(Sanjay Kumar and K. Vinod Chandran, JJ.)
Madhav Infra Projects Limited _______________________ Appellant;
v.
State of Rajasthan ______________________________ Respondent.
Civil Appeal No. 3229 of 2026 (@ Special Leave Petition (C) No. 15863 of 2025), decided on March 10, 2026
The Order of the court was delivered by
Order
1. The appeal arises from an order of the High Court under Section 37 of the Arbitration and Conciliation Act, 19961 interfering with an arbitral award affirmed under Section 34 of the Act. The Division Bench before entering into the issues raised rightly analyzed the jurisdiction vested under Section 37 of the Act. Summarizing the law, it was found that under Section 34, the Court does not sit in appeal over the arbitral award and only interferes if the award is against India’s Public Policy or amounts to patent illegality on account of contravention of Indian Law, violations of the Act or in breach of the terms of contract. The power of the Appellate Court under Section 37 is equally constrained in not substituting a possible view.
2. The dispute arose with respect to a Build Operate and Transfer (BOT) Project for construction of Sikar Bypass. According to Sri. Vivek Chib, learned Senior Counsel appearing for appellant/the Concessionaire, Sikar was a city where multiple highways converged and a necessity arose to construct a Bypass to avoid the traffic congestion in the city and also to provide smooth traffic to the five big cities connected with Sikar. The necessity as portrayed in the project report along with the Origin and Destination Survey (ODS), based on which the returns were estimated, clearly indicate a 20% return on investment. The Concessionaire was not able to achieve the estimated returns by reason only of the State Government, the awarder, having not complied with the terms of the contract. The violation is said to be insofar as not prohibiting the vehicles to use the other Highways to Sikar, while prohibiting traffic only on the Bikaner-Jaipur Highway. The loss caused was on account of the vehicles having not used the Bypass, as it was intended to be used, for failure of the State Government to prohibit traffic on these Highways directly to Sikar avoiding the toll collection points on the Bypass. Though not a specific term; a condition as provided in the contract, it is implied, as found by the Tribunal considering the fact that the project report and the estimated traffic diversion and the toll collection projected could have been achieved only if such prohibition of traffic was put in place. It is the submission of the learned Senior Counsel that the Arbitral Tribunal was perfectly within its powers to imply the prohibition especially looking at the intention, the project outlay and the schedule of repayment as arrived at by the State itself. A possible view of the Arbitral Tribunal shall not be interfered with under Section 37 is the contention.
3. Sri. Padmesh Mishra, learned Additional Attorney General for the respondent-State, however, points out that there was no specific condition that the traffic through the Highways would be diverted to the Bypass by issuing a notification prohibiting direct access to Sikar. It is also the contention that 20% interest was the estimated returns, which was not at all a promise made by the State, which was urged before the Arbitral Tribunal also. Clause 4 (page 48 of the bid document) provided that the Concessionaire will be required to make their own assessment of the project including traffic, actual/anticipated, and execute its own design and drawing without in any way affecting the scope and technical requirement of the project, subject only to the final approval of the designs and drawings by the Government. Hence the bid should have been submitted after a fair own assessment of the toll collection possible, before making the bid to aid which the estimated projection was made, which is not a promise as such. The Government, it is asserted, has not made any commitment with respect to the returns possible, which in any way cannot be made in the context of a BOT contract where the Concessionaire is provided a specific period for construction and operation. Any amounts collected in excess of the projected returns cannot be claimed by the State and any loss would not be compensated by the State is the argument. We were also taken through the minority opinion which according to the learned AAG is more in tune with the law settled on arbitration, prohibiting an Arbitral Tribunal from a deviation from the essential terms of the contract or a term being read into the contract which is not expressly provided.
4. The Arbitral Tribunal framed 10 issues for consideration: the first two being the maintainability of the claims and the questions raised on limitation, delay and latches, which were rightly found in favour of the Concessionaire. While looking at the maintainability of the claims the Tribunal specifically noticed the deletion of a term, which absolves the Government from any guarantee for the data included in the project report. Then, it was noticed that the termination of operation and consequent transfer under the BOT agreement, though originally stipulated to be at the expiry of the ‘concession period’ has been altered to ‘after recovery of investment’. In considering the breach of terms of the agreement, the ‘Necessity’ as highlighted in Clause 3 of the Project Report was underlined, which required traffic from three roads to be diverted to the Bypass. One the National Highway and the other two, State Highways. With respect to the State Highways there was no notification issued prohibiting the traffic through such roads.
