Madras High Court
The Chief Engineer Chennai Zone vs M/S.Amulya Constructions on 2 December, 2021
O.P.No.501 of 2017
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 02.12.2021
CORAM
THE HONOURABLE Mr. JUSTICE SENTHILKUMAR RAMAMOORTHY
O.P.No.501 of 2017
Union of India rep by
1.The Chief Engineer Chennai Zone,
Island Grounds,
Chennai - 600 009. ...Petitioner/Respondent No.1
2.The Garrison Engineer (I),
Laxmi Tek Camp,
Belgaum - 590 009. ...Petitioner/Respondent No.2
-Vs.-
M/s.Amulya Constructions
rep.by its Partner,
No.567, 2nd Cross, 2nd Block,
R.T. Nagar,
Bangalore - 560 032. ... Respondent/Claimant
Prayer: Original Petition filed under Section 34 of the Arbitration
and Conciliation Act, 1996 praying to set aside the Award dated
15.12.2016 made in Arbitration C.A.No.CECZ/BEL.24 of 2010-11
and to direct the respondent to pay costs.
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O.P.No.501 of 2017
For Petitioners : Mr.R.Sankaranarayanan
Additional Solicitor General
assisted by
Mr.Venkataswamy Babu
For Respondent : Mr.R. Yashod Vardhan
Senior Counsel
for M/s.Rajinish Pathiyil
ORDER
The petitioners assail an arbitral award dated 15.12.2016 (the
Award). In the arbitral proceedings, the petitioners herein were the
respondents and the respondent herein was the claimant.
2. A contract was entered into between the first petitioner
and the respondent on 07.03.2011 for the construction of
residential quarters for the employees of the petitioners (the
Contract). The term of Contract was twenty months for completion
of the two phases thereof. The first petitioner was under an
obligation to provide the site for construction after clearing the
trees standing thereon. On account of the fact that the first
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petitioner was unable to provide a vacant site to the respondent
until 29.10.2012 (Exhibit C-41) and other reasons such as failure to
provide electricity supply, the respondent issued a notice dated
19.12.2012(Exhibit C-50) informing the petitioners that it had
mobilized its men and material and that the said resources were
idling at site. On such basis, a claim for escalation was made. In
addition, the petitioners were put on notice that the respondent is
entitled to overhead charges and loss of profit. The petitioners were
also informed that the Contract would stand rescinded if such
escalation is not agreed to by the petitioner. Pursuant thereto, it
appears that the petitioners also issued a termination notice dated
23.01.2013. In these facts and circumstances, the respondent
initiated arbitration proceedings. In such arbitration, the
respondent claimed amounts due and payable towards the final bill.
In addition, reimbursement claims were made as well as a claim for
loss of profit. In oral arguments, the petitioners confined the
challenge to the loss of profit claim and the Award in relation
thereto. The claim for loss of profit was for a sum of
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Rs.2,01,92,002/-. As against the said claim, the Arbitral Tribunal
awarded a sum of Rs.66,71,000/-.
3. The petitioners assail this part of the Award on the
principal ground that a loss of profit claim is a claim for
unliquidated damages. Such claim is required to be proved by
adducing evidence. The petitioners referred to paragraph 105 of
the Award and contended on such basis that it had requested the
Arbitral Tribunal to direct the respondent/Contractor to submit the
audited income tax returns for the previous ten years so as to
ascertain the profit percentage derived by the Contractor from
previous projects executed by it. In spite of such specific request,
it is stated that the Arbitral Tribunal did not direct the respondent
to produce such evidence. The petitioners also referred to
paragraph 110 of the Award and pointed out that there was no basis
at all to the conclusion in the Award that the respondent is entitled
to loss of profit at 5% of the balance value of the Contract.
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4. In support of this contention, the petitioners relied upon
the following judgments:
(i)Bharat Coking Coal Limited v. L.K. Ahuja [(2014) 5
Supreme Court Cases 109] (Bharat Coking Coal), wherein, at
paragraph 24, the Hon'ble Supreme Court held that a person
claiming loss of profit should establish that he could have utilised
the resources deployed on the contract on some other business
through which he could have earned the profit claimed.
