2023 (10) TMI 951 - SC - Indian Laws

Dismissal of the appellant's claim for compensation relating to loss of profits - Setting aside of Arbitral Award to the extent it awarded loss of profit to the appellant - section 37 of the Arbitration and Conciliation Act, 1996 - High Court set aside the award - HELD THAT - It is undeniably established that the appellant's claim for loss of profit stems from the delay attributed to the respondent in completing the project. It is further evident that the loss of profit sought in the present case is primarily based on the grounds that the appellant, having been retained longer than the period stipulated in the contract and its resources being blocked for execution of the work relatable to the contract in question, it could have taken up any other work order and earned profit elsewhere. The contentions advanced on behalf of the appellant tasks us to resolve a recurring issue which, while not unprecedented, has consistently confronted the courts leading it to navigate various circumstances under which a claim for loss of profit may be allowed in cases of delay simpliciter in the execution of a contract - However, the contentions so raised, need not detain the case for too long. Quite apart from the appeal raising the question as to whether a claim on account of loss of profit is liable to succeed merely on the ground that there has been delay in the execution of the construction contract, attributable to the employer, the question that first needs to be answered on facts and in the circumstances is whether the Second Award is in conflict with the public policy of India. Having read the Second Award, there are no hesitation to hold that it fares no better than the First Award, for, it is equally in conflict with the public policy of India. We have noticed from the order dated 20th May, 2002 of the learned Single Judge that while remitting Claim No.12 for reconsideration, the Arbitrator was warned not to be influenced by the factors that weighed in his mind while making the First Award. The Arbitrator was also required to proceed only on the basis of the evidence on record. Yet, regrettably, what we find is that the Arbitrator went on to ignore the judicial decision of the High Court with impunity. In the wake of authority of judicial determination made by the Courts of law, any award of an arbitrator or a tribunal that seeks to overreach a binding judicial decision, does conflict with the fundamental public policy and cannot, therefore, sustain. The arbitral award in question is patently illegal in that it is based on no evidence and is, thus, outrightly perverse; therefore, again, it is in conflict with the public policy of India as contemplated by section 34(2)(b) of the Act - appeal dismissed.

Summary

Issues Involved:
1. Legitimacy of the arbitral award for loss of profit.
2. Application of Hudson's formula for calculating loss of profit.
3. Judicial intervention under Section 34 of the Arbitration and Conciliation Act, 1996.

Summary:

1. Legitimacy of the Arbitral Award for Loss of Profit:
The appellant, M/s Unibros, challenged the dismissal of its claim for loss of profit due to project delays caused by the respondent, All India Radio. The Arbitrator initially awarded Rs. 1,44,83,830 for loss of profit, which was set aside by the High Court due to lack of credible evidence. The High Court remitted the matter for reconsideration. The Arbitrator reiterated the award in the Second Award, which was again set aside by the High Court for similar reasons. The Supreme Court upheld the High Court's decision, emphasizing the need for credible evidence to substantiate claims for loss of profit.

2. Application of Hudson's Formula:
The Arbitrator used Hudson's formula to calculate the loss of profit, which was criticized by the High Court for lack of supporting evidence. The Supreme Court noted that while Hudson's formula is accepted in trade, it cannot be applied in a vacuum without credible evidence. The appellant failed to provide evidence such as potential projects, financial statements, or other relevant documents to prove the loss of profit.

3. Judicial Intervention under Section 34:
The Supreme Court reiterated that judicial intervention under Section 34 of the Arbitration and Conciliation Act, 1996, is limited and should not act as an appellate or revisional court. However, the intervention is justified when the award is in conflict with the public policy of India, which includes compliance with fundamental legal principles and the need for credible evidence. The Supreme Court found the Second Award to be patently illegal and perverse due to lack of evidence, thus conflicting with the public policy of India.

Conclusion:
The Supreme Court dismissed the appeal, affirming the High Court's decision to set aside the arbitral award for loss of profit due to lack of credible evidence. The court emphasized the necessity of substantiating claims with concrete evidence and upheld the limited scope of judicial intervention under Section 34. The cost awarded by the learned Single Judge was made easy.