claim of loss of profitability in Arbitration

Supreme Court: In an appeal by Unibros (‘appellant’) against the Judgment and Order of the Delhi High Court, whereby, the appellant’s appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (‘Act’) was dismissed and the Single Judge’s order was affirmed, whereby the All India Radio’s (‘respondent’) objection under Section 34 of the Act was allowed resulting in setting aside of an arbitral Award wherein, a sum of Rs. 1,44,83,830 was awarded for delay in completing the work beyond the stipulated contract period, the Division Bench of S. Ravindra Bhat and Dipankar Datta, JJ. dismissed the appeal for being devoid of merits and held that the arbitral award was in conflict with the ‘public policy of India’ as contemplated by Section 34(2)(b) of the Act.


In the matter at hand, the respondent awarded a work contract to the appellant to carry out construction of the Delhi Doordarshan Bhawan, Mandi House. The work was scheduled to commence on 12-04-1990 and be completed by 11-04-1991. However, it suffered a delay and was finally completed on 30-10-1994. The disputes and differences between the parties due to the delay, were subsequently referred to an Arbitrator for resolution. The appellant was awarded a sum of Rs. 1,44,83,830 along with an interest of 18 percent per annum on the fact that the delay in completing the work beyond the stipulated contract period was caused by the respondent and 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 3½ years leading to loss of the appellant’s profit earning capacity during the said extended period. Aggrieved by the said award, the respondent filed an objection under section 34 of the Act. The Single Judge set aside the First Award and the claims were remitted to the Arbitrator for re-consideration and for passing a fresh award.

The Arbitrator passed a second award on 15-07-2002 and maintained the award for loss of profit and interest to the appellant vide First Award. The respondents preferred an objection under section 34 of the Act against the second award. The Single Judge allowed the respondent’s objection and held that no sufficient evidence was presented by the appellant to establish the claimed loss of profit, the lack of records regarding the alleged utilization of men, material, machinery, overheads, and other resources in the contract performance that could have otherwise been used for other profitable contracts raised doubts about the legitimacy of the claimed losses of Rs. 2,00,00,000. The Division Bench in the appellant’s appeal against the Single Judge’s order dismissed the appeal and viewed that no evidence was produced to support the plea of loss of profit during the period when the work was prolonged, therefore, the Arbitrator’s findings were contrary to law, more particularly the Contract Act, 1872 which governs matters related to loss of profit.

Analysis and Decision

The question raised before the Court in the appeal was that as to whether a claim on account of loss of profit is liable to succeed merely on the ground that there has been delay in the execution of the construction contract, attributable to the employer?

Public Policy of India

The Court referred to ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705, wherein the question that what would constitute ‘public policy of India’ was tackled and it was held that “the phrase ‘public policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matters which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.”

Further, the Court referred to Associated Builders v. Delhi Development Authority (2015) 3 SCC 49, wherein the compliance with fundamental policy of Indian law, statutes and judicial precedents, need for judicial approach, compliance with natural justice, Wednesbury unreasonableness and patent illegality were included in the interpretation of ‘public policy of India’.

Whether the Second Award was in conflict with the public policy of India?

The Court held that the second award was no better than the First Award, for, it is equally in conflict with the public policy of India. The Court said that while pronouncing the second award the Arbitrator went on to ignore the Single Judge’s warning of not to be influenced by the factors that weighed in his mind while making the First Award. The Court noted that the Arbitrator once again emphasized on the appellant by not providing complete site and drawings within the stipulated contract period and that non-handing over of site certainly constituted fundamental breach of contract vitiating the entire contract. The Court also pointed out that the Arbitrator referred to Hudson’s espousal of fundamental breach of contract which, according to him, was the standard text in all engineering and building contracts. Therefore, the Court said that it was apparent that the factors which weighed in the Arbitrator’s mind in the first award and the second award are one and the same. Further, the Court said that to avoid any charge of being branded as a mirror image of the First Award, the Second Award appears to have been expressed in language and form different from the earlier one without, however, there being any change in substance. The Court said that any award of an Arbitrator or a Tribunal that seeks to overreach a binding judicial decision, does conflict with fundamental public policy and cannot, therefore, sustain.

On appellant’s claim of loss of profit, the Court referred to Bharat Cooking Coal Limited v. L.K. Ahuja, (2004) 5 SCC 109 wherein the principle that a claim for such loss of profit will only be considered when supported by adequate evidence was reaffirmed. The Court explained that to support a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts that the appellant could have earned elsewhere by taking up any, it becomes imperative for the claimant to substantiate the presence of a viable opportunity through compelling evidence. This evidence should convincingly demonstrate that had the contract been executed promptly, the contractor could have secured supplementary profits utilizing its existing resources elsewhere.

For the nature and quality of such evidence for supporting the claim for loss of profit, the Court opined that it will be contingent upon the facts and circumstances of each case. The Court said that the evidence may generally include independent contemporaneous evidence such as other potential projects that the contractor had in the pipeline that could have been undertaken if not for the delays, the total number of tendering opportunities that the contractor received and declined owing to the prolongation of the contract, financial statements, or any clauses in the contract related to delays, extensions of time, and compensation for loss of profit. The Court stated that the credibility of the evidence, therefore, is the evidence of the credibility of such claim.

The Court illustrated the conditions required for claims related to loss of profit, profitability or opportunities to succeed:

  1. that there was a delay in the completion of the contract;
  2. such a delay is not attributable to the claimant;
  3. the claimant’s status as an established contractor, handling substantial projects; and
  4. credible evidence to substantiate the claim of loss of profitability.

The Court said that in the present case, the fourth condition i.e., credible evidence to substantiate the claim of loss of profitability was not satisfied. The Court held that a claim for damages, whether general or special, cannot as a matter of course result in an award without proof of the claimant having suffered injury. The Court held that the arbitral award in question was patently illegal as it is based on no evidence and thus, outrightly perverse. The Court also held that the arbitral award was in conflict with the ‘public policy of India’ as contemplated by Section 34(2)(b) of the Act.

Thus, the Court dismissed the appeal for being devoid of merits.

[Unibros v. All India Radio, 2023 SCC OnLine SC 1366 ,decided on 19-10-2023]

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