Telangana High Court
M/S. Ncc Limited vs M/S. Elecon Epc Projects Limited on 23 April, 2025
THE HON'BLE JUSTICE MOUSHUMI BHATTACHARYA
AND
THE HON'BLE JUSTICE B.R.MADHUSUDHAN RAO
COMCA No.29 of 2022
Mr. Avinash Desai, learned Senior Counsel representing Mr. Mohammed
Omer Farooq, learned counsel appearing for the appellant.
Mr. Dama Seshadri Naidu, learned Senior Counsel representing
Mr. K. V. Pavan Kumar, learned counsel for the respondent No.1.
JUDGMENT:
(Per Hon’ble. Justice Moushumi Bhattacharya)
1. The Appeal, filed under section 37(1)(b) of The Arbitration
and Conciliation Act, 1996, assails an order passed by the
learned Commercial Court on 30.03.2022 in Commercial
Original Petition No.79 of 2017. By the impugned order, the
Commercial Court dismissed the appellant’s petition filed under
section 34 of the 1996 Act for setting aside an Award dated
17.12.2016.
2. The appellant was the respondent in the arbitration. The
respondent No.1 was the claimant. The arbitration culminated
in the Award dated 17.12.2016 passed by a Tribunal consisting
of three learned Arbitrators. Apart from challenging the
impugned order dated 30.03.2022 passed by the Commercial
Court, the appellant also seeks to set aside the Award dated
17.12.2016. The appellant however restricts the scope of the
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Appeal to the extent of the loss of profit awarded by the Arbitral
Tribunal in favour of the respondent No.1/claimant.
3. But first, a brief narration of the relevant facts leading to
the Award and the impugned order.
4. In June, 2012, M/s. Gayathri Projects Limited
(GPL)/Principal Employer issued a Tender Notification inviting
bids for designs, engineering, supplies, erection, testing and
commissioning of 4,000 TPH External Coal Handling Plant for
construction of 2X660 MW Thermal Power Plant developed by
NCC Power Projects Limited at Krishnapatnam. The appellant
(M/s.NCC Limited) and GPL were partners in a Joint Venture for
development of the said power plant. The appellant and the
respondent No.1/claimant (M/s. Elecon EPC Projects Limited)
entered into a Consortium Agreement dated 27.08.2012 with
the appellant as the lead partner. On 29.08.2012, the appellant
submitted its bid to GPL on an individual basis with the
understanding that upon securing the contract, the appellant
would enter into a back-to-back contract with the respondent
No.1 except for the construction of civil works. Before finalizing
the contract with GPL, the appellant issued a Letter of Intent
(LOI) dated 19.12.2012 to the respondent No.1 with a contract
value of Rs.183 Crores and a contract period of 22 months from
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the date of the LOI. On 09.02.2013 and 11.02.2023, GPL
issued Letters of Award (LOAs) to the appellant and the
appellant issued 2 LOAs to the respondent No.1 on 02.03.2013.
The respondent No.1 submitted an Advance Bank Guarantee of
Rs.15,48,56,900/- and a Performance Bank Guarantee of
Rs.16,49,89,400/- in terms of the Agreement. The respondent
No.1 also issued a LOA to the M/s. CKIT Conveyor Engineers of
South Africa for availing of Professional Services for the 7.5 KM
Pipe Conveyor Installation.
5. On 03.05.2013, the appellant released Rs.12 Crores as
advance and thereafter the balance of Rs.3,48,56,900/-, against
which the respondent No.1 submitted a Bank Guarantee for
Rs.15.48 Crores. The respondent No.1 started the work on
17.05.2013, as per the LOI. On 27.08.2013, the appellant
communicated the approval of the respondent No.1’s designs
and other permissions between August 2013 and October 2013.
In October 2013, there was a change in the management of the
appellant-Company. In December 2013, GPL instructed the
respondent No.1 to proceed with the critical engineering works.
