MANU/DE/1882/2002

Equivalent Citation: 2003(1)ARBLR270(Delhi), 101(2002)DLT401, 2003(66)DRJ132

IN THE HIGH COURT OF DELHI

FAO(OS) 487/2001
Decided On: 22.11.2002
Appellants: Delhi Development Authority
Vs.
Respondent: Polo Singh & Co.
Hon'ble Judges/Coram:
Devinder Gupta, A.C.J. and B.N. Chaturvedi, J.
Counsels:
For Appellant/Petitioner/plaintiff: K.K. Bhuchar, Adv
For Respondents/Defendant: Rajesh Lakhanpal, Adv.
Case Note:
Arbitration Act, 1940 - Sections 14, 17, 19, 30 & 33--Objection to award--
Construction contract--Failure to commence work--Compensation for loss of
profit with interest being made rule of the court--Objection--Finding that
rescission of contract by contractee illegal not appealed against becoming
final--No misconduct or commission of error of law on the face of the award
by arbitrator alleged--Award of damages for loss of profit with interest @10%
rightly made rule of the court--Objection unsustainable--Contract Act, 1872,
Sections 73 & 74.
Held:
While allowing claim No. 1 and disallowing counter-claims of appellant on three counts,
the arbitrator returned his finding holding the rescission of the contract as illegal and
bad in law. Except on claim No.5, the award dated 26.12.1992 was made rule of the
court. The decision of the Single Judge on the aforesaid aspect was not appealed
against by the appellant. As a result, the finding of the arbitrator that the rescission of
contract by the appellant was legally unsustainable becomes final and the same is no
longer open to challenge while seeking to assail the validity of the award dated
4.3.1998 on claim No. 5. No infirmity is, thus, noticeable in the finding of the Single
Judge holding the finding adjudging the rescission of the contract by the appellant
illegal as attaining finality.
There is no allegation of arbitrator misconducting himself or the proceedings. Also there
is no challenge to the award in question on the ground that the arbitrator has
committed any error of law apparent on the face of the award. In the given situation, it
is not open to re-evaluate the material placed before the arbitrator which constitute the
basis of his finding leading to award under claim No.5.
The arbitrator awarded damages to the claimant to to compensate it on account of loss
of profit. He arrived at this figure by calculating the same @ 10% of the contract value.
This was a fair and reasonable basis to work out the amount of loss of profit. It is
relevant to take into account if the respondent would have actually been able to earn

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profit to the said extent had the contract not been rescinded and the respondent-
claimant would have been allowed to complete the awarded work. The Single Judge
rightly dismissed the appellant's objections and made the award rule of the court.
JUDGMENT
B.N. Chaturvedi, J.
1 . Aggrieved by an order and judgment dated 21.3.2001 of the learned Single Judge
dismissing appellant's objections and making the award dated 4.3.1998 rule of the
Court, the appellant preferred instant appeal seeking reversal thereof.
2. First, a resume of fact--
The respondent/claimant was awarded construction work of 356 SFS houses, Category
II at Madipur, Pocket III and 132 SFS houses, Category II, at Madipur, Pocket III, Grade
II, by the appellant-Authority. The stipulated date for commencement of work was 17th
of March, 1989. The estimated cost of the work was Rs. 1,23,06,150/- and the tendered
amount was Rs. 1,48,25,910/-. The work was to be completed within 15 months, on or
before 16th of June, 1990. The respondent/claimant, however, failed to commence the
work. The contract was eventually rescinded by the appellant-Authority on 21st of
August, 1989. The reason for non-commencement of work, as stated by the
respondent/claimant, is that the site was not handed over to it on 7th of March, 1989
when the work was awarded as the piling work, being executed by another contractor,
was incomplete apart from being defective, thereby incapacitating the
respondent/claimant from proceeding with construction thereon. In spite of such defects
being brought to the notice of the appellant by way of sketches and photographs, the
same were not got rectified. The respondent/claimant claimed to have been keen to
start the work and for that purpose constructed a godown at the site for storage of
cement, besides undertaking the boring of a tube well, drawing water sample there from
and sending the same of Shriram Institute for Industrial Research for analysis. It also
paid a sum of Rs. 1,810/- to DESU on 11th of April, 1989 to secure an electric
connection, and collected building materials, including cement, bricks, iron bars, etc.
However, due to non-availability of site and defective piling work, it could not proceed
with the work. The respondent/claimant, in the circumstances, termed the termination
of the contract by the appellant as illegal since the delay in the commencement of work,
according to it, was attributable to the appellant only.
3. The plea of the appellant, on the other hand, was that the respondent/claimant had
no intention from the very beginning to execute the work as is manifest from the fact
that the site for 11.5 blocks was handed over to the respondent/claimant on the
stipulated date for commencement of the work w.e.f. 17.3.1989, which was followed by
handing over of 2.5 blocks on the 11th of April, 1989 and the remaining 2.5 blocks on
the 25th of April, 1989. It is, accordingly, claimed that substantial portion of the site
was made available to the respondent/claimant to proceed with the work. According to
the appellant, the piling foundation work did not suffer from any major defect and only
minor rectifications were required to be carried out, for which only 16 bags of cement
were consumed, the details of which are as under:-

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4 . It is pleaded that as the respondent/claimant failed to execute the work and had
simply been making excuses to cover up the lapse on its part, the contract was
rescinded by the appellant on 21st of August, 1989 after serving a notice dated
12.7.1989 on the respondent/claimant, and got the work executed through another
agency.
5 . In view of the parties to the contract finding fault with each other for non-
commencement of the construction work, disputes arose, which were referred to
arbitration. The arbitrator made his award on 26th of December, 1992.
6. The following claims were made by respondent/claimant:-
Claim No. 1:- Rs. 50,920/- being refund of security deposit.
Claim No. 2:- Interest of Rs. 50,920/- @ 18% per annum being amount illegally
recovered by getting the fixed deposit receipt encased with interest.
Claim No. 3:- Rs. 26,290/- on account of infructuous expenditure and damages
sustained by the claimant due to various breaches committed by the appellant-
Authority.
Claim No. 4:- Rs. 1,93,000/- as cost of material collected at site.
Claim No. 5:- Rs. 14,39,972/- being loss of profit to the extent of 10% of the
contract value.
Claim No. 6:- Rs. 1 lakh on account of infructuous expenditure and damages on
maintenance of site establishment and T&P for a period of five months.
Claim No. 7:- Interest @ 18% per annum from 20.4.1991 to the date of first
bearing, from the date of first hearing to the date of making of award and from
the date of award until payment.
Claim No. 8:- Costs of the arbitration proceedings."
7 . The arbitrator awarded a sum of Rs. 24,368/- in favor of respondent/claimant on
account of claim No. 1, simple interest @ 18% per annum from 28th of August, 1991,
the date of entering upon reference, to 26th December, 1992, the date of making and
publishing the award under claim Nos. 2 & 7. Claim No. 3 was partly allowed to the
extent of Rs. 5,000/- in lumpsum. A sum of Rs. 10,000/- was awarded against claim
No. 4 on account of cost of material at site. Against claim No. 5, a sum of Rs.
13,48,083/- was awarded as compensation for loss of profit while claim No. 6 was
disallowed. In relation to claim No. 8, the parties were directed to bear their own costs.
8. The appellant-Authority had also made counter-claims asunder:-
Counter-claim No. 1: Rs. 20 lacs (Approx.) on account of higher cost of balance
work got done at the risk and cost of the claimant.