5. The prohibition implemented was only with respect to the Bikaner-Jaipur Road, National Highway No. 11, by a notification dated 27.05.2000, which the State contended was not on the basis of an obligation flowing from the BOT agreement issued. The said prohibition was only as a measure of public interest especially considering the heavy traffic in Sikar city, to decongest which the Bypass was proposed. The Tribunal refused to accept the respondent’s contention that the said notification had no link with the Bypass project and on the other hand categorically found an implied contract that the traffic through the other roads would also be restricted.
6. Issues 4 to 6 and findings thereon are not relevant for our purpose. Issues 7 and 8 pertained to loss suffered by the Concessionaire on investment and the loss of return on investment claimed, allegedly as assured @ 20%. In considering the loss suffered by the claimant on account of non-recovery and loss of return on investment the State Government was found to have agreed and assured an investment @ 20% per annum. The clauses deleted and modified as noticed above were specifically relied on to clearly find that the claimants were not able to recover the investment and returns as projected. They had requested for an extension relying on the modified Clause 7 which was ignored by the respondent-State while taking over the project on the mid-night of 02.12.2008, on expiry of the concession period stipulated in the agreement of 10 years. The takeover was without honoring the modification in Clause 7, which permitted the Concessionaire to continue till the recovery of investment was achieved.
7. We have been taken through the arbitral award and the terms of the contract which are necessary for adjudication. We have to observe at the outset that the Arbitral Tribunal had found breach of contract on two grounds. First, the expected traffic as projected having not been facilitated by reason only of prohibition of traffic on the two roads leading to Sikar city not being issued. The other ground for finding breach was the modification of Clause 7, permitting the Concessionaire to continue operation till recovery of the investment, having been totally ignored. Insofar as the compensation for loss is concerned, we cannot but notice that the Tribunal has specifically observed that what has been awarded is far less than the 20% returns projected in the project report which, in any event, is an estimate and not necessarily a promise. The State Government thus was not held down to any promise of ensuring definite returns and not at all to an assurance of 20% returns. This would not be possible, even according to us, in a BOT project which; though advancing a public purpose, for the Concessionaire is a purely business proposition, the commercial considerations of which would be reckoned while submitting a bid, the successful completion of which, with profits, would be at the sole risk and responsibility of the bidder/Concessionaire; unless an express term guaranteeing the returns is available in the agreement.
8. We are not convinced that there was any implied term in the contract that the traffic through the two State Highways would be regulated so that there is diversion of vehicles and enhanced use of the Bypass. Admittedly, the Bypass was envisaged to skirt Sikar and provide smooth traffic on the National Highway 11, which is evident from the drawing produced by the appellant along with the additional documents; available at page 50 of the compilation. The other two roads referred to are from Salasar to Sikar and Jodhpur to Sikar, both State Highways. We see from the drawing itself that they intersect the Bypass. When such intersection was conceded to by the Concessionaire, there cannot be raised any implied contract to prohibit traffic on the State Highways, especially since it is very difficult to identify which of the vehicles would be proceeding to Sikar or that, on reaching Sikar which would proceed either to Bikaner or Jaipur.
9. We are unable to agree with the Arbitral Tribunal that there is an implied contract for prohibition of traffic through the State Highways. The prohibition issued on the National Highway was not essentially arising out of the commitment from the contract but in public interest, with the intention of decongesting Sikar city, the very purpose of construction of the Bypass. When an implied term of the contract cannot be found even in the prohibition issued by the State on the National Highway, there is no question of finding such a prohibition on the State Highways, intersecting the Bypass to be an implied commitment flowing from the BOT agreement.
10. Having said that, we cannot but notice the other violations as found by the Arbitral Tribunal. Clause 4 of the terms and conditions of the BOT agreement read as follows: –
“No guarantee for the data included in the Project Report can be made by Govt. although it will be prepared to the best information and the entrepreneur should make his own assessments also”.
This was deleted and the same was confirmed by the parties which in terms, if not a guarantee; absent in express terms, but at least an assurance of returns insofar as the data in the project report, which is a part of the Concession Agreement, as agreed to by the parties.
11. Further there were two other Clauses, one deleted and the other modified, which were as under:—
“The entrepreneur will be entitled to retain the fees so collected during the concession period notwithstanding the fact that the ‘Project Cost’ has been recovered prior to the expiry of the said concession period”.
“After expiry of concession period, the facility shall stand transferred to Govt. free of cost and all rights of the entrepreneur on the assets created will stand extinguished thereafter and stand transferred to the Government”.
12. The first of these clauses was deleted and the second modified to read as under:—
“After recovery of investment, the facility shall stand transferred to Govt. free of cost and all rights of the entrepreneur on the assets created will stand extinguished thereafter and stand transferred to the Government”.
13. The effect of these deletions and modifications as found by the Tribunal would be that there is a guarantee provided insofar as the recovery of investment, if not with 20% as such, at least reasonable. The agreement provided for a two-year period for construction and then eight years’ period for operation, which also by the modification as to time of expiry, carved out an exception insofar as permitting the Concessionaire to continue operation if the recovery of the investment has not been made in the period provided. The above ground of deletion of terms of contract is severable from the violation found on the failure of the Government to issue notification prohibiting traffic on the State Highways, the last of which we have already held cannot be sustained. The violation as found by the Tribunal on the ground of not honoring the provision for continued operation till recovery of investment stands on its own legs.
14. In this context, we would also notice that though the Concessionaire staked a claim of investment totaling Rs. 13,01,26,878.00/-, the Tribunal only accepted the initial investment of Rs. 7,70,76,226.00/- and rejected the hire charges claimed by the Concessionaire for the machinery deployed amounting to Rs. 5,30,50,652.00/-. The disallowance was also due to the fact that the balance sheet of the Concessionaire produced before the Tribunal did not reflect the amount of hire charges as an investment. The Tribunal found that the project was completed on 30.12.1999 and the toll collection was started from 16.01.2000. When the initial investment as noticed hereinabove was due to insufficient toll collection the return of investment increased to Rs. 8,21,02,897.00/- in the year 2002-2003 which increase is reflected in the balance sheet. However, at the end of the concession period, the Tribunal found the recovery of investment to be deficient only to the extent of Rs. 1,79,48,477.00/-, which alone was awarded under the head of recouping of investment. The loss of return of investment as computed by the Tribunal was not @ 20% per annum return projected but on the actual interest paid during each financial year, revealed from the balance sheet. The accumulated loss of return of investment came to Rs. 5,79,23,439.00/- which according to the Tribunal is far less than the projection by the respondent State in the project report @ 20%. This is awarded not by way of profit or even returns on investment, but for incurred interest as revealed from the balance sheet of the Concessionaire.
15. As per the estimate provided in the project report, the Schedule of Repayment is available in Table 10.3. The project cost was estimated at Rs. 1043 lakhs, the returns from which were computed in the Table, as possible or probable, with 20% interest on investment in a period of six years. The net toll collection for each year was estimated, which in each year would be partially set off first against the interest component and the balance for recouping the principal amounts invested. The appropriation towards interest being higher in the early years and the ratio shifting in favour of the principal deduction in the later years, an accepted accounting practice ensuring zero interest accrual on the interest component.
16. The projection of recovery at 20%, though not a promise was the expectation on which the Concessionaire placed their bid. The terms of the agreement specifically provided for recovery of investment which has to be related to the project report and the estimated projections therein. It is also to be observed that the Tribunal did not adopt 20% interest on the investment but included the interest only on the basis of the actual payment as reflected from the balance sheet of the Concessionaire. The promise cannot be found for recovery of investment along with 20% per annum interest within six years or within the eight-year period provided in the agreement.
17. A promise can be found only on the specific terms of the agreement which permitted the continuance of the Concessionaire till the recovery of investment is made possible. The takeover made on the date of expiry of the eight year period without reference to the modified clauses and ignoring the representation made by the Concessionaire brings in the violation, which has to be compensated by the State on the actual non-recovery of investment and the loss computed on the basis of actual interest payment as disclosed from the balance sheet; which is the exercise adopted by the Arbitral Tribunal, by a majority.
18. We find absolutely no reason to uphold the order of the High Court which interfered with the award on the ground of patent illegality, which we find to be absent. We allow the appeal, setting aside the impugned judgment and restoring the award of the Arbitral Tribunal, to the extent of the ground of violation of agreement upheld by us and the computation of loss on investment and the interest paid, as carried out by the Tribunal being retained as such.
19. The appeal is allowed.
20. Pending application (s), if any, shall stand disposed of.
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1 For brevity, ‘the Act’
