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M/s. KHEC Technologies (India) Pvt. Ltd., Chennai v/s Corporation of Chennai

    O.P. No. 1041 of 2017

    Decided On, 08 September 2022

    At, High Court of Judicature at Madras

    By, THE HONOURABLE MR. JUSTICE SENTHILKUMAR RAMAMOORTHY

    For the Petitioner: M/s. B. Sudarshan, Advocate. For the Respondent: G.T. Subramanian, SC (Corpn.).



Judgment Text

(Prayer: Original Petition filed under Section 34 of Arbitration and Conciliation Act, 1996, pleased to set aside the award in so far as Claim Nos.11, 14 and 17 and direct the respondent to pay Rs.8,27,278/- towards the said claims with interest at 18% from 04.11.2015 till date of realization.)

1.The dispute relates to and arises out of a contract awarded by the respondent to the petitioner for the construction of a dispensary. The contract was required to be executed in ten months and the contract price was Rs.52,53,399.55/-. The execution of work was delayed on account of multiple reasons, including re-location of the site. Eventually, after issuing a show cause notice, the respondent terminated the contract by communication dated 24.05.2011, which was received by the petitioner on 31.05.2011. In these circumstances, the petitioner raised a dispute and, upon constitution of an arbitral tribunal, submitted a claim statement in which about 26 claims were made. Out of the 26 claims, about 14 claims were allowed in part by the arbitral award dated 25.02.2017 (the Award). The petitioner has challenged the Award only in respect of three disallowed claims. Out of the three disallowed claims, one claim, namely, the claim pertaining to refund of security deposit was settled while this petition was pending adjudication. As a result, this petition survives only in respect of two claims, namely, the claims for escalation and loss of profit.

2. Learned counsel for the petitioner challenged the Award in relation to the escalation claim on the ground that the contract does not contain a clause prohibiting the grant of escalation and, therefore, the refusal of the arbitral tribunal to grant escalation calls for interference. After referring to the petitioner's pleadings in relation to escalation, whereby the basis of claim was communicated, he pointed out that the only response of the respondent to such claim was that the contract does not contain a clause for escalation. He contended that the ten month contract could not be executed as per schedule on account of various reasons attributable to the respondent, and turned to the findings of the arbitral tribunal with regard to attribution of responsibility for delay. With specific reference to paragraphs 4.15, 4.20 and 4.26 of the Award, learned counsel pointed out that the arbitral tribunal concluded that the delay was not attributable to the claimant, and that, therefore, the respondent had no right to terminate the contract on the ground of delay by the claimant. After recording such findings, learned counsel submitted that the conclusions at paragraphs 15.3 to 15.5 of the Award are patently illegal. By drawing reference to the judgment of the Hon'ble Supreme Court in P.M.Paul v. Union of India (P.M.Paul), AIR 1989 SC 1034, learned counsel submitted that escalation is the natural consequence of passage of time and that an escalation claim may be awarded unless prohibited by the relevant contract. By relying on the judgment in K.N.Sathyapalan v. State of Kerala (Sathyapalan), (2007) 13 SCC 43, he submitted that escalation should have been awarded once the arbitral tribunal concluded that the respondent was responsible for delay. In the context of the findings on delay and termination, learned counsel contended that the findings of the arbitral tribunal on escalation warrant interference in as much as such findings are directly contrary to the law laid down in P.M.Paul and Sathyapalan.

