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SC Ruling: Contractors Must Prove Loss of Profits Due to Execution Delays

In a recent significant legal development, the Supreme Court Bench headed by Justice Sanjiv Khanna and Justice M.M. Sundresh underscored a critical stipulation for contractors seeking compensation for loss of profits due to delays in contract execution. The ruling emphasized that contractors must convincingly demonstrate the availability of alternative work and provide substantial evidence of turnover reduction to substantiate their claims.

Delving into the case details, Hindustan Petroleum Corporation Limited (HPCL) and Batliboi Environmental Engineers Limited (BEEL) entered into a contract for engineering work on a Sewage Water Reclamation Plant. Unfortunately, the execution of the contract faced considerable delays caused by HPCL. BEEL, having completed 80% of the work, eventually abandoned the project after receiving a partial payment of Rs. 4.14 Crores, leaving a balance of Rs. 1.14 Crores.

Upon the dispute being referred to arbitration, the Arbitral Tribunal awarded Rs. 1.57 Crores to BEEL to compensate for loss of overheads and loss of profits or profitability in a contract initially valued at Rs. 5.74 Crores. However, this award was subsequently set aside by the Division Bench of the High Court under Section 37 of the Arbitration and Conciliation Act, 1996.

Analyzing the verdict, the Supreme Court meticulously examined the awarded damages, assessing the justification and basis for each component of compensation granted by the Arbitrator. The court noted that compensation for breaches not constituting fundamental breaches, which don't warrant termination of the contract, should be calculated based on the loss of profit arising from reduced profitability or additional expenses incurred due to the delayed work.

"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 were declined due to insufficient capacity to undertake other work," stated Justice Khanna in the judgment.

Furthermore, the Court emphasized that in cases where a contract's execution is delayed, and a contractor claims loss due to depleted income, it is imperative for the contractor to provide concrete evidence of alternative work opportunities. "Tender invitations should be produced by the Contractor which it alleges to have declined due to insufficient capacity to undertake other work," noted the Court. Moreover, demonstrating a decline in turnover through accurate bookkeeping is essential to attribute the decrease to the specific delay in question.

The Court expressed dissatisfaction over the compensation awarded by the Arbitral Tribunal, deeming it disproportionately high and lacking proper rationale. "The principle of mitigation with regard to overhead expenses does not mandate working on Sundays or holidays," stated the Court. The principles guiding the computation of compensation or damages were seemingly ignored, rendering the award legally flawed.

Ultimately, the Supreme Court upheld the High Court's decision to set aside the award, citing the lack of reasoned conclusions and calculation of awarded amounts. The appeal filed by BEEL was subsequently dismissed.

The Supreme Court's ruling in this case underscores the necessity for contractors to meticulously substantiate claims for loss of profits resulting from delays in contract execution. Providing substantial evidence of alternative work opportunities and demonstrating a decline in turnover through accurate documentation is critical to ensure a fair assessment of compensation. This ruling highlights the importance of clarity and substantiation in claims made by contractors in arbitral proceedings, ensuring equitable resolutions in cases of delayed contract execution.

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