In a recent judgement¹, the Supreme Court deemed an arbitral award “patently illegal” and against India’s public policy, stating that a claim for damages cannot automatically lead to an award without sufficient proof of injury. The present decision underscored the importance of substantial evidence in awarding claims for loss of profit.

The Supreme Court further held 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 vital for the claimant to substantiate the presence of a viable opportunity through persuasive evidence.

Background of the Dispute
In the matter at hand, the Respondent (All India Radio) awarded a work contract to the Appellant (M/s Unibros) to carry out the construction of the Delhi Doordarshan Bhawan, Mandi House. The project suffered a delay of about 3 and a half years. The disputes and differences between the parties due to the delay, were subsequently referred to an Arbitrator for resolution. By way of the First Award dated 11th February 1999, the Appellant was awarded the claim for loss of profit along with an interest of 18 per cent per annum on the ground that the delay in completing the work beyond the stipulated contract period was caused by the Respondent. Furthermore, it was observed by the Arbitrator that as against the stipulated contract period of 12 months, the Appellant was retained by the Respondent for an additional period of 3 and a half years for executing the work which led 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 Arbitration and Conciliation Act.²

The Single Judge set aside the First Award and the claims were remitted to the Arbitrator for re-consideration and passing a fresh award. The Arbitrator passed a Second Award dated 15th July 2002 and maintained the award for loss of profit and interest to the Appellant vide the 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 the Appellant could not present sufficient evidence 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. The Division Bench in the Appellant’s appeal against the Single Judge’s order dismissed the appeal and noted 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, predominantly the Contract Act, 1872 which governs matters related to loss of profit.

Analysis of the Court
The primary issue for consideration before the Supreme Court was whether a claim on account of loss of profit is liable to succeed merely on the ground of delay in execution of the construction contract attributable to the employer.

While examining the integrity of the awards passed by the Arbitrator, the Court referred to ONGC Ltd. v. Saw Pipes Ltd.,³ wherein the Court delved into the question of what would constitute ‘public policy of India’ held that “..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...”

While dealing with the Appellant’s claim of loss of profit, the Court referred to Bharat Cooking Coal Limited v. L.K. Ahuja⁴ 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, it becomes crucial for the claimant to substantiate the presence of a viable opportunity through compelling evidence. This evidence should persuasively demonstrate that had the contract been executed promptly, the contractor could have secured supplementary profits utilizing its existing resources elsewhere.

The Court further reiterated that for claims related to loss of profit, profitability, or opportunities to succeed, one would be required to establish the following conditions:

1. There was a delay in the completion of the contract.
2. Such delay is not attributable to the claimant.
3. The claimant’s status as an established contractor, handling substantial projects.
4. Credible evidence to substantiate the claim of loss of profitability.

Based on the foregoing reasons, the Supreme Court held that the last condition being, the evidence to substantiate the claim of loss of profitability remained unfulfilled in the present case and thus, dismissed the appeal.

By - Prachi Pandey