Full Judgment Text
2019:BHC-OS:4603
Mohite/sg arbp106010.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.1060 OF 2010
Municipal Corporation of Greater Mumbai .... Petitioner
vs.
S.N. Thakkar Construction
Company Private Limited …. Respondents
….
Mr. P.G. Lad, a/w. Mr. R.Y. Sirsikar and Mr. D.S. Shingade, for the
Petitioner.
Mr. Nikhil Wadikar, a/w. Mr. Pradip Zende, i/b. Mr. S.S. Phadke, for the
Respondent.
…..
CORAM: S.C.GUPTE, J.
DATED : FEBRUARY 13, 2019
(Oral Judgement) :
. This arbitration petition challenges an award passed by a
sole arbitrator in the matter of disputes and differences between the
parties arising out of a contract for construction for the Petitioner
Municipal Corporation.
2. In 2002, the Petitioner invited tenders for providing and
constructing diversion chambers for diverting sewage from SWD to
sewerage system at seven locations in the city of Mumbai. The
Respondents submitted their offer. The Petitioner accepted the offer and
issued a work order directing the Respondents to commence the work
from 01.10.2003 and complete the same by 31.05.2004. The
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Respondents were directed to get the work drawings approved before
commencing the work and also to submit a PERT program and seek
approval thereof. On 08.10.2003, the Respondents submitted a bar chart
and cash flow statement. (This was after the due date of commencement
of work.) During the course of the work, the Petitioner wrote several
letters to the Respondents complaining of slow progress as also breaches
of contract on the part of the Respondents and asking the latter for
expediting the work. It is the case of the Petitioner that on 31.05.2004,
the contract came to an end by efflux of time. On 09.08.2004, the
Respondents applied for extension of time proposing various conditions,
which, according to the Petitioner, were contrary to the terms of the
contract. In the alternative, the Respondents requested for finalisation of
accounts on “as is where is” basis. The Petitioner asked the Respondents
to submit the list of compensatory events with documentary evidence
without prejudice to the right of the Petitioner to grant extension, if any.
It is the Petitioner's case that the Respondents did not submit any details
in response and instead alleged that these details were already available
with the Petitioner. The Respondents made several allegations claiming
that hindrances were caused to the work by the Petitioner. In these
circumstances, when the Petitioner sought to invoke the bank guarantees
submitted for mobilisation advance as also for performance, the
Respondents offered to pay the amount of the mobilisation advance bank
guarantee after deducting the sum already recovered from their running
account bills. The Respondents also submitted a pay order to the
Petitioner in lieu of performance bank guarantee. The Respondents
thereafter raised several claims including a claim for wrongful
encashment of bank guarantees under economic duress and financial
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pressure. Differences and disputes arose between the parties as a result,
which were referred to the learned arbitrator. The Respondents were the
claimants before the arbitrator, whereas the Petitioner was the
respondent/counter claimant. The Respondents filed in all nine claims.
The learned arbitrator, by this impugned award dated 04.02.2010,
allowed Claim No.1 (partly), Claims Nos.2 and 3(fully), Claim No.4
(partly), Claim No.8 (partly) and Claim No.9 (partly) and rejected the
counter claim of the Petitioner.
3. The award of the Respondents' claims as above has been
challenged by the Petitioner on various grounds. Learned Counsel for
the Petitioner, however, mainly submitted that the award was based on
no evidence and also was contrary to the documents submitted by the
Petitioner. Learned Counsel submitted that the findings of the learned
arbitrator on the alleged breaches of contract by the Petitioner and in
particular, the delay in issuance of detailed construction drawings, were
contrary to the record as well as the stipulations of the contract. Learned
Counsel also submitted that the finding of the arbitrator that there was
delay on the part of the Petitioner in making the site available for
contract work or removing obstructions as also stoppage of work, etc.
were either without evidence or contrary to the record. In particular
reference to the Respondents' claim for loss of profits, learned Counsel
submitted that the award was contrary to public policy of India, since it
wholly disregarded fundamental principles of Indian Law on award of
damages. It was submitted that out of the contract work of about
Rs.2.70 crores, the Respondents had hardly completed work of about
Rs.16 lakhs. Learned Counsel contended that in the absence of evidence
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to suggest that the Respondents were in fact in a position and had kept
themselves ready to complete the contract work, damages for loss of
profits arising from the balance work could not have been awarded by
the arbitrator. Besides, learned Counsel argued the arbitrator's finding
that the Petitioner was responsible for stoppage of work and had
committed breach of contract by not permitting the Respondent
contractor to complete the work, is clearly perverse and not supported by
any evidence.
