Arbitration and Conciliation Act, 1996 – Sections 34 and 37 – Any award of an arbitrator or a tribunal that seeks to overreach a binding judicial decision, does conflict with the fundamental public policy and cannot, therefore, sustain – 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 – This principle, ex proprio vigore, would be applicable to an arbitrator and a multi-member arbitral tribunal as well

a) Arbitration proceedings having been initiated, the Arbitrator vide award dated 11th February, 1999 (“First Award”, hereafter) decided various claims and counter-claims filed by the parties. Claim Nos. 10, 11, and 12 were collectively addressed under section 73 of the Indian Contract Act, 1872 (“Contract Act”), as they all centred around the issue of delay and the resultant losses. Vide Claim No. 10, the appellant claimed a sum of Rs. 50,00,000.00 (Rupees fifty lakh) owing to the marked escalation in prices/rates for the work executed beyond the stipulated contract period. Vide Claim No. 11, the appellant implored the Arbitrator to award Rs. 41,00,000.00 (Rupees forty-one lakh) to cover substantial expenses associated with the establishment, machinery, centring/shuttering, and other vital aspects of the project. Additionally, vide Claim No. 12, the appellant urged that a compensation of Rs. 2,00,00,000.00 (Rupees two crore) be granted as redress for the loss of profit endured due to the appellants protracted retention on the contract without any corresponding increase in monetary benefits earned. Despite the Arbitrator’s rejection of Claim Nos. 10 and 11, the appellant was awarded a sum of Rs. 1,44,83,830 (Rupees one crore, forty-four lakh, eighty-three thousand, eight hundred and thirty) towards Claim No. 12, along with an interest of 18% per annum under Claim No. 13 from 12th May, 1997 to the date of actual payment. The Arbitrator supported this award 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 31V years leading to loss of the appellants profit earning capacity during the said extended period. The loss of profit was worked out based on a profit allowance of 7V% per year, which the Arbitrator held to be reasonable in a civil works contract. Applying Hudsons formula, the Arbitrator arrived at the final compensation for loss of profit, the computation of which is outlined below:

b) Aggrieved by the aforesaid First Award, primarily to the extent it awarded Rs.1,44,83,830.00 towards loss of profit to the appellant, the respondent filed an objection under section 34 of the Act before the High Court impugning the decision pertaining to Claim Nos. 12 and 13. Vide judgment and order dated 20th May, 2002, the First Award was set aside and the aforesaid claims were remitted to the Arbitrator for re-consideration and for passing a fresh award. The operative part of the judgment passed by the learned Single Judge reads thus:

“24. *** Except for placing on record the Hudsons formula and a passage from the book law (sic, Law) on Building and Engineering Contracts, no other evidence is placed on record by the respondent to show that the profit percentage as claimed towards loss of profit was a realistic one at that times and consequently there was no change in the market and also that the work of at least the same general level of profitability would have been available to the respondent at the end of the stipulated contract period. Therefore, evidence in respect of the said claim appears to be definitely not available on record. In absence of any credible evidence and when claims under Claim Nos. 10 & 11 were rejected on the ground that no sufficient evidence had been placed on record by the respondent indicating increase in the prices/rates for the work executed after the stipulated contract period and also on account of establishment, machinery, centering/shuttering etc., Claim No.12 was allowed by the arbitration (sic, arbitrator) without even considering whether the respondent has placed credible and reliable evidence as required to be proved. ***

25. *** Not only there was lack of credible and required evidence placed on record by the respondent in support of Claim No.12 as set out in the extracts from the book Law of Building and Engineering Contracts, and (sic) the arbitrator also took into consideration such factors which could not and should not be (sic, have) influenced his mind. Therefore, the award was passed by the arbitrator against the fundamental policy of Indian Law attracting the provisions of Section 34 (2)(b) (ii) of the Act. I set aside the award given by the arbitrator against Claim No.12 and remit the same for re-consideration by the arbitrator and to pass a fresh award in respect of the said claim without being in any manner influenced by such factors and on the basis of the evidence available on record. Since the award passed by the arbitrator is set aside to the aforesaid extent, the award of interest in Claim No. 13 in respect of the amount of Claim No. 12 also stands set aside and quashed and the same are remitted for reconsideration and decision. Subject to the aforesaid modifications in the award, the remaining part of the award is upheld.” (emphasis ours)

c) The Arbitrator passed a fresh award dated 15th July, 2002 (“Second Award”, hereafter) maintaining the award for loss of profit and interest to the appellant vide First Award. By referring to the communications between the parties, the Arbitrator reiterated that the respondent had failed to provide the complete site and drawings within the stipulated contract period, leading to delays. 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.

d) The respondent filed a petition under Section 34 of the Act, seeking to set aside the Second Award. The learned 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 under Claim No. 12 with an observation that there was no sufficient evidence presented by the appellant 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 under Claim No. 12. With an observation that the Union of India was forced into litigation due to the appellant’s misconceived claim, the Single Judge awarded costs of Rs. 50,000.00 (Rupees fifty thousand) in favour of the respondent, payable within four weeks from the date of the final order and interest of 9% per annum in case of non-compliance. Findings returned by the learned Single Judge are extracted below:

“4. I have gone through the entire Award. The Award … as a loss under this Claim 12.

5. In this view of the . in the arbitration proceedings.

7. *** 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. Accordingly, in the facts of the present case, I deem it fit to award interest on the costs.”

e) Dissatisfied with the findings of the learned Single Judge, the appellant preferred an appeal before the Division Bench of the High Court under Section 37 of the Act. While dismissing the appeal vide the impugned judgment, the Division Bench 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. Having found no infirmity or illegality, the judgment of the learned Single Judge was confirmed, and the appeal was dismissed, being devoid of any merit.

a) The learned Arbitrator had arrived at a just and reasoned conclusion after carefully perusing the materials and evidence on record and in the absence of any perversity or caprice, the courts cannot interfere with the award. Relying on Associated Builders vs. Delhi Development Authority, (2015) 3 SCC 49, learned counsel submitted that the arbitrator is the sole judge of the quality and quantity of evidence and the High Court, under section 34 of the Act, cannot act as a first appellate or a revisional court by interfering with arbitral awards in the absence of perversity.

b) Bharat Cooking Coal Limited vs. L.K. Ahuja, (2004) 5 SCC 109 was placed in support of the contention that the High Court has a limited scope of interference in awards passed by an arbitrator. Learned counsel placed reliance on the specific excerpt of this Court’s decision, which is extracted below for facility of reference:

“11…When the arbitrator has applied his mind to the pleadings, the evidence adduced before him and the terms of the contract, there is no scope for the court to reappraise the matter as if this were an appeal and even if two views are possible, the view taken by the arbitrator would prevail. So long as an award made by an arbitrator can be said to be one by a reasonable person no interference is called for. However, in cases where an arbitrator exceeds the terms of the agreement or passes an award in the absence of any evidence, which is apparent on the face of the award, the same could be set aside.”

c) According to Section 34, an award cannot be modified but can only be set aside under specific grounds outlined in the provision. Unlike the Arbitration Act of 1940, which explicitly allowed for modification, the Act of 1996, modelled on the UNCITRAL Model Law on International Commercial Arbitration 1985, does not grant the court the power to modify awards under Section 34. This aligns with the legislative intent of minimizing judicial intervention in arbitral awards. Reliance in support of the said contention was placed on The Project Director, NHAI vs. M. Hakeem and Another, (2021) 9 SCC 1;

d) M/s AT Brij Paul Singh & Ors. vs. State of Gujarat, (1984) 4 SCC 59 was relied upon to submit that a contractor is entitled to damages for loss of expected profit on the remaining work and only a broad evaluation is required to assess the amount of damages instead of going into minute details; and

e) Hudsons formula has received legal acceptance and is generally used by courts and other judicial bodies in awarding loss of profit. Learned counsel further submitted that Hudsons formula works on the numbers and figures contemplated in the contract as envisaged by the parties at the time of signing of the contract rather than the actuals during the ongoing work. Therefore, the actual number of men, material and machinery allocated by the appellant for the work bears no relevance whatsoever in calculating the loss of profit incurred by the appellant due to the breach of contract by the respondent, else Hudsons formula would be rendered redundant. Reliance was placed on McDermott International Inc. vs. Burn Standard Co. Ltd. and Ors., (2006) 11 SCC 181 to draw support.

a) The present case being that of delay simpliciter, Hudsons formula will have no application to award any amount for loss of profit without the aggrieved party leading any evidence as a condition precedent to the application of the said formula.

b) The application of Hudsons formula hinges upon three essential conditions:

i. Firstly, the profit awarded to the contractor must have been realistically attainable elsewhere had it been free to leave the contract at the appropriate time;

ii. Secondly, the contractor should not have consistently underestimated his costs during pricing, ensuring that the profit percentage was genuinely viable at that point;

iii. Thirdly, there should have been no subsequent changes in the market, such that work of a comparable level of profitability would have been available to the contractor at the time of the conclusion of the contract.

c) It was further submitted that to fulfil the aforesaid conditions, satisfactory and cogent evidence is a sine qua non even if the loss is not of a remote or imaginary nature. In the absence of cogent evidence substantiating a genuine loss of profit or opportunity, it would be unjustifiable to permit the contractor to capitalize solely on the application of a formula.

d) In the present case, the ASG submitted, no evidence was led by the appellant, far less, any credible or cogent evidence, to prove that it was capable of earning such price elsewhere by way of any other contract that was available to it at that time, which it could not execute due to prolongation of the contract; such an award, being perverse, conflicts with the public policy of India under Section 34(2)(b)(ii) of the Act.

e) The Arbitrator’s actions present a perplexing situation: while dismissing Claim Nos. 10 (compensation for increased prices/rates after the contract period) and 11 (compensation for the establishment, machinery, centring/shuttering, etc.) due to the absence of credible evidence, the Arbitrator, on the other hand, proceeded to grant damages for loss of profit under Claim No. 12. This prompts a crucial question: If there was insufficient evidence to support Claim Nos. 10 and 11, what other evidence could possibly justify awarding loss of profit under Claim No. 12?

f) Mechanical application of Hudsons formula would serve no purpose and burden the exchequer was the ASGs concluding submission.

“31…, the phrase public policy of India used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter 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. Such award/judgment/decision is likely to adversely affect the administration of justice.”

“24… It is not unusual for the contractors to claim loss of profit arising out of diminution in turnover on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilised 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.” (emphasis ours)