DELHI HIGH COURT HOLDS THAT COMPENSATION CAN NOT BE PROVIDED TO A PARTY IF IT FAILS TO PROVE REASONABLE LOSS OF PROFIT.

A single Judge Bench of Delhi High Court comprising of Justice Anup Jairam Bhambhani passed a judgement dated 22.05.2024 in M/s Divyam Real Estate Pvt. Ltd. v. M2K Entertainment Pvt Ltd. O.M.P. (COMM) 162/2020 wherein the Hon’ble High Court of Delhi set aside an Arbitral Award on the ground that if there is no surety of incurring loss/profits, a party cannot be provided compensation for ‘reasonable loss of profit’.

Facts

The present Petition was filed under Section 34 of the Arbitration and Conciliation Act 1996 (Application for setting aside arbitral awards) against the Award dated 07.03.2012 passed by Ld. Sole Arbitrator wherein the dispute arose between the Petitioner and the Respondent when the Petitioner breached the terms of a contract. The Parties had entered into a Memorandum of Understanding (MoU) to construct a Mall in the name and style of ‘R-3 Mall’ in Ahmedabad, Gujarat which was to be constructed by the Petitioner and the Respondent agreed to start a multiplex in that Mall.

However, the Respondent alleged that the Petitioner had committed breach of terms of the MoU by entering into a contract with a third-party on 09.03.2006, thereby terminating the Respondent’s Contract. The Respondent claimed that the termination was invalid and illegal, which compelled them to file a claim in arbitration.

On hearing both the parties, the Arbitrator directed the Petitioner to pay a sum of Rs. 24,54,458/- along-with interest at the rate of 12% per annum. The total sum was divided into two parts, first the sum of Rs. 4,54,458/- for expenses incurred by Respondent in advertisement and exhibition charges. Secondly, the sum of Rs.20,00,000/- towards ‘loss of profit’ suffered by the Respondent.

The Petitioner challenged the Award by filing objections against the Award dated 07.03.2012. The Petitioner relied on the judgement of National Highways Authority of India vs. IJM-Gayatri Joint Venture (2020) SCC OnLine Del 2498,  which stated that “…..to submit that a Co-ordinate Bench of this court has opined that a party claiming loss of profit must first prove the existing opportunity and then it’s attempt to seize that opportunity and finally, that by not availing the said opportunity, it has incurred a loss.”

On the other hand, the Respondent’s argued that the amount of loss incurred by them was based on market calculations and evaluations and thus was appropriate and there were sufficient evidences in front of the Ld. Arbitrator to reach to such conclusion of awarding Rs. 24,54,458.33/- to the Respondent.

Issues

Whether the Arbitrator awarded the compensation to the Respondent without any evidence of loss?

Decision by High Court

The Hon’ble High Court took consideration of all facts and contentions made by both the parties. By relying on the Hon’ble Supreme Court judgement, I-Pay Clearing Services (P) Ltd. v. ICICI Bank Ltd (2022) 3 SCC 121 wherein the Supreme Court held that-

“41. Under the guise of additional reasons and filling up the gaps in the reasoning, no award can be remitted to the arbitrator, where there are no findings on the contentious issues in the award. If there are no findings on the contentious issues in the award or if any findings are recorded ignoring the material evidence on record, the same are acceptable grounds for setting aside the award itself. Under the guise of either additional reasons or filling up the gaps in the reasoning, the power conferred on the Court cannot be relegated to the arbitrator. In absence of any finding on contentious issue, no amount of reasons can cure the defect in the award.”  

The Hon’ble High Court took consideration of the fact that the Arbitrator in his award observed that there is always a speculation that whether the Claimant/Respondent would have made profit at all or not. Thus clearly, the learned Arbitrator was of the view that even the foundational fact as to whether the Respondent would have made a profit at all was in doubt.

The Arbitrator also observed that the Petitioner had committed a breach of contract and therefore, the Respondent was liable to be compensated but on the other hand while passing the Award, the Ld. Arbitrator didn’t mention about compensation of damages for breach of contract but instead, provided reasonable loss of profit of Rs. 20 lakhs.

Thus, it was clear for the Hon’ble High Court to conclude that the Ld. Arbitrator erred in passing an Award and directing the Petitioners to pay compensation for ‘reasonable loss of profit’ to the Respondent even when the Arbitrator was not sure that whether the Respondent would have earned profits out of the said Contract.

Conclusion

The High Court of Delhi allowed the Petition and set aside the Award dated   07.03.2012 passed by the Ld. Arbitrator on the grounds that the Arbitrator erred in calculating the amount for reasonable loss of profit of the Respondent meanwhile the Arbitrator failed to even decide whether the Respondent had incurred, or would have incurred, any loss of profit at all.

ARJAV JAIN

ASSOCIATE

THE INDIAN LAWYER & ALLIED SERVICES

 

Editor’s Comments

In any suit or claim filed for loss of profit the plaintiff/claimant must always be in a position to show how the loss has occurred. Mere averments without any evidence to show the loss that has taken place cannot be accepted by the Court/Arbitrator while deciding the case. Loss or damages must always be proved before the claim can succeed.  All litigants are therefore advised not to rush to Court with huge and false claims if it cannot be substantiated by the evidence that they are producing. While damages can also be claimed for remote damages but loss must always be claimed on the basis of facts and documents that establish the loss.

 

Edited by-

SUSHILA RAM VARMA

ADVOCATE AND Chief Consultant

THE INDIAN LAWYER & ALLIED SERVICES