4. So far as Claim Nos.1, 2 and 3 are concerned, these are for
actual work done as also extra work performed by the Respondent
contractor and refund of performance security and retention amount
based on actuals. The arbitrator, after taking into account the provisions
of the contract and submissions of the parties in the light of evidence
placed before him, came to a conclusion that the actual work done as per
th
B.O.Q. and extra items of work done were reflected in the 5 RA Bill
submitted by the Respondents. The arbitrator noted that some of these
items were admitted by the Petitioner. The arbitrator considered the
difference between the parties in respect of the other items of work
concerning individual work sites. After considering the rival cases set up
by the parties, the arbitrator determined that the claim should be worked
out on the basis of measurements recorded by the Petitioner at B.O.Q.
rates plus admissible extra items, with appropriate deductions. The
individual deductions contested between the parties were duly
considered by the arbitrator. Wherever there were no joint
measurements, those items were deducted. So also, wherever any rate or
extra item was to be treated as B.O.Q. rate or item, the arbitrator deleted
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the same. Thus, after arriving at the total amount of work done including
extra items and giving credit for the amount paid by the Petitioner to the
th
contractor prior to the 5 R.A. Bill, the arbitrator worked out the balance
payable to the Respondents in the sum of Rs.26,27,361/. These are
clearly possible views supported by evidence. Neither the approach of
the learned arbitrator for working out the balance amount payable to the
Respondents for work done nor the actual findings arrived at by the
learned arbitrator could be said to be impossible views, or views which
no fair or judiciously minded person would take, or views that would
shock the conscience of the court. The award on these claims, therefore,
does not merit any interference.
5. So far as the enforcement of performance bank guarantee
and withholding of retention amount are concerned, which were the
subject matters of Claim Nos.2 and 3, the arbitrator came to the
conclusion that there was no case for the Petitioner to either encash the
performance bank guarantee or withhold the retention amount from R.A.
Bills due and payable to the Respondents. No fault can be found with
the award on these two claims. The Petitioner, having failed to show
that the Respondents were responsible for breach of contract, the refund
of performance security and retention amount ordered by the learned
arbitrator cannot be faulted. These are all assessments of fact and the
arbitrator's views on these matters are possible views, which do not merit
any interference.
6. When we come to the loss of profit claimed by the
Respondents, i.e. the subject matter of Claim No.4, the arbitrator's
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conclusion that the Petitioner had abandoned the balance work is, in the
very first place, contrary to the record and based on practically no
evidence. The documents considered by the learned arbitrator for
arriving at this conclusion, namely, Exhibits C55, C56, C57, C58, C
60, C64 and C67, do not suggest or support the inference drawn by the
learned arbitrator. Exhibit C55 is minutes of a review meeting between
the parties. It merely shows that the contractor was instructed to
mobilise for work at Haji Ali immediately after the scheduled marathon
race and pursue the matter of NOC with Traffic Department for
commencing the work. This is treated by the arbitrator as stoppage of
work by the Petitioner in the name of the marathon race. It is strange
that express instructions for taking up the contract work immediately
after the marathon race, which was scheduled to be held in a couple of
days, and keeping itself ready with all permissions including traffic
permission by that time so as to commence the work immediately after
the race, are considered to be a breach on the part of the Petitioner by
terming them as instructions for stoppage of work. There is no indication
in the evidence adduced before the arbitrator that the work was stopped
as a result of the marathon race. Exhibit C56 is a letter addressed by the
Respondents. In this letter, the Respondents had claimed that at Kirti
College site, no sewer line was found and arrangements for diverting of
flow were required to be made by provision of P.V.C. pipes and blocking
the arch drain on both sides. It is not the contractor's case that the work
could not be completed as a result. This letter also claims that at P. Balu
site, a large size arch drain was wet, which resulted in a more laborious
and time consuming work. This letter was treated as evidence by the
arbitrator of the Petitioner's misrepresentation in drawings. The whole
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idea of the letter was to show that there was extra work involved, for
which the Respondents might charge extra. There was no case of
misrepresentation even alleged by the Respondents in this letter.
