[Raghav Bhatia is an Advocate practising at the Supreme Court and Delhi High Court. He may be contacted at [email protected]]
Recently, the Supreme Court, in Unibros v. All India Radio, has explained, inter alia, the requirements to succeed in a claim for loss of profits. This post argues that while the judgment is in the right direction, the Supreme Court may have missed an opportunity to discuss the law on loss of profits in greater detail.
Background
All India Radio (‘AIR’) entered into a contract with Unibros (‘the contractor’), whereby the contractor was “to carry out construction of Delhi Doordarshan Bhawan” in New Delhi. As per the contract, the construction was to begin on April 12, 1990 and be completed by April 11, 1991. However, due to reasons attributable to AIR, the construction was only completed in October 1994.
Various disputes arose between the parties, which were referred to an arbitral tribunal (‘AT’) consisting of a sole arbitrator, and one of the claims of the contractor before the AT was for the loss of profits, i.e., claim no. 12 on the ground that the contractor, “having been retained longer than the period stipulated in the contract and its resources being blocked for execution of the work relatable to the contract in question”, could not take up any other contract and earn profit.
By way of an Award dated February 11, 1999 (‘first arbitral award’), the AT merely applied the Hudson’s formula (calculated by multiplying the contractor’s expected profit per month with the number of months of delay) and awarded an amount of Rs. 1,44,83,830/- to the contractor as loss of profits, even though the other ancillary claims were rejected. Aggrieved, AIR filed a petition under section 34 of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’) before the High Court of Delhi (‘High Court’) for setting aside the first arbitral award. By way of an order dated May 20, 2002, the High Court set aside the first arbitral award and remanded the disputes back to the AT “for re-consideration and for passing a fresh award” as there was no credible evidence in support of the Award for loss of profits.
Accordingly, an Award dated July 15, 2002 (‘second arbitral award’) was passed by the AT wherein the AT upheld its first arbitral award qua the loss of profits. The second arbitral award was again challenged by AIR under section 34 of the Arbitration Act, and the second arbitral award was set aside as well. Thereafter, the contractor filed an appeal under section 37 of the Arbitration Act, which was dismissed, with the Division Bench observing that since the findings in the second arbitral award qua the loss of profits were not based on any evidence, they were contrary to the law, including the Contract Act.
In light of the above, the contractor approached the Supreme Court.
Issues
There were two issues before the Supreme Court: Firstly, can an arbitral award, which is in contravention of a High Court judgment, be sustained? Secondly, whether the AT could have allowed the claim for loss of profits in the absence of evidence?
Proceedings before the Supreme Court
At the outset, the Supreme Court observed that both the arbitral awards were in conflict with the public policy of India by noting that in the Order dated May 20, 2002, the High Court had remanded the matter back to the AT with the direction “to proceed only on the basis of the evidence on record” and not “be influenced by the factors that weighed in his mind while making the” first arbitral award. However, the AT ignored a judicial decision of the High Court, and the factors that weighed with the AT while passing the first arbitral award were the same as those weighed while passing the second arbitral award. Therefore, on this very ground, the second arbitral award was set aside for being in conflict with section 34(2)(b)(ii) of the Arbitration Act.
In spite of the aforesaid, the Supreme Court proceeded to discuss the law on loss of profits. The Supreme Court observed that in Bharat Coking Coal Ltd. v. L. K. Ahuja & Co., it was held that a court could allow a claim for loss of profits only where the Claimant is able to establish, through evidence, that because of the delay, it missed out on other available contracts or opportunities. Such a claim cannot be allowed on mere asking but only where it is supported by evidence.
The Supreme Court noted that in a claim for loss of profits, there cannot be any exhaustive list of the nature of evidence that may be required to succeed. However, in order to succeed, 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 Supreme Court also cautioned that methods such as Hudson’s formula, while helpful in assessing losses, cannot alone be used to decide the claim for loss of profits. Such methods are only useful where there is evidence on record supporting the plea of loss of profits, as these methods help in the calculation of claims but do not measure the exact costs.
In light of the aforesaid, the Supreme Court concluded that in order to succeed in a claim for loss of profits, a Claimant must establish the following:
- Firstly, there is a delay in the execution of the contract;
- Secondly, the delay in the completion of the contract cannot be attributed to the Claimant;
- Thirdly, the Claimant must be an established contractor, managing substantial projects; and
- Fourthly, the Claimant must produce credible evidence to substantiate its claim for loss of profits.
Coming back to the facts of the present case, the Supreme Court noted that the fourth condition, i.e., evidence to substantiate the claim for loss of profits, was not satisfied. As the second arbitral Award for damages was based on no evidence at all, the Supreme Court rightly held that the same was perverse.
While perversity comes within the ambit of patent illegality (see, Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India), the Supreme Court interestingly observed that since the second arbitral award was perverse, it was “in conflict with the ‘public policy of India’ as contemplated by section 34(2)(b)” of the Arbitration Act.
Analysis
Many times, a party simplistically relies on judgments such as A. T. Brij Paul Singh v. State of Gujarat and Bharat Coking Coal to argue that on mere asking, a Court/AT can award loss of profits. However, none of these judgments say that even in absence of evidence, a claim for loss of profits can be granted. This has also been noted by the Delhi High Court on multiple occasions (see, Ahluwalia Contract (India) Limited v. Union of India and GTM Builders & Promoters Pvt. Ltd. v. Sneh Developers Pvt. Ltd.).
While the Indian courts have always emphasised the requirement to lead evidence in order to succeed in such a claim for loss of profits under section 73 of the Indian Contract Act, 1872 (‘Contract Act’) as discussed above, there has not been much discussion on whether a claim of this nature would fall within the first limb or the second limb of Hadley v. Baxendale. The two limbs were explained in Hadley v. Baxendale as “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” The text of section 73 of the Contract Act is based on the aforesaid compartmentalisation as explained in Hadley v. Baxendale.
The AT’s reasoning seemed to indicate that it had treated the contractor’s claim as one which falls within the first limb and therefore, there was no requirement to lead evidence on the factum of loss. Whether a case falls within the first limb or the second limb depends on the facts of the particular case. In the author’s opinion, loss of profits such as those claimed in the instant case would arguably fall within the second limb as it is a consequential loss and not a direct loss. Consequently, they cannot be awarded unless they were in the contemplation of both the parties, at the time of entering the contract, as a probable result of the breach. Therefore, evidence would be required to be led not just on the quantum of damages but also to prove the factum of the contractor missing out on other available contracts.
If such a claim is allowed to fall within the ambit of the first limb, then in every case where there is a delay in the completion of the contract on account of reasons attributable to the other party, the contractor would claim loss of profits, the quantum of which may possibly be computed by applying the likes of the Hudson’s formula, as done by the AT in this case.
Although the Supreme Court in this judgment could have discussed the law on loss of profits in greater detail, it has nevertheless, by explaining the requirements to succeed in a claim for loss of profits, settled the scope for the grant of such a claim which shall guide the Courts/ATs, going forward.
– Raghav Bhatia
