M/S N N CONSTRUCTIONS vs UNION OF INDIA
- Court
- Karnataka High Court
- 1 -
COMAP No. 177 of 2026
TH
RESERVED ON 16 JUNE 2026
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ND
DATED THIS THE 2 DAY OF JULY, 2026
PRESENT
THE HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
AND
THE HON'BLE MRS. JUSTICE K.S. HEMALEKHA
COMMERCIAL APPEAL NO. 177 OF 2026
BETWEEN:
1. M/S. N.N. CONSTRUCTIONS
A PROPRIETARY CONCERN
REP. BY ITS PROPRIETOR
SRI B. JAGADEESWAR
HAVING OFFICE AT:
NO.4, DEVAGIRI ELITE
TH
GF-002, 7 CROSS
I BLOCK, JAYANAGAR
BENGALURU - 560 011
…APPELLANT
(BY SRI BAPAT SAMPATH VINAYAKA RAO, ADVOCATE)
Digitally signed
by
VEERENDRA
KUMAR K M
Location: High
Court of
Karnataka
AND:
UNION OF INDIA
1.
DIVISIONAL RAILWAY MANAGER
SOUTH WESTERN RAILWAY
BENGALURU - 560 023
2. SENIOR DIVISIONAL
ENGINEER/EAST
- 2 -
COMAP No. 177 of 2026
SOUTH WESTERN RAILWAY
BENGALURU-560023
3. THE GENERAL MANAGER
SOUTH WESTERN RAILWAY
HUBBALLI - 580 020
4. SRI A.V. CHANDRASHEKARA
SOLE ARBITRATOR
ARBITRATION CENTRE
BENGALURU - 560 001
…RESPONDENTS
(SRI SHIVAKUMAR, CGC FOR R-1 TO 3)
THIS COMMERCIAL APPEAL IS FILED UNDER SECTION
13 (1-A) OF COMMERCIAL COURT ACT, 2015 READ WITH
SECTION 37 OF THE ARBITRATION AND CONCILATION ACT,
1996 PRAYING TO SET ASIDE THE JUDGMENT AND ORDER
DATED 30.01.2026 PASSED IN COM.A.P. NO.113/2025 BY THE
LXXXII ADDITIONAL CITY CIVIL AND SESSIONS JUDGE,
COMMERCIAL COURT, BENGALURU ON THE PETITION FILED
UNDER SECTION 34 OF THE ARBITRATION AND
CONCILIATION ACT, 1996 & ETC.
THIS COMMERCIAL APPEAL HAVING BEEN HEARD AND
RESERVED FOR JUDGMENT, COMING ON FOR
PRONOUNCEMENT THIS DAY, JUDGMENT WAS
PRONOUNCED AS UNDER:
- 3 -
COMAP No. 177 of 2026
CORAM: HON'BLE MR. VIBHU BAKHRU ,CHIEF JUSTICE
and
HON'BLE MRS. JUSTICE K.S. HEMALEKHA
C.A.V. JUDGMENT
(PER: HON'BLE MR. VIBHU BAKHRU ,CHIEF JUSTICE)
1. The appellant has filed the present appeal under Section
37(1)(c) of the Arbitration and Conciliation Act, 1996 [ A&C Act ]
impugning the judgment dated 30.01.2026 [ impugned judgment ]
delivered by the learned LXXXII Additional City Civil and Sessions
Judge, Commercial Court, Bengaluru [ Commercial Court ] in Com.
A.P.No.113/2025.
2. The appellant had filed the said petition under Section 34 of
the A&C Act, seeking the setting aside of an arbitral award dated
05.05.2025 [ impugned award ] delivered by respondent No.4
[ Arbitral Tribunal ] in A.C.No.300/2024. The appellant is aggrieved
as the Arbitral Tribunal had rejected its claims.
3. The appellant invoked the arbitration clause in relation to
disputes arising under an agreement dated 27.04.2017 [ the
Agreement ] between the parties for execution of the work, namely
the widening of the Fountain Circle Road Under Bridge (RUB)
No.867 at Railway Km. 355/400-500 in the Bangalore City Station
Yard.
