Annual Arbitration Review 2018

GTM Builders and Developers Pvt. Ltd. v Sneh Developers

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Judgment: GTM Buildersand Developers Pvt. Ltdv Sneh DevelopersPvt. Ltd.

 

Citation:2018 SCC Online Del 9653

 

Court: Delhi High Court

 

Coram: Justice Vibhu Bakhru

 

Date: July 3rd, 2018

 

Overview:The case revolved around a construction contract in which disputes arose in regard to the payments to be made under the contract. The moot question which came up before the Hon’ble Court subsequent to the passing of the award by the Arbitrator was that could loss of profits have been awarded by mere estimation of the same without any particular evidence for the same. The Court held that evidence was needed to be provided by a party which showcased loss of profits from the contract which was terminated. Although it is open for the courts to estimate the quantum of loss of profits; however, it is necessary for a party to establish the same with concrete evidence.

 

Issue:Whether no particular evidence is required for awarding loss of profits and the same could be awarded by estimating the same at 10%?

 

Factual background:

 

GTM (“Petitioner”)is a construction company and it had launched a project named “GTM Residency Tower No. 11, Valley View Estate, Gurgaon”for construction of a Group Housing Society on a part of plot of land. Sneh (“Respondent”)is also a company engaged in the business of construction and taking up projects on a turnkey basis. The Petitioner had entered into an agreement with the Respondent wherein the Respondent through a contract was entrusted with construction and  providing detailed construction drawings and other services in the nature of architectural services for a consideration mutually agreed by the parties.

 

Subsequently disputes arose between the parties in relation to delay in execution of the work and submission of architectural designs by the Respondents as alleged by the Petitioners. Discussions and negotiations were undertaken between the parties and an Addendum was agreed to whereunder the Respondent agreed to complete the execution of the project by the new deadline which was agreed upon. The Respondent also provided a bank guarantee in the sum of ₹50,00,000/- or provide five cheques of ₹10,00,000/- each in lieu thereof, which could be encashed, if Sneh failed to perform the contract.

 

Subsequently, the work was still not completed by the Respondent and thus the Petitioner issued a notice cancelling the Agreement and the Addendum. The Respondent  was also informed that the Petitioner would be presenting the five cheques provided by Sneh as a security for its performance of the contract. However, another set of negotiations ensued in consequence of which a Memorandum of Understanding was signed by which the revised date for completion of the project and payments in instalments to be given for the same was agreed upon. A further dispute arose over the amounts claimed by the Respondent from the Petitioner and the termination of the contract which was done subsequent to these disputes which led to the invocation of the arbitration clause. A number of issues were framed and dealt with by the Arbitral Tribunal in its award. However, the most important one for us is whether any of the parties succeeding in its claim, is entitled to any interest and if so on what amount and at what rate and for what period.

 

Analysis:

 

The Arbitral Tribunal held that Sneh was entitled to loss of profits for the unexecuted works. The unexecuted works were computed at ₹2,19,50,695/- being the total cost of the project of ₹15.25 crores and ₹13,05,49,305/- being the amount paid to Sneh. The Arbitral Tribunal computed the loss of profits on the said unexecuted works at the rate of 10% of the value amounting to ₹21,95,070/-. The Arbitral Tribunal also awarded interest at the rate of 18% per annum on the awarded amount from 01.04.2010 till the date of the award and future interest at the rate of 18% per annum on the awarded sums (₹6,37,88,000/-) from the date of the award till actual date of the payment if the awarded amount was not made within a period of ninety days from the date of the impugned award. This Award was subsequently challenged before the Hon’ble High Court of Delhi.

 

It was observed by the Delhi High Court that the award of loss of profits was premised on the basis that the letter of termination issued by GTM was not in terms of the Agreement. On the other hand, there was no finding that Sneh had fully complied with its obligation. Thus, although the Arbitral Tribunal had found fault with the termination notice issued by GTM, there was no adjudication on the central issue as to which party was responsible for the breach of the Agreement. Moreover, the award of loss of profits is also not sustainable as it is based on no evidence at all. The Arbitral Tribunal had simply relied upon the decisions of the Supreme Court in Mohd. Salamatullah & Ors v. Govt. of AP[1], and Dwaraka Das v. State of MP & Anr:[2]for awarding the claim for loss of profits as ₹21,95,070/- (being 10% of the estimated value of unexecuted works). None of the said decisions are authorities for the proposition that claim for loss of profits can be awarded without any rudimentary evidence or material indicating the same. Indisputably, it is open for the courts to estimate the quantum of loss of profits; however, it would be necessary for a party to establish that in the normal course, the contract would have yielded profits to the extent as claimed. In the present case, there is no material to establish that Sneh would have earned any profit from the contract in question.

 

Conclusion:

 

In my opinion, the court was justified in pronouncing such a judgment. Evidence must be presented in order for a party to prove its case or even in the event of asking for loss of profits. A mere estimation by the party or the court themselves without any credible evidence to support the same is prima faciean incorrect precedent to be set. The law is well-settled in this regard that the court while awarding damages needs to come to the requisite amount to be awarded and a mere pre-estimate of damages by the parties would not be enough. A judgment in this regard is Punj Lloyd Ltd. v IOT Infrastructure and Energy Services Ltd.[3]

 

[1](1977) 3 SCC 590.

[2](1999) 3 SCC 500.

[3]ARBP/1323/12, dtd. 14 December 2018.

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