The Supreme Court recently dismissed an appeal challenging the denial of compensation for loss of profits in a construction contract dispute. The Court held that the arbitrator's award, which lacked credible evidence to substantiate the claim of loss of profit, conflicted with the public policy of India and could not be sustained.
Facts of the Case:
M/s Unibros, the appellant, challenged a judgment and order of the Delhi High Court. The High Court had dismissed an appeal brought by the appellant under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘The Act’). The dispute arose from a construction contract awarded to the appellant by the All India Radio, the respondent, for the construction of Delhi Doordarshan Bhawan. The contract was significantly delayed, leading to disputes referred to an arbitrator.
The arbitration proceedings commenced resulting in the First Award that addressed various claims, particularly Claim No. 12 seeking compensation for a profit loss due to contract extension. The arbitrator awarded the appellant Rs. 1,44,83,830 for this loss. Subsequently, the High Court, in response to the respondent's objection under Section 34 of The Act, set aside the award, citing insufficient evidence. A Second Award by the arbitrator maintained the loss of profit award attributing the delay and loss to the respondent's actions. The respondent once again sought to set aside the Second Award in the High Court. The Single Judge allowed the objection, rejecting the loss of profit claim due to insufficient evidence and awarding costs to the respondent. The Division Bench upheld this decision, emphasizing the appellant's failure to provide adequate evidence to support the loss of profit claim.
The appellant, dissatisfied with the High Court's decision, appealed to the Supreme Court, leading to the current case.
Contentions of the Appellant:
The appellant contended that in the absence of any perversity or caprice, the Courts should not interfere with the award, relying on the principle that the arbitrator is the sole judge of the quality and quantity of evidence. He emphasized that the High Court, under Section 34 of the Arbitration and Conciliation Act, should not act as a first appellate authority and should only interfere with arbitral awards in the presence of perversity.
The appellant also referred to the limited scope of interference in awards by the High Court, citing the Bharat Cooking Coal Limited vs. L.K. Ahuja[1] case. It was argued that as per Section 34 of The Act, an award cannot be modified but can only be set aside under specific grounds, and this limitation aligns with the legislative intent of minimizing judicial intervention in arbitral awards. Additionally, they relied on M/s AT Brij Paul Singh & Ors. vs. State of Gujarat[2] to assert that a contractor is entitled to damages for loss of expected profit on the remaining work without the need to delve into minute details.
The appellant justified the application of Hudson’s formula, emphasizing its broad acceptance and its reliance on the contract's original terms rather than actual work execution, rendering the appellant's resource allocation irrelevant in the calculation of loss of profit, with reference to McDermott International Inc. vs. Burn Standard Co. Ltd. and Ors[3].
Contentions of the Respondent:
On the other hand, the respondent contended that the arbitral award was passed arbitrarily and argued that Hudson’s formula was inapplicable in cases of delay alone and required the aggrieved party to provide evidence. They emphasized three essential conditions for the formula's application: the profit awarded must have been realistically attainable elsewhere, the contractor should not have consistently underestimated costs, and there should have been no subsequent market changes.
The respondent argued that no evidence was presented to substantiate a genuine loss of profit or opportunity. The absence of credible evidence to prove the appellant's capability to earn profits elsewhere was stressed. It was highlighted that the award conflicted with the public policy of India under Section 34(2)(b)(ii) of the Act and questioned the arbitrator's contradictory approach in dismissing certain claims while granting damages for loss of profit.They asserted that the mechanical application of Hudson’s formula would serve no purpose and burden the exchequer.
Observations of the Court:
The Supreme Court held that judicial decisions, whether by a superior Court or through limited remands, should be respected and upheld by an arbitrator or a multi-member arbitral tribunal. The Second Award was found to be in direct conflict with the public policy of India, particularly because it essentially mirrored the First Award, and the arbitrator did not consider the judicial decision ordering a limited remand.
The Court established the criteria for substantiating a claim related to loss of profit. These conditions included the presence of a delay not attributable to the claimant, the claimant's status as an established contractor, and the need for credible evidence to support the loss of profitability. The Court emphasized that the mere use of formulas, like Hudson's formula, was not sufficient to prove loss of profit, and that evidence must be provided to substantiate the claim.
The Court held that “in the wake of authority of judicial determination made by the Courts of law, any award of an arbitrator or a tribunal that seeks to overreach a binding judicial decision, in our opinion, does conflict with the fundamental public policy and cannot, therefore, sustain.”
The Decision of the Court:
The Supreme Court emphasized that the arbitral award in question was patently illegal, as it lacked credible evidence and was based on no evidence. Consequently, the award was in conflict with the "public policy of India" as contemplated by Section 34(2)(b) of The Act.
The Court concluded that there was no merit in the appeal and accordingly dismissed it.
Case Title: M/S Unibros vs. All India Radio
Coram: Hon’ble Justice S. Ravindra Bhat and Dipankar Datta
Case no.: C.A. No. 6895 / 2023
Citation:
Advocate for the Appellant: Jagdish Vatsa, Sameer Rohtagi, T.S. Chaudhary, Kartikey Singh, and Sachin Gupta
Advocate for the Respondents: Amrish Kumar
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