Unpleaded and unsupported claims for overheads and lost profits cannot sustain an arbitral award.

The appellant, State Project Director, Rashtriya Madhyamika Shikshana Abhiyana, awarded BSR Infratech India Ltd. Package A-3 for constructing four Adarsha Vidyalayas and six girls’ hostels in Bellary District for a contract price of ₹32,58,20,153.

The parties executed the construction agreement on 15 May 2013, with completion stipulated within twenty months from 17 May 2013.

Delays occurred, which BSR attributed to the appellant, including delayed site handover, drawings, approvals, payments, and other administrative impediments.

BSR invoked arbitration and raised twelve claims aggregating ₹80,03,19,726, including claims for unproductive overhead charges, loss of expected profits, interest, and litigation costs.

The Sole Arbitrator rejected most claims but partly allowed Claim Nos. 7(a), 8 and 12, awarding ₹1,59,75,852 towards unproductive overhead charges, ₹90,52,982 towards loss of expected profits, ₹2,00,000 towards costs, and future interest at 9% per annum.

The appellant challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

The Commercial Court dismissed the challenge on 18 September 2024.

The appellant thereafter preferred the present appeal under Section 13(1A) of the Commercial Courts Act, 2015 read with Section 37(1)(c) of the Arbitration and Conciliation Act, 1996.

Whether the Arbitral Tribunal’s award of unproductive overhead charges under Claim No. 7(a), in the absence of supporting pleadings, particulars, methodology, and evidence, was legally sustainable?

Whether the award of damages for loss of expected profits under Claim No. 8 was sustainable when the contract had been fully performed and BSR had neither pleaded nor proved the alleged loss?

Whether the consequential award of litigation costs and interest could survive after the awards under Claim Nos. 7(a) and 8 were set aside?

The Court exercised appellate jurisdiction under Section 13(1A) of the Commercial Courts Act, 2015 read with Section 37(1)(c) of the Arbitration and Conciliation Act, 1996, in examining the Commercial Court’s refusal to interfere with the arbitral award.

An arbitral tribunal cannot award damages on a basis that was neither pleaded nor supported by evidence, and a claim must be established through material particulars and proof of the alleged loss.

The Court also considered the principle stated in A.T. Brij Paul Singh v. State of Gujarat, (1984) 4 SCC 59, concerning compensation for loss of expected profits in appropriate construction-contract cases; however, such compensation must be founded on the facts and evidence of the particular case.

The Court held that Claim No. 7(a) was unsupported by pleadings and evidence.

BSR had not set out the particulars or methodology for calculating unproductive overheads, and its witness had not provided supporting evidence.

Nevertheless, the Arbitral Tribunal applied the Hudson Formula and assumed that overheads constituted 10% of the contract price, despite BSR not having advanced that basis of quantification.

The Court found this award unsustainable.

The award under Claim No. 8 was likewise invalid.

Although the Tribunal relied on A.T. Brij Paul Singh, the Court distinguished the present case because the contract had been fully performed and BSR had already realised the profit embedded in the contract price.

BSR had not claimed loss of profits on the basis adopted by the Tribunal and had adduced no evidence establishing the quantum of such loss.

The Tribunal’s award of 10% per annum of the expected profits included in the value of work executed was therefore without a proper evidentiary or contractual foundation.

Since the award of costs was premised on BSR’s success under Claims 7(a) and 8, the costs award and associated interest also could not stand.

The Court set aside the arbitral award insofar as it granted Claim Nos. 7(a), 8 and 12, together with the interest awarded on those amounts.

The remaining portions of the arbitral award, including the rejection of the other claims, were not disturbed.