- 4 -
COMAP No. 177 of 2026
4. The appellant had raised certain claims, which were rejected
by the Arbitral Tribunal. Additionally, the Arbitral Tribunal also
awarded costs of ` 2,50,000/- along with the respondents' share of
the arbitrator's fee and administrative expenses in favour of
respondents Nos.1 to 3 [ the Railways ]. The appellant's petition
(Com.A.P.No.113/2025) to set aside the impugned award, was
dismissed by the impugned judgment.
PREFATORY FACTS
5. Respondent No.1 invited tenders on 12.10.2016 for widening
of the Fountain Circle Road Under Bridge (RUB) No.867 at Railway
Km. 355/400-500, Bangalore City Station Yard. The Appellant's
tender was accepted by Letter of Acceptance dated 30.03.2017
[ the LOA ] for a contract value of Rs.12,77,28,104/-. The period for
completion was eight months from the LOA, that is, up to
30.11.2017. The appellant furnished a Performance Guarantee of
Rs.63,86,405/-, and its Earnest Money Deposit [ EMD ] of
Rs.9,58,840/- was adjusted towards the Security Deposit. An
Agreement bearing No.61/SBC/17 was executed on 27.04.2017,
governed by the General Conditions of Contract [ the GCC ].
Clauses 63 and 64 of the GCC provide for conciliation and
arbitration of disputes.
- 5 -
COMAP No. 177 of 2026
6. After the work commenced, the appellant complained of
obstructions at the site, including a BESCOM high-tension line, a
BWSSB sewage line, OFC cables, and approach roads pending
completion by the Bruhat Bengaluru Mahanagara Palike [ the
BBMP ]. The contract was extended on four occasions:
(a) up to 30.06.2018;
(b) pursuant to the appellant's letter dated 24.07.2018, to
31.05.2019;
(c) pursuant to its letter dated 25.05.2019, to 31.05.2020,
under Clause 17-A(ii) of the GCC, on the stated ground
that work could be taken up only after traffic diversion
through newly constructed Boxes 1 and 2; and
(d) a further extension up to 31.01.2021 under Clause 17-
A(ii) of the GCC.
7. In the intervening period, the Railways, by letter dated
04.11.2019, informed the appellant that approach work for Boxes 1
and 2 stood completed in one direction, and called upon the
appellant to commence work on Boxes 3 and 4. The appellant, by
its letters dated 03.12.2019, 06.03.2020 and 22.05.2020,
maintained that diversion of cables, pipelines and drainage
- 6 -
COMAP No. 177 of 2026
remained incomplete. The Railways, by letters dated 20.05.2020
and 03.07.2020, called upon the appellant to mobilise men and
material. And, by its letter dated 20.08.2020, the appellant stated
that it had commenced preliminary work near RUB No.867 but had
encountered further underground utilities.
8. By letter dated 23.02.2021, the appellant sought a further
extension up to 31.01.2022, this time invoking Clause 17-A(iii) of
the GCC. By a letter dated 05.03.2021, the appellant furnished a
No Claim Certificate [ the NCC ], albeit without prejudice to claims
under the Agreement. Subsequently, a revised NCC, in the
Railways' format, was furnished on 07.04.2021. It is averred that
joint final measurements were recorded on 05.03.2021.
9. By letter dated 09.06.2021, the Railways informed the
appellant that pursuant to joint discussions and upon receipt of the
NCC, the Agreement was foreclosed and the final bill had been
forwarded for payment on 25.05.2021. The final bill, in the sum of
Rs.1,21,913/-, was passed on 09.04.2022.
10. By letter dated 07.07.2021, the appellant claimed that it had
suffered loss on account of the foreclosure, and raised claim under
seven heads, requesting that the letter be treated as a notice
invoking arbitration under Clauses 63 and 64 of the GCC. By its
- 7 -
COMAP No. 177 of 2026
reply dated 30.07.2021, the Railways denied the claims, asserting
that the Agreement was foreclosed by mutual consent and that the
NCC had been furnished voluntarily.
11. As the disputes remained unresolved, the appellant filed
C.M.P. No. 563/2021 before this court under Section 11 of the A&C
Act, which was allowed by an order dated 23.02.2024, thereby
constituting the Arbitral Tribunal.
12. The appellant thereafter filed its claim petition in the arbitral
proceedings (A.C.No.300/2024) on 06.06.2024, raising various
claims aggregating Rs.4,38,30,224/, with interest. The Railways
filed their Statement of Objections on 08.01.2025, contending that
the appellant was disentitled to compensation by reason of the
NCC, read with Clause 17-A(ii), Clause 43(2) and Clause 61(3) of
the GCC. By the impugned award dated 05.05.2025, the Arbitral
Tribunal dismissed the claim petition in its entirety.
