Loss of Profit Claims: Supreme Court clarifies evidence requirements in Unibros vs. All India Radio (2023)

LEGAL ISSUE: What constitutes sufficient evidence for a claim of loss of profit due to delays in contract execution?

CASE TYPE: Arbitration Law

Case Name: M/s Unibros vs. All India Radio

[Judgment Date]: 19th October 2023

Date of the Judgment: 19th October 2023

Citation: 2023 INSC 931

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can a contractor claim loss of profit simply because a project was delayed? The Supreme Court of India recently addressed this question in a case between M/s Unibros and All India Radio. The court clarified the kind of evidence needed to prove such a claim, emphasizing that a mere delay isn’t enough. This judgment is crucial for understanding how loss of profit claims are evaluated in arbitration cases in India.

Case Background

M/s Unibros (the appellant) was awarded a contract by All India Radio (the respondent) to construct the Delhi Doordarshan Bhawan, Phase-II. The project was scheduled to begin on April 12, 1990, and finish on April 11, 1991. However, the project faced a delay of approximately 42.5 months and was finally completed on October 30, 1994. This delay led to disputes between the parties, which were then referred to an arbitrator.

Timeline

Course of Proceedings

Initially, the arbitrator issued an award on February 11, 1999, which included a sum of Rs. 1,44,83,830 for loss of profit to the appellant. All India Radio challenged this award in the High Court, which partially set aside the award on May 20, 2002, and sent it back to the arbitrator for reconsideration. The arbitrator then issued a second award on July 15, 2002, upholding the original award for loss of profit. This second award was also challenged by All India Radio, and the High Court set it aside on February 25, 2010. The Division Bench of the High Court upheld this decision on December 9, 2019. M/s Unibros then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around Section 73 of the Indian Contract Act, 1872, which deals with compensation for loss or damage caused by a breach of contract. The Supreme Court also considered Section 34 of the Arbitration and Conciliation Act, 1996, which outlines the grounds for setting aside an arbitral award.

Section 73 of the Indian Contract Act, 1872 states:

“When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”

Section 34 of the Arbitration and Conciliation Act, 1996, allows a court to set aside an arbitral award if it conflicts with the public policy of India.

Arguments

Appellant’s Arguments (M/s Unibros):

• The arbitrator’s decision was based on a careful review of the evidence, and the High Court should not have interfered without proof of perversity.
• The High Court cannot act as an appellate court and re-evaluate evidence.
• The 1996 Act does not allow for modification of awards, but only setting them aside.
• A contractor is entitled to damages for loss of expected profit, and only a broad evaluation is required.
• Hudson’s formula is a legally accepted method for calculating loss of profit, and it relies on contract terms, not actual expenses.

Respondent’s Arguments (All India Radio):

• Hudson’s formula cannot be applied without the contractor providing evidence of actual loss.
• The contractor must prove they could have realistically earned the claimed profit elsewhere.
• There should be no change in the market conditions.
• The arbitrator inconsistently rejected other claims due to lack of evidence, but still awarded loss of profit.
• The mechanical application of Hudson’s formula would unjustly burden the exchequer.

Innovativeness of the argument: The respondent’s argument that the mechanical application of Hudson’s formula would burden the exchequer was an innovative argument.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issue:

1. Whether the arbitral award for loss of profit was justified in the absence of sufficient evidence, and whether it conflicted with the public policy of India.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

✓ Associated Builders vs. Delhi Development Authority [(2015) 3 SCC 49]*: The court referred to this case to emphasize that the High Court cannot act as a first appellate court and interfere with arbitral awards in the absence of perversity, but the court also said that the High Court was correct in interfering with the arbitral award as it was in conflict with public policy.

✓ Bharat Cooking Coal Limited vs. L.K. Ahuja [(2004) 5 SCC 109]*: The court reaffirmed the principle that a claim for loss of profit must be supported by adequate evidence.

✓ The Project Director, NHAI vs. M. Hakeem and Another [(2021) 9 SCC 1]*: The court relied on this case to support the contention that the 1996 Act does not grant the court the power to modify awards under Section 34.

✓ M/s AT Brij Paul Singh & Ors. vs. State of Gujarat [(1984) 4 SCC 59]*: The court acknowledged that a contractor is entitled to damages for loss of expected profit but clarified that this must be proved by evidence.

✓ McDermott International Inc. vs. Burn Standard Co. Ltd. and Ors [(2006) 11 SCC 181]*: The court acknowledged that Hudson’s formula was legally accepted but also clarified that it cannot be applied without evidence of actual loss.

✓ ONGC Ltd. vs. Saw Pipes Ltd [(2003) 5 SCC 705]*: The court referred to this case to explain the concept of “public policy of India” and that an award in violation of statutory provisions cannot be in public interest.

