Citation Codes

Neutral Citations

2010 DHC 1154

Equivalent Citations

citation codes

Case Number

O.M.P No. 331/2002

Advocates

Mr. Abhinav Jain, Advocate.
Mr. Jagdish Vats, Advocate.

Judges

Valmiki J. Mehta, J.

Acts

See more information ...

Smart Summary

Judgment Summary: Valmiki J. Mehta, J. — 25 February 2010

Factual and Procedural Background

This is a petition under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an arbitral Award dated 15 July 2002 by the sole Arbitrator. The Award decided only one claim (Claim No. 12) brought by the respondent/contractor for loss of profits arising from alleged prolongation of the contractor's work period. The Arbitrator had held that the petitioner (the employer/Union of India) was responsible for prolongation of the contract period from 11 April 1991 to 30 October 1994. The underlying contract concerned additional construction of a Doordarshan Branch at Mandi House (substructure including a double basement).

The petitioner challenged the Award under Section 34 contending, in essence, that the Arbitrator erred in allowing loss of profits without requisite evidence and contrary to the law governing contractual consequences of prolongation.

Legal Issues Presented

Whether prolongation of the contract by the employer (here held to be caused by the petitioner) entitles the contractor to recover loss of profits under Section 73 of the Indian Contract Act, 1872, or whether the contractor's remedy is limited to escalation/other consequences under Section 55 of the Contract Act.
What evidentiary proof is required to establish entitlement to loss of profits caused by prolongation (specifically, whether the contractor must prove that additional men, machinery, materials, overheads, etc. were necessarily and exclusively retained at the site and could otherwise have earned profit on other contracts).
Whether an arbitral Award that allows loss of profit without the necessary evidentiary foundation is illegal or so perverse as to justify interference under Section 34 of the Arbitration Act.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bharat Engg. Enterprises v. DDA, 2006 (Supp.) Arb. LR 129 (Single Judge)	Established that: on prolongation a party may be entitled to escalation for materials and extra wages if proved; compensation for idle machinery if shown it could have been used elsewhere; hire charges for plant taken on hire; but loss of profit is not a natural consequence and cannot be allowed without proof that the contractor was unable to bid/take other works because manpower/machinery were necessarily deployed.	The court relied on this authority to support the proposition that loss of profit is not automatically recoverable on account of prolongation and must be proved by showing the extra use/retention of resources which could have otherwise earned profit.
Uttar Pradesh Cooperative Federation Limited v. Three Circles, (2009) 10 SCC 374	Holds that interest can be imposed on costs awarded (after referring to the 55th Report of the Law Commission, 1973).	The court relied on this Supreme Court decision to justify awarding interest on the costs ordered in favour of the petitioner, applying the principle that interest on costs is permissible.

Court's Reasoning and Analysis

The court proceeded in a stepwise analytical fashion:

It identified the core legal question (whether prolongation entitles the contractor to loss of profits) and explained the legal distinction between immediate consequences available under Section 55 of the Contract Act and loss of profits under Section 73. The court emphasised that loss of profit is not an automatic consequence of prolongation even if prolongation is caused by the employer.
The court set out the evidentiary requirement: to recover loss of profit the contractor must prove that, during the extended period, it was forced to retain or deploy additional men, machinery, materials, overheads etc. which could otherwise have been used on other contracts to earn profit. The court stated that mere prolongation does not by itself establish loss of profit.
The court examined the impugned Award and described it as comprising three parts with respect to Claim 12:
- The Arbitrator's finding that the petitioner caused delay (accepted and undisputed);
- Reference to evidence as to the rate of profit (also not disputed); and
- Quantification of the rate of profit (the Award quantified a sum).
Critically, the court noted the absence from the Award (and from the arbitration record as pointed out to this court) of any finding or evidence showing unnecessary retention or exclusive use of additional men, machinery, materials, overheads etc. that would have enabled the contractor to earn profit elsewhere.
Relying on the legal standard (including the cited authority Bharat Engg. Enterprises v. DDA), the court concluded that because there was no evidence that the contractor had thereby lost opportunities to earn profit on other works, allowing loss of profit was legally impermissible.
The court found the Award not only illegal (contrary to the Contract Act and settled legal position) but also sufficiently perverse to "shock the judicial conscience" because a large sum (Rs. 1,44,83,830/-) plus interest at 18% had been allowed without the requisite evidentiary foundation—an outcome the court regarded as unacceptable.
On the basis of the foregoing, the court held that interference under Section 34 was warranted and that the challenged portion of the Award (Claim 12) should be set aside.

Holding and Implications

Core Ruling: The arbitral Award dated 15.7.2002 is set aside insofar as Claim No. 12 is concerned, and the contractor's claim for loss of profit (Claim 12) is dismissed.

Direct consequences and orders:

The court accepted the petitioner's objections and set aside the relevant part of the Award (claim dismissed).
Costs of Rs. 50,000/- were awarded in favour of the petitioner and against the respondents.
If these costs are not paid within four weeks, they shall carry interest at 9% per annum until actual payment (the court referenced Uttar Pradesh Cooperative Federation Limited v. Three Circles as authority that interest may be imposed on costs).

The opinion does not purport to lay down a novel legal principle; it applies existing principles from the Contract Act and earlier authority to the facts and concludes that the Arbitrator's allowance of loss of profit lacked the necessary evidentiary basis. The decision's practical effect is confined to setting aside the Award in respect of Claim 12, dismissing the contractor's claim for loss of profit, and awarding costs with conditional interest.

Disposition: Petition disposed of on 25 February 2010.

Show full summary ...

To access the original judgment, please Sign In or Subscribe.

All India Radio Petitioner v. M/S. Unibros & Anr.

JUDGMENT (ORAL) VALMIKI J.MEHTA, J

1. This petition under Section 34 of the Arbitration Act, 1996 challenges the Award dated 15.7.2002 passed by the sole Arbitrator. The Award deals with only one claim i.e Claim No. 12. Claim No. 12 was the claim of the respondent/contractor for loss of profits. The Arbitrator has awarded loss of profits to the contractor after holding that the petitioner was guilty of causing prolongation of the contract from 11.4.1991 to 30.10.1994 The Award decides the disputes which arose out of the contract awarded to the respondent for additional construction of Doordarshan Branch at Mandi House substructure including the double basement.

2. The issue is that, if it is the petitioner who is guilty of delay in causing prolongation of the contract from 11.4.1991 to 30.10.1994, what is the consequence thereof. In consequence of prolongation of time in the performance of the contract, a loss of profit may be payable under Section 73, or it can only be that escalation is payable under Section 55 of the Contract Act. It depends on the facts of each case as to whether a contractor is entitled to loss of profits under Section 73 because of prolongation of the contract by the department. Prolongation of a contract no doubt causes the immediate consequences provided under Section 55 of the Contract Act, 1872, (provided the ingredients therein are complied with) however, loss of profit is not an automatic consequence of extension/prolongation in the performance of the contract, even assuming that the same is on account of fault of the petitioner/employer/Union of India.

3. When a contract is performed during a prolonged period, instead of the originally contracted period, in certain cases, loss of profit does take place to the contractor, however, to get such loss of profit, it is necessary for the contractor to prove before the Arbitrator that in the period of performance of the contract in the extended/prolonged period, the contractor has been forced to utilize men, machinery, material, overheads etc. which could have been utilized elsewhere in any other contract. Merely because there is a prolongation of the contract, as stated above, loss of profit is not a natural consequence. The ingredient of profit is very much inbuilt in the performance of a particular contract and the contractor does get that ingredient of profit while performing the contract in the extended period. If, however, the contractor claims extra profit, than as already inbuilt in performance of the contract, it is incumbent upon the contractor/respondents to establish and prove before the Arbitrator that at the site in question it had used more men, machinery, overheads and so on which could have been utilized in some other contract to earn profit and therefore, the contractor is caused loss of profit in not executing the other contract. I am supported in the view I am taking by a judgment of a learned Single Judge of this court (Pradeep Nandrajog, J) in the judgment reported as Bharat Engg. Enterprises v. DDA 2006 (Supp.) Arb. LR 129 wherein it was held as under:

“28. If a contract gets prolonged, a party would be entitled to escalation on account of price rise, if established, for the materials consumed during extended period of work as also reimbursement for extra wages paid to the workmen if it is established that labour rates increased. Party may also be entitled to be compensated for idle machinery provided it is established that the same could be used for some other works. Further, if any plant or machinery is taken on hire, hire charges can be sought. But I fail to understand any claim towards loss of profit. I accordingly hold that sum of Rs. 73,935.48 awarded under sub-head (c) is patent illegality committed by the learned arbitrator. I may additionally note that it was not the case of the contractor that it did not bid for other works because manpower was deployed at site of the other work in question and due to the said fact the contractor could not take up other works.”

4. I have gone through the entire Award. The Award as regards this claim is in three parts. The first part holds the petitioner guilty of delay in the performance of the contract. There is no dispute to this finding. The second part of the Award under Claim 12 refers to the evidence to show the rate of profit which would have been available to the contractor. There is no dispute on this aspect also. The third part of the Award gives a quantification of the rate of profit. The most important aspect and which is the fourth aspect i.e loss of profit caused on account of unnecessary retention of men, machinery, material, overheads and so on at the site in question, is not found, even by a whisper in the impugned Award. Even before this court, it has not been pointed out as to how before the Arbitrator it was established that unnecessary men, material, machinery, overheads and so on were used in the performance of the contract which could have been used in the performance of some other contract to earn the profit claimed as a loss under this Claim 12.

5. In this view of the matter, the Award is clearly illegal and against the law of the land. The law of the land is the Contract Act, 1872 under which loss of profit can only be allowed in the circumstances, already narrated above, and to which there is absolutely no evidence before the Arbitrator and nor does the Award deal with any such evidence filed in the arbitration proceedings.

6. While hearing objections under Section 34, a Court is entitled to, and in fact duty bound to interfere with an Award if the Award is illegal or against the contractual provisions or is so perverse that it shocks the judicial conscience. In my opinion, the impugned Award, in the present case, not only is wholly illegal being violative of the settled legal position with regard to the Contract Act, but it is perverse which shocks the judicial conscience because the effect of the allowing of this claim has been that huge amount of Rs. 1,44,83,830/- is awarded to the respondent. Not only that, interest at 18% thereafter has been awarded from 12.5.1997 till date of actual payment and which therefore would mean that the amount awarded presently would become over Rs. 3 crores. This position, in my opinion, is totally unacceptable, being against the substantive law of land which is the Contract Act and also on account of the findings being totally perverse in that amounts have been awarded without even a modicum of reference to the evidence with regard to additional men, material, machinery, overheads and so on which are forced to be used by the respondent/contractor at the present site in this contract and which for the purpose of awarding of profit, it is necessary that these were extra and the same could have been used elsewhere to earn additional profit.

7. In view of the above, I accept the objections to the Award and the Award dated 15.7.2002 of the Arbitrator is set aside and the claim of the contractor under Claim 12 will accordingly stand dismissed. In the facts and circumstances of the case, I award costs of Rs. 50,000/- in favour of the petitioner and against the respondents. Since the Union of India has been forced into this litigation on account of a misconceived claim of the respondent, I deem it fit that if costs are not paid within a period of four weeks from today, then, the same shall carry interest at 9% per annum till actual payment. I may note that Supreme Court recently in the case of Uttar Pradesh Cooperative Federation Limited v. Three Circles (2009) 10 SCC 374after referring to the 55th report of the Law Commission of the year 1973, has held that interest can be imposed on the costs awarded. Accordingly, in the facts of the present case, I deem it fit to award interest on the costs.

8. With the aforesaid observations, the petition stands disposed of.

VALMIKI J. MEHTA, J

February 25, 2010 Ne

All India Radio Petitioner v. M/S. Unibros & Anr.

Judgment Summary: Valmiki J. Mehta, J. — 25 February 2010

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

All India Radio Petitioner v. M/S. Unibros & Anr.

Comments