Contractor Not Barred from Claiming Loss of Profit for Unexecuted Works: Karnataka HC [Read Judgment]

Bengaluru: The Karnataka High Court has held that a contractor claiming damages for loss of profit on unexecuted works is not barred from raising such a claim merely because the work remained unexecuted.

Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha were hearing a commercial appeal filed by M/s. N.N. Constructions under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996, impugning a judgment of the Commercial Court, Bengaluru, which had dismissed the appellant's Section 34 petition seeking to set aside an arbitral award rejecting its claims against the Railways.

The dispute traced back to an agreement dated 27th April 2017 between the appellant and respondent-Railways for widening the Fountain Circle Road Under Bridge No.867 at the Bangalore City Station Yard, for a contract value of Rs.12,77,28,104, to be completed within eight months. The work was beset by hindrances, including a BESCOM high-tension line, a BWSSB sewage line, OFC cables, and approach roads pending completion by the BBMP, resulting in the contract period being extended on four occasions, ultimately up to 31st January 2022.

After the appellant furnished a No Claim Certificate on 5th March 2021, and a revised certificate in the Railways' format on 7th April 2021, the Railways informed the appellant by letter dated 9th June 2021 that the agreement stood foreclosed by mutual discussion and that the final bill had been forwarded for payment. The appellant, by letter dated 7th July 2021, claimed it had suffered losses on account of the foreclosure and invoked arbitration, raising claims aggregating Rs.4,38,30,224 under seven heads, including a claim of Rs.1,91,59,215 towards loss of profits, computed at 15% of the contract value.

The Arbitral Tribunal dismissed the claim petition in its entirety, holding, first, that the appellant had failed to substantiate its claims with any evidence of loss, and second, that the No Claim Certificate debarred the appellant from raising claims under Clause 43(2) of the General Conditions of Contract. This finding was upheld by the Commercial Court, leading to the present appeal.

Before the High Court, counsel for the appellant contended that the No Claim Certificate had been furnished under coercion and could not preclude the appellant's claims. He focused primarily on the rejection of the loss-of-profits claim, relying on the Supreme Court's decision in M/s. AT Brij Paul Singh and others versus State of Gujarat to contend that a contractor whose contract is wrongfully terminated is entitled to loss of profits on a presumptive basis.

The Court noted that the Arbitral Tribunal had examined the communications between the parties and concluded that the delay in execution was attributable to hindrances the appellant could not overcome, that the agreement was foreclosed by mutual discussion, and that the No Claim Certificate had been voluntarily furnished. Holding that these were findings of fact based on materials on record, the Court observed that they could not be said to be perverse or unreasonable in the sense of the Wednesbury principle, and therefore could not vitiate the award on the ground of patent illegality.

The Court also examined Clause 17-A(iii) of the General Conditions of Contract, under which the appellant had sought extension, and found that it expressly provided that any extension granted on account of Railways' delay would not entitle the contractor to damages or compensation. The claim for interest on the security deposit was likewise held to be barred by Clause 16(3), which proscribes payment of interest on the Earnest Money and Security Deposit.

Turning to the loss-of-profits claim, the Court agreed that it was not based on prolongation of the contract but on the value of work left unexecuted, and held that a contractor prevented from executing works for reasons attributable to the employer is not precluded from raising a claim for loss of profits for the unexecuted works. However, the Court clarified that this did not dispense with the requirement of proving such loss, and that AT Brij Paul Singh was not authority for the proposition that no evidence is required to establish the measure of damages, since that decision had turned on the fact that a 15% measure had already been accepted by the High Court in an identical contract between the same parties.

The Court referred to the Bombay High Court's decision in Edifice Developers and Projects Engineers Limited versus Essar Projects (India) Limited, where an arbitral award granting overhead losses on the basis of Hudson's Formula, without any supporting evidence, had been set aside as manifestly erroneous, the Bombay High Court having held that no formula could substitute for actual proof of loss.

It also relied on the Delhi High Court's ruling in Nandi Infratech Pvt. Ltd. versus R.K. Bararia and others, of which Chief Justice Bakhru was a member, holding that an inclusive allowance of 15% built into rates for extra items could not, by itself, establish that the contractor would have earned 15% profit on execution of the contract, since such rate analysis bore no relation to the profit margin at which the contract as a whole had been undertaken.

Since the appellant had produced no evidence of the investment made, the resources deployed, or the profits it would otherwise have earned, the Court held that the Arbitral Tribunal was justified in rejecting the claim for loss of profits as unsubstantiated. Finding no infirmity in the Arbitral Tribunal's rejection of the appellant's claims and holding that the impugned award was not vitiated by patent illegality, the Court dismissed the appeal.

Appearances: Sri Bapat Sampath Vinayaka Rao, Advocate, appeared for the appellant; Sri Shivakumar, CGC, appeared for respondents No.1 to 3.

Case Title: M/s. N.N. Constructions versus Union of India & Ors.

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