Contractor Claiming Loss Of Profits Due To Delayed Execution Must Prove That Other Works Were Lost Due To Delay : Supreme Court

The Supreme Court Bench comprising Justice Sanjiv Khanna and Justice M.M. Sundresh, has held that in arbitral proceedings where the execution of a contract is delayed and the Contractor claims loss arising from depletion of income, then the Contractor must prove that there was alternative work available for him/her by placing on record invitation to tender, which were rejected by the Contractor due to incapacity to undertake other work. The drop in turnover also must be proved through books of accounts.

The judgment authored by Justice Khanna stated :

“Ordinarily, when the completion of a contract is delayed and the contractor claims that s/he has suffered a loss arising from depletion of her/his income from the job and hence turnover of her/his business, and also for the overheads in the form of workforce expenses which could have been deployed in other contracts, the claims to bear any persuasion before the arbitrator or a court of law, the builder/contractor has to prove that there was other work available that he would have secured if not for the delay, by producing invitations to tender which was declined due to insufficient capacity to undertake other work. The same may also be proven from the books of accounts to demonstrate a drop in turnover and establish that this result is from the particular delay rather than from extraneous causes.

If loss of turnover resulting from delay is not established, it is merely a delay in receipt of money, and as such, the builder/ contractor is only entitled to interest on the capital employed and not the profit, which should be paid.”

BACKGROUND FACTS

Hindustan Petroleum Corporation Limited (HPCL) and Batliboi Environmental Engineers Limited (“Appellant/BEEL”) entered into a contract for engineering work in Sewage Water Reclamation Plant. The execution of Contract was delayed by HPCL. BEEL abandoned the work after doing 80% of the work for which it received a payment of Rs. 4.14 Crores and the balance was Rs.1.14 Crores.

When the dispute between the Parties was referred to arbitration, the Arbitral Tribunal awarded Rs. 1.57 Crores to BEEL towards loss of overheads and loss of profits/profitability, in a contract of Rs. 5.74 Crores.

The Award was set aside by the Division Bench of High Court under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). BEEL filed an appeal before Supreme Court against the High Court’s decision.

SUPREME COURT VERDICT

The Court examined the quantum of damages under each head awarded to the Claimant by the Arbitrator and the reasoning thereof.

It was observed that in scenarios where the breach by the employer is not fundamental and does not entitle the builder/contractor to cease the work, or, being fundamental, is not treated as repudiation by the builder/contractor, then the measure of compensation or damages would be loss of profit arising from reduced profitability or added expense of the work carried out.

The Court further observed:

“In a given case, where there is a fundamental breach by the employer, albeit, the builder/contractor does not immediately elect to treat the contract as repudiated, he may still be entitled to raise a claim for loss of profit on the uncompleted work. Offsite expenses or overheads are all administrative or executive costs incidental to the management supervision or capital outlay as distinguished from operating charges. These charges cannot be fairly charged to one stream of work or job, and rather be distributed as they relate to the general business or the work of the contractor/builder being undertaken or to be undertaken, as the overheads are relatable to the builder/contractor’s business in entirety.”

Also, in cases where the execution of a contract is delayed and the Contractor claims loss arising from depletion of income, the Contractor must show that there was another work available for him/her. Tender invitations should be produced by the Contractor which it alleges to have declined due to insufficient capacity to undertake other work. The loss must also be proved by showing drop in turnover in books of accounts.

The Court noted that the Arbitral Tribunal had accepted that applicability of principle of mitigation but had observed that the only way BEEL could have abased the loss, was to work on Sundays or holidays. It was held that such reasoning is again ex facie fallacious and wrong. “The principle of mitigation with regard to overhead expenses does not mandate working on Sundays or holidays.”

The Court expressed displeasure over the ‘abnormally inflated’ compensation/damages awarded by Arbitral Tribunal, wherein none of the principles of computing compensation or damages have been applied. The Court held the Award to be highly disproportionate and exorbitant.

The High Court’s decision of setting aside the Award has been upheld by the Court, while observing that the Award is patently illegal as the conclusions and calculation of amounts awarded are not reasoned.

Appeal has been dismissed.

Also from the judgment - Supreme Court Explains Scope Of Judicial Interference In Arbitral Awards

Case Title: Batliboi Environmental Engineers Limited V Hindustan Petroleum Corporation Limited And Another

Citation: 2023 LiveLaw (SC) 817

Click Here To Read/Download Judgment