Wednesday, 22 July 2015

Whether claim for loss of profit can be allowed to contractor when it is not proved that he suffered loss of profit?

 On the other hand, the Court finds that it has been repeatedly
stressed in the decisions of the Court that some basic material has to
be placed on record by the contractor to demonstrate loss of profits. It
is one thing to say that on account of the premature termination of a
contract, losses would be suffered and such in such instances it will
be possible to demonstrate loss of profit. However, that is not the case
here. Extension of time was given by NHAI up to 30th September
2004 without levy of LD. As the AT itself noted, BHSB did earn
profits but over an extended period of time. Secondly, as the AT itself
noted, BHSB did not produce any material to show that it had  
suffered any overhead costs or loss of profit. Therefore, the question
of the AT simply applying the formulae did not arise. T
IN THE HIGH COURT OF DELHI AT NEW DELHI
O.M.P. 249/2013

Decision on: March 25 2015
NATIONAL HIGHWAYS AUTHORITY OF INDIA..... Petitioner

versus
BUMI HIWAY (M) SDN BHD ..... Respondent


CORAM: JUSTICE S. MURALIDHAR
Dated; 25.03.2015
Citation;AIR 2015(NOC)877 Delhi

1. Both these petitions under Section 34 of the Arbitration and
Conciliation Act, 1996 („Act‟) raise limited challenge to an Award
dated 4th December 2012 passed by the Arbitral Tribunal („AT‟) in the
disputes between the parties i.e. the National Highways Authority of  
India (NHAI) and Bhumi Hiway (M) SDN BHD ('BHSB') arising out
of a contract agreement dated 14th June 2001 for the Four-Laning of
Km 4.23 to 26.00 of Jalandhar Pathankot Section of NH-1A in the
State of Punjab.
2. The start date was 30th August 2001. The scheduled date of
completion was 29th August 2003. The date up to which the extension
was granted was 30th September 2004. In terms of the report of the
Engineer the date of substantial completion was 1st October 2004 and
the date of completion was 16th October 2004.
3. The disputes between the parties were referred to a three-Member
AT. The following claims of BHSB were rejected by the AT:
(ii) Claim No.1 in for a sum of Rs.48,46,316.40 for recoupment of
premium paid on additional insurance covers apart from the
stipulation of the contract agreement.
(ii) Claim No. 2 for a sum of Rs.1,37,71,418 for breach in
compliance with the provisions of construction methodology as per
contract agreement and the consequential loss suffered by the
claimant.
(iii) Claim No.3 for sum of Rs.30,46,496 on account of the loss
caused to the contractor for preparation of construction drawings
for permanent works which was primarily the obligation of the
Engineer/employer.
(iv) Claim No. 4 for a sum of Rs.58,47,103 for laying DBM in two
layers instead of a single layer. 
(v) Claim No.5 for a sum of Rs.1.19 crores for loss of estimated
profit in respect of abnormal reduction in the scope of work.
4. Claim No. 6 was for a sum of Rs.8.64 crores for losses on account
of overheads and for loss by way of profit. The AT applied the MOST
Data Book and also the Hudson‟s formula and determined that BHSB
would be entitled to Rs.1,88,70,000.
5. Claim No. 7 was for interest on the above claims @ 12% per
annum pendente lite. The AT determined that no pre-suit or pendente
lite interest was payable since Claims 1 to 5 had already been
rejected. However, under Claim No. 8 i.e. future interest @ 12% per
annum on the awarded amount against Claim No. 6 from the date of
the Award till the receipt of payment was granted.
6. OMP No. 249/2013 has been filed by the NHAI challenging the
above Award primarily on the ground that no material was placed by
BHSB on record to prove that it had incurred any overheads or
suffered any losses. Having acknowledged this, the AT could not
have applied the formula and estimated the overhead charges and loss
of profit.
7. On its part BHSB has filed OMP No. 274/2013 to the limited
extent that in the impugned Award the AT declined to grant it
pendente lite interest.
8. It was submitted by Mr. Rajiv Kapoor, learned counsel for NHAI,
that the AT erred in holding that NHAI was responsible for the delay
of 38 weeks of the total delay of 59 weeks because liquidated 
damages („LD‟) were levied only for 16 days. Secondly, it was
submitted that in assessing the loss of the overheads to be 4%, the AT
proceeded on surmises and conjectures. No amount towards
overheads or the loss of profit could have been awarded unless BHSB
proved that there was some actual loss and that it had done all that
was required to mitigate the loss. NHAI had already paid BHSB
escalation up to 30th September 2004 by which time the work had
been substantially completed. Therefore, awarding 6% on account of
loss of profit had no reasonable basis. Mr. Kapoor accordingly
submitted that the impugned Award was against public policy and
wholly unsustainable.
9. Mr. D. Moitra, learned counsel appearing for BHSB, submitted that
the scope of interference by the Court in the impugned Award was
extremely limited. The AT had only applied Hudson‟s formula which
had been approved by the Supreme Court in McDermott
International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC
181.The AT had taken into consideration the MOST Data Book as per
which the overhead charges were considered as 8% of the total cost of
the work. The figure of 4% of the total cost of charges determined by
the AT was, therefore, reasonable. Likewise, after taking into account
the doctrine of mitigation of expenses, the AT considered that 6% of
the costs would be a fair and reasonable amount as per the loss of
