Introduction

• This judgment lays down that an award that goes against the public policy of India in so far as it is against the judicial precedents should be set aside.

Facts

• The appellant was awarded a work contract by the respondent to carry out construction of Delhi Doordarshan Bhawan, Mandi House, Phase-II, New Delhi. The work was scheduled to commence on 12^th April, 1990 and reach completion on 11th April, 1991; however, it suffered a delay of roughly 42½ months and was finally completed on 30^th October, 1994.
• Disputes arose and the matter was referred to arbitration.
• The first arbitration proceedings resulted in the first arbitration award which awarded a claim for loss of profits as compensation under Section 73 of Indian Contract Act (ICA) applying the Hudson’s formula.
• Aggrieved by the above award primarily on the ground that a sum of Rs. 1,44,83,830.00 was awarded towards loss of profit an application under Section 34 of Arbitration and Conciliation Act, 1996 was filed.
• Resultantly the first award was set aside and the matter was referred to the Arbitrator for reconsideration and passing a fresh award.
• The second award was passed on 15th July, 2002. The arbitrator while passing the second award observed “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.”
• The Respondent filed a petition under Section 34 of the Act against the second award. A single bench of High Court allowed the objection and set aside the second award and rejected the appellant’s claim for loss of profits.
• An appeal was passed against this order before the Division Bench of High Court under Section 37 of the Act.
• The Division Bench confirmed the decision passed by the single bench.

Issues Involved

• Whether the claim for loss of profits be awarded in cases of delay simpliciter in execution of a contract?
• Whether the present award can be set aside on the ground that it is in conflict with public policy of India?

Observations

• The Hon’ble Supreme Court first discussed when the award would be in conflict with public policy of India.
• The Court cited the case of ONGC Ltd. v. Saw Pipes Ltd. (2003) wherein the Court held: “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.”
• Subsequent decisions of the Hon’ble Supreme Court have also 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.
• Further, the Court went on to discuss when a claim for loss of profits can be awarded as per the judicial decisions.
• The Court cited the case of Bharat Cooking Coal Limited vs. L.K. Ahuja (2004) which held that “What he should establish in such a situation is that had he received the amount due under the contract, he could have utilized the same for some other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profits could not have been granted. In this case, no such material is available on record. In the absence of any evidence, the arbitrator could not have awarded the same.”
• Hence, in order to be entitled to the claim for loss of profits the 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 also answered the question as to what the nature and quality of such evidence should be.
  • The evidence may 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
    • This list is not exhaustive and Court may consider other evidence as well
• The Hon’ble Supreme Court finally laid down the law on claims related to loss of profits.
  • Thus, in order to succeed in claims related to loss of profits following must be proved:
    • first, there was a delay in the completion of the contract;
    • second, such delay is not attributable to the claimant;
    • third, the claimant’s status as an established contractor, handling substantial projects; and
    • fourth, credible evidence to substantiate the claim of loss of profitability.
• The Hon’ble Supreme Court held that on perusal of the records, it can be concluded that the fourth condition, namely, the evidence to substantiate the claim of loss of profitability remains unfulfilled in the present case.
• The Hon’ble Supreme Court therefore held that the award in question is patently illegal in so far as it is based on no evidence at all and is hence in conflict with public policy of India.

Conclusion

• An award passed can be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 on the grounds of violation of public policy of India.
• 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.
• In order for a party to succeed in the claim for loss of profit the party must show with convincing evidence that had the contract been performed promptly, the contractor could have secured supplementary profits utilizing it’s existing resources elsewhere.