Sikkim High Court
Kmc Brahmaputra Infrastructure ... vs The Chief Engineer, Road And ... on 20 December, 2022
Bench: Hon'Ble The Justice, Meenakshi Madan Rai
THE HIGH COURT OF SIKKIM : GANGTOK
(Civil Appellate Jurisdiction)
DATED : 20th December, 2022
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DIVISION BENCH : THE HON'BLE MR. JUSTICE BISWANATH SOMADDER, CHIEF JUSTICE
THE HON'BLE MRS. JUSTICE MEENAKSHI MADAN RAI, JUDGE
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Arb.A. No.03 of 2021
Appellant : KMC Brahmaputra Infrastructure Limited
versus
Respondent : The Chief Engineer, Roads & Bridges Department,
Government of Sikkim
Appeal under section 37(1)(c) of the Arbitration
and Conciliation Act, 1996 (as amended)
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Appearance
Mr. Rohan Batra, Advocate with Mr. Dhruv Sethi and Mr. Hemlal
Manager, Advocates for the appellant.
Mr. Varun Mishra, Advocate with Mr. Rishab Joshi and Ms.
Bhawana Rai, Advocates for the respondent.
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JUDGMENT
Meenakshi Madan Rai, J.
1. The dispute between the parties before this Court is
confined to the "Loss of Profit" awarded by the Learned Arbitral
Tribunal (hereinafter, "Tribunal") to the appellant, but disallowed
by the Learned Commercial Court (hereinafter, "Commercial
Court") while considering the matter under section 34 of the
Arbitration and Conciliation Act, 1996 (for short, "Arbitration Act").
2. The appellant was to construct a two-lane Gangtok
Bypass Road, from Ranipool to Burtuk in East Sikkim, measuring
23.14 kms., commencing from 22-12-2010, to be completed within
thirty six months. The Project was being developed by the
respondent with the Ministry of Road, Transport and Highways,
Government of India (MoRTH). The appellant's financial bid for
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
execution of the Project was submitted on 25-06-2010, the
respondent having invited bids on 05-05-2010. On 18-11-2010,
the bid submitted by the appellant, which was about 10% below
the approximate value of the work was accepted, being the lowest
bid. The Letter of Acceptance was issued on the same day. On 22-
12-2010, an Agreement was entered into between the parties
whereby the appellant was to execute the Project within 36 (thirty-
six) months from the date of commencement, i.e., 22-12-2010.
The milestones to be achieved by the appellant was set out in the
Contract which at Clause 25.3 provided that; "The arbitration shall
be conducted in accordance with the arbitration procedure stated in
the Special Conditions of Contract". Clause 59.2(d) of the Contract
provided that "The Employer or the Contractor may terminate the
Contract if the other party causes a fundamental breach of the
Contract. Fundamental breaches of Contract include, but shall not be
limited to the following:";
"(a) .................................................................
(b) .................................................................
(c) .................................................................
(d) a payment certified by the Engineer is not paid
by the Employer to the Contractor within 56
days of the date of the Engineer's certificate;
(e) .................................................................
(f) .................................................................
(g) .................................................................
(h) .................................................................
................................................ [emphasis supplied]"
On 26-09-2016, the appellant put forth a proposal to the
respondent to foreclose the Contract, sans adverse consequences
on the appellant and undertaking not to claim compensation if the
foreclosure materialised. Before a response was furnished by the
respondent, the Contract came to be terminated by the appellant
on 18-10-2016 alleging breach of Clause 59.2(d) supra of the
Contract on the failure of the respondent Department to release
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
payment of Running Account (RA) bills after more than 56 days
from the date of certification. On 25-10-2016, the appellant
invoked the Arbitration Clause in the Contract, while the
respondent by its letter addressed to the appellant dated 29-10-
2016 refuted the basis of termination of Contract. Thereafter, on
the nomination of the Arbitrators the Notice of Preliminary Hearing
was given by the Tribunal on 24-12-2016 and on 12-01-2017 the
first meeting of the Tribunal took place.
3. The Statement of Claim before the Tribunal was filed on
18-02-2017, the appellant inter alia made the following claims;
"1. Release/Return of the following Bank Guarantees
S. No. Particulars of Bank Guarantee Amount (INR)
(a) Performance Bank Guarantee 4,54,30,000
No.01774101PG000041
(b) Performance Bank Guarantee 2,56,27,142
No.69/2015
(c) Performance Bank Guarantee 2,27,15,000
No.01774101PG000044
(d) Equipment Bank Guarantee 3,67,00,000
No.2013/47
2. Damages/Losses being the following:
S. No. Heads of Claims/Damages Amount (in INR)
(a) Outstanding Payments:
1,17,32,363/-
Certified RA/PA Bills
2,33,65,351/-
Uncertified RA/PA Bills
(b) Refund of Security Deposit 1,80,31,640/-
(c) Refund of amounts 19,84,000/-
wrongfully and
unauthorizedly deducted
(d) Idling costs for machinery 62,36,01,265/-
(e) Overhead costs 11,39,80,104/-
(f) Refund of excess interest 3,41,17,059/-
charged on mobilization
advance
(g) Loss of profit 11,49,59,328/-
(h) Demobilization and other 75,94,772/-
related expenses
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
3. Cost of Proceedings under Section 31(8) r/w
Section 31A of the Arbitration and Conciliation
Act, 1996, Legal Expenses for Court Proceedings
and Interest."