(ii)MSK Projects India (JV) Limited v. State of Rajasthan
and another [(2011) 10 Supreme Court Cases 573](MSK
Projects), wherein, at paragraphs 38 and 39, the Hon'ble Supreme
Court referred to the meaning of the expression “reimbursement”
and, thereafter, at paragraphs 45 to 47, rejected the claim on the
basis that a person cannot be permitted to claim damages in respect
of amounts not spent in terms of the contract.
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(iii)Oil and Natural Gas Corporation v. Off-Shore
Enterprises Inc. [(2011) 14 Supreme Court Cases 147](Off-shore
Enterprises), wherein, at paragraphs 16 and 20, the Hon'ble
Supreme Court rejected a claim for cost of repair work based on
estimates which were revised upwards from time to time.
(iv)Kailash Nath Associates v. Delhi Development Authority
and another [(2015) 4 Supreme Court Cases 136], wherein the
Hon'ble Supreme Court considered the law on the award of
damages and held that even for a claim for liquidated damages, a
person aggrieved is required to prove actual loss unless actual loss
would be impossible or difficult to prove in view of the nature of
the contract.
5. These contentions were refuted by the respondent. At the
outset, the respondent emphasised that the Arbitral Tribunal
recorded the categorical finding that the petitioners had committed
a fundamental breach of Contract. On such basis, it was contended
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that the Arbitral Tribunal accepted the plea of the respondent that
its rescission was valid. The respondent referred to paragraph 107
of the Award and pointed out that the Arbitral Tribunal recorded
therein that every business is undertaken with a view to receive
profit. In addition, the respondent pointed out that the Arbitral
Tribunal took note of the fact that Condition 62(G) of the relevant
General Conditions of Contract provided for the Contractor's profit
margin at 15% of the value of the Contract. The respondent also
adverted to the notice dated 19.12.2012 from the respondent to the
petitioners. By referring to paragraphs 12 and III (a) and (b) of
such notice, the respondent contended that it had established that
its men and equipments were mobilized in order to perform the
Contract and that it had incurred substantial losses on such account.
6. In this factual context, the respondent contended that the
award of loss of profit at 5% of the value of the balance work does
not call for interference under Section 34 of the Arbitration and
Conciliation Act, 1996 (the Arbitration Act). The respondent
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relied upon the judgment of the Hon'ble Supreme Court in
Maharashtra State Electricity Distribution Company Limited v.
Datar Switchgear Limited and others [(2018) 3 Supreme Court
Cases 133]. With specific reference to paragraphs 51 and 67
thereof, the respondent contended that a party which was held to
have been always ready and willing to perform its contractual
obligations but was prevented by the counter party from doing so is
entitled to damages. The respondent also distinguished the
judgments that were relied upon by the petitioners. With reference
to the judgment in Bharat Coking Coal, the respondent submitted
that the conclusion in paragraph 24 thereof turned on the fact that
the prolongation claim and the claim for escalation had been paid
in that case. Therefore, the Hon'ble Supreme Court rejected the
claim of loss of profit at 15%. Similarly, with reference to the
judgment in MSK Projects, the respondent pointed out that the
Hon'ble Supreme Court rejected the claim because the contract had
not been performed by the private appellant therein in respect of
the second phase. As regards the judgment in Off-Shore
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Enterprises, the respondent pointed out that the claim therein
pertained to repair work. Given the nature of the claim, the actual
expenditure for repair work could and should have been proved
through hard evidence. Therefore, the respondent concluded that
all the above judgments are distinguishable.
7. Upon considering the rival submissions, it should be
noticed at the outset that the Award is challenged only insofar as
the decision on the claim for loss of profit is concerned. A claim
for loss of profit is distinguishable from other types of claim which
are typically made in construction contract disputes by a contractor.
Typically, claims are made for: payment for work done, including
additional work; disruption (otherwise called idling); price
variation (otherwise called escalation); prolongation (otherwise
called extended stay compensation); and loss of profit. Other than
a loss of profit claim, as regards all the other types of claim
outlined above, it is possible for a claimant to prove loss by
adducing evidence of actual loss. A qualification should be made,
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however, in respect of the portion of the prolongation claim
towards head office overheads because the overall head office
overheads should be apportioned across all the projects of the
contractor and, therefore, various formulae are adopted. A claim
for loss of profit, by contrast, falls into a distinct category. Such
claim is made towards profit which was not earned but which could
possibly have been earned but for the termination or breach by the
employer. Therefore, such claim cannot be proved by showing
actual loss of profit. The merits of this petition should be
considered by bearing the nature of a loss of profit claim in mind.