Exhibit C60 is a letter by the Respondents. It is said to be for the Haji
Ali site. Even this letter does not show that there was any case set up by
the Respondents of any misrepresentation by the Petitioner. All that it
suggests is that due to site conditions, the drawing had to be revised (in
this case due to the drain being of a larger size as noticed at the site).
There is no indication in the award as to what was the impact of the
particular site condition or need for revised drawings whether or not
the revised drawings were forwarded and when, and whether this
particular grievance resulted into any actionable delay on the part of the
Petitioner employer. Exhibit C57 is another letter addressed by the
Respondents. It merely reports that there was no place for storing of
excavated material at Haji Ali site and as per conditions of traffic NOC,
the excavated material had to be immediately removed from the site.
What was claimed was that this item therefore should be treated as an
extra item, to be paid for separately. One is at a loss to understand as to
how this amounts to any stoppage of work or actionable delay or breach
of contract on the part of Petitioner. Exhibit C58 is another
communication addressed by the Respondents, which again talks about
variations necessitated by site conditions. This obviously cannot be
treated as evidence of any breach on the part of the Petitioner. Even the
letters at Exhibits C64 and C67 do not suggest any breach on the part of
the Petitioner as a result of which the Respondents were prevented from
carrying out the contract work. These are letters addressed in the course
of the work. It is natural to expect actual site conditions to be different
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at times from the suggested drawings and revisions would have to be
made, some of these even entailing extra work, but that is no ground to
show that the Petitioner thereby committed breach of contract, which
resulted in Respondents being denied the opportunity to complete the
work. The very basis, therefore, for awarding loss of profit is untenable.
There is nothing to suggest that it was the Petitioner, who had
abandoned the balance work or denied opportunity to the Respondents
to complete the same. On these facts, there was no way the learned
arbitrator could have awarded compensation towards loss of profit.
7. There is one more serious challenge to the award of
damages. This challenge is on the ground of determination of quantum
of damages in a rough and ready manner, and by a simplistic thumb rule.
Damages by way of loss of profits were calculated on a simple
mathematical calculation of 12 % anticipated profit on the entire balance
work, on the basis of a rate analysis submitted by the Petitioner without
prejudice to its contentions. Learned Counsel for the Respondents
relies on the Supreme Court decisions in Dwaraka Das vs. State of
1 2
M.P. , M/s. A.T. Brij Paul Singh vs. State of Gujarat and MSK
3
Projects India (JV) Limited vs. State of Rajasthan . Learned Counsel
submits that these cases establish that whenever the employer is guilty of
breach of contract or whenever rescission of contract by the employer is
held to be unjustified and the contractor has executed a part of the works
contract, the contractor would be entitled to damages by way of loss of
profits; such claim is legally admissible on proof of breach of contract by
(1999) 3 SCC 500
1
(1984) 4 SCC 59
2
3 (2011) 10 SCC 573
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the erring employer and without insisting on any strict proof of actual
damages incurred towards such loss of profits. Learned Counsel submits
that such damages have been awarded on a thumb rule on the basis that
reasonable expectation of profit is implicit in any works contract and its
loss has to be compensated by way of damages if the other party to the
contract is guilty of its breach.
8. The cases cited by learned Counsel do not suggest any
inflexible or absolute rule or proposition of law. Any award towards loss
of profit would always depend on the facts and circumstances of each
case. In a case, where the contractor has merely done a negligible part of
his contract work and there is nothing to suggest that the contractor had
kept himself ready with engagement of capital and labour to complete
the entire work and yet he was prevented from carrying out the balance
work on account of a breach on the part of his employer, there is no case
for awarding loss of profit on a thumb rule such as this. Profit is usually
an incidence of capital and labour; deployment of these results into or
gives rise to profit. In this particular case, the learned arbitrator has not
gone into the facts of employment of capital or engagement of labour by
the contractor, which was really the subject matter of Claim No.5 (for
idling of resources), because the arbitrator was of the view that claim for
loss of profit could be awarded on a thumb rule. It is not in serious
dispute that a very negligible percentage of work was actually carried out
by the contractor at the stage when the work was stopped. Out of the
total contract worth of about Rs.2.70 crores, a mere Rs.16 lakhs worth of
work was accomplished out of the B.O.Q. work. There is no evidence to
suggest that contractor had kept himself ready and in fact was in a
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position to complete the entire balance work as per the schedule of work
assured to the employer. This is besides the point that there is no case
here, as noticed above, that it was the Petitioner who was actually
responsible for preventing the Respondents from carrying out the balance
work by reason of a breach of contract.
