Supreme Court: Claiming Loss Of Profit Without Substantial Proof In Conflict With Public Policy

Supreme Court: Claiming Loss Of Profit Without Substantial Proof In Conflict With Public Policy

States it is contrary to Section 34(2)(b) of the Arbitration and Conciliation Act, 1996

The Supreme Court has held that the damages claim cannot result in an arbitral award without the claimant providing proof of suffering an injury.

The bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta emphasized the importance of substantial evidence in awarding claims for loss of profit while rendering an arbitral award as patently illegal and in conflict with ‘India’s public policy’.

Under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996, an arbitral award may be set aside if the court finds that the same conflicts with the Public Policy of India.

The appellant, Unibros, was awarded a work contract by the respondent, All India Radio (now termed Akashvani), to carry out the construction of Delhi Doordarshan Bhawan, Mandi House, Phase-II, New Delhi.

However, the work suffered a delay of over 42 months due to which disputes and differences emerged between the two entities These were subsequently referred to an arbitrator.

The arbitrator twice upheld the compensation claim of the appellant for the loss of profit.

When the first award was challenged before the High Court, it set aside the award, remitting it to the arbitrator for reconsideration. However, when the award was repeated, the appellant’s claim was rejected by a single-judge bench of the high court. The division bench too refused to interfere with the decision.

Aggrieved by the outcome, the appellant approached the Apex Court.

The judges observed that the decisions had interpreted the ‘Public Policy of India’ to include compliance with the fundamental policy of the Indian law, statutes, and judicial precedents, the need for judicial approach, compliance with natural justice, Wednesbury unreasonableness, and patent illegality.

The bench held, “Having read the second award, we have no hesitation to hold that it fares no better than the first award. It is equally in conflict with the public policy of India. It is, therefore, apparent that the factors that weighed in the arbitrator’s mind in the first round and the second round are one and the same. It is elementary, though it must be restated that a judicial decision of a superior court, binding on an inferior court, must be accepted with grace by the inferior court, notwithstanding that the decision may not be palatable.”

In the first award, the arbitrator awarded compensation to the appellant for loss of profit. It was because of the delay in completing the work beyond the stipulated contract period caused by the respondent. It was against the stipulated contract period of 12 months. The appellant was retained by the respondent for the execution of the work for an additional period of over three years leading to loss of the appellant’s profit-earning capacity during the extension. This loss was worked out based on a profit allowance of 7.5 percent annually, which the arbitrator held was reasonable in a civil works contract.

However, aggrieved by the award, the respondent filed an objection before the high court under Section 34 of the A&C Act. Thereafter, a single-judge bench set aside the award. The claims were remitted to the arbitrator for reconsideration and for passing a fresh award.

In the second award, the arbitrator reiterated that the respondent failed to provide the complete site and drawings within the stipulated contract period, leading to the delay. It maintained the award for loss of profit and interest to the appellant vide the first award. The arbitrator also stated that the party responsible for the breach of the contract was liable for reasonably foreseeable losses.

Considering the appellant's status as an established contractor, handling substantial projects, the arbitrator assumed the appellant could earn profits elsewhere. Employing the doctrine that within a contract, the gains prevented qualified as a loss sustained, he held that the appellant was not required to establish the exact amount of gain or loss. He supposed that presenting the best available evidence under the circumstances would suffice.

While challenging the second award, the respondent filed a petition under Section 34 of the A&C Act. Herein, the single-judge bench, vide its 25 February 2010 final order allowed the objection. It rejected the appellant’s claim observing that there was no sufficient evidence presented by the appellant to establish the claimed loss of profit.

Thereafter, the appellant appealed before the division bench of the high court under Section 37. While dismissing the appeal, the bench held that no evidence was produced by the appellant to support the plea of loss of profit during the period when the work was prolonged. It stated that the findings returned by the arbitrator were contrary to law, particularly the Indian Contract Act, 1872, which governed such matters.

The Top Court expressed its dissatisfaction with the second award. It stated that the single-judge bench while remitting the claim for reconsideration, warned the arbitrator not to be influenced by the factors weighing in his mind while making the first award. However, the arbitrator was expected to proceed only based on the evidence.

The bench held, “Yet, regrettably, the arbitrator ignored the judicial decision of the high court with impunity.”

On the appellant’s claim for loss of profit, the judges maintained that to support a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts, it was imperative for the claimant to substantiate the presence of a viable opportunity through compelling evidence. The proof had to demonstrate that if the contract was executed promptly, the contractor could have secured supplementary profits utilizing its existing resources elsewhere.

Justice Bhat and Justice Datta reiterated that for claims related to loss of profit, profitability, or opportunities to succeed, a person was required to establish the following conditions:

a.) There was a delay in the completion of the contract.

b.) The delay was not attributable to the claimant.

c.) The claimant’s status as an established contractor, handling substantial projects.

d.) Credible evidence to substantiate the claim of loss of profitability.

Thus, while citing that the condition of the evidence to substantiate the claim of loss of profitability remained unfulfilled, the appeal was dismissed by the bench.