Mere Knowledge of Defect Can't Override Statutory Safety Mandate: Bombay High Court Upholds Arbitral Award in HPCL-Aegis Dispute

"Arbitral Tribunal is the master of evidence, and a Section 34 court cannot act as a court of appeal over factual findings" – In a significant decision reaffirming judicial restraint under Section 34 of the Arbitration and Conciliation Act, 1996, the Bombay High Court dismissed Hindustan Petroleum Corporation Limited’s (HPCL) challenge to an arbitral award that had set aside its termination of an Operating and Services Agreement (OSA) with Aegis Logistics Pvt. Ltd. and awarded substantial compensation to the latter.

The Court, presided by Justice Sandeep V. Marne, held that the Arbitral Tribunal had “conducted a detailed factual enquiry” into the safety concerns flagged by a statutory authority and found Aegis’ suspension of operations at the railway siding to be “prudent, justified, and not in breach of the OSA”. The Court emphasized that no case of “patent illegality” or “perversity” had been made out to warrant judicial interference.

“No Fair-Minded Person Could Insist On Continuing Operations Under Unsafe Conditions” – Court Affirms Validity of Stop Work Notice

On 30 May 2024, the Sole Arbitrator had declared HPCL’s termination of the OSA on 3 March 2017 as wrongful, awarding over ₹4.38 crores in damages, loss of profits, wrongful invocation of bank guarantee, and unpaid dues, along with 13% interest and arbitration costs.

The dispute stemmed from Aegis’ issuance of a stop work notice on 26 September 2016, halting operations at the railway siding of HPCL’s Guntakal Depot following a damning Oil Industry Safety Directorate (OISD) audit report dated 7 September 2016. The report, issued by a statutory body under the Ministry of Petroleum and Natural Gas, flagged severe deficiencies such as oil-soaked ballast, uneven tracks, absence of proper drainage and firefighting norms, and the risk of derailment and fire due to proximity to electrified lines.

Though HPCL argued that Aegis was already aware of the siding’s condition when it bid for the contract, the Court categorically held that “familiarity with the condition of the siding before contract execution is irrelevant when a statutory authority later flags the site as unsafe.”

The Court noted: “Ordinarily, no prudent business entity who has earned a contract with a State Oil Company would voluntarily surrender the same… Respondent got alarmed by the scathing OISD report which directed partial/full shut down of the siding.”

Justice Marne found the Arbitrator’s conclusion that the stop work notice was justified under HPCL’s own “Stop Work Authority” circular (dated 18 April 2014) to be sound. The circular allowed contractors to halt operations in case of safety concerns. The Court added, “The Respondent was not walking away from the contract but merely insisting that the Petitioner confirm in writing that operations were safe.”

Attempt to Recast Arbitration Arguments Before Court Rejected

The Court rebuffed HPCL’s argument that Aegis had “partially repudiated” a composite contract by ceasing only railway siding operations while continuing terminal activities. Justice Marne observed that HPCL had never advanced the “composite contract” argument in this form before the Arbitrator.

“Petitioner drove the Arbitral Tribunal in the direction of breach of contract by failure to decant three rakes, not part-repudiation. Arguments not raised before the Tribunal cannot be entertained afresh under Section 34,” held the Court, relying on the Supreme Court’s decisions in National Highways Authority v. ITD Cementation and Union of India v. Susaka Pvt. Ltd.

Even otherwise, the Court held that the argument lacked merit: “Once the stop work notice is found valid, and not a breach, the question of partial repudiation or composite contract becomes meaningless.”

Award of Loss of Profits and Wrongful Invocation of Bank Guarantee Upheld

The Court upheld the Tribunal’s award of ₹2.31 crore as loss of profit, noting that the claim was supported by uncontroverted evidence and conservative calculations based on a 24% profit margin over lost revenue of approximately ₹9.65 crore.

“There was no cross-examination of the Respondent’s witness who computed the loss. The Petitioner cannot now allege lack of proof,” the Court observed.

Further, the award of ₹13.05 lakh for wrongful invocation of bank guarantee was sustained without objection, as was the award of ₹1.93 crore for unpaid dues under the OSA.

Arbitration Costs Reduced on Equity Grounds

Though the Arbitrator had awarded ₹1.6 crore in arbitration costs to Aegis, the Court reduced this to ₹25 lakh, citing that HPCL is a public sector entity and noting that the siding's deficiencies were not solely its responsibility.

“Explanation to Section 31-A of the Arbitration Act allows award of ‘reasonable costs’. The Tribunal is not bound to always grant actual costs. The doctrine of severance applies here,” said Justice Marne, invoking Gayatri Balasamy v. ISG Novasoft Technologies Ltd. [(2025) 7 SCC 1].

Section 34: A Reminder of Judicial Deference to Arbitration

The Court’s judgment reaffirms the limited scope of judicial review under Section 34, emphasizing the principles laid down in Associate Builders v. DDA, Dyna Technologies v. Crompton Greaves, and OPG Power Generation v. Enexio Power.

Justice Marne observed: “This Court is not an appellate forum under Section 34. Unless there is perversity—findings based on no evidence, or ignoring vital evidence—interference is not warranted. Mere possibility of a different view is irrelevant.”

He added, “The Award is detailed, runs over 417 pages, and contains reasoned findings. Petitioner’s reliance on judgments regarding lack of reasoning or fairness is misplaced.”

In dismissing HPCL’s petition, the Bombay High Court has not only reinforced the sanctity of arbitral findings but also sent a clear message that commercial contracts involving safety-sensitive operations must yield to statutory safety mandates, regardless of prior knowledge or business inconvenience.

The only modification permitted was a reduction in arbitration costs—from ₹1.6 crore to ₹25 lakh—on equitable grounds. All other aspects of the award were upheld.

Date of Decision: 19 December 2025