Pune court sets aside Rs 91.04 lakh of arbitration award in AFMC store construction contract

Pune, November 7, 2026: The District Commercial Court in Pune has partly allowed a petition by the Union of India challenging an arbitration award. The case concerns a Rs 5.34 crore contract to build store accommodation at the Armed Forces Medical College (AFMC), Pune, which was given to Kanika Construction Company.

The court set aside Rs 91,04,711.34 of the award, citing patent illegality and saying that some amounts paid to the contractor were contrary to the terms of the contract. The court upheld the rest 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, through the Chief Engineer, Pune Zone, had approached the court under Section 34 of the Arbitration and Conciliation Act, 1996. It sought to have the award of July 18, 2016, later corrected on August 17, 2016, set aside.

The dispute began with a contract awarded to M/s Kanika Construction Company on March 5, 2009, for Rs 5.34 crore. The project covered a two-storey, three-wing building for BTD, MED and QM stores at AFMC, Pune, along with related work. After the original deadline was extended, the contractor completed the work on December 28, 2011. It then made several claims, which were referred to arbitration.

The Union of India challenged three parts of the award: the extra cost of excavation due to a change in the foundation soil layer, waterproofing treatment on open terraces, and compensation for differences in the prices of materials, labour and fuel.

On the excavation claim, the contractor had been awarded Rs 17.31 lakh. The court said the contract already provided a method for fixing rates for excavation in rock, namely through a deviation order, at the MES schedule rate plus 55 per cent. The department's assessment of Rs 9.26 lakh was not in dispute. Rs 8,05,631.89 was therefore set aside from this part and the department's assessment stood.

For waterproofing, the arbitrator had awarded the contractor Rs 47.84 lakh. The court noted that waterproofing was part of the original lump-sum contract, according to the contract documents, including the schedule of finishes, structural drawings and related specifications. The court also said the contractor itself had included waterproofing while preparing the joint work yardstick and had taken payment on that basis in 21 running account bills.

According to the court, the arbitrator ignored key documents and did not properly answer the department's objection to Rs 24.89 lakh of the claim, which the department said was not proved by evidence. The entire award of Rs 47,84,085 on this part was therefore set aside.

The third part was an escalation claim of Rs 35.14 lakh. The court said Condition 63 of the General Conditions of Contract provides for price variation and permits no other method. The arbitrator had relied on the empirical formula in the 2007 Manual on Contracts, which was an internal departmental instruction and was not part of the agreement.

The judgment records that the contractor could neither prove compliance with the price variation conditions nor produce account books and evidence of actual payments. The court also said the award was self-contradictory, because the arbitrator rejected a separate claim for extension of the contract period but still allowed escalation for the extended period. Rs 35,14,994.45 on this part was therefore also set aside.

With these findings, the court reduced the amount awarded under Claim No. 1 by Rs 91.04 lakh. Interest on the rejected excavation and waterproofing parts was also set aside. No further interest will be payable on the escalation amount.

The court did not interfere with the rest, which includes the other claims and the arbitrator's decision to award simple interest at 12 per cent a year. It said the Union of India's remaining grounds did not warrant interference under Section 34. The rest of the award will stand and both sides will bear their own legal costs.

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