REASONS AND CONCLUSION
13. A plain reading of the statement of claims filed by the
appellant indicates that the appellant's claims are, essentially, in
the nature of seeking damages for breach of contract. The
appellant had submitted a demand notice dated 07.07.2021 raising
the following claims:
- 8 -
COMAP No. 177 of 2026
"The claimant submits that in the demand notice dated
07.07.2021, the claimant had raised the following claims:
1. Expenditure towards PBG ` 6,06,708/-
2. Idling of Establishment ` 1,60,00,000/-
3. Reimbursement of GST ` 2,52,000/-
( ` 1,02,248)- restricted to
4. Loss of Profits ` 1,91,59,215/-
5. Loss of Credential ` 60,00,000/-
6. Interest on EMD/SD from the date ` 8,12,301/-
of Deposit upto the date of notice
7. Interest on the above claims To be quantified
8. Cost ` 10,00,000/-
Total ` 4,38,30,224/-
14. The appellant claimed that it had mobilised funds to the
extent of ` 12,77,28,104/-, which were kept idle for a period of 50
months. It was alleged that the Railways had failed to fulfil their
contractual obligations by failing to provide a hindrance-free site,
which was essential for the appellant to execute the works.
15. The Arbitral Tribunal rejected the claims essentially on two
grounds. First, that the appellant had failed to substantiate its claim
and had not produced any evidence to establish that it had suffered
any loss. And second, that the claimant had issued a NCC, and in
terms of clause 43(2) of the Agreement, the appellant was
debarred from making any claims after signing the NCC.
16. The learned counsel for the appellant contended that
appellant had issued the NCC at the insistence of the Railways and
was coerced into furnishing the same. Therefore, the appellant
- 9 -
COMAP No. 177 of 2026
could not be precluded from claiming damages. Primarily, he
focused his submissions on the claim for loss of profits for the
unexecuted works. The appellant claimed that it had made
investments with the hope of earning a return of 15% of the
contract value of ` 12,77,28,104/- and thus was entitled to a sum of
` 1,91,59,215/- as loss of profits on the illegal determination of the
contract.
17. The principal dispute centres on whether the Railways
breached the terms of the Agreement and whether the delay in the
execution of the work was attributable to them.
18. The Arbitral Tribunal examined the communications between
the parties and concluded that the delay was due to the claimant’s
difficulties arising from the diversion of cables, pipelines, drainage,
etc. The appellant had sought an extension of time for completion
of the contract, and the Railways had extended the same from time
to time.
19. The claimant had furnished a letter dated 23.02.2021
seeking an extension of the contract till 31.01.2022. Although the
appellant had also stated in his letter that the work had been
stopped at the instructions of the Railways, the Arbitral Tribunal
found – on the basis of communications on record – that the work
- 10 -
COMAP No. 177 of 2026
was delayed/stalled on account of various hindrances, which the
appellant could not overcome.
20. Since the works were not completed despite extension of
time on several occasions, the Railways held joint meetings and
discussions and decided to foreclose the Agreement.
21. The appellant disputes that it had agreed to the foreclosure
of the Agreement. However, there are documents on record, which
indicate otherwise. The appellant had furnished the NCC dated
05.03.2021 but reserved the right to make claims as permissible
under the contract and the law governing the same. However,
subsequently, on 07.04.2021, the appellant furnished an NCC in
the format described by the Railways (Ex.P20). The said certificate
is set out below:
"To,
Divisional Railway Manager (works)
Southwestern Railway,
Bangalore Division,
Bangalore- 560 023.
(THROUGH ADEN/CENTRAL/SBC)
NO CLAIM CERTIFICATE
Sub: SBC widening of fountain circle RUB No.867 at
Railway km 355/400-500 SBC station yard
Ref: 1) Agt No.61/SBC/2017 Dt. 27.04.2017
2) LOA No.B/W.496/6291 Dt. 30.03.2017
- 11 -
COMAP No. 177 of 2026
As per your request we herewith State that we have
no claim against the South Western Railway
administration in respect of the above cited subject and
agreement except PVC claims.