4. The respondent filed their Statement of Defence and in
the Counter-Claim put forth a claim of ₹ 101,87,86,714/- (Rupees
one hundred and one crores, eighty seven lakhs, eighty six
thousand, seven hundred and fourteen) only, with rates of interest
as deemed appropriate as detailed in the averments. The break-up
in the Counter-Claim is as hereinbelow;
Sl. No. Counter Claim Amount
1. Performance Guarantee Rs.7,10,57,142/-
2. Recoveries of outstanding Rs.6,39,44,376/-
Mobilization/Equipment Advance
(or encashment of Bank Guarantee up
till the outstanding amount)
3. Claims against interest on At 8% Rs.
outstanding advances 37,68,817/-
At 10% Rs.
47,11,021/-
At 12% Rs.
56,53,226/-
4. Liquidated Damages Rs.11,67,66,000/-
5. Damage to public properties Rs.41,40,540/-
6. Maintenance of existing road Rs.83,81,900/-
7. Claim against 20% of the balance Rs.22,99,18,565/-
unfinished work
8. Cost Over-run Rs.33,33,55,000/-
9. Additional overhead Cost Rs.9,02,00,000/-
10. Security Deposit Rs.1,80,31,640/-
11. Establishment Cost −
12. Expenditure incurred towards Rs.38,00,000/-
obtaining dumping yard at 9th Mile
13. Financial Loss due to late recovery of Rs.82,13,000/-
Mobilization/machinery advance
The appellant filed its response to the Counter-Claim denying
the claims raised by the respondent.
5. On the basis of the pleadings of the parties, on 13-07-
2017 eleven Issues were settled for determination. On
consideration of the entire facts and circumstances, the evidence
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
and the rival arguments of counsel placed before the Tribunal, the
Award was pronounced on 18-12-2018 granting inter alia Loss of
Profit to the appellant. Pursuant thereto, on 22-02-2019 certain
typographical and computational errors that had crept into the
Award were brought to the notice of the Tribunal which considered
and rectified the Award and pronounced finally as follows;
"488. ..................................................................
(i) The Respondent is ordered to pay
Rs.2,43,34,347/- to the Claimant against outstanding
payments.
(ii) The Respondent is ordered to pay/refund to the
Claimant security deposit amounting to
Rs.2,05,48,417/-
(iii) The Respondent is ordered to pay/refund an
amount of Rs.19,84,000/- to the Claimant so
deducted from RA Bill No.8, PA Bill No.4 and RA Bill
No.10 respectively.
(iv) The Respondent is ordered to pay an amount
of Rs.5,74,79,664/- to the Claimant under the head
"Loss and Profits".
(v) The Claimant is ordered to pay a sum of
Rs.6,39,44,376/- to the Respondent towards the
principal outstanding Mobilization/ Equipment
Advance and an amount of Rs.1,19,40,954/- towards
interest thereon.
(vi) The Respondent is liable to pay to the Claimant
a simple interest @ 12% per annum on the sum of
Rs.2,63,18,347/- (Rs.2,43,34,347/- + 19,84,000/-)
from the date of the Statement of Claim i.e.
18.02.2017 until 18.12.2018 (the date of award).
The interest amount, thus, payable by the
Respondent to the Claimant from the date of
Statement of Claim till the date award comes to
57,79,942/-.
489. The Respondent in terms of the above award
shall adjust Rs.7,58,85,330/- from the amount of
Rs.11,01,26,370/- and pay to the claimant the
balance amount of Rs.3,42,41,040/- within a period of
two months from today failing which the Respondent
shall pay simple interest @ 12% per annum on
Rs.3,42,41,040/- from the date of the award along
with an amount of Rs.3,42,41,040/- until the payment
to the Claimant. [emphasis supplied]"
6. Dissatisfied with the grant of Award under Loss of Profit
(supra) to the appellant by the Tribunal, the respondent went
before the Commercial Court by filing an application under section
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
34 of the Arbitration Act, in Arbitration Case No.04 of 2019 (The
Chief Engineer, Roads & Bridges Department, Government of Sikkim vs.
M/s. KMC Brahmaputra Infrastructure Limited), assailing it.
7. The Commercial Court, by the impugned order dated
17-06-2021, set aside the entire claim for damages awarded under
the head "Loss of Profit" on grounds that it was a windfall as the
Tribunal had awarded the amount in a mechanical manner and as
the respondent itself had not complied with the terms of the
Contract and was somehow responsible for the delay, it was not
entitled to earn a profit. As per the Commercial Court, the
approach of the Tribunal in awarding such damages was erroneous,
patently illegal, perverse and hence, could not be sustained.
8. Aggrieved thereof, the appellant impugns the findings
of the Commercial Court by approaching this Court under section
37 of the Arbitration Act.
9(i). Learned counsel for the appellant contended that the
Commercial Court erroneously held that the appellant having
elected to foreclose the Contract by its letter dated 26-09-2016,
had waived its right to claim any compensation or repatriation
charges and was thereby estopped from claiming "Loss of Profit",
while at the same time noting that foreclosure of the Contract
never fructified. The appellant's letter dated 26-09-2016, does not
amount to a waiver of its right to claim Loss of Profit under the
Contract as erroneously presumed by the Commercial Court, which
also failed to appreciate that foreclosure requires the mutual
consent of both parties to truncate the Contract and cannot be a
unilateral act of a party. Submission of the proposal for foreclosure
which was not accepted, cannot amount to waiver by the proposing
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
party to make legal claims under the Contract. The words,
"without prejudice" in the communication dated 26-09-2016 means
without prejudice to the position of the proposer if the terms he
proposes are not accepted. There was a misplaced observation by
the Commercial Court on the meaning of the words "without
prejudice".
(ii) Learned counsel for the appellant further contended
that, in fact, the Tribunal had reasoned that the appellant was
entitled to damages for future loss of bargain due to "fundamental
breach" of the terms of the Contract by the respondent, which
ultimately led to its termination. The Commercial Court having
concurred with the Tribunal about the fundamental breach, could
not have called into question the entitlement to claim Loss of Profit,
which was a legal and natural consequence of the fundamental
breach. On this aspect reliance was placed by the appellant on
Maharashtra State Electricity Distribution Company Limited vs. Datar
Switchgear Limited and Others . As the respondent had not assailed
the findings of the Tribunal regarding the "fundamental breach" it
had attained finality.
(iii) In the next leg of his argument, learned counsel urged
that the Tribunal had correctly factored in the contributory delay in
the performance of the Contract by the respondent and considered
its consequences on the execution of the Contract, thereby,
concluding that the delay was also attributable to the respondent
on account of non-performance of their obligations. Accordingly,
Loss of Profit, computed at 50% of the total claim put forth by the
appellant was awarded to them. This contention was fortified by
(2018) 3 SCC 133
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
Assam State Electricity Board and Others vs. Buildworth Private
Limited . Loss of Profit was neither granted in a mechanical
manner nor was it a windfall to the appellant as erroneously opined
by the Commercial Court which substituted the plausible view of
the Tribunal with its own, which is impermissible. Strength on this
count was garnered from Dyna Technologies Private Limited vs.
Crompton Greaves Limited . Inviting the attention of this Court to
the ratio in Union of India and Others vs. Sugauli Sugar Works (P)
Ltd. it was urged that the Supreme Court observed therein that
the principle is that as far as possible, the injured party should be
provided compensation for pecuniary loss which naturally flows
from the breach. The finding of the Commercial Court that if a
party has not complied with the terms of the Contract and is
somehow responsible for the delay and thereby cannot avail the
benefit of such delay and claim that it is entitled to earn a profit, is
contrary to the settled principles of law. Reliance by the
Commercial Court on MSK Projects India (JV) Limited vs. State of
Rajasthan and Another is completely misplaced as the ratio does
not lay down such a proposition and the decision is distinguishable
on facts.
(iv) The use of the word "perverse" and "patently illegal" by
the Commercial Court is erroneous since the Supreme Court in
Ssangyong Engineering and Construction Company Limited vs. National
Highways Authority of India (NHAI) has explained the import of
"patent illegality" and "perversity". Thus, the Commercial Court
exceeded the scope of section 34 of the Arbitration Act, as nothing
(2017) 8 SCC 146
(2019) 20 SCC 1
(1976) 3 SCC 32
(2011) 10 SCC 573
(2019) 15 SCC 131
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
illegal or perverse emerges in the claim for Loss of Profit which was
duly awarded by the Tribunal. As the impugned order suffers from
non-application of mind and misconstruction of the findings in the
Award, the present Appeal be allowed and the impugned order of
the Commercial Court, dated 17-06-2021 (supra), be set aside.
10(i). Resisting the arguments put forth by learned counsel
for the appellant, learned counsel for the respondent would
contend that the Commercial Court has rightly set aside the Award
on Loss of Profit. The appellant had executed only 19% of the
work, towards which a sum of more than ₹ 27,00,00,000/- (Rupees
twenty seven crores) only, was already paid, but even after 6 (six)
years of the commencement of the work, the appellant was unable
to build a single kilometer of paved road out of the entire length.
Significant evidence which undermined the claim for Loss of Profit
and the admission of the appellant that it was incurring losses in
the Contract was entirely ignored by the Tribunal. On this aspect,
the respondent relied on Hudson's Building and Engineering
Contracts . It was contended that in fact, the appellant would not
have made any profit in executing the Contract, for the reason that
no profit element was incorporated into the appellant's bid as it had
underbid by 10% less than the estimated value of the Contract.
Reliance was placed on this count in GTM Builders & Promoters Pvt
Ltd vs. Sneh Developers Pvt Ltd and State of State of Madhya Pradesh
and Others vs. M/s. Recondo Limited, Bhopal9 wherein the Courts
were loathe to allow damages towards Loss of Profit in the absence
of proof. The findings of the Tribunal, which have not been
13th Edition at Pages 869-872 (Sweet & Maxwell)
Judgment of the High Court of Delhi in O.M.P.(COMM) 10/2016
& IA Nos.6379/2016 & 4720/2017 dated 03-07-2018
1989 M.P.L.J 822
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
challenged by the appellant, indicate acceptance of imprudence in
its work, raising serious concerns on its ability to perform the
Contract. The contents of the letter dated 13-09-2014 addressed
to the respondent Department by the appellant would fortify the
submission on whether the appellant would have made any profit
on account of increase in the value of the Contract.