8. The respondent adverted to the notice dated 19.12.2012
and, in particular, paragraph 12 thereof to defend the Award on this
aspect. In such paragraph, the respondent categorically stated that it
had mobilized its men and material so as to perform the Contract.
Such men and material appear to have been deployed for about 19
months of the contractual term of twenty months. A claim was
made in such communication towards overhead charges and loss of
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profit. Ideally, in such situation, a claim towards non-utilisation of
men and material on account of prevention by the employer could
have been made as a disruption claim. However, except for
claiming reimbursement for tools and infrastructure, which were
retained by the petitioner-employer, no disruption claim was made.
Equally, no claim for price variation or escalation was made before
the Arbitral Tribunal. The admitted position is that the Contract
was initially rescinded by the respondent herein and, thereafter,
purportedly terminated by the petitioner.
9. The findings of the Arbitral Tribunal on loss of profit
should be considered next against this backdrop. The Arbitral
Tribunal recorded that the respondent/claimant therein was ready
and willing to perform its contractual obligations. The Arbitral
Tribunal also recorded that the petitioners herein did not perform
the prior contractual obligation of, inter alia, providing the vacant
site. Thus, the first condition for any claim for damages, namely,
breach of contract was undoubtedly established. The question of
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proof of damages remains to be examined. At paragraph 107, the
Arbitral Tribunal recorded that every business is carried on in order
to gain profit there from. Thereafter, significantly, the Arbitral
Tribunal noticed that Condition 62(G) of the General Conditions
of Contract provides for Contractor's profit at 15% of the value of
the Contract. Then, after noticing the judgment of the Hon'ble
Supreme Court in Brij Paul Singh , at paragraph 110, the Arbitral
Tribunal awarded loss of profit at 5% of the balance value of work
by taking into account the level of competition in the market.
10. In a loss of profit claim, the best evidence that the
respondent could have been adduced would have been by
producing its bid document indicating the profit margin which was
assumed therein or by adducing evidence of other similar contracts
awarded to the respondent or any other contractor. Even such
assumption could turn out to be completely off the mark, especially
in a fixed price contract, due to price escalation and its impact on
margins. Even as regards other contracts, no two contracts are
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identical and actual profit margins tend to vary as many variables
impact such margins. The petitioners contended that the Arbitral
Tribunal should have called for the income tax returns of the
respondent. Such income tax returns would, in all likelihood, have
not indicated project-specific profit margins although an average
profit margin could, arguably, have been computed. As set out at
the inception of the analysis, unlike in the case of other claims, no
proof of actual loss of profit could have been adduced. Another
significant aspect is that the Arbitral Tribunal awarded 5%, which
is lower than the typical 10%-15% profit margin factored in
construction contracts as judicially noticed not only in Brij Paul
Singh but also Government of Andhra Pradesh and others v.
V.Satyam Rao, AIR 1996 AP 288 (DB), and The Superintending
Engineer, T.N.U.D.P., Madras Circle v. A.V.Rangaraju AIR
1994 Mad 217. As correctly pointed out by the respondent,
Bharat Coking Coal is distinguishable. In this context and bearing
in mind that the Arbitral Tribunal took note of Condition 62(G) of
the General Conditions of Contract, I am of the view that the
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Award cannot be said to be either against public policy or patently
illegal so as to warrant interference under Section 34 of the
Arbitration Act.
11. For reasons set out above, O.P.No.501 of 2017 is
dismissed without any order as to costs.
02.12.2021
Internet : Yes/No
Index :Yes/No
Speaking / Non-Speaking
mps/rrg
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O.P.No.501 of 2017
SENTHILKUMAR RAMAMOORTHY, J,
mps/rrg
O.P.No.501 of 2017
02.12.2021
https://www.mhc.tn.gov.in/judis