3. Learned counsel dealt with the loss of profit claim next. By referring to the pleadings in relation thereto, he submitted that loss of profit was claimed at 20% of the incomplete contract value. By turning to the counter statement of the respondent, he stated that the respondent did not deal with the claim for loss of profit. With reference to paragraph 18.4 of the Award, learned counsel submitted that the conclusion arrived at by the arbitral tribunal is not a plausible conclusion in as much as the tribunal based its decision entirely on the rejection of the escalation claim. By referring to paragraph 13.1 of the Award, learned counsel submitted that, while dealing with claims 1-9, the arbitral tribunal took into account the trade practice of loading approximately 5-10% of the tendered amount as the cost of miscellaneous heads of expenditure. By contrast, he submitted that the arbitral tribunal disregarded trade practice in relation to the loss of profit claim. In order to substantiate this claim, learned counsel relied upon the judgment of the Supreme Court in Dwaraka Das v.State of Madhya Pradesh and another(Dwaraka Das), 1999(1) RAJ 466 (SC), particularly paragraph 9 thereof, wherein the Supreme Court took into account earlier decisions such as A.T.Brij Pal Singh and others v. State of Gujarat (Brij Pal Singh)(1984)4 Supreme Court Cases 59 and Mohd. Salamatullah v. Government of Andhra Pradesh, AIR 1977 SC 1481, before concluding that the grant of 10% of the contract price by the trial court in that case did not warrant interference. Similarly, in this case, learned counsel contended that the arbitral tribunal should have awarded a reasonable percentage of the contract price as loss of profit. He concluded his submissions by stating that the rejection of the loss of profit claim merely on the ground that the contract does not contain an escalation clause is patently illegal.

4. Learned counsel for the respondent made submissions to the contrary. The first submission was that a large member of claims were allowed by the arbitral tribunal and, upon being allowed, the amounts awarded by the arbitral tribunal were paid to the petitioner. Even with regard to the three disallowed claims, learned counsel submitted that the amount claimed as refund of security deposit was paid by the respondent while this petition was pending adjudication. As regards the two rejected claims, which form the subject matter of this petition, learned counsel submitted that the petitioner did not place any evidence before the arbitral tribunal in support of these claims. Consequently, he submitted that the arbitral tribunal was fully justified in rejecting the said claims and that the decision of the arbitral tribunal does not warrant interference under Section 34 of the Arbitration Act. Learned counsel further submitted that the respondent is the Corporation of Chennai and that the contract related to the construction of a dispensary for the public. In contracts of this nature, he submitted that the grant of escalation or loss of profit would cause loss not only to the corporation but also to the general public. For all these reasons, he submitted that this petition should be rejected.

5. A petition to set aside an arbitral award should be tested on the grounds contained in Section 34 of the Arbitration Act, as interpreted by courts of law. On the merits of the dispute, interference is permissible either on the ground of public policy or patent illegality. If the award is in disregard of substantive law or the terms of the contract, it may be concluded that it is patently illegal. With regard to appreciation of evidence by the arbitral tribunal, the scope of interference is limited to cases where the award is perverse because it is based on no evidence, completely irrelevant evidence or disregards vital evidence. The challenge made by the petitioner should be considered in the legal context set out above.

6. The petitioner assailed the Award in relation to the escalation claim on the ground that the arbitral tribunal disregarded the law laid down by the Supreme Court on escalation. The contention of learned counsel for the petitioner that an escalation claim may be awarded even if the relevant contract does not contain a clause dealing with escalation is in line with the ratio laid down by the Supreme Court in P.M.Paul and liable to be accepted. The settled legal position, in this regard, is that the arbitral tribunal is a creature of contract; consequently, a claim for escalation should be rejected if prohibited under the relevant contract as held in cases such as Continental Construction Co. v. State of Madhya Pradesh, (1988) 3 SCC 82 and New India Civil Erectors (P) Ltd. v. ONGC, (1997) 11 SCC 75. On the other hand, as held in P.M.Paul, a claim for escalation may be granted if the relevant contract does not deal with or prohibit escalation. While Sathyapalan, at first blush, appears to depart from the said position, the conclusion therein also turned on the factual finding that the prohibition against escalation was contained in a supplementary agreement which was signed by the contractor under protest. In any case, the admitted position in this case is that the relevant contract does not deal with or prohibit escalation; so, the claim for escalation merited consideration subject to proof.

7. After recording that the relevant contract does not contain a clause for the grant of escalation, the arbitral tribunal proceeded to record findings with regard to the evidence adduced by the petitioner in relation to escalation. Paragraph 15.4 of the Award is relevant in this regard, and reads as under:

"15.4. The claimants did not specifically plead that this was a claim under Section 73 of the Contract Act. Even for claiming damages under Section 73, proof needs to be produced as to the extent of damages. Apart from giving a statement (page 124 of Vol.IX) showing the escalation in cost of "current price" over "BOQ price", no vouchers or cash bills or bank statements were produced to show that those materials were indeed purchased at the prices shown in the statement. Therefore for want of documentary proof, I am unable to entertain this claim under Section 73 of the Contract Act also."

8. As is evident from the above paragraph, the arbitral tribunal noted that the petitioner / claimant merely submitted a statement showing the escalation in current price over the bill of quantities (BoQ) price, but did not place on record the relevant vouchers or cash bills or bank statements to show that materials were indeed purchased at the prices shown in the statement. On such basis, the arbitral tribunal rejected the claim for want of documentary proof. An escalation claim should be made on the basis of the formula, if any, prescribed in the relevant contract in relation to escalation. In the absence of such formula, it is both possible and necessary for the claimant to adduce evidence of escalation by producing invoices evidencing the purchase of materials and proof of payment towards labour at the escalated price. In the absence of proof, the arbitral tribunal was fully justified in rejecting the claim. Since such conclusion is drawn on the basis of a reasonable appraisal of the evidence on record, it does not call for interference.

9. This leads to the claim for loss of profit. A loss of profit claim is different from most other claims arising out of a construction contract because the claim relates to profits that the contractor concerned could have earned but for the termination of the contract prior to the expiry of the term thereof. By its very nature, it is not possible for the contractor to provide proof of the actual loss incurred by the contractor. Nonetheless, it is possible for the contractor to provide evidence relating to the profit margin reckoned by the contractor at the time of bid submission or provide evidence of actual profits earned by said contractor by executing similar projects or evidence of the typical profit margin in such construction contracts (trade practice). In this case, the admitted position is that such evidence was not adduced by the contractor.

10. While considering this claim, the arbitral tribunal concluded as follows in paragraph 18.4 of the Award:

"18.4. The claimants themselves have indicated that due to escalation in prices an extra expenditure of Rs.3,68,215/- had been actually incurred by them. If the contract had been completed by the claimants on time, even then, due to the intervening monsoon they would have had to incur this extra expenditure; and this extra expenditure would not have been reimbursed to the claimants because the contract itself does not contain any escalation clause. Therefore it is clear, that even if the contract had not been terminated they would have made no profit at all because it would have been off-set by escalation in prices. Therefore, I do not find any merit in this claim of loss of profit and is rejected."

11. The conclusion of the arbitral tribunal that the contractor would not have made profits because of the admitted escalation is not entirely convincing. Learned counsel for the petitioner ha

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d relied on the judgment in Dwaraka Das to contend that the trade practice is to award a loss of profit claim at about 10-15% of the value of incomplete work. In Dwaraka Das, the Supreme Court noticed the earlier judgment in Brij Pal Singh and relied thereon. In Brij Pal Singh, the Supreme Court concluded that 15% of the value of the balance work is not an unreasonable measure of loss of profit after taking note of the grant of 15% for similar work in the same locality. Therefore, Brij Pal Singh is not an authority for the proposition that a loss of profit claim requires no evidence. As stated earlier, the petitioner could have provided evidence of the profit margin factored in the bid submitted by the petitioner or of the actual profit earned in similar projects executed by the petitioner or of trade practice. In the absence of such evidence, the arbitral tribunal, in unconvincing fashion, took into account the case of the petitioner / claimant that there was escalation to conclude that the petitioner would not have made any profit and is, therefore, not entitled to the loss of profit claim. When the loss of profit is considered in the overall facts and circumstances of this case, the rejection of the loss of profit claim does not constitute a patent illegality warranting interference by this Court. 12. For reasons set out above, O.P.No.1041 of 2017 is dismissed without any order as to costs.
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