mode of dispute resolution, this decision further strengthens the legislative intent of ensuring efficiency, fairness, and finality, without judicial overreach.

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

[1] FMA 1409 of 2022 and FMA 1409 of 2022, judgment dated 24^th July 2025

[2] Under Section 34 of the A&C Act, 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.

[3] District Judge, Purba Medinipur in J. Misc Case (Arbitration) no. 68 of 2018, judgment and order dated 9^th August 2019

[4] Clause 2 of the GCC provides that time is of the essence of the contract. In the event of delay by the contractor in commencing or completing the work as per the agreed timeline, the contractor is liable to pay compensation at the rate of 1% (or a lesser amount as determined by the Superintending Engineer) of the total contract value for each day of delay. The total compensation, however, is capped at 10% of the tendered amount. The clause also mandates specific progress milestones based on the duration of the contract.

[5] “Section 11 – Appointment of arbitrators”. Parties are free to agree on a procedure, failing which statutory defaults apply; each party appoints one arbitrator, and the two so appointed nominate the presiding arbitrator. In case of failure, the Supreme Court (for international commercial arbitration) or the relevant High Court (for domestic arbitration), or their designated institutions/persons, may appoint arbitrators. The Court’s role is confined to examining the existence of the arbitration agreement, and the decision is final and non-appealable. The Court must also ensure that the appointed arbitrator is independent, impartial, and satisfies any party-agreed qualifications. The provision further mandates expeditious disposal of such applications, preferably within 60 days of notice service.

[6] The Court appointed the Superintending Engineer, South Western Highway Circle, PW (roads) Directorate as the Sole Arbitrator

[7] (1984) 4 SCC 59. The Supreme Court held that where the employer is found to have wrongfully rescinded the contract after partial execution by the contractor, the contractor is entitled to damages for loss of profit. The Supreme Court has upheld 15% of the value of the unexecuted work as a reasonable measure for computing such loss (Para 11).

[8] Section 37 of the A&C Act 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.

[9] Comprising Justice Arijit Banerjee and Justice Rai Chattopadhyay

[10] Although BBM initially claimed Rs.29,76,504 as loss of profit in its statement of claim, the Arbitrator, relying on the respondent’s own pleadings regarding the value of unexecuted work, awarded Rs.59,51,032, applying the standard 15% loss of profit formula.

[11] Clause 3 empowers the Divisional Officer, acting on behalf of the Government, to adopt specific remedial measures in cases where the contractor becomes liable to forfeit the entire security deposit. These measures include: (a) rescission of the contract with forfeiture of the security deposit; (b) execution of the remaining work through departmental labour and materials at the contractor’s cost; and (c) reallocation of the unexecuted portion to another contractor, with any resulting excess costs recoverable from the original contractor. All assessments and certifications by the Divisional Officer under this clause are deemed final and conclusive. The contractor is barred from claiming compensation for losses or advances incurred in anticipation of performance.

[12] AIR 1951 SC 177. Ordinarily, a court cannot grant relief on a case not pleaded. However, where the alternative case is not only admitted in the defendant’s written statement but is also relied upon by the defendant as part of its own defence, it is open to the court to grant relief on such basis. A claim grounded on the defendant’s own admitted position cannot cause prejudice or surprise, and no additional evidence is required when the facts are expressly admitted (Para 9).

[13] (2015) 3 SCC 49. Under the “public policy” test, courts do not sit in appeal over arbitral awards. Errors of fact are not subject to judicial review, and a plausible view taken by the arbitrator must be upheld. The arbitrator is considered the final judge of the quality and quantity of evidence, even if not legally trained, and an award cannot be invalidated merely because it is based on limited or non-technical evidence (Para 33). An arbitral award may be set aside as being contrary to public policy if it is found to be against justice or morality, two distinct legal concepts. An award is said to be against justice only when it shocks the conscience of the court, reflecting a degree of unfairness or irrationality that renders it intolerable in law (Para 36).

[14] 2019 SCC Online SC 677. An arbitral award is liable to be set aside on the ground of patent illegality if it is based on no evidence at all or if the Arbitrator has ignored vital evidence that was material to the outcome. Such omission renders the award perverse in law (Para 42).

[15] (2024) 2 SCC 613.

[16] (2025) 2 SCC 417. While an arbitral tribunal is bound to decide in accordance with the terms of the contract, it retains the jurisdiction to interpret those terms in light of the contract as a whole, the parties’ conduct, correspondence, and pleadings. If the arbitrator’s conclusion is based on a plausible view, courts ought not to interfere. However, where such a view is not even a possible interpretation of the contract, the award is perverse and open to judicial interference (Para 84).