profit is concerned and that finding also was not liable to be
challenged. He placed reliance on the decision in National Highways
Authority of India v. Oriental Structural Engineers Pvt. Ltd.–
Gammon India Ltd. (JV) 2013(2) AD(Delhi) 450.
10. As far as the petition by BHSB was concerned, Mr. Moitra 
submitted that there was no basis for the AT to decline to grant
pendente lite interest only because Claims 1 to 5 were rejected. He
submitted that non-Award of interest was against public policy and
law of the land and contrary to Clause 43.2 read with 43.1 and 57.1 in
terms of which BHSB was entitled to interest @ 12% per annum with
effect from 3rd October 2005.
11. As regards Claim No.6, the AT noted that extension of time had
been granted up to 30th September 2014 i.e. for 57 weeks without
levying compensation. Compensation was levied only for a period of
16 days from 1st to 16th October 2014. In the Award, in respect of
reference 1, the AT had held that the levy of LD was not justified.
The AT had concluded that out of the total delay of 59 weeks, NHAI
had been responsible for delay of 38 weeks. The AT discussed two
components of the claim. One was loss by way of overheads, the
other was loss by way of profits. The AT itself noted that “regarding
the loss of overheads, claimant has not supported its claim by any
documents.” In the absence of any such document, the AT resorted to
MOST Data Book and after noting that overhead charges in terms of
the said Data Book were considered to be 8% of the total cost of the
work, applied the doctrine of mitigation of damages and considered
that a figure of 4% of the total cost of the work “would be a fair and
reasonable assessment of the overhead charges by way of damages.”
12. As regards loss of profit, the AT again noted that “the claimant
has not substantiated this part of the claim based on any documentary
evidence.” It noted that “to avail loss of profit, claimant should have
put forth convincing evidence to suggest it was geared in terms of
financial capacity and other resources to tender for other works during  
the period of delay to be able to earn profit. This exercise has not been
done by the claimant.” The AT also noted that the claimant had been
paid escalation up to 30th September 2004 by which time the work
had substantially been completed. Consequently, the claimant had
earned profit from the work as originally planned by them with the
only difference that this profit had been earned over a longer period of
time than intended. After noticing the absence of the details, the AT
resorted again to the MOST Data Book as per which the profit was
taken as 10% of the total work. Again after mitigation of expenses,
the AT considered that a figure of 6% of the cost of the work “would
be a fair and reasonable compensation towards loss of profit.”
13. The principal question that arises therefore is whether in the
absence of BHSB placing any material before the AT to prove any
loss of profit or damages having been incurred, the AT was justified
in proceeding to award BHSB any amount in respect of the said two
claims.
14. The Court is conscious of the scope of the interference with an
Award in terms of Section 34 of the Act. In Associate Builders v.
Delhi Development Authority 215 (2014) DLT 204, after referring to
the decision in ONGC Limited v. Western Geco International
Limited 2014 (9) SCC 263 the Supreme Court held that where a
finding is based on no evidence or the AT takes into account
something irrelevant to the decision which it arrives at, such decision
would necessarily be perverse. The AT was expected not to give an
Award which was contrary to the settled legal position.
15. In McDermott International Inc. v. Burn Standard Co. Ltd. 
(supra), the Court specifically dealt with the method for computation
of damages. The Court prefaced its discussion with the remarks that
“In the assessment of damages, the Court must consider only strict
legal obligations, and not the expectations, however reasonable, of
one contractor that the other will do something that he has assumed
no legal obligation to do.” The Court then explained each of the
formulae commonly adopted. The Court noted the criticisms of the
Hudson‟s formula observing that “it adopts the head office overhead
percentage from the contract as the factor for calculating the costs and
this may bear little or no relation to the actual head office costs of the
contractor.” The Emden formula which has received judicial support
in a number of cases has the advantage of using the “contractor‟s
actual head office and profit percentage rather than those contained in
the contract.” The Eichleay formula is used “where it is not possible
to prove loss of opportunity and the claim is based on actual cost.”
The Court did not endorse any one particular formula since “it is an
accepted position that different formulas can be applied in different
circumstances and the question as to whether damages should be
computed by taking recourse to one or the other formula, having
regard to the facts and circumstances of a particular case, would
eminently fall within the domain of the arbitrator.” What is significant
as far as the above discussion is concerned is that it is only concerned
with the application of formulae and not whether the formulae would
apply notwithstanding there is no proof of the contractor having
suffered overhead charges or loss of profit.
16. In McDermott International Inc it was argued that MII could not
prove the actual loss suffered by it as required by Sections 55 and 73