Dated: 07.04.2021 Your's
sincerely
Sd/-
Contractor"
22. Notwithstanding that the appellant had furnished the NCC, it
sent a letter dated 08.06.2021, that is, two months after it had
furnished the NCC, referring to its earlier letter dated 23.02.2021
seeking extension of the contract under Clause 17A(iii) of the GCC.
The said letter had no reference to an earlier NCC or any other
discussions between the parties. The said letter (Ex.P21) reads as
under:
"08.06.2021
To,
Sr.DEN/East/SBC.
S.W.Railway
Bangalore-23.
Dear Sir
Sub: Position of My Agreement for the work,
widening of Fountain circle RUB No.867
at Rly. Km 355/400-500 SBC
Agt.No.61/SBC/2017 Dt. 27.04.2017
With reference to the above subject, I have given
letter for currency extension in 17A(iii) clause of GCC.
Still I have not received any correspondence from your
- 12 -
COMAP No. 177 of 2026
end. Hence I request you to please confirm the position
of Agt. Please reply immediately for further process.
Thanking you
Your's faithfully
Sd/-
Contractor"
23. The Railways responded to the said letter on 09.06.2021.
The said letter (Ex.P22) is set out below.
"SOUTH WESTERN RAILWAY
B/W/148/296 Divisional Office
Works Branch
Bangalore-23
Date: 09.06.2021
M/S N.N.CONSTRUCTIONS
nd th
No.425, 2 Floor, 7 Main
th
14 Cross, Shastri Nagar
K.R.Road,
Bangalore- 560 028.
Sub: Widening of fountain circle RUB No.8367
at Rly.Km.355/400-500 in SBC yard
AGT No.61/SBC/17 Dt. 27.04.2017
LOA No.B/W.496/6291 Dt. 30.03.2017
REF: Your letter No. Nil dated 08.06.2021
With reference to your letter cited supra, this is to
state that on receipt of your request for currency
extension upto 31.01.2022 under 17A(iii) of GCC vide
your letter No. Nil dated 23.02.2021, it was proposed for
foreclosure of the agreement after meeting & discussions
held jointly between you and railway officials.
Accordingly, final measurements were taken with you
jointly and on receipt of the No claim certificate and other
necessary certificates from the field office, the proposal
for foreclosure of the work was mooted and competent
authority approval obtained.
- 13 -
COMAP No. 177 of 2026
The final bill has been submitted to Associate
finance for passing on 25.05.2021. Meanwhile release of
performance Guarantee has also been processed. On
clearance of the final bill your security deposit deducted
from the bill shall be released along with EMD.
Sd/-
Sr./DEN/E/SBC
Copy to ADEN/SBC for kind information."
24. The Arbitral Tribunal referred to the terms of the Agreement
and noted that the Railways retained the right to determine the
Agreement.
25. Additionally, the Arbitral Tribunal took note of a reply letter
dated 30.07.2021 (Ex.P24) from the Railways disputing the
appellant's claims. The Railways did not accept that the delay was
attributable to them. They contend that the Railways had
completed the work on adjacent Boxes 1 and 2 in April 2018, and
that, due to hurdles faced by BBMP, the approach roads could be
completed only in August 2019. The appellant was called upon to
commence works immediately thereafter, but took no action to that
end until 01.08.2020. The documents on record also support the
said claim.
- 14 -
COMAP No. 177 of 2026
26. The Arbitral Tribunal examined the evidence on record and
concluded that the Railways was not solely responsible for the
delay in execution and completion of the works. The Arbitral
Tribunal also concluded that the Agreement was mutually closed in
consultation with the appellant. According to the Railways, it was
necessary to do so because the contract had not been completed
even after 4 years. The appellant was also not willing to execute
the works at the rates quoted by it.
27. The aforesaid findings of the Arbitral Tribunal – that Railways
was not solely responsible for the delay; that the parties had
decided to foreclose the contract by mutual discussion; and that the
appellant had voluntarily issued the NCC – are findings of fact. As
noted above, the said conclusions are based on materials on
record. The said findings hence will not to be held to be perverse or
unreasonable in the sense of the Wednesbury principle of
1
unreasonableness . Thus, these findings cannot be held to vitiate
the impugned award on the ground of patent illegality.
28. In the aforesaid view, it is not necessary to examine the
separate claims made by the appellant. However, for the sake of
1
In Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation [1948] 1 KB
223, Lord Greene M.R. articulated the said principle in the following words: "If a
decision on a competent matter is so unreasonable that no reasonable authority could
ever have come to it, then the courts can interfere"
- 15 -
COMAP No. 177 of 2026
completeness, we may refer to certain clauses of the Agreement,
which were relied upon by the learned counsel for the appellant.
29. It was earnestly contended by the learned counsel that the
appellant had sought for extension of contract under clause 17A(iii)
of the Agreement and therefore, the appellant's right to claim
damages was not foreclosed.
30. We may refer to Clause 17A(iii) of the GCC, which reads as
under:
" 17-A Extension of Time in Contracts :
(iii) Extension for Delay due to Railways : In the event
of any failure or delay by the Railway to hand over the
Contractor possession of the lands necessary for the
execution of the works or to give the necessary notice to
commence the works or to provide the necessary
drawings or instructions or any other delay caused by the
Railway due to any other cause whatsoever, then such
failure or delay shall in no way affect or vitiate the
contract or alter the character thereof or entitle the
Contractor to damages or compensation therefor, but in
any such case, the Railway may grant such extension or
extensions of the completion date as may be considered
reasonable."
31. As is apparent, the said clause expressly provides that any
extension under clause 17A(iii) of the GCC, would not entitle the
contractor to claim any damages or compensation.
- 16 -
COMAP No. 177 of 2026
32. The appellant's claim for interest on the security deposit of a
sum quantified at ` 8,12,301/- could also not be entertained, as
payment of interest was expressly proscribed under clause 16(3) of
the GCC. The said clause reads as under:
"16.(3) No interest shall be payable upon the Earnest
Money and Security Deposit or amounts payable to the
Contractor under the Contract, but Government
Securities deposited in terms of Sub-Clause 16.(4)(b) of
this clause will be payable with interest accrued thereon"
33. As noted earlier, the Arbitral Tribunal had found that the
appellant had not produced any evidence to substantiate its claims.
Thus, even if it is accepted that the appellant was not bound by its
NCC, the appellant would not be entitled to any damages without
substantiating the same.
34. The learned counsel appearing for the appellant did not
seriously contest the rejection of the appellant's claim for damages
under various heads. He focused his submissions mainly on the
rejection of the claim for damages for loss of profits. He submitted
that the appellant is entitled to reasonable profits in respect to the
balance works that had been foreclosed, and such damages could
be awarded on presumptive basis. He referred to the decision of
the Supreme Court in M/s. AT Brij Paul Singh and others V.
- 17 -
COMAP No. 177 of 2026
2
State of Gujarat , and on the strength of the said decision,
contended that in a case where the contract is wrongfully
terminated, the contractor would be entitled to loss of profits on a
presumptive basis. The Arbitral Tribunal had rejected the said claim
with the following observations:
"34. In the present case, the claimant had executed work
to an extent of Rs.12 lakh only and there was no further
progress. No evidence is placed on record much less the
acceptable evidence with regard to the investment made
by the claimant for this project, men and materials
deployed and the loss that he suffered because of other
contracts being deprived. There is no independent
contemporaneous evidence with regard to the potential
projects that the contractor had in the pipeline that could
have been undertaken if not for the delays, the total
number of tendering the opportunities that the contractor
received and being declined owing to the prolongation of
the contract, financial statements, or any clauses in the
contract related to delays, extension of time and
compensation for loss of profits. As such, the decision
Unibros v. AIR
rendered in the case of mentioned
above, is aptly applicable to the facts of the case. In this
view of the matter, the claim for loss of profits needs to
be rejected and is rejected."
35. There is some merit in the contention that the appellant's
claim for loss of profit was not based on prolongation of the
contract; it was based on the value of work that was not executed.
If a contractor is prevented from executing the contract on account
of reasons attributable to the employer, the contractor is not
precluded from raising a claim for loss of profits for the unexecuted
2
(1984) 4 SCC 59
- 18 -
COMAP No. 177 of 2026
works. This cannot be conflated with the claim for loss of profits on
account of loss of opportunity or on account of prolongation of
contract. However, the contention that the contractor is not
required to establish that it had suffered such loss is unmeritorious.
36. The decision of the Supreme Court in M/s AT Brij Paul Singh
( supra) is not an authority for the proposition that no evidence is
required to be led to prove the measure of damages on account of
loss of profits. It would be erroneous to proceed on the basis that
in all cases where the arbitral tribunal or court finds that the
contracts have been terminated illegally, a loss of profits quantified
at 15% of the balance works would be payable as damages.
37. In M/s AT Brij Paul Singh ( supra ), the Supreme Court had
found that the respondent had breached the contract and thus, the
appellant in the said case (M/s. AT Brij Paul Singh) was entitled to
claim damages on account of loss of profits. Insofar as measure of
damages is concerned, the Supreme Court noted that in another
proceeding relating to a similar contract between the same parties,
the High Court had accepted a claim for loss of profits computed at
the rate of 15% of the value of the unexecuted works. It is on the
facts of that case, that the Supreme Court concluded that the
- 19 -
COMAP No. 177 of 2026
appellant therein was entitled to 15% of the value of the
unexecuted works as damages.
38. In Edifice Developers and Projects Engineers Limited V.
3
Essar Projects (India) Limited , the Division Bench of the
Bombay High Court considered a challenge to an arbitral award
where the arbitral tribunal had relied on the decision of M/s. AT Brij
Paul Singh ( supra ) and had awarded a claim relating to overhead
losses, even though the claimant had not produced evidence to
establish the same. The learned Single Judge of the Bombay High
Court had set aside the arbitral award, and the said decision was
challenged before the Division Bench. In the aforesaid context, the
Division Bench rejected the contention that award of overhead
losses could be sustained without producing evidence. In the said
case, the arbitral tribunal had awarded a claim of loss of profits at
the rate of 10% of the value of the remaining works. The Bombay
High Court faulted the arbitral tribunal for awarding a claim for loss
of profits without any evidence to support the same. We consider it
apposite to set out the following extract from the said decision:
" 7. Learned senior counsel appearing on behalf of the
Appellant submits that in the present case the Appellant had
relied upon documentary material consisting of
3
2013 SCC OnLine Bom 5
- 20 -
COMAP No. 177 of 2026
correspondence exchanged between the parties. It was
urged that if the Appellant had sought to establish the claim
for overhead losses on the basis of that correspondence, it
would have become necessary to lead evidence in support
of the claim set out by the Appellant in its letters. However,
the Appellant sought to claim a lesser amount. Hence, it
was urged that the Arbitrator was justified in taking recourse
to Hudson's Formula. Moreover it was sought to be urged
that the reliance which was placed on the judgment of the
Supreme Court in Brij Paul Singh's case by the Arbitrator
cannot be faulted.
8. The arbitral award, ex facie, demonstrates that the
Arbitrator proceeded on the basis that the Appellant had not
produced either the basis of the account or any oral
evidence to prove the overhead losses caused to or
suffered by it. Despite that finding the Arbitrator held that in
the construction industry a contractor becomes entitled to
overhead losses on the basis of Hudson's Formula, even in
the absence of direct evidence to prove such losses when
resources are mobilized and delay is caused in the
execution of the work not attributable to the contractor. In
holding this the Arbitrator relied upon the judgment of the
Supreme Court in Brij Paul Singh's case (supra).
9. The Learned Single Judge, in our view, was justified
in coming to the conclusion that the Arbitrator was
manifestly in error in awarding the claim for overhead losses
in spite of the fact that no oral evidence was adduced on
behalf of the Appellant. In Brij Paul Singh's case the
Supreme Court noted that it was not disputed that where in
a works contract a party entrusted with the work commits a
breach of the contract, the contractor would be entitled to
claim damages for loss of profit which he expected to earn
by undertaking the contract. The Supreme Court, however,
noted that what must be the measure of the profit and what
evidence should be tendered to sustain the claim are
different matters. The judgment of the Supreme Court
adverts to the fact that in that case the High Court had
referred to Hudson's treatise on Building and Engineering
Contracts. Hudson states there that in major contracts
subject to competitive tender on a national basis, the
evidence given in litigation on many occasions suggests
that head office overheads and profits are between 3 to 7%
of the total price of cost which is added to the tender. The
High Court in that case had rejected the claim of the
- 21 -
COMAP No. 177 of 2026
contractor. The Supreme Court noted that in an identical
contract with regard to another portion of the same road and
for the same type of work the High Court had accepted loss
of profit at 15% of the price of the balance of work as a
reasonable measure of damages if the State is guilty of a
breach of contract. It was on this basis that the Supreme
Court came to the conclusion that since for the same type of
work, between the same parties involving a nearby portion
of the same road a certain measure of damages had been
adopted by the High Court, the same measure ought to
have been adopted in that case as well.
10. Brij Paul Singh's case therefore does not stipulate as
a doctrine of law that the formula which has been
prescribed in Hudson's treatise must invariably be accepted
in all cases as a measure of damages sustained on account
of loss of overheads. On the other hand in the subsequent
decision of the Supreme Court in McDermott
International (supra), the Supreme Court has relied upon
the following observations contained in the earlier decision
in M.N. Gangappa v. Atmakur Nagabhushanam Setty &
3
Co. .
“In the assessment of damages, the court must consider
only strict legal obligations, and not the expectations,
however reasonable, of one contractor that the other will do
something that he has assumed no legal obligation to do.”
11. The judgment in McDermott International (supra)
considers various formulae including Hudson's Formula,
Emden Formula and Eichleay Formula. As regards
Hudson's Formula the Supreme Court has noted, in the
following extract, that although it has received judicial
support in many cases, it has been the subject matter of
criticism:
“(a) Hudson Formula : In Hudson's Building and
Engineering Contracts, Hudson formula is stated in the
following terms:
“Contract head office overhead & contract sum period of
delay” profit percentage x --------------------- x
contract period
In the Hudson formula, the head office overhead
percentage is taken from the contract. Although the Hudson
formula has received judicial support in many cases, it has
been criticized principally because it adopts the head office
- 22 -
COMAP No. 177 of 2026
overhead percentage from the contract as the factor for
calculating the costs, and this may bear little or no relation
to the actual head office costs of the contractor.”
(emphasis supplied)
12. In McDermott International (supra) the Supreme
Court has held that it is an accepted position that different
formulae can be applied in different circumstances and the
question as to whether damages should be computed by
taking recourse to one or other formula, having regard to
the facts and circumstances of a particular case, would fall
within the domain of the Arbitrator. In the present case no
other formula other than Hudson's formula has been
considered in the arbitral award. In the present case the
Arbitrator proceeded on the basis that it was only Hudson's
Formula which was to be applied and that even though no
direct evidence had been adduced on behalf of the
Appellant, nonetheless the Appellant would be entitled to
damages measured with reference to the aforesaid formula.
This approach of the Arbitrator is manifestly in the teeth of
the law laid down by the Supreme Court in McDermott
International . Section 28(1)(a) requires that the Arbitral
Tribunal shall decide a dispute submitted to arbitration in
accordance with the substantive law for the time being in
force in India. Section 28(3) requires the Arbitral Tribunal to
decide in accordance with the terms of the contract and
take into account the usages of the trade applicable to the
transaction. The Arbitral Tribunal under Section 28(2) can
act as amiable compositeur and can decide ex aequo et
bono only if parties have expressly authorized it to do so. In
the present case, the Learned Single Judge was correct in
coming to the conclusion that the award of the Arbitrator
proceeds on the manifestly misconceived notion that a
contractor is entitled to claim overhead losses even in the
absence of evidence on the basis of Hudson's Formula.
Similarly, the Arbitral Tribunal proceeded on a misconceived
premise that this formula is invariably adopted for
quantification of claims for overhead losses in India. In the
present case the Appellant produced no evidence in support
of its claim; this has been so stated in the Award. The
award of the claim is on the misconceived basis that the
Hudson's Formula must be applied despite the absence of
evidence. Since the fundamental basis that has permeated
the award is contrary to law, the judgment of the Single
Judge cannot be faulted in setting aside the arbitral award
on that aspect.
- 23 -
COMAP No. 177 of 2026
13. The Arbitrator, as noted earlier, also awarded claims
in respect of loss of profit, for under utilized plant and
equipment and for reimbursement of infrastructure
expenses. In respect of loss of profits, the Arbitrator merely
held that a measure of 10% on the value of the remaining
part of the works contract cannot be said to be
unreasonable. The Arbitrator observed that a percentage
representing 10% of the rate of profit is invariably accepted
in the construction industry. Evidently save and except for
an priori assumption, no evidence whatsoever was led
before the Arbitrator in that regard. In P.R. Shah, Shares
and Stock Brokers Private Limited v. B.H.H. Securities
4
Private Limited the Supreme Court has held that while an
Arbitral Tribunal cannot make use of its personal knowledge
of the facts of the dispute, which is not a part of the record,
the Tribunal can certainly use its expert or technical
knowledge or the general knowledge about the particular
trade in deciding a matter. That is why in many arbitrations,
persons with technical knowledge are appointed since they
may be well-versed with the practices and customs in the
respective fields. The Arbitrator in the present case was not
an arbitrator drawn from the trade. No basis whatsoever has
been indicated in the award for accepting 10% as a
measure representing loss of profits. No material was
produced before the Arbitrator on the nature of the practice
in the trade. During the course of the hearing no basis has
been indicated to the Court from the record to suggest that
any practice of that nature in the construction industry was
brought to the notice of the Arbitral Tribunal. In the
circumstances, the arbitral award to the extent that it allows
the claim for loss of profits is based on pure conjecture and
in the absence of any evidence whatsoever was correctly
set aside. Similarly, in regard to the claim for underutilized
plant and equipment and for reimbursement of expenses of
infrastructure, it is evident that the Arbitrator has merely
awarded a sum which he considered to be reasonable. No
evidence whatsoever was led before the Arbitral Tribunal."
4
39. In Nandi Infratech Pvt. Ltd. Vs. R. K. Bararia and others ,
the Division Bench of the Delhi High Court (of which one of us
Mr.Vibhu Bakhru J., was a member), had considered a case where
4
2024 SCC OnLine Del 4287.
- 24 -
COMAP No. 177 of 2026
the arbitral tribunal had awarded compensation for loss of profits on
unexecuted works on the basis of a stipulation that rates for extra
items would be fixed by including an allowance of 15% of the costs
as overhead profits and establishment charges. In the aforesaid
context, the court observed as under:
53. The fact that rates of extra items would include an all
inclusive allowance of 15% of costs on account of
“overheads, profits and establishment charges” does not
establish that RKB would have earned 15% profit on
execution of the contract in question.
54. The mark up on account of overheads, profit and
establishment expenses in item rates cannot form the basis
of awarding compensation for loss of profits that would have
been earned by execution of the contract. This is essentially
for three reasons. First, that analysis of rates of an extra
item is not akin to execution of the contract of the works as
a whole. The value of the contract is determined on the
basis of the offer made by the contractor and there is no
requirement for the contractor to align its estimated profit on
the basis of analysis of rates of extra items. It is quite
possible that a contractor, who has unutilized spare
capacity, may agree to execute the works on marginal
profits. On the other hand, a contractor that has no spare
capacity may not accept a contract unless there is sufficient
mark up to expand its capacity. The profit margin on which
a contractor would agree to execute the works has no
relation with the rate analysis for extra items.
55. Second, an inclusive allowance of 15% on the item
of rates translates to an allowance of 13.04% on the value
of item rate. This can be clearly illustrated by assuming the
costs of a component of extra item at Rs.100/-, a 15%
inclusive allowance would translate to an item rate of Rs.
115/-. A profit mark up of Rs. 15/- on the item rate of Rs.
115/- would translate into 13.04% (Rs. 15/115). Thus, if it is
assumed that the balance work was akin to an extra item,
the same would include an allowance of 13.04% on the
value of the work as mark up on account of overheads,
profits and establishment expenses. Thus, the assumption
- 25 -
COMAP No. 177 of 2026
that the loss of profits is 15% of the remaining value of the
work is ex facie erroneous.
56. Third, all inclusive allowance of 15% includes an
allowance for overheads and establishment expenses in
addition to an allowance for profits. RKB's claim was
confined to loss of profits alone. Thus, in any event, it would
not be apposite to assume a profit margin of 15% on the
basis of analysis of rates for extra items. The said analysis
would inapposite as the all inclusive allowance of 15% of
costs also includes establishment expenses and
overheads."
40. The Supreme Court had dismissed the special leave petition
[SLP (C) No.20353/2024] filed against the said decision by an
order dated 13.09.2024.
41. We find no infirmity with the decision of the Arbitral Tribunal
to reject the claims for damages, including the claim for loss of
profits, on the ground that the same were unsubstantiated.
42. In the given circumstances, we are unable to accept that the
impugned award is vitiated by patent illegality and is thus liable to
be set aside. In view of the above, the appeal is dismissed.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(K.S. HEMALEKHA)
JUDGE
KMV