Madras High Court

M/S.Khec Technologies (India) ... vs Corporation Of Chennai on 8 September, 2022

                                                                                    O.P.No.1041 of 2017

                                  IN THE HIGH COURT OF JUDICATURE AT MADRAS

                                                 DATED: 08.09.2022

                                                       CORAM

                                  THE HONOURABLE MR.JUSTICE SENTHILKUMAR
                                              RAMAMOORTHY

                                                 O.P.No.1041 of 2017


                     M/s.KHEC Technologies (India) Pvt. Ltd.,
                     No.82A, Athreya Apartments,
                     VGP Layout, Part - 1,
                     Palavakkam, Chennai - 600 041.                                    ... Petitioner

                                                           vs.

                     Corporation of Chennai,
                     The Commissioner /
                     The Superintending Engineer
                     Rippon Buildings,
                     Chennai 600 003.                                                ... Respondent



                     PRAYER: Original Petition filed under Section 34 of Arbitration and

                     Conciliation Act, 1996, pleased to set aside the award in so far as Claim

                     Nos.11, 14 and 17 and direct the respondent to pay Rs.8,27,278/- towards

                     the said claims with interest at 18% from 04.11.2015 till date of realization.



                     1/14


https://www.mhc.tn.gov.in/judis
                                                                                     O.P.No.1041 of 2017

                                        For Petitioner    : M/s.B.Sudarshan

                                        For Respondent    : Mr.G.T.Subramanian, SC (Corpn.)

                                                          ORDER

The dispute relates to and arises out of a contract awarded by the

respondent to the petitioner for the construction of a dispensary. The

contract was required to be executed in ten months and the contract price

was Rs.52,53,399.55/-. The execution of work was delayed on account of

multiple reasons, including re-location of the site. Eventually, after issuing

a show cause notice, the respondent terminated the contract by

communication dated 24.05.2011, which was received by the petitioner on

31.05.2011. In these circumstances, the petitioner raised a dispute and,

upon constitution of an arbitral tribunal, submitted a claim statement in

which about 26 claims were made. Out of the 26 claims, about 14 claims

were allowed in part by the arbitral award dated 25.02.2017 (the Award).

The petitioner has challenged the Award only in respect of three disallowed

claims. Out of the three disallowed claims, one claim, namely, the claim

pertaining to refund of security deposit was settled while this petition was

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pending adjudication. As a result, this petition survives only in respect of

two claims, namely, the claims for escalation and loss of profit.

2. Learned counsel for the petitioner challenged the Award in relation

to the escalation claim on the ground that the contract does not contain a

clause prohibiting the grant of escalation and, therefore, the refusal of the

arbitral tribunal to grant escalation calls for interference. After referring to

the petitioner's pleadings in relation to escalation, whereby the basis of

claim was communicated, he pointed out that the only response of the

respondent to such claim was that the contract does not contain a clause for

escalation. He contended that the ten month contract could not be executed

as per schedule on account of various reasons attributable to the respondent,

and turned to the findings of the arbitral tribunal with regard to attribution

of responsibility for delay. With specific reference to paragraphs 4.15, 4.20

and 4.26 of the Award, learned counsel pointed out that the arbitral tribunal

concluded that the delay was not attributable to the claimant, and that,

therefore, the respondent had no right to terminate the contract on the

ground of delay by the claimant. After recording such findings, learned

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counsel submitted that the conclusions at paragraphs 15.3 to 15.5 of the

Award are patently illegal. By drawing reference to the judgment of the

Hon'ble Supreme Court in P.M.Paul v. Union of India (P.M.Paul), AIR

1989 SC 1034, learned counsel submitted that escalation is the natural

consequence of passage of time and that an escalation claim may be

awarded unless prohibited by the relevant contract. By relying on the

judgment in K.N.Sathyapalan v. State of Kerala (Sathyapalan), (2007) 13

SCC 43, he submitted that escalation should have been awarded once the

arbitral tribunal concluded that the respondent was responsible for delay. In

the context of the findings on delay and termination, learned counsel

contended that the findings of the arbitral tribunal on escalation warrant

interference in as much as such findings are directly contrary to the law laid

down in P.M.Paul and Sathyapalan.

