Sikkim High Court: While dealing with the dispute in relation to ‘Loss of Profits’ awarded by the Arbitral Tribunal but disallowed by the Commercial Court, the division bench of Biswanath Somadder, Chief Justice and *Meenakshi Madan Rai, J., while considering the matter under Section 37 of Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), set aside the order passed by the Commercial Courts and restored the award passed by the Tribunal.
Background
KMC Brahmaputra Infrastructure Limited (‘The appellant’) was to construct a two-lane Gangtok Bypass Road, from Ranipool to Burtuk in East Sikkim commencing from 22-12-2010, which was to be completed within thirty-six months. The Project was being developed by the respondent with the Ministry of Road, Transport and Highways, Government of India. The agreement was entered into between the parties whereby clause 59.2(d) of the contract stated, “The employer or the Contractor may terminate the Contract if the other party causes a fundamental breach of the Contract- (d) a payment certified by the Engineer is not paid by the Employer to the Contractor within 56 days of the date of the Engineer’s certificate”.
The contract came to be terminated by the appellant in October 2016 alleging breach of Clause 59.2(d) (supra) of the contract on the failure of the respondent to release payment of Running Account bills after more than 56 days from the date of certification. The appellant invoked the Arbitration Clause in the contract, while the respondent refuted the basis of termination of contract and put forth a counterclaim before the Tribunal.
The Tribunal pronounced award granting inter alia‘Loss of Profit’ to the appellant. Being aggrieved by the award granted by the Tribunal, respondent filed an application under Section 34 of the Arbitration Act assailing the award pronounced by the Tribunal. Subsequent to which, the Commercial Court set aside the entire claim for damages awarded under the head of “Loss of Profit” on grounds that the awarded passed was passed in a mechanical manner since respondent itself had not complied with the terms of the contract and conjointly responsible for the delay, therefore not entitled to earn a profit.
Issue
Whether the Commercial Court was correct in setting aside the ‘Loss of Profit’ awarded by the Tribunal to the appellant?
Court Analysis, Observation and Findings
While navigating the parameters for setting aside an Arbitral Award, referring to the provision of Section 34 of the Arbitration Act interpreted in McDermott International INC. v. Burn Standard Co. Ltd., (2006) 11 SCC 181 the Supreme Court held that “the public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of section 34 of the Act.”
The Court relied upon Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd., (2019) 7 SCC 236 where it was observed that “if a term of the Contract has been construed in a reasonable manner then the Award ought not to be set aside on this ground alone” while in National Highway Authority of India v. Progressive-MVR (JV), (2018) 14 SCC 688, the Supreme Court held that “even when the view taken by the Arbitrator is a plausible view and/or when two views are possible, the particular view taken by the Tribunal which is also reasonable should not be interfered with…”
The Court noted that the Tribunal while factoring in the ‘Loss of Profit’, discussed the scheme of Section 39 of the Indian Contract Act, 1872 (‘Contract Act’) and observed that the aggrieved party may make a claim for loss of bargain for the entire period of contract.
The Court reiterated that observation stated in Maharashtra State Electricity Distribution Company Limited v. Datar Switchgear Limited, (2018) 3 SCC 133 which held that “fundamental breach by its very nature pervades the entire Contract and once committed the Contract as a whole stands abrogated.” Thus, the Court held that there was indeed a breach of contract pursuant to the reasoning put forth by the Tribunal as well as upon reading Clause 59.2(d) of the contract between the parties and what remains for consideration is the method of computation which depend upon the facts and circumstances of each case.
The Court stated that the Tribunal reasoned that the contract is a commercial one, where the claimant has not bid to make losses, that the ingredient of profit is always inbuilt in the performance of a particular contract.
The Court further observed that despite Commercial Court being aware about the foreclosure of the contract which never fructified, still proceeded to observe that prior to the termination of the contract there was a proposal for foreclosure by the appellant, wherein the appellant had waived its rights to claim any compensation or repatriation, should the foreclosure materialise. The Commercial Court was of the opinion that the same conditions of waiver would have to be read into the communication for termination of the contract, sans such specific waiver. Pursuant to which the Court held that it is absurd to suggest that the appellant had waived all legal rights while terminating the contract.
While addressing the observation of the Commercial Court that the Award of damages under the head “Loss of Profit” was clearly erroneous, patently illegal and the Award to that extent was ex-facie perverse, in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India, (2019) 15 SCC 131 the Court referred to the findings of the Supreme Court which expanded on ‘illegality’ appearing on the face of the Award and observed that such ‘illegality’ must go to the root of the matter, and ought not to be a mere erroneous application of the law. Further, the Award would be considered ‘patently illegal’ if an Arbitrator gives no reasons for an Award and wanders outside the contract and deals with matters not allotted to him. “Patent illegality” would also be one in which a decision is so irrational, that no reasonable person would have arrived at the same and if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic, then, the finding would be rendered infirm in law.
The Court thus found elaborate reasons rendered for the conclusion arrived at by the Tribunal which could neither be termed as “erroneous”, “irrational” or “patently illegal”.
Moreover, with the question of interpretation of section 73 of the Contract Act, the case of MSK Projects India (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573 made certain observation which lent a quietus to the dispute that if the party entrusted with work committed breach of contract, the contractor is entitled to claim the damages for ‘Loss of Profit’ which he expected to earn by undertaking the work contract. Claim of expected profit is legally admissible proof of the breach of contract, there shall be a reasonable expectation of profit implicit in the works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract
Thus, the Court held that neither the Court below nor this Court was empowered under the relevant provisions of law to reappreciate the evidence on record nor do the provisions of law envisage that Courts while exercising power under section 34 of the Arbitration Act shall function as a regular first Court of Appeal. The Court, under section 34 of the Arbitration Act cannot replace the views of the Tribunal, if found plausible, by substituting its own views.
The Court further observed that the Tribunal after holding that there was a fundamental breach of contract, factored in the contributory delay caused by the appellant and fairly awarded ‘Loss of Profit’ by slashing it to 50% of the original claim put forth by the appellant.
Thus, the Court accordingly set aside the order of the Commercial Curt and restored the award passed by the Tribunal.
[KMC Brahmaputra Infrastructure Ltd. v. The Chief Engineer, Roads & Bridges Department, Government of Sikkim, 2022 SCC OnLine Sikk 130, decided on 20-12-2022]
*Judgement by Justice Meenakshi Madan Rai.
Advocates who appeared in this case:
For the Appellant- Advocate Rohan Batra;
Advocate Dhruv Sethi;
Advocate Hemlal Manager;
For the Respondent- Advocate Varun Mishra;
Advocate Rishab Joshi;
Advocate Bhawana Rai.