Loss Of Goodwill Is Difficult To Prove, Cannot Be Proved With Mathematical Precision: Delhi High Court

The bench of Justices Vibhu Bakhru and Justice Amit Mahajan upheld an arbitral award wherein the arbitrator allowed a party to retain certain amount as penalty, being the genuine pre-estimate of the loss of goodwill without any proof of quantum of actual loss suffered by it.

Facts

In 1997, the appellants (Metal Engineering and Forging Company - MEFC) and the respondent (Central Warehousing Corporation - CWC) entered into an agreement. The agreement, initially ad hoc and extended monthly, eventually became a two-year contract awarded on 17.12.1997 for handling and transporting containers. The contract included penalties for delays beyond seven days, imposed by CWC.

Disputes arose, leading MEFC to seek Ministry intervention in April 1998 regarding deductions by CWC. Despite MEFC's attempts to resolve issues, a Committee was formed by CWC in November 1998 to review penalties. It recommended refund of Rs. 22 lakhs to MEFC. However, the Board of CWC did not make a decision based on the Committee's recommendations.

MEFC invoked arbitration, claiming ₹49,89,124 and more, including a refund of security amounts. The respondent, CWC, countered, asserting its right to penalties and additional claims. MEFC raised several arguments, including that penalties were imposed without notice, were not mandatory, and CWC hadn't suffered any loss.

First Arbitral Award (03.02.2003):

The arbitrator partly allowed the claim of the appellant for the refund of withheld amount to the sum of Rs. 22 lakhs as recommended by Committee. It recorded that CWC did not lead any evidence to prove actual loss suffered by it due to the delay in the delivery, however, it observed that it was entitled to the remaining sum as it was genuine pre-estimate of the loss as provided under Clause 3 of the agreement.

MEFC challenged the award in court (OMP No.191/2003), specifically regarding the refund issue. In 2014, the court set aside the award, stating the Tribunal had relied too much on equity and hadn't required proof of damage.

Second Round of Arbitration:

In the fresh arbitration, MEFC argued for the refund of ₹49,89,124 on the grounds of no show cause notice, lack of evidence of penalty imposition by the Regional Manager, and CWC not suffering any loss. The arbitral tribunal held that MEFC was entitled to a refund of Rs. 22 lakhs as recommended by the committed, however, it also held that CWC was justified in withholding the remaining amount as it was a genuine pre-estimate of the loss of goodwill it suffered due to the delay in the delivery. It held that since the penalty was imposed due to the loss of goodwill, CWC was not required to prove actual loss as it is difficult to prove actual in such cases.

Aggrieved thereby, the appellant challenged the award under Section 34 of the A&C Act, however, the same was rejected leading to the filing of appeal under Section 37 of the Act.

Grounds of Appeal

The appellant challenged the impugned order and the arbitral award on the following grounds:

• That the arbitrator erred in allowing CWC to retain the remaining amount without any proof of actual loss.
• That merely because a sum is provided in the agreement as a penalty for breach of the agreement, the same cannot be paid without any proof of loss occurred to the aggrieved party.

Analysis by the Court

The Court observed that in terms of Clause 3 of the agreement, CWC CWC was entitled to levy a penalty at ₹2,000/- per Twenty Equivalent Units (TEU) and recover ground rent. The Court acknowledged delays in goods delivery, partly attributable to MEFC.

The Court referred to Section 74 of the Indian Contract Act, 1872, citing legal precedents. It clarified that if a compensation named in the contract for breach is a genuine pre-estimate of loss known to the parties, proof of actual loss isn't required. The Court then considered the impugned award's validity in light of these principles, focusing on whether CWC needed to prove actual loss for the penalty.

The Court found that CWC claimed loss of goodwill, which is challenging to prove precisely. Despite the difficulty, CWC was obligated to establish it had suffered a loss, and the Arbitral Tribunal, after evaluating evidence, concluded that CWC indeed suffered a loss of goodwill due to MEFC's breach. The Court determined that this conclusion was not patently illegal and warranted no interference.

Accordingly, the Court dismissed the appeal.

Case Title: Metal Engineering and Forging Company v. Central Warehousing Corporation

Citation: 2023 LiveLaw (Del) 1167

Date: 22.11.2023

Counsel for the Appellant: Mr. Anurabh Chowdhary, Sr. Adv. with Mr. Abhishek Roy, Adv

Counsel for the Respondents: Mr. Prabhas Bajaj & Mr. Priyanshu Tyagi, Advs.

Click Here To Read/Download The Order