3. Learned counsel dealt with the loss of profit claim next. By

referring to the pleadings in relation thereto, he submitted that loss of profit

was claimed at 20% of the incomplete contract value. By turning to the

counter statement of the respondent, he stated that the respondent did not

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deal with the claim for loss of profit. With reference to paragraph 18.4 of

the Award, learned counsel submitted that the conclusion arrived at by the

arbitral tribunal is not a plausible conclusion in as much as the tribunal

based its decision entirely on the rejection of the escalation claim. By

referring to paragraph 13.1 of the Award, learned counsel submitted that,

while dealing with claims 1-9, the arbitral tribunal took into account the

trade practice of loading approximately 5-10% of the tendered amount as

the cost of miscellaneous heads of expenditure. By contrast, he submitted

that the arbitral tribunal disregarded trade practice in relation to the loss of

profit claim. In order to substantiate this claim, learned counsel relied upon

the judgment of the Supreme Court in Dwaraka Das v.State of Madhya

Pradesh and another(Dwaraka Das), 1999(1) RAJ 466 (SC), particularly

paragraph 9 thereof, wherein the Supreme Court took into account earlier

decisions such as A.T.Brij Pal Singh and others v. State of Gujarat (Brij Pal

Singh)(1984)4 Supreme Court Cases 59 and Mohd. Salamatullah v.

Government of Andhra Pradesh, AIR 1977 SC 1481, before concluding that

the grant of 10% of the contract price by the trial court in that case did not

warrant interference. Similarly, in this case, learned counsel contended that

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the arbitral tribunal should have awarded a reasonable percentage of the

contract price as loss of profit. He concluded his submissions by stating

that the rejection of the loss of profit claim merely on the ground that the

contract does not contain an escalation clause is patently illegal.

4. Learned counsel for the respondent made submissions to the

contrary. The first submission was that a large member of claims were

allowed by the arbitral tribunal and, upon being allowed, the amounts

awarded by the arbitral tribunal were paid to the petitioner. Even with

regard to the three disallowed claims, learned counsel submitted that the

amount claimed as refund of security deposit was paid by the respondent

while this petition was pending adjudication. As regards the two rejected

claims, which form the subject matter of this petition, learned counsel

submitted that the petitioner did not place any evidence before the arbitral

tribunal in support of these claims. Consequently, he submitted that the

arbitral tribunal was fully justified in rejecting the said claims and that the

decision of the arbitral tribunal does not warrant interference under Section

34 of the Arbitration Act. Learned counsel further submitted that the

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respondent is the Corporation of Chennai and that the contract related to the

construction of a dispensary for the public. In contracts of this nature, he

submitted that the grant of escalation or loss of profit would cause loss not

only to the corporation but also to the general public. For all these reasons,

he submitted that this petition should be rejected.

5. A petition to set aside an arbitral award should be tested on

the grounds contained in Section 34 of the Arbitration Act, as interpreted by

courts of law. On the merits of the dispute, interference is permissible

either on the ground of public policy or patent illegality. If the award is in

disregard of substantive law or the terms of the contract, it may be

concluded that it is patently illegal. With regard to appreciation of evidence

by the arbitral tribunal, the scope of interference is limited to cases where

the award is perverse because it is based on no evidence, completely

irrelevant evidence or disregards vital evidence. The challenge made by the

petitioner should be considered in the legal context set out above.

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6. The petitioner assailed the Award in relation to the

escalation claim on the ground that the arbitral tribunal disregarded the law

laid down by the Supreme Court on escalation. The contention of learned

counsel for the petitioner that an escalation claim may be awarded even if

the relevant contract does not contain a clause dealing with escalation is in

line with the ratio laid down by the Supreme Court in P.M.Paul and liable

to be accepted. The settled legal position, in this regard, is that the arbitral

tribunal is a creature of contract; consequently, a claim for escalation should

be rejected if prohibited under the relevant contract as held in cases such as

Continental Construction Co. v. State of Madhya Pradesh, (1988) 3 SCC 82

and New India Civil Erectors (P) Ltd. v. ONGC, (1997) 11 SCC 75. On the

other hand, as held in P.M.Paul, a claim for escalation may be granted if the

relevant contract does not deal with or prohibit escalation. While

Sathyapalan, at first blush, appears to depart from the said position, the

conclusion therein also turned on the factual finding that the prohibition

against escalation was contained in a supplementary agreement which was

signed by the contractor under protest. In any case, the admitted position in

this case is that the relevant contract does not deal with or prohibit

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escalation; so, the claim for escalation merited consideration subject to

proof.