✓ Section 73, Indian Contract Act, 1872*: The court referred to this section to explain the legal framework for compensation for loss or damage caused by breach of contract.

✓ Section 34, Arbitration and Conciliation Act, 1996*: The court referred to this section to explain the grounds for setting aside an arbitral award, particularly if it is in conflict with the public policy of India.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the lack of credible evidence supporting the appellant’s claim for loss of profit. The court emphasized that while Hudson’s formula is acceptable, it cannot be applied without the contractor demonstrating actual loss of opportunity. The court also highlighted the arbitrator’s disregard for the High Court’s previous order to reconsider the award based on evidence. The court was also concerned that the arbitrator had rejected other claims due to lack of evidence, but still awarded loss of profit, which showed an inconsistency in the approach. The Court was also concerned that the arbitrator had ignored the judicial decision of the High Court.

The court’s reasoning was heavily influenced by the factual aspects of the case, particularly the lack of evidence presented by the appellant to support the claim for loss of profit. The legal aspects, such as the interpretation of Section 34 of the Arbitration and Conciliation Act, 1996, and the concept of “public policy of India” were also considered, but the factual deficiency was the primary reason for the court’s decision.

The court considered alternative interpretations of the evidence and the law but rejected them due to the lack of credible evidence to support the claim for loss of profit. The court also rejected the argument that Hudson’s formula could be applied without proof of actual loss. The court concluded that the arbitral award was patently illegal and in conflict with the public policy of India.

The Supreme Court held that the arbitral award was not justified and was in conflict with the public policy of India. The court emphasized that a claim for loss of profit must be supported by credible evidence, and the mere fact of delay is not sufficient. The court also held that the arbitrator had ignored the High Court’s previous order and had relied on the same factors as the first award.

The court provided the following reasons for its decision:

• The arbitrator ignored the High Court’s direction to reconsider the award.
• The arbitrator relied on the same factors as the first award.
• The arbitrator did not consider the evidence on record.
• The appellant did not provide credible evidence to support the claim for loss of profit.
• The arbitral award was patently illegal and in conflict with the public policy of India.

The court quoted the following from the judgment:

“…the phrase ‘public policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest.”

“It is not unusual for the contractors to claim loss of profit arising out of diminution in turnover on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilised the same for some other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profits could not have been granted.”

“Hudson’s formula, while attained acceptability and is well understood in trade, does not, however, apply in a vacuum. Hudson’s formula, as well as other methods used to calculate claims for loss of off-site overheads and profit, do not directly measure the contractor’s exact costs. Instead, they provide an estimate of the losses the contractor may have suffered.”

There was no minority opinion in this case, and the judgment was delivered by a bench of two judges.

The Supreme Court’s decision reinforces the principle that claims for loss of profit must be supported by credible evidence and that the mere fact of delay is not sufficient. The court also emphasized that arbitrators must adhere to judicial decisions and cannot ignore directions from superior courts.

The decision has implications for future cases involving claims for loss of profit in contract disputes. It clarifies that the application of Hudson’s formula must be accompanied by evidence of actual loss and that arbitrators cannot rely on assumptions or inferences without supporting evidence.

The court did not introduce any new doctrines or legal principles but rather clarified the existing principles related to loss of profit claims and the application of Hudson’s formula. The court emphasized the need for credible evidence and adherence to judicial decisions.

Key Takeaways

• A claim for loss of profit due to contract delays must be supported by credible evidence.
• The mere fact of delay is not sufficient to claim loss of profit.
• Hudson’s formula is acceptable but cannot be applied without evidence of actual loss.
• Arbitrators must adhere to judicial decisions and cannot ignore directions from superior courts.
• Contractors must demonstrate that they had viable opportunities to earn profits elsewhere, which they missed due to the delay.

This judgment will likely lead to more rigorous scrutiny of loss of profit claims in arbitration cases, requiring contractors to provide detailed evidence to support their claims.

Directions

The Supreme Court did not provide any specific directions in this case, except to dismiss the appeal. The cost awarded by the Single Judge was made easy.

Development of Law

The ratio decidendi of this case is that a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts must be supported by credible evidence. The court clarified that the mere fact of delay is not sufficient to claim loss of profit, and the application of Hudson’s formula must be accompanied by evidence of actual loss. This judgment reinforces the existing legal principles and clarifies the evidentiary requirements for such claims. There is no change in the previous position of law, but the court has clarified the evidentiary requirements.

Conclusion

In the case of M/s Unibros vs. All India Radio, the Supreme Court dismissed the appeal, holding that the arbitral award for loss of profit was not justified due to the lack of credible evidence. The court emphasized that a claim for loss of profit must be supported by substantial proof, and the mere fact of delay is not enough. This judgment reinforces the importance of evidence in arbitration cases and clarifies the application of Hudson’s formula.