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 Counter-claim No. 2:- Rs. 4,35,000/- (Approx.) on account of interest paid by
the appellant-Authority to the allottees of SFS houses.
Counter-claim No. 3:- Rs. 10 lacs (Approx.) on account of defamation.
9. All these counter-claims were, however, disallowed by the arbitrator.
10. An application under Section 14, 17 & 29 of the Arbitration Act (hereinafter referred
to as 'the Act') was filed on behalf of respondent/claimant for making the award dated
26.12.1992 rule of the court. In addition, interest @ 18% per annum on the decretal
amount was claimed from the date of award till realisation of the amount.
1 1 . The appellant-Authority does not appear to have had filed any objection to the
award. However, in the course of oral submissions, it objected to the award being made
rule of the court in relation to claim No. 5 on account of damages for loss of profit. By
judgment dated 30.5.1997 barring claim No. 5, the award was made rule of the Court.
The award in relation to claim No. 5, was set aside and the matter was remitted back to
the arbitrator for fresh adjudication thereon in the light of observations made in the
judgment. The arbitrator, on reconsideration, made and published a fresh award dated
4.3.1998 in relation to claim No. 5, awarding a sum of Rs. 12,35,742/- in favor of
respondent/claimant. On a notice of filing of the award being issued, the appellant-
Authority filed its objections under Section 30 & 33 of the Act (IA.7010/99) in respect
of claim No. 5.
12. Referring to a part of the judgment dated 30.5.1997 rendered by the learned Single
Judge earlier, in respect of claim No. 5, the validity of the award was questioned by the
appellant-Authority on the grounds that the same is based on no evidence and it
reiterated its stand which was taken while challenging the award dated 26.12.1992
earlier in relation to claim No. 5.
13. On perusal of impugned order dismissing the objections being (IA.7010/99), it is
gathered that in the course of hearing before the learned Single Judge, challenge to the
impugned award was based on the sole plea that the claim with respect to loss of
profits was a claim of remote nature, which was not permissible under Section 73 & 74
of the Indian Contract Act, 1872. It was contended that after undertaking the
construction work respondent/claimant would not have necessarily earned profits. The
learned Single Judge, however, did not find any merit in the objection to the aforesaid
effect. Holding that the rescission of the contract by the appellant-Authority having
already been adjudged as illegal and such finding having attained finality, the arbitrator
was quite justified in awarding 10% of the prima cost work as reasonable measure of
profit. It was noted that for allowing the claim on this count, the arbitrator has given
valid reasons. Taking note of judgments in Superintending Engineers T.N.U.D.P. Madras
Circle and Anr. v. A.V. Rangaraju and Anr. " 1994 Arb. LR. 173; "State of Kerala v.
Bhaskaran" MANU/KE/0011/1985 : AIR1985Ker49 ; and "A .T. Brij Paul Singh & Brothers
v. State of Gujarat" MANU/SC/0081/1984 : AIR1984SC1703 , wherein claim on account
of loss of profit @ 10% was held justified, the objections petition (IA.7010/99) was
dismissed. In view of dismissal of objections, the award pertaining to claim No. 5 was
made rule of court.
14. We have heard both the parties.
15. The arbitrator, taking note of the fact that the rescission of the contract by the
appellant-Authority having already been held in his earlier award dated 26.12.1992 as
legally unjustified, allowed the claim of the respondent/claimant on account of loss of