7. After recording that the relevant contract does not contain a

clause for the grant of escalation, the arbitral tribunal proceeded to record

findings with regard to the evidence adduced by the petitioner in relation to

escalation. Paragraph 15.4 of the Award is relevant in this regard, and

reads as under:

"15.4. The claimants did not specifically plead that this was a claim under Section 73 of the Contract Act. Even for claiming damages under Section 73, proof needs to be produced as to the extent of damages. Apart from giving a statement (page 124 of Vol.IX) showing the escalation in cost of "current price" over "BOQ price", no vouchers or cash bills or bank statements were produced to show that those materials were indeed purchased at the prices shown in the statement.

Therefore for want of documentary proof, I am unable to entertain this claim under Section 73 of

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the Contract Act also."

8. As is evident from the above paragraph, the arbitral tribunal

noted that the petitioner / claimant merely submitted a statement showing

the escalation in current price over the bill of quantities (BoQ) price, but did

not place on record the relevant vouchers or cash bills or bank statements to

show that materials were indeed purchased at the prices shown in the

statement. On such basis, the arbitral tribunal rejected the claim for want of

documentary proof. An escalation claim should be made on the basis of the

formula, if any, prescribed in the relevant contract in relation to escalation.

In the absence of such formula, it is both possible and necessary for the

claimant to adduce evidence of escalation by producing invoices evidencing

the purchase of materials and proof of payment towards labour at the

escalated price. In the absence of proof, the arbitral tribunal was fully

justified in rejecting the claim. Since such conclusion is drawn on the basis

of a reasonable appraisal of the evidence on record, it does not call for

interference.

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9. This leads to the claim for loss of profit. A loss of profit

claim is different from most other claims arising out of a construction

contract because the claim relates to profits that the contractor concerned

could have earned but for the termination of the contract prior to the expiry

of the term thereof. By its very nature, it is not possible for the contractor to

provide proof of the actual loss incurred by the contractor. Nonetheless, it

is possible for the contractor to provide evidence relating to the profit

margin reckoned by the contractor at the time of bid submission or provide

evidence of actual profits earned by said contractor by executing similar

projects or evidence of the typical profit margin in such construction

contracts (trade practice). In this case, the admitted position is that such

evidence was not adduced by the contractor.

10. While considering this claim, the arbitral tribunal

concluded as follows in paragraph 18.4 of the Award:

"18.4. The claimants themselves have indicated that due to escalation in prices an extra expenditure of Rs.3,68,215/- had been actually incurred by them. If the contract had been

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completed by the claimants on time, even then, due to the intervening monsoon they would have had to incur this extra expenditure; and this extra expenditure would not have been reimbursed to the claimants because the contract itself does not contain any escalation clause. Therefore it is clear, that even if the contract had not been terminated they would have made no profit at all because it would have been off-set by escalation in prices. Therefore, I do not find any merit in this claim of loss of profit and is rejected."

11. The conclusion of the arbitral tribunal that the contractor

would not have made profits because of the admitted escalation is not

entirely convincing. Learned counsel for the petitioner had relied on the

judgment in Dwaraka Das to contend that the trade practice is to award a

loss of profit claim at about 10-15% of the value of incomplete work. In

Dwaraka Das, the Supreme Court noticed the earlier judgment in Brij Pal

Singh and relied thereon. In Brij Pal Singh, the Supreme Court concluded

that 15% of the value of the balance work is not an unreasonable measure of

loss of profit after taking note of the grant of 15% for similar

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work in the same locality. Therefore, Brij Pal Singh is not an authority for

the proposition that a loss of profit claim requires no evidence. As stated