9. In the circumstances, there was really no case for any claim
of loss of profit. What the learned arbitrator could instead have done
was to consider the contractor's claim for compensation for infructuous
capital and labour expenses. This the learned arbitrator did not
consider, as noted above, since he was considering the case of loss of
profit and awarding the same to the contractor. The arbitrator's award
on Claim No.4, thus, cannot be sustained and will have to be interfered
with on the ground of a perverse conclusion, i.e. a conclusion not
supported by any evidence and also a conclusion in patent breach of
Indian law on damages.
10. Under Indian law, contained in Section 73 of the Contract
Act, in every case of breach of contract, the only compensation receivable
by the party suffering by such breach is for any loss or damage which
naturally arose in the usual course of things from such breach, or which
the parties knew, when they made the contract, to be likely to result from
the breach of it.
11. Learned Counsel for the Respondents relies on the cases of
Dwaraka Das, A.T. Brij Paul Singh and MSK Projects India (JV) Ltd.
(supra), and submits that the contractor would be entitled to claim
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damages for loss of profit which he expected to earn by undertaking the
works contract, where the party entrusting the work commits a breach of
the contract. No doubt the contractor is entitled to do so. Entitlement,
as a matter of law, is one thing, but the measure of profit and the proof
to be tendered to sustain such claim of profit are quite another. These
are not matters of any thumb rule; these have to be individually
assessed in every given case, and these are essentially matters of facts. In
Dwaraka Das , the Supreme Court upheld the legal entitlement of the
aggrieved contractor to be compensated by the erring party. In A.T. Brij
Singh , the Division Bench of High Court found 15 per cent of the value
of the balance of the works contract as a reasonable measure of damages
for loss of profit. That was on the basis of the facts of that case. The
High Court had earlier considered 15 per cent as reasonable profit for
another portion of the same road in the vicinity and that was accepted by
the employer State as a fair measure of damages in that case. The plea
in A.T. Brij Paul Singh that the cognate appeal could not be looked into
was, in the premises, found unacceptable by the Supreme Court. The
Court was of the view that it would be too technical; the work sites being
in the vicinity of each other and the work being of an identical type
between the same parties, the same measure, namely, 15 per cent of the
balance value of the contract found by the High Court could not be said
to be unreasonable. Even in MSK Projects India (JV) Ltd. (supra), the
Supreme Court has reiterated the same principle as stated in A.T. Brij
Paul Singh . The Court held that a claim by a contractor for recovery of
damages as expected profit out of the contract cannot be disallowed on
the ground that there was no proof that he suffered actual loss to the
extent of the amount claimed for loss of profits. In any event, though the
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Court did say that whilst estimating such damages, the Court should
rather make a broad evaluation than going into minute details, it
nevertheless reiterated that what would be the measure of profit would
depend upon the facts and circumstances of each case. In none of these
cases, the Supreme Court has found 15 per cent or indeed any other
percentage as a reasonable measure of damages as a thumb rule.
Besides, there is no authority in these, or indeed any other, cases to
support the proposition that just because, whilst accepting the contract
work, the contractor expected to earn a reasonable amount of profit, in
all cases of breach of contract by the employer, without consideration of
peculiar facts and circumstances of the case, and on the basis of the
breach alone, loss of profit ought to be awarded to the contractor as
damages by applying a thumb rule of percentage.
12. On the other hand, the authorities seem to clearly suggest
that the correct measure of damages is in every case a question of
assessment of evidence in the light of the pleas raised. In Bharat Coking
4
Coal Ltd. vs. L.K. Ahuja , the arbitrator had awarded 15 per cent of
works contract value as compensation towards loss of profits on account
of prolongation of works. It was in addition to escalation of wage bills
and price of materials and interest for delayed payments. The Supreme
Court found it difficult to accept that in addition to escalation and
interest, 15 percent towards loss of profit could be awarded. The Court
observed that it was not unusual for contractors to claim loss of profit
arising out of diminution of turnover on account of delay in the matter of
completion of work. The Court held that what should be established in
4 ( 2004) 5 SCC 109
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such a situation was that had the contractor received the amount due
under the contract, he could have utilised the same for some other
business in which he would have earned profits; unless such a plea was
raised and established, claim for loss of profits could not have been
granted. The Court referred to the case of Appeal Court in Sunley (B.)
5
and Company Limited vs. Cunard White Star Ltd. , discussed below, in
this context.
13. In Sunley (B.) and Company 's case, the plaintiffs were
public works contractors. As a result of the defendant's breach, their
machine could not reach the site of work in time. For this delay they
claimed damages. The plaintiffs had failed to prove any facts on which
their damages could be estimated. They nevertheless relied on law. The
trial judge accepted their case and gave them damages for loss by making
a guesswork of the profit which the machine could have earned for the
plaintiffs for the period of delay relying on a variety of cases. The Appeal
Court, reversing the order, held that those cases were no authority for
the proposition that, if the owner of a profit – earning chattel does not
prove the loss he has sustained, the judge may make a guess in the dark
and award him some arbitrary sum. The Appeal Court instead assessed
the damages in the following manner : The machine was a chattel of
commercial value, but on the facts before the court there were only four
possible heads of damage (1) depreciation which was running on, (2)
interest on the money invested which was being wasted, (3) some trivial
amount of maintenance which was no doubt involved, and (4) some
expenditure of wages which were thrown away. The Court accordingly
5 (1940) 1 KB 740: (1940) 2 ALL ER 97(CA)
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estimated the depreciation (for a machine having a life of three years)
and added some amount on the three other heads, whilst making
allowance for receipts, and worked out the total claim.
14. A Division Bench of our Court in Edifice Developers and
6
Project Engineers Ltd. vs. Essar Projects (India) Ltd. did not
countenance an award, where, without any evidence of damages, the
arbitrator had awarded loss of overheads on the basis of Hudson's
formula, which was considered by the Supreme Court in McDermott
7
International Inc. vs. Burn Standard Co. Ltd. as one of the many
formulae used for assessing loss of overheads in case of a works contract.
The Division Bench observed that in McDermott International , the
Supreme Court had held that it was an accepted position that different
formulae could 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. The
arbitrator in the case before the Division Bench had found that though no
direct evidence had been adduced on behalf of the contractor, he would
nonetheless be entitled to damages measured with reference to Hudson's
formula. This approach was found by the Division Bench manifestly in
the teeth of the law laid down by the Supreme Court in McDermott
International . The Division Bench made the following observations in
this behalf:
“Section 28(1)(a) requires that the Arbitral Tribunal shall decide a
6 Appeal No. 11 of 2012 decided on 3 January 2013
7 2006 (2) Arb.L.R. 498 (SC)
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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.”
The Division Bench in Edifice Developers (supra)
explained in this context the judgment of A.T. Brij Paul Singh (supra) in
the following words :
“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
contractor. The Supreme Court noted that in an identical contract with
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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.
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.”
15. Following this judgment, a learned Single Judge of our
Court in Essar Procurement Services Ltd. vs. Paramount
8
Constructions set aside an award which had allowed a claim for
overheads merely on the basis of Hudson's formula without any evidence.
The learned Judge found the approach to be contrary to the principles
laid down by this Court in Edifice Developers (supra), holding the
award to be patently illegal and in conflict with public policy. The
learned Judge set aside even a loss of profit award given on the basis of
Hudson's formula, holding as follows:
“113 The principles laid down by the Supreme Court and this court
in the judgments referred to aforesaid while dealing with the claim
for loss of overhead would also apply to the claim for loss of profit. A
perusal of the impugned award indicates that the claim for loss of
profit is also allowed by the arbitral tribunal simplicitor based on the
Hudson Formula and not based on any evidence and thus the same
also deserves to be set aside.”
16. As the Division Bench of Delhi High Court said in the case of
8 Arbitration Petition No.470 of 2012 decided on 25 November 2016
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9
Ahluwalia Contract (India) Limited vs. Union of India , that in
arbitration proceedings, just as in civil cases, an injured party can claim
damages, does not necessarily translate into an award for damages
towards loss of profits in every case unless some diligence is exercised by
the party claiming it. The Court held that a claim for damages (general
or special) cannot, as a matter of course, result in an award without
proof of injury. The arbitral tribunal in that case was unable to discern
any substantial material to justify the claim for damages towards loss of
profits and accordingly denied the claim. The Court sustained the award,
holding that no interference was warranted. The Court briefly
explained the cases of Bharat Coking Coal (supra) and A.T. Brij Paul
Singh (supra) thus:
“9. Bharat Coking (supra) and Brij Paul (supra), no doubt, are
authorities for the proposition that the Court even in arbitration
cases should be conscious of and ordinarily should not refuse claims
towards loss of profits. At the same time, the reference to Section 73
– which finds express mention in Brij Paul (supra) clarifies that
damages claimed cannot be granted as a matter of course; some
material evidence is necessary.”
17. The upshot of the above discussion is that though, as a
matter of law, in a works contract, where the contractor is prevented
from completing the contract work for no fault of his, the contractor may
be entitled to damages for reasonable profits which he expected to earn
in the contract, the measure of such profits is essentially a matter of
evidence. There are well known formulae, one or the other of which may
be used by the adjudicators, having regard to the evidence before them,
for working out such profits. It may be that in a given case, the employer
9 244 (2017) Delhi Law Times 360 (DB)
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has been computing profit as a certain proportion of the total value of
the works contract for awarding such contract or making or assessing
tenders; it may be that there may be a particular industry practice for
any such particular proportion; it may be that in the given contract, a
particular proportion was actually assessed as may be established by
evidence. These are, however, matters of evidence. Besides, even where
profit as a proportion of total contract value actually used is
demonstrable, there may still be difficulties in establishing a claim for
loss of profit on uncompleted work in case of wrongful rescission of
contract. We are, after all, concerned with the contract price of the
remaining work. The profit element must be shown visavis such
balance contract price. Particular industries (and even particular
contractors in the same industry) are known to price their contracts
differently; the profit percentage, stagewise or pricing elementwise,
may not be uniform. The earlier stages or elements of work may be more
profitable, whereas the remaining stages or elements may be less
profitable or even be nonprofitable, though the contract itself as a
whole may be profitable. So also, in every case where a contract is
terminated for no fault of the contractor, he cannot claim profits on the
entire balance amount of the unperformed contract. In the first place, at
the moment the contract was rescinded or determined, he may not be in
a state of readiness to perform the whole of the contract; he may not be
in a position where his resources are fully committed for the whole of the
balance work. This may particularly be so, where the performance of the
contract, at the time of its rescission, is at a very early stage. At that
stage, he may not have deployed capital or spent for labour for the whole
of the balance work. Can he then claim profit for the whole of the
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balance work without any commitment of capital and labour? Profit, as
we have noted above, is derived from the employment of capital and
labour; without these latter two, no profit can arise. Besides, depending
on the stage at which the rescission takes place, there would be a duty on
the part of the contractor, as the party suffering from a breach, to
mitigate damages. Such mitigation would imply that he seeks other
avenues to earn profits and employ his resources elsewhere. If there is
plentiful work around, there is no reason he should not so divert his
resources. In fact, in many cases he would have actually done so. Can
he then seek loss of profit for the whole of the balance contract value?
Will it not amount to his unjust enrichment?
18. These and such other elements are matters to be considered
in any adjudication of damages. It is no doubt, firstly, for the parties to
plead and prove these elements, consistent with the legal burden of proof
and shifting onus of proof as part of the trial. It is then for the
adjudicators to assess the evidence and arrive at a correct measure of
damages.
19. In the present case, as noted above, none of these
considerations appears to have been gone into by the arbitrator. The
contract was abandoned at a much early stage of the anticipated contract
work; only a miniscule percentage of work was accomplished by that
time. There is no pleading, much less evidence, that the contractor had
actually deployed resources or was even ready, or in a position, to do so.
And yet, by a simple arithmetical calculation, loss of profits at the rate of
12 per cent of the whole of the balance work was awarded. Even this 12
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per cent was on the basis of a rate analysis submitted by the employer
without prejudice to his rights and contentions. This is a clear error, and
an error of law at that, which goes to the root of the matter. It entails a
breach of public policy of India, since Indian law only countenances
compensatory damages. The fundamental idea behind the Indian
conception of damages is placing the party suffering from the breach of
contract in the same position in which he would have been had the
breach not occurred; he must show what he was in a position to receive
at the time the contract was broken, for it is only that which he would
receive as compensation.
20. The impugned award on Claim No.4, accordingly, cannot be
sustained and will have to be set aside. Award on Claim No.8, which was
for interest, will also have to be accordingly modified, since the award on
Claim No.4 is being set aside.
21. In the result, the arbitration petition partly succeeds. The
impugned award dated 04.02.2000 in so far as it awards Claim No.4, and
Claim No.8 to the extent it includes interest on Claim No.4, is set aside.
The rest of the award is sustained. The petition is disposed of
accordingly.
( S.C. GUPTE, J. )
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