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profit to the extent of Rs. 12,35,742/- in view of his finding as stated hereunder:
"Under the circumstances when the rescission of the contract effected by the
respondents was in disregard of the merits/facts, the claimants have been
deprived of their legitimate right to earn profit out of a legal binding contract
between the parties. The fact that the department at the time of preparing the
estimates itself takes into consideration the element of profit to be 10%
remains unrebutted. Besides this the said clement of profit is according to the
norms/practice prevailing in the trade and is recognised accordingly.
Accordingly I conclude that fair ends of justice would be met by granting
damage under the head "Loss of Profit" worked out @ 10% of prime cost of
work which is reasonable measure of profit. From my experience in the field I
think that 10% profit in a work of this nature can be said to be a loss naturally
arising out of termination of contract."
1 6 . To justify award of damages on account of loss of profit, a finding adjudging
rescission of the contract as illegal is essential. The quantum of damages to be awarded
in a particular case is another point for consideration. A reference to the earlier award
dated 26.12.1998 reveals that while allowing claim No. 1 and disallowing counter-
claims of appellant-Authority, on three counts, the arbitrator returned his finding
holding the rescission of the contract as illegal and bad in law. Except on claim No. 5,
the award dated 26.12.1992 was made rule of the court. The decision of the learned
Single Judge on the aforesaid aspect was not appealed against by the appellant-
Authority. As a result, the finding of the arbitrator that the rescission of contract by the
appellant-Authority was legally unsustainable becomes final and the same is no longer
open to challenge while seeking to assail the validity of the award dated 4.3.1998 on
claim No. 5. No infirmity is, thus, noticeable in the finding of the learned Single Judge
holding the finding adjudging the rescission of the contract by the appellant-Authority
illegal as attaining finality.
17. On behalf of the appellant-Authority, in the course of hearing before the learned
Single Judge, in support of their objections against the award, a reference was made to
a decision of this Court in "R.B. Chy. Ruchi Ram Khattar & Sons. v Delhi Development
Authority" 1997 (1) Arb.LR 372, to contend that the claim on account of loss of profit
could not have been awarded as the claimant could not be sure of earning profits in the
even it would have been allowed to undertake and complete the work in question.
Learned Single Judge, noticing the facts in R.B.Chy. Ruchi's case (supra) held that the
same was manifestly distinguishable and could in no way help promote the argument
advanced on behalf of the appellant-Authority. That was case where the contract had
unduly been prolonged on account of lapses attributable to the respondent. For delay in
completion of work by the stipulated date, the contractor staked his claim for
compensation on the ground that had the contract been completed by the stipulated
date, it would have had earned profits by executing another contract/work. The claim
was, however, negatived though the arbitrator had allowed the contractor's claim and
awarded a sum of Rs. 1,54,081/28 on that count. Relying on a decision of the Supreme
Court in "Kersandas H. Tacket v. The Saran Engineering Co. Limited"
MANU/SC/0381/1965 : AIR1965SC1981 , the award in this respect was set aside
observing that under Section 73 of the Indian Contract Act, 1872, a party is liable to be
compensated for breach of contract by the other party on account of direct loss of
profits. Remote or indirect loss or damage sustained by reason of the breach will not
entitle the party to receive any compensation on that score. In the given case, claim No.
5 being made on account of loss of profit owing to rescission of the contract is in the
nature of direct loss and not a remote one.

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18. The award dated 4.3.1998 clearly spells out the reasons for awarding the aforesaid
amount on account of damages for loss of profit. The arbitrator took note of the entire
relevant facts and the materials placed before him by the parties, and made his award in
the light of observations occurring in the earlier judgment dated 30.5.1997 is evident
on a bare perusal of the same. The plea to the effect that the award is base don no
evidence is, Therefore, totally unfounded.
19. Adverting to the point relating to award of compensation reference may be made to
a decision in "A.T. Brij Paul Singh & Brothers v. State of Gujarat" MANU/SC/0081/1984
: AIR1984SC1703 , wherein while interpreting the provisions of Section 73 of the Indian
Contract Act, 1872, the Supreme Court held that where the party entrusting the work
commits breach of contract by improperly rescinding the contract, the contractor is
entitled to claim damages for loss of profit which he expected to earn by undertaking
the works/contract. Speaking on measure to evaluate the amount of damages, it was
observed:
"What would be the measure of profit would depend upon facts and
circumstances of each case. But that there shall be a reasonable expectation of
profit is implicit in a works contract and its loss has to be compensated by way
of damages if the other party to the contract is guilty of breach of contract
cannot be gainsaid..."
2 0 . I "Mohd. Salamatullah and Anr. v. Government of Andhra Pradesh"
MANU/SC/0020/1977 : AIR1977SC1481 , where the trial court awarded damages for
breach of contract @ 15% and the High Court, in appeal, reduced the same from 15% to
10% of the contract price, the Supreme Court held that the appellate court was not
justified to interfere with the finding of fact given by the trial court regarding
quantification of the damages even if it was based on guesswork.
2 1 . In yet another decision in "Dwarka Das v. State of Madhya Pradesh and Anr."
MANU/SC/0088/1999 : [1999]1SCR524 , where the appellant was in response to the
tenders invited by the respondent/State, allotted the work for construction of a hostel
within a specified period, in different phase, failed to complete the work within the time
schedule and the contract executed between the parties was rescinded by the
respondent/State on the ground of non-completion of work within the stipulated time,
and the appellant made a claim of Rs. 20,000/- as damages contending that the
termination of the contract was in breach thereof and the suit in this respect was
decreed by the trial court in favor of the appellant, which was, however, disallowed by
the High Court, in appeal, as the appellant was found to have not placed the material on
record to show that he had actually suffered any loss on account of the breach of
contract, setting aside the judgment of the High Court, the Supreme Court held:
"The appellant had never claimed Rs. 20,000/- on account of alleged actual loss
suffered by him. He had preferred his claim on the ground that had he carried
out the contract, he would have earned profit of 10% on Rs. 2 lakhs which was
the value of the contract....."
".....it follows, Therefore, as and when the breach of contract is held to have
been proved being contrary to law and terms of the agreement, the erring party
is legally bound to compensate the other party to the agreement. The appellate
Court was, Therefore, not justified in disallowing the claim of the appellant for
Rs. 20,000/- on account of damages as expected profit out of the contract
which was found to have been illegally rescinded."

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22. It is not necessary for a Court to examine the merits of the awarded with reference
to the materials produced before the arbitrator. The Court cannot sit in appeal over the
view of the arbitrator by re-examining and re-assessing the materials. [see "Puri
Construction Private Limited v. Union of India" MANU/SC/0427/1989 : AIR1989SC777 ;
"Food Corporation of India v. Joginderpal Mohinder Pal and Anr." MANU/SC/0182/1989
: [1989]1SCR880 .
2 3 . In "Smt. Santa Sia Devi and Anr. v. Dhirendra Nath Sen and Ors."
MANU/SC/0004/1963 : [1964]3SCR410 , the Supreme Court laid down:
".....at court should approach an award with a desire to support it, if that is
reasonably possible, rather than to destroy it by calling it illegal....."
2 4 . In "Joginder Pal Mohinder Pal" (supra), the Supreme Court in the context of
Sections 30 & 33 of the Arbitration Act, 1940, while dealing with the grounds on which
an award can be set aside held:
"It is necessary to find whether the arbitrator has misconducted himself or the
proceedings legally in the sense whether the arbitrator has gone contrary to the
terms of reference between the parties or whether the arbitrator has committed
any error of law appearing on the fact of it. ..... It is not misconduct on the part
of an arbitrator to come to an erroneous decision whether his error is one of
fact or law, and whether or not his findings of fact are supported by evidence."
25. In the present case, there is no allegation of arbitrator misconducting himself or the
proceedings. Also there is no challenge to the award in question on the ground that the
arbitrator has committed any error of law apparent on the face of the award. In the
given situation, it is not open to re-evaluate the material placed before the arbitrator
which constitute the basis of his finding leading to award under claim No. 5.
26. In the instant case, the arbitrator awarded damages to the respondent-claimant to
the tune of Rs. 12,35,742/- to compensate it on account of loss of profit. He arrived at
this figure by calculating the same @ 10% of the contract value. This was a fair and
reasonable basis to work out the amount of loss of profit. It is irrelevant to take into
account if the respondent-claimant would have actually been able to earn profit to the
said extent had the contract not been rescinded and the respondent-claimant would
have been allowed to complete the awarded work. The impugned order & judgment,
thus, call for no interference as the learned Single Judge rightly dismissed the
appellant's objections and made the award rule of the Court.
27. Being devoid of merit, the appeal is dismissed. No costs.

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