Arbitration | Awarding Claim For Loss Of Profit Without Substantial Evidence Is In Conflict With Public Policy Of India: Supreme Court

Recently, the Supreme Court, while rendering an arbitral award as patently illegal and being in conflict with the “public policy of India”, held that a claim for damages cannot as a matter of course result in an arbitral award without proof of the claimant having suffered injury. The present decision emphasised the importance of substantial evidence in awarding claims for loss of profit.

“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 arbitral award in question, in our opinion, is patently illegal in that it is based on no evidence and is, thus, outrightly perverse; therefore, again, it is in conflict with the “public policy of India” as contemplated by section 34(2)(b) of the Act.,” Justices S. Ravindra Bhat and Dipankar Datta.

It may be noted that Section 34 (2)(b)(ii) of the Arbitration and Conciliation Act, 1996, (Act) lays down that an Arbitral Award may be set aside if the court finds that the same is in conflict with the Public Policy of India.

The matter was placed before the Division Bench of Justices S. Ravindra Bhat and Dipankar Datta.

In the matter at hand, the Appellant (M/S Unibros) was awarded a work contract by the respondent (All India Radio) to carry out construction of Delhi Doordarshan Bhawan, Mandi House, Phase-II, New Delhi. However, the work suffered a delay of roughly 42½ months. Disputes and differences emerged between the parties owing to such delay, which were subsequently referred to an Arbitrator. The claim of the appellant pertaining to compensation for the loss of profit was upheld by the Arbitrator on two occasions.

It must be noted that when the first award was challenged before the High Court, the Court while setting aside the award, remitted the same to the arbitrator for re-consideration. However, when the award was maintained again, the appellant's claim was rejected by the Single Judge Bench of the High Court. The same decision was not interfered by the Division Bench of the High Court. Aggrieved by the same, the appellant approached the Top Court.

The Bench while referring to the decisions related to the interpretation of Public Policy, observed that these decisions have interpreted “public policy of India” to include, among others, compliance with fundamental policy of Indian law, statutes and judicial precedents, need for judicial approach, compliance with natural justice, Wednesbury unreasonableness and patent illegality. In this context, the Court held:

“Having read the Second Award, we have no hesitation to hold that it fares no better than the First Award, for, it is equally in conflict with the public policy of India…. It is, therefore, apparent that the factors which weighed in the Arbitrator's mind in the first round and the second round are one and the same…. It is elementary, though it has to be restated, that a judicial decision of a superior court, which is binding on an inferior court, has to be accepted with grace by the inferior court notwithstanding that the decision of the superior court may not be palatable to the inferior court.”

Case History and Rounds of Litigation

First Award

The Arbitrator awarded compensation to appellant for loss of profit. As per the arbitrator, the award was based on the undisputed 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. The loss of profit was worked out based on a profit allowance of 7½% per year, which the Arbitrator held to be reasonable in a civil works contract.

Aggrieved by the aforesaid First Award, the respondent filed an objection under section 34 of the Act before the High Court impugning the decision. Thereafter, a single judge bench of the High Court set aside First Award and the claims were remitted to the Arbitrator for re-consideration and for passing a fresh award.

Second Award

The arbitrator in its second award reiterated that the respondent had failed to provide the complete site and drawings within the stipulated contract period, leading to delays. Thus, it maintained the award for loss of profit and interest to the appellant vide First Award.

Further, the arbitrator also opined that as per established legal principles, the party responsible for the breach of the contract is liable for reasonably foreseeable losses.

Considering the appellant's status as an established contractor, handling substantial projects, the arbitrator inferred that it was reasonable to assume earning of expected profits elsewhere by the appellant. Employing the doctrine that within a contract, gains prevented qualify as loss sustained, the Arbitrator observed that the appellant was not required to establish the exact amount of gain or loss with absolute certainty; instead, presenting fairly persuasive and the best available evidence under the particular circumstances of the case would suffice.

Again, challenging the second award, the respondent filed a petition under Section 34 of the Act. This time, The Single Judge of the High Court vide judgment and final order dated 25th February 2010 allowed the objection under Section 34 and rejected the appellant's claim with an observation that there was no sufficient evidence presented by the appellant to establish the claimed loss of profit.

Impugned Judgment

The appellant preferred an appeal before the Division Bench of the High Court under Section 37 (Appealable orders) of the Act. In its impugned judgment, the Division Bench, while dismissing the appeal, was of the view that no evidence was produced on behalf of the appellant to support the plea of loss of profit during the period when the work was prolonged; findings returned by the Arbitrator are, therefore, contrary to law, more particularly the Contract Act which governs matters related to loss of profit.

Court Observations

The Court expressed its dissatisfaction to the findings of the second award. The Court categorically opined that the Single Judge while remitting the claim for reconsideration, warned the Arbitrator not to be influenced by the factors that weighed in his mind while making the First Award. The Arbitrator was also required to proceed only on the basis of the evidence on record.

“Yet, regrettably, what we find is that the Arbitrator went on to ignore the judicial decision of the High Court with impunity.,” the Court added.

Appellant's Claim for Loss of Profit

Answering the same, the Court observed 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.

The Court while giving several illustrations regarding the nature and quality of such evidence held that the same may include any other piece of evidence that the court may find relevant, what is cut and dried is that in adjudging a claim towards loss of profits, the court may not make a guess in the dark; the credibility of the evidence, therefore, is the evidence of the credibility of such claim.

Moving forward, the Court also reiterated that for claims related to loss of profit, profitability or opportunities to succeed, one would be required to establish the following conditions: a. there was a delay in the completion of the contract; b. such delay is not attributable to the claimant; c. the claimant's status as an established contractor, handling substantial projects; and d. credible evidence to substantiate the claim of loss of profitability.

Based on the perusal of the records, the Court held that the last condition namely, the evidence to substantiate the claim of loss of profitability remains unfulfilled in the present case and thus, dismissed the appeal.

Case Title: M/S UNIBROS v. ALL INDIA RADIO, ARISING OUT OF SLP (CIVIL) NO. 8791/2020

Citation : 2023 LiveLaw (SC) 918

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