(ii) The Loss of Profit was also granted for the reason that
there was a breach of the contract on account of delay in payment
of two bills, the amounts being de minimis would obviously not
have caused any loss to the appellant. The Tribunal observing that
there was a fundamental breach in the Contract gave reasons for
granting Loss of Profit to the appellant. However, in M/s. Hind
Construction Contractors by its Sole Proprietor Bhikam-Chand Mulchand
Jain (Dead) by Lrs. vs. State of Maharashtra10 and N. Srinivasa vs.
Kuttukaran Machine Tools Limited , the Supreme Court has observed
that intention of a Contract is to be gleaned from its holistic
reading, the conduct of the parties and not merely by
interpretation of one Clause. Clause 43 of the Contract entitled the
Contractor to interest @ 12% per annum on delayed payment,
which indicates that payment of bills within 56 days was not
intended to be the "essence of the contract". MSK Projects India
(JV) Limited (supra) is fairly instructive on whether loss of profits
ought to be payable to a Contractor who failed to abide by the
terms of a Contract. All payments computed by the Tribunal ought
to have been limited to the date of termination and Loss of Profit
not granted as the appellant had itself terminated the Contract.
(1979) 2 SCC 70
(2009) 5 SCC 182
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
(iii) It was next argued that the fundamental policy
contained in section 73 of the Indian Contract Act, 1872 (for short,
"Contract Act"), is that damages can only be awarded for any loss
or damage which naturally arose in the usual course of things from
such breach, or which the parties knew when they made the
Contract, to be likely to result from the breach of it. Thus, it is trite
that the party claiming compensation as loss of profit or anticipated
profit, must establish that there was a causal connection between
the breach and the loss sustained by the party who suffered the
breach, which is not so in the present case. It was in fact the
appellant's termination of the Contract, vide its letter dated 18-10-
2016, that resulted in its alleged loss of profit. The claim for Loss of
Profit would have been justified if the respondent had illegally
terminated the Contract, thereby, preventing the appellant from
earning any alleged profit from the Contract. Thus, the observation
of the Tribunal that a claim for Loss of Profit would be likely to
result from delay in payment by the respondent, is patently illegal.
Strength was garnered on this count from the ratio in Kanchan
Udyog Limited vs. United Spirits Limited .
(iv) Relying on the ratio in M. Lachia Setty and Sons Ltd. vs.
Coffee Board, Bangalore wherein the Hon'ble Court relied on
Halsbury's Laws of England (4th Edn., Vol. 12, Page 477), for the
law on mitigation of loss, learned counsel advanced the argument
that it is an admitted case that as on the date of termination, the
appellant had executed the Contract works worth approximately
₹ 27,00,00,000/- (Rupees twenty seven crores) only, out of a total
of ₹ 142,00,00,000/- (Rupees one hundred and forty two crores)
(2017) 8 SCC 237
(1980) 4 SCC 636
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
only, and was yet to execute ₹ 115,00,00,000/- (Rupees one
hundred and fifteen crores) only, worth of work to make its alleged
profit. By terminating the Contract pre-maturely, the appellant
was able to free up and divert its men and machinery to perform
other works, from which the appellant could have derived a profit
which ought to be set off against the appellant's claim for Loss of
Profit, otherwise it would lead to a windfall for the appellant.
(v) Learned counsel for the respondent further contended
that the respondent's case before the Tribunal was that future
damages may only be claimed in the event of a repudiatory breach
under section 39 of the Contract Act, whereas, failure to make a
certified payment within 56 (fifty six) days as envisaged under
clause 59.2(d) is not covered by the ambit of section 39 of the
Contract Act. The Tribunal placed unnecessary emphasis on the
phrase, "Fundamental Breach", in clause 59.2 and treated it as a
repudiatory breach. To fortify his submissions, reliance was placed
on Hind Construction Contractors (supra); N. Srinivasa (supra) and
Transmission Corporation of Andhra Pradesh Limited and Others vs.
GMR Vemagiri Power Generation Limited and Another .
(vi) In the last leg of his arguments, it was contended by
learned counsel that the respondent sought to perform its
obligation under the Contract and acknowledged vide its letter
dated 12-02-2016 that some delays in payment are inevitable due
to MoRTH's involvement, which is routine Government procedure.
Besides, the appellant themselves failed to raise the monthly R.A.
bills in terms of clause 42 of the Contract. The Contract spanned a
period of more than 5 (five) years while bills raised were only 14
(2018) 3 SCC 716
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
R.A. bills. The Tribunal ignored the appellant's undertaking dated
26-09-2016 wherein it categorically undertook not to claim
compensation/repatriation charges if the foreclosure of the
Contract took place, which led the respondent to believe that the
Contract would be foreclosed, but the appellant proceeded to
terminate the Contract and sought for damages in lieu of future
performance. Thus, the Appeal ought to be dismissed as the
learned Court below has correctly set aside the Tribunal's Award on
loss of profit.
11. In rebuttal, the vehement contention advanced by
counsel for the appellant was that the arguments of the respondent
pertaining to the breach committed by the respondent which led to
termination of the Contract being a "technical breach" and not a
"fundamental breach" ought not to be considered by this Court
while deciding the instant Appeal as these arguments were not
raised before the Court below. The test of the Award is whether
there was a fair conclusion and the Tribunal has articulated all the
essential principles in its order considering all aspects. It is settled
law that an Arbitral Award cannot be interfered with in a cavalier
manner unless the Commercial Court comes to a conclusion that
the perversity of the Award goes to the root of the matter. The
finality of the Arbitral Award is to be respected, hence the Appeal
be allowed.
12. The submissions put forth in extenso have been duly
considered, all documents perused, as also the citations made at
the Bar. This Court is now to consider whether the Learned
Commercial Court by its impugned order was correct in setting
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
aside the Loss of Profit awarded by the Tribunal to the appellant,
vide its Award dated 18-12-2018?
13. In this context, in the first instance, it is essential to
navigate the parameters for setting aside an Arbitral Award. The
provisions of section 34 of the Arbitration Act are itself explicit on
this aspect. We may refer to section 34(2A) which is relevant for
the present purpose and provides as follows;
"34. Application for setting aside arbitral
award.--(1) ...............................................
(2) .................................................
(2A) An arbitral award arising out of
arbitrations other than international commercial
arbitrations, may also be set aside by the Court, if the
Court finds that the award is vitiated by patent
illegality appearing on the face of the award.
Provided that an award shall not be set aside
merely on the ground of an erroneous application of
the law or by reappreciation of evidence.
(3) ......................................................
(4) ....................................................
(5) ......................................................
(6) ...................................................."
14(i). While examining the scope of section 34 of the
Arbitration Act, in Renusagar Power Co. Ltd. vs. General Electric Co.15
the Supreme Court laid down that the Arbitral Award can be set
aside if it is contrary to (a) fundamental policy of Indian Law; (b)
the interests of India; (c) or justice or morality. In Oil & Natural
Gas Corporation Ltd. vs. Saw Pipes Ltd.16 apart from the above
mentioned three grounds, the Supreme Court appended another
ground, i.e., if it is patently arbitrary. It was however clarified that
such patent illegality must go to the root of the matter. This was
reiterated in McDermott International INC. vs. Burn Standard Co. Ltd.
and Others wherein the Supreme Court observed that such patent
illegality must go to the root of the matter. The public policy
1994 Supp (1) SCC 644
(2003) 5 SCC 705
(2006) 11 SCC 181
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
violation, indisputably, should be so unfair and unreasonable as to
shock the conscience of the court. Where the arbitrator, however,
has gone contrary to or beyond the expressed law of the contract or
granted relief in the matter not in dispute would come within the
purview of section 34 of the Act.
(ii) In Datar Switchgear Limited (supra) it was inter alia
observed that the proposition of law is that the Arbitral Tribunal is
the master of evidence and the findings of fact arrived at by the
Arbitrators on the basis of evidence on record are not to be
scrutinised as if the Court was sitting in Appeal. This principle was
upheld in MMTC Limited vs. Vedanta Limited18 and it was explained
therein that the Court may interfere on merits on the limited
ground of the Award being against the public policy of India.
(iii) In Parsa Kente Collieries Limited vs. Rajasthan Rajya
Vidyut Utpadan Nigam Limited it was held that an Arbitral Tribunal
must decide in accordance with the terms of the Contract, but if a
term of the Contract has been construed in a reasonable manner
then the Award ought not to be set aside on this ground alone, while
in National Highway Authority of India vs. Progressive-MVR (JV)20, the
Supreme Court on considering a plethora of decisions on the scope
and ambit of the proceedings under section 34 of the Arbitration
Act, observed that, even when the view taken by the Arbitrator is a
plausible view and/or when two views are possible, the particular
view taken by the Tribunal which is also reasonable should not be
interfered with in proceedings under section 34 of the Arbitration
Act.
(iv) In Dyna Technologies Private Limited (supra), the
Supreme Court while discussing the limitations of the Court in
(2019) 4 SCC 163
(2019) 7 SCC 236
(2018) 14 SCC 688
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
exercising powers under section 34 of the Arbitration Act,
highlighted as follows;
"24. There is no dispute that section 34 of the
Arbitration Act limits a challenge to an award only on
the grounds provided therein or as interpreted by
various courts. We need to be cognizant of the fact
that arbitral awards should not be interfered with in
a casual and cavalier manner, unless the court comes
to a conclusion that the perversity of the award goes
to the root of the matter without there being a
possibility of alternative interpretation which may
sustain the arbitral award. Section 34 is different in
its approach and cannot be equated with a normal
appellate jurisdiction. The mandate under section 34
is to respect the finality of the arbitral award and the
party autonomy to get their dispute adjudicated by
an alternative forum as provided under the law. If the
courts were to interfere with the arbitral award in the
usual course on factual aspects, then the commercial
wisdom behind opting for alternate dispute resolution
would stand frustrated.
25. Moreover, umpteen number of judgments
of this Court have categorically held that the courts
should not interfere with an award merely because
an alternative view on facts and interpretation of
contract exists. The courts need to be cautious and
should defer to the view taken by the Arbitral
Tribunal even if the reasoning provided in the award
is implied unless such award portrays perversity
unpardonable under section 34 of the Arbitration Act.
[emphasis supplied]"
15(i). The aforesaid judgments have detailed the contours of
the powers of the Court in proceedings under section 34 of the
Arbitration Act, on the anvil of which, we now examine the matter
before us.
(ii) On a careful perusal of the Award, it is evident that the
Tribunal while factoring in the Loss of Profit, elucidated its
reasoning from paragraph 362 to paragraph 380 of the Award,
discussed the scheme of section 39 of the Contract Act and inter
alia observed that "(vii) where the parties to the contract have
expressly stipulated a term of the contract as "fundamental" or "of
the essence" and there is breach of such fundamental or essential
term by a party, the aggrieved party may invoke the express term
and terminate the contract. In such a situation, the principle of law
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
stated in sub-para (iv) above has no application and the aggrieved
party is entitled to claim damages for past losses i.e. losses up to
the date of the contract and also future losses post termination. In
other words, in such event, the innocent/aggrieved party may
make a claim for loss of bargain for the entire period of contract."
The Tribunal also opined that the respondent was under a
misconception that as the appellant had terminated the contract
under an express clause of the Contract and termination was on
account of technical breach of the term of the Contract, although
termed as "fundamental breach", such "fundamental breach" did
not entitle the aggrieved party to loss of profit post-termination.
That, "repudiatory breach" and "fundamental breach" are two
different aspects, but the outcome that follows on termination of
Contract by the aggrieved party in either case, is the same. The
Tribunal further observed that;
"364. By stipulating the breach in clause 59.2(d)
as a fundamental breach, the parties agreed the
payment of certified bills within the stipulated
time to be of essence. Thereby, the parties have
ensured the same outcome in the event of
breach of fundamental term which would
ordinarily follow on termination of contract for
repudiatory breach.
......................................................
369. The Tribunal is of the considered view that the
Claimant is entitled to the damages for future
loss of bargain due to fundamental breach of the
term of the contract by the Respondent which
ultimately led to the termination of contract.
[emphasis supplied]"
(iii) Insofar as the termination of Contract is concerned, the
Tribunal dealt with it specifically at paragraph 108 of its Award
where it was observed as follows;
"108. Clause 59.2(d) of the contract expressly
states that if a payment certified by the
Engineer is not paid by the Employer to the
Contractor within 56 days of the date of the
Engineer's certificate shall be treated as a
fundamental breach of the contract. The
fundamental breach specified in Clause 59.2(d)
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
is a standalone breach which entitles the
Contractor to terminate the contract. The
factum of non-payment of certified bill by the
Engineer beyond 56 days of the date of
certificate, thus, by itself is sufficient for the
Contractor to terminate the contract as such
delayed payment is treated as a fundamental
breach of the Employer. [emphasis supplied]"
The Court below did not disagree with the conclusion of the learned
Tribunal on this aspect. It may relevantly be pointed out that, it is
a settled position of law that a fundamental breach by its very
nature pervades the entire Contract and once committed the
Contract as a whole stands abrogated. [See, Datar Switchgear
Limited (supra)].
(iv) The Tribunal did not find any merit in the argument of
counsel for the respondent that the claimant underbid and,
therefore the Loss of Profit was misconceived. The Tribunal
reasoned that the Contract is a commercial one, where the
claimant has not bid to make losses, that the ingredient of profit is
always inbuilt in the performance of a particular Contract. It was
also opined that the original price of the Contract was revised from
₹ 99.16 crores where the claimant had bid ₹ 90.86 crores to
₹ 195.22 crores by MoRTH. That, in the said circumstance, the
argument that the claimant's underbidding disentitled it to any
"Loss of Profit" was not accepted. That, the claimant had put forth
Loss of Profit @ 10% of the unexecuted work. That, the measure
of 10% of the unexecuted work toward Loss of Profit is prescribed
by the MoRTH.
(v) The Tribunal relied on the decision of the Hon'ble High
Court of Kerala in State of Kerala vs. K. Bhaskaran21 where it was
observed that the measure of damage no doubt is the amount of
AIR 1985 Ker 49
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
profit lost to the Contractor by the breach. This is a measure of
compensation for the loss which arose in the usual course of
things. This can be stated as the loss which the parties knew when
they made the contract, as likely to result from the breach of it.
When the plaintiff entered into the contract, he agreed to complete
the work for the stated amount reckoning a sum for his profit also.
(vi) The Tribunal also referred to a decision of the Supreme
Court in Sugauli Sugar Works (supra) relied on by the Kerala High
Court (supra) in the same ratio, wherein it was held as follows;
"22. ............................ One of the principles for
award of damages is that as far as possible he who
has proved a breach of a bargain to supply what he
has contracted to get is to be placed as far as money
can do it, in as good a situation as if the contract had
been performed. The fundamental basis thus is
compensation for the pecuniary loss which naturally
flows from the breach. Therefore, the principle is that
as far as possible the injured party should be placed
in as good a situation as if the contract had been
performed. In other words, it is to provide
compensation for pecuniary loss which naturally flows
from the breach. The High Court correctly applied
these principles and adopted the contract price in the
facts and circumstances of the case as the correct
basis for compensation."
(vii) It is imperative to notice at this juncture that the
Supreme Court held in M/s. A.T. Brij Paul Singh and Others vs. State
of Gujarat that, what must be the measure of profit and what
proof should be tendered to sustain the claim are different matters,
but the claim under the head of Loss of Profit is clearly admissible.
It thus concludes that Loss of Profit is to be granted by the Tribunal
in a breach of Contract.
(viii) That, there was a breach of Contract is evident from
the reasoning put forth by the Tribunal and on reading Clause
59.2(d) of the Contract between the parties, what remains for
(1984) 4 SCC 59
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
consideration is the method of computation. While addressing the
issue of computation, we may necessarily refer to the
pronouncement of the Supreme Court in M. N. Gangappa (Dead) By
L.Rs vs. Atmakur Nagabhushanam Setty & Co. and Another wherein it
was held that the method used for computation of damages will
depend upon the facts and circumstances of each case.
16. The Tribunal while computing the Loss of Profit inter
alia examined the evidence furnished by the claimant through its
witness and concluded as follows;
"378. The Respondent in its Statement of Defence
has not specifically disputed the measure of
10% applied by the Claimant. Moreover, CW-2
has been cross examined by the Respondent at
quite some length but his evidence in paragraphs
28 and 29 of the affidavit has not at all been
challenged. In the circumstances, there is no
justification for the Tribunal to reject the
evidence of CW-2 on this count.
379. The Tribunal is of the considered view that
measure of 10% of the unexecuted work adopted
by the Claimant for claiming loss of profits is a
fair and reasonable measure. However, in the
facts and circumstances of the case, the
Claimant would not be entitled to 10% loss of
profit on the entire unexecuted work. In the
Tribunal's view, since the Claimant also
contributed to delay in performance of the
contract by not discharging its some of the
important obligations on the time as already
noted in the earlier part of the award and the
fact that few days before it terminated the
contract, the Claimant itself wanted the contract
to be foreclosed without imposition of any
liability on it, an award of 50% of what has been
claimed by the Claimant as the loss of profit of
unexecuted work seems to be fair and
reasonable.
380. The Tribunal, accordingly, awards 50% of
the claim of Rs.11,49,59,328/- under the head
"Loss and Profits" made by the Claimant which
comes to Rs.5,74,79,664/-" [emphasis supplied]
17. The learned Court below however disagreed with the
findings of the Tribunal while setting aside the Award under loss of
Profit and contrarily observed as follows;
(1973) 3 SCC 406
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
"39. ........... . Be that as it may, the above
facts and circumstances would make it clear that
the respondent/claimant had clearly elected to
proceed with the foreclosure of the contract-work
subject only to the condition that no adverse
consequences are attached to it and it had
undertaken not to claim any compensation or
repatriation charges in the event of such
foreclosure which was contemplated by 30.09.
2016. Clearly, apart from having consciously
made such election it had also waived its right to
claim any compensation/ repatriation charges if
the foreclosure took place. It is rather strange
that despite the same the respondent/claimant
would make a complete volte face and
immediately rush to terminate the contract vide
its letter dated 18.10.2016. Strictly speaking, the
respondent/claimant having unequivocally
elected to proceed with the foreclosure of the
contract for expediting which it had itself later
requested vide its letter dated 28.09.2016 and
having waived its right to claim any
compensation or repatriation charges could not
have still claimed „loss of profit‟ by suddenly
terminating the contract nor could it have been
awarded by the Ld. Arbitral Tribunal. In other
words, the respondent/claimant cannot be
allowed to approbate and reprobate at the same
time once having elected as above and having
undertaken to waive any claim whatsoever in the
event of the foreclosure without any adverse
consequences on it. .........................
..............................................................................
42. Viewed from the other angle, the
Respondent/claimant having expressly waived its
right to claim compensation or repatriation
charges in the event of the proposed foreclosure
could not have claimed „loss of profit‟. ..........
..............................................................................
46. Suffice it to say, in the light of the above
settled position, observation and the peculiar
facts and circumstances obtaining in the case on
hand the fact that the undertaking dated
26.09.2016 was without prejudice would not
enure any benefit to the respondent/claimant
when it had consciously and unequivocally
elected to proceed with the foreclosure of the
contract subject only to the condition that no
adverse consequences are meted out to it, and it
having clearly waived its right to claim
compensation or repatriation charges in the
event of such foreclosure by the petitioner-
employer. So much so, vide its subsequent
letter dated 28.09.2016 which incidentally was
not marked without prejudice the respondent/
claimant would even request the petitioner-
employer to expedite the process of foreclosure.
These attenuating circumstances also go against
the claims of the respondent/claimant with
regard to „loss of profit‟.
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
47. Needless to say, the approach of the Ld.
Arbitral Tribunal in awarding damages under the
head „loss of profit‟ despite the above facts and
circumstances is clearly erroneous and patently
illegal which goes to the root of the concerned
matter. The award to that extent is ex
facie perverse and cannot be sustained."
18. It appears from the reasonings extracted supra that the
Commercial Court was aware that the foreclosure of the Contract
never fructified despite which it proceeded to observe that prior to
the termination of the Contract there was a proposal for
foreclosure, vide letter of the appellant, dated 26-09-2016. The
Commercial Court opined that the appellant in the communication
had waived its right to claim any compensation or repatriation,
should the foreclosure materialise. The Commercial Court was
evidently of the opinion that the same conditions of waiver would
have to be read into the communication for termination of the
Contract, sans such specific waiver. The observation of the
Commercial Court that in the Undertaking dated 26-09-2016, the
words "without prejudice" would not enure any benefit to the
appellant who had elected to foreclose the Contract, is an apparent
erroneous observation considering the fact that the words were
employed in the said communication for a proposal for foreclosure.
In any event, the words "without prejudice" as per Black's Law
Dictionary, Tenth Edition, 2014, means "without loss of any rights; in
a way that does not harm or cancel the legal rights or privileges of
a party". In other words, it means without detriment to any
existing right or claim and not as interpreted by the Commercial
Court in paragraph 46 (extracted supra) of its impugned order.
Consequently, the remark of the Commercial Court that the
appellant was approbating and reprobating is also an incorrect
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
observation. It is indeed absurd to suggest that vide the
communication of 26-09-2016, the appellant had waived all legal
rights even while terminating the Contract.
19. While addressing the observation of the Commercial
Court that the Award of damages under the head "Loss of Profit"
was clearly erroneous, patently illegal and the Award to that extent
was ex facie perverse, in Ssangyong Engineering and Construction
Company Limited (supra) the Supreme Court while expanding on
illegality appearing on the face of the Award observed that such
illegality must go to the root of the matter, and ought not to be a
mere erroneous application of the law. The Award would also be
"patently illegal" if an Arbitrator gives no reasons for an Award and
wanders outside the Contract and deals with matters not allotted to
him. That, "Patent illegality" would also be one in which a decision
is perverse or so irrational that no reasonable person would have
arrived at the same and if a finding of fact is arrived at by ignoring
or excluding relevant material or by taking into consideration
irrelevant material or if the finding so outrageously defies logic so
as to suffer from the vice of irrationality incurring the blame of
being perverse, then, the finding would be rendered infirm in law.
It would be apposite to mention that in Datar Switchgear Limited
(supra) it was laid down that the Tribunal is the master of evidence
and the findings of fact cannot be scrutinized as if the Court is
sitting in Appeal. Interference on merits would be permissible only
if the Award is against public policy [See MMTC Limited (supra)].
20. After having perused the Award and having extracted
hereinabove the relevant paragraphs, we find that elaborate
reasons have been rendered for the conclusion arrived at by the
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
Tribunal which can neither be termed as "erroneous", "irrational" or
"patently illegal".
21. We also agree with the counsel for the appellant that
reliance on MSK Projects India (JV) Limited (supra) by the
Commercial Court to opine that if a party has not complied with
terms of the Contract and is somehow responsible, even if not
equally for the delay taken cannot avail the benefit of such delay
and claim that it is entitled to earn a profit, is completely
misplaced. This observation of the Supreme Court was made in the
context of a case, the facts of which are distinguishable from the
instant case. The facts therein were that as per the terms of the
agreement between the petitioner (MSK Projects) and the
respondent (State of Rajasthan) the petitioner was required to
complete the project of construction of roads in two phases. In the
first phase, a certain amount of investment was to be made and
after five years, in the second phase, another amount was to be
invested by the petitioner. The petitioner however failed to abide
by the terms of the agreement and did not make any investment
for the second phase and thereby breached the contract. The
State of Rajasthan submitted that the contention of the petitioner
that he is entitled to recover its investment was erroneous and the
petitioner had not approached the Court with clean hands. The
allegations were found not to have been denied by the Petitioner.
That being so, the Supreme Court observed that the State
Authorities had for reasons best known to them not made
reference to the arbitration proceedings for non-execution of the
work of the second phase of the Contract. However, the relief
claimed by the private appellant would prove to be a windfall profit
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
without carrying out the obligation to execute the work just on
technicalities. In order to do complete justice between the parties,
the Supreme Court ordered that the matter requires adjudication
and reconsideration on two points by the Tribunal. The above
matter is irrelevant for the present purposes as a fundamental
breach of the Contract is the basis of its termination.
22. So far as reliance of the respondent on GTM Builders &
Promoters (supra) and Recondo Limited (supra) are concerned, the
judgments only have persuasive value, over and above which we
notice that the facts in the citations are distinguishable from the
instant case and are of no assistance to the respondent.
23. Coming to the question of interpretation of section 73
of the Contract Act as agitated by learned counsel for the
respondent, it is useful to notice that in MSK Projects India (JV)
Limited (supra) reference was made to A.T. Brij Paul Singh (supra)
where, while interpreting the above provision of law the Court
specifically held that; where in the works contract the party
entrusting the work committed breach of Contract, the Contractor
is entitled to claim the damages for loss of Profit which he expected
to earn by undertaking the works contract. Claim of expected
profit is legally admissible on proof of the breach of Contract by the
erring party. What would be the measure of profit would depend
upon facts and circumstances of each case, but that there shall be
reasonable expectation of profit is implicit in the works contract
and its loss has to be compensated by way of damages if the other
party to the Contract is guilty of breach of contract cannot be
gainsaid. The observation being a settled position of law it also
lends a quietus to the dispute herein.
KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim
24. Neither the Court below nor this Court are empowered
under the relevant provisions of law to reappreciate the evidence
on record nor do the provisions of law envisage that Courts while
exercising power under section 34 of the Arbitration Act shall
function as a regular first Court of Appeal. The Court, under
section 34 of the Arbitration Act cannot replace the views of the
Tribunal, if found plausible, by substituting its own views.
25. From a meticulous perusal of the Award, we cannot
bring ourselves to agree with the observations of the Learned
Commercial Court that the findings of the Learned Tribunal suffers
from the vice of being erroneous, patently illegal or ex facie
perverse.
26. In our considered opinion, the Learned Tribunal after
holding that there was a fundamental breach of Contract, factored
in the contributory delay caused by the appellant and fairly
awarded Loss of Profit by slashing it to 50% of the original claim
put forth by the appellant.
27. Order of the learned Commercial Court is set aside and
the Award passed by the learned Tribunal stands restored.
28. Appeal along with all pending applications stand
disposed of accordingly.
29. Parties to bear their own costs.
( Meenakshi Madan Rai ) ( Biswanath Somadder )
Judge Chief Justice
20-12-2022 20-12-2022
Approved for reporting : Yes
ds
