Pune Court Sets Aside Rs 91.04 Lakh of Arbitration Award in Military Engineering Services Contract Dispute

Pune, 7th November 2026: The District Commercial Court in Pune has partially allowed a petition filed by the Union of India challenging an arbitral award in a dispute involving a Rs 5.34-crore construction contract awarded to Kanika Construction Company for the provision of store accommodation at the Armed Forces Medical College (AFMC), Pune.

The court set aside Rs 91,04,711.34 from the arbitral award, citing patent illegality and findings that certain payments granted to the contractor were contrary to the terms of the contract. However, it upheld the remaining portions of the award.

The judgment was delivered on November 6, 2026, by District Judge-2 (Commercial Court) S. S. Kanthale in Civil Miscellaneous Application No. 1071/2016.

The Union of India, represented by the Chief Engineer, Pune Zone, had approached the court under Section 34 of the Arbitration and Conciliation Act, 1996, seeking to set aside an arbitral award dated July 18, 2016, which was subsequently corrected on August 17, 2016.

The dispute arose from a contract awarded to M/s Kanika Construction Company on March 5, 2009, for Rs 5.34 crore. The project involved constructing a double-storeyed building with three wings for BTD, MED and QM stores at AFMC, Pune, along with allied works.

The contractor completed the work on December 28, 2011, after receiving extensions to the original completion deadline. Subsequently, it raised several claims, which were referred to arbitration.

The Union of India challenged three specific components of the arbitral award relating to additional excavation costs due to changes in foundation strata, waterproofing treatment on accessible rooftops, and reimbursement for variations in material, labour and fuel prices.

On the excavation-related claim, the contractor had been awarded Rs 17.31 lakh. The court held that the contract already provided for a mechanism to determine rates for excavation in rock through deviation orders based on MES Schedule rates plus 55%. The department’s valuation of Rs 9.26 lakh was undisputed.
Consequently, the court set aside Rs 8,05,631.89 from this component, retaining the departmental valuation.

Regarding waterproofing treatment, the arbitrator had awarded Rs 47.84 lakh to the contractor. The court observed that the contract documents, including the schedule of finishes, structural drawings and relevant specifications, clearly included waterproofing treatment within the original lump-sum contract.

It also noted that the contractor had included waterproofing as a component while preparing the joint work yardstick and had received payments on that basis through 21 running account bills.

The court held that the arbitrator had overlooked important contractual documents and had failed to adequately address the department’s objection regarding Rs 24.89 lakh of the claim, which was allegedly unsupported by evidence. It therefore set aside the entire award of Rs 47,84,085 under this component.

The third disputed component involved an escalation claim of Rs 35.14 lakh towards variations in material, labour and fuel prices.
The court held that the contract specifically provided for price variation under Condition 63 of the General Conditions of Contract and did
not permit the use of an alternative mechanism.

It observed that the arbitrator had relied on an empirical formula contained in the 2007 Manual on Contracts, which was an internal departmental instruction and had not been incorporated into the agreement.

The judgment noted that the contractor had neither established compliance with the contractual requirements for price variation nor produced the relevant books of accounts and evidence of actual payments to substantiate the escalation claim.

The court also observed that the arbitral award was internally inconsistent because the arbitrator had rejected the contractor’s separate claim for prolongation of the contract period while allowing escalation for the extended period.

Accordingly, the entire amount of Rs 35,14,994.45 awarded under this component was set aside.
With these findings, the court reduced the amount awarded under Claim No. 1 by Rs 91.04 lakh. It also set aside the applicable interest on the amounts disallowed under the excavation and waterproofing claims. The court clarified that no future interest would be payable on the escalation amount.

However, the court declined to interfere with the remaining portions of the arbitral award, including the other claims and the arbitrator’s decision to grant simple interest at 12% per annum. It also observed that the remaining grounds raised by the Union of India did not warrant interference under Section 34 of the Act.

The court directed that the remaining part of the arbitral award would continue to stand and ordered both parties to bear their own legal costs.

Advocates: Advocate K. D. Ratnaparkhi appeared for the Union of India, while Advocate B. A. Bhogal represented the respondents, including Kanika Construction Company and the sole arbitrator.