of the Contract Act despite which the Arbitrator had applied Hudson‟s  
formula for calculating the amount of damages “having regard to the
books of accounts and other documents maintained by MII.” The
Court noted that “the learned Arbitrator did insist that sufferance of
actual damages must be proved by bringing on record the books of
accounts and other relevant documents.” Consequently, the question
in McDermott International Inc was whether despite there being no
material whatsoever produced to prove the suffering of losses by the
claimant, it would still be entitled to compensation only by applying
one of the formulae. In para 115 (SCC) the Court held: "only because
the Arbitrator adopted a certain formula by itself does not lead to the
conclusion that there is a breach of Sections 55 and 73 of the Indian
Contract Act."
17. The net result of the discussion is that nowhere in the decision in
McDermott International Inc (supra) did the Supreme Court hold
that even without producing any material to show loss of overheads or
profit, the Arbitrator could apply one of the formulae to award the
claims.
18. On the other hand, the Court finds that it has been repeatedly
stressed in the decisions of the Court that some basic material has to
be placed on record by the contractor to demonstrate loss of profits. It
is one thing to say that on account of the premature termination of a
contract, losses would be suffered and such in such instances it will
be possible to demonstrate loss of profit. However, that is not the case
here. Extension of time was given by NHAI up to 30th September
2004 without levy of LD. As the AT itself noted, BHSB did earn
profits but over an extended period of time. Secondly, as the AT itself
noted, BHSB did not produce any material to show that it had  
suffered any overhead costs or loss of profit. Therefore, the question
of the AT simply applying the formulae did not arise. The Award
appears to have proceeded on guess work.
19. Even Associate Builders (supra) was not a case of a contractor not
producing any material to show that it had suffered losses. On the
other hand, the evidence produced by the contractor was discussed in
great detail in para 18 (SCC) of the judgment. In particular it was
observed as under:
“Further, he has pointed out from the statement of claims
before the Arbitrator that there was evidence for claims 9,
10 and 11 laid before the Arbitrator which the Arbitrator
has in fact accepted. Also establishment expenses were
set out in great detail before the Arbitrator and it is only
on this evidence that the Arbitrator ultimately has
awarded these claims.”
20. In Steel Authority of India Limited v. Gupta Brother Steel Tubes
Limited JT 2009 (12) SC 135, the Court analysed Section 74 of the
Contract Act which contemplated a party aggrieved by a breach of
contract receiving compensation whether or not actual damages or
loss were proved to have been caused by the breach. The Court
explained that the section merely
"dispenses with proof of 'actual loss or damage'; it does not justify
the award of compensation when in consequence of the breach no
legal injury at all has resulted, because compensation for breach of
contract can be awarded to make good loss or damage which
naturally arose in the usual course of things, or which the parties
knew when they made the contract, to be likely to result from the
breach.”
21. In State of Rajasthan v. Ferro Concrete Construction Private
Limited (2009) 12 SCC 1 the Court observed in para 55 as under: 
“While the quantum of evidence required to accept a
claim, may be a matter within the exclusive jurisdiction
of the arbitrator to decide, if there was no evidence at
all and if the arbitrator makes an award of the amount
claimed in the claim statement, merely on the basis of
the claim statement without anything more, it has to be
held that the award on that account would be invalid.
Suffice it to say that the entire award under this head is
wholly illegal and beyond the jurisdiction of the
arbitrator, and wholly unsustainable.”
22. In Shah Jagshi Jethabhai v. J.N. Construction 2012 (3) Bom CR
546, it was observed that in case of a contract containing an LD
clause, evidence of actual loss/damage is necessary and the burden to
prove the same lies on the claimant. It was held:
“The quantum of damages cannot be awarded only on the basis of
presumption and assumption and/or expectations. The doctrine of
mitigation of loss, burden of proof, onus of proof and shift of
burden, just cannot be overlooked by the Arbitrator while awarding
the damages.”
23. For the aforementioned reasons, the Court is unable to sustain the
impugned Award of the Arbitrator as it has proceeded merely on
surmises and conjectures in awarding BHSB's claim for overheads
and loss of profits without there being any evidence whatsoever
produced to even prima facie show that it had suffered overhead
charges and incurred losses. This is not a case of inadequacy of
evidence but there being no evidence whatsoever to justify the
impugned Award. In such circumstances, merely applying formulae
to the total cost of the project to calculate the compensation was
impermissible in law. The award of the amount under Claim No. 7 is
therefore set aside. Consequently, the question of awarding any
interest on the said amount also does not arise.  
24. For the aforementioned reasons, OMP No. 249/2013 is allowed
with costs of Rs.10,000 which will be paid by the contractor NHAI
within four weeks. OMP No. 274/2013 is dismissed.
 S. MURALIDHAR, J.
MARCH 25, 2015

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