6. On 19.04.2014, GPL awarded the same scope of work to
M/s.Macmet India Limited although the contract awarded to the
respondent No.1 was not expressly terminated. On 05.06.2014,
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the appellant invoked the Advance Bank Guarantee of
Rs.15,48,56,900/- which led the respondent No.1 to file
petitions under section 9 of the 1996 Act before the District
Court at Ranga Reddy, Hyderabad. The respondent No.1 filed
O.P.Nos.342 and 364 of 2014 for injunction on the invocation of
the Bank Guarantee and Performance Bank Guarantee and also
issued a notice for invocation of arbitration to the appellant on
05.07.2014. The respondent No.1 claimed Rs.101,68,18,000/-
from the appellant.
7. The Award was passed on 17.12.2016 in favour of the
respondent No.1 for an amount of Rs.5,09,49,625/- along with
interest @ 12% per annum and Rs.5 Crores towards damages
together with interest @ 12% per annum from the date of the
Award till realization. The appellant’s petition for setting aside of
the Award was dismissed by the Commercial Court on
30.03.2022 (impugned order) leading to the present Appeal.
8. On 10.10.2022, a Co-ordinate Bench of this Court
granted the appellant 8 weeks to deposit the awarded amount
and the respondent No.1 was permitted to withdraw the said
amount. On 19.01.2023, the appellant deposited Rs.8 Crores
and sought for time to deposit the balance of Rs.9.66 Crores
which was granted by the Co-ordinate Bench. The appellant
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has deposited Rs.17.66 Crores as on date and the respondent
No.1 has furnished a Bank Guarantee for an amount of
Rs.19.50 Crores which is lying with the Commercial Court in
COP No.79 of 2017.
Arguments advanced on behalf of the Parties:
9. Learned Senior Counsel appearing for the appellant
submits that the award of damages in favour of the respondent
No.1 for loss of profits is patently illegal and contrary to public
policy since there was no breach of contract and the respondent
No.1 failed to bring any material on record in support of its
claim for loss of profits. Counsel submits that the claim was
awarded solely on the decision of the Supreme Court in A.T. Brij
Paul Singh Vs. State of Gujarat 1 . Counsel submits that the
Commercial Court travelled beyond the scope of the section 34
application in giving further reasons in support of the award of
loss of profits by relying on Hudson’s formula. According to
counsel, damages cannot be awarded under section 73 of The
Indian Contract Act, 1872, in the absence of evidence of loss of
profits.
1
(1984) 4 SCC 59
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10. Learned Senior Counsel appearing for the respondent
No.1/claimant submits that the claims were supported by
evidence and were meticulously addressed by the Tribunal.
Counsel asserts that interference based on fundamental policy
is only warranted in exceptional circumstances which are
absent in the present Appeal. Counsel submits that the
appellant’s admitted failure to notify the respondent No.1 of the
termination of the principal contract formed the primary basis
for the Award. Counsel urges that the Tribunal correctly found
that the appellant’s failure to notify the respondent No.1 of the
contract termination amounted to a material breach. Counsel
submits that the respondent No.1 continued to perform the
work to the benefit of the appellant and that the Tribunal was
justified in upholding the principal claims and awarding
consequential damages for loss of profits.
The Point which falls for Adjudication:
11. The controversy before the Court is whether the Arbitral
Tribunal was justified in awarding Rs.5 Crores to the
respondent No.1/claimant as damages for loss of profits.
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12. As stated above, the appellant has challenged only this
component of the Award and has not pressed any of the other
claims which were allowed in favour of the respondent No.1.
13. Our decision on this point is given under specific
headings for a better delineation of the issues involved.
Decision:
14. The basis for awarding damages for loss of profits was on
account of the respondent No.1/claimant bearing the
consequences of short-closure without notice thereof. The claim
for damages for loss of profits was the eighth and the last claim
of the respondent No.1 in the arbitration. The total claim
amount was for Rs.101,68,18,000/-. The claimed damages
under the head of loss of profits was Rs.18.30 Crores i.e., 10 %
of the contract value. The Tribunal awarded Rs.5 Crores for loss
of profits.
The Undisputed Facts before the Arbitral Tribunal
15. The appellant and GPL were shareholders in NCCPL. GPL
short-closed the contract with the appellant on account of
changes in the management structure of the appellant. The
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respondent No.1/claimant was admittedly kept in the dark
about the short-closure. The respondent No.1 expected that the
contract would be awarded to it on revised terms despite the
changes in the management structure of the appellant.
16. The respondent No.1 engaged a consultant for
procurement of projects and the service agreement with the
consultant was part of the records. Moreover, orders were also
placed with M/s.CKIT Limited of South Africa for the Design
and Engineering of the Pipe Conveyor System. The appellant
did not object to the quality of work at any point of time.
Although there is a controversy regarding the quantum of work
completed by the respondent No.1, GPL assessed the work done
as 19.21% up to October 2013.
17. The contractual relationship between the appellant and
the respondent No.1 continued till 26.10.2013. The respondent
No.1 continued to perform the work and the appellant
continued to enjoy the services and benefits of that work. The
respondent No.1 came to know on 19.04.2014 that GPL had
awarded the same work to M/s.Macmet. The appellant
meanwhile stayed away from meetings and any form of
exchange with the respondent No.1 from October, 2013 to April
2014.
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18. The Arbitral Tribunal allowed most of the claims of the
respondent No.1 including part-claim for damages for loss of
profits to the extent of 5 Crores against the claim of 18.30
Crores.
The Indian Contract Act, 1872 and Compensation for Breach
19. The Indian Contract Act, 1872 does not define the word
‘breach’ as a standalone act or omission. Sections 73 and 74 of
the Act ensure compensation as a consequence of breach.
Section 37 of the Act clarifies a pre-breach situation by
declaring that the parties to a contract must either perform or
offer to perform their respective promises unless such
performance is dispensed with or excused under the provisions
of the Act or under any other law. Section 39 gives the promisee
the option to terminate the contract when the other party has
refused to perform or has disabled himself/herself from
performing the promise in its entirety. This option is subject to
the promisee’s acquiescence either by words, actions, or
conduct.
20. The appellant indisputably benefited from the work done
by the respondent No.1/claimant but suppressed the fact of
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short-closure keeping the respondent No.1 in the dark. The
appellant, on the other hand, did not suffer any loss which
would be evident from the appellant not filing any counterclaim
in the arbitration for damages.
21. The question is whether the Arbitral Tribunal overstepped
its limits in relying on A.T. Brij Paul Singh (supra) for awarding
5 Crores to the respondent No.1 as damages for loss of profits.
The award should be viewed in the factual context of A.T. Brij
Paul Singh (supra) and Hudson’s formula which provided the
calculation template for the Supreme Court in that case.
22. In A.T. Brij Paul Singh, the Supreme Court dealt with
breach of a works contract and of the contractor’s entitlement to
damages for loss of profit consequent to the breach. The
Supreme Court held that the plaintiff/contractor was entitled to
damages under the head “loss of profits” with reference to
Hudson’s Building and Engineering Contracts (commonly
referred to as Hudson’s formula) and directed the respondent
State to pay Rs.2,00,000/- as damages for breach. The Supreme
Court noted that the plaintiff/appellant had relied upon the
decision of the same High Court in a connected proceeding
where the Court had accepted the claim for loss of profit
computed at 15% of the value of the unexecuted work. Despite
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the decision in the connected matter, the High Court had
refused to accept the appellant’s case on the ground that the
appellant had not produced relevant documents to establish its
claim. The Supreme Court accordingly held that the High Court
should have accepted 15% of the value of the balance of the
works contract as a reasonable measure of damages for loss of
profit since the appeal concerned the same scope of work.
23. Neither Section 73 nor Section 55 of The Indian Contract
Act, 1872 provides for a mechanism for assessment of damages
for breach or failure to perform a fixed-time contract,
respectively, notwithstanding the legislative intent to
compensate a party who suffers on account of the breach or
non-performance.
24. In fact, Section 56 of the 1872 Act also contemplates
compensation for loss through non-performance of an act which
the promisor knew to be impossible or unlawful, as opposed to
the promisee who was kept unaware of such impossibility or
illegality. The underlying thrust of these provisions is simply to
compensate the innocent party who has suffered due to the act
of another, whether on account of breach, failure, or
impossibility of performance.
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25. Section 70 of The Indian Contract Act, 1872 invigorates
the framework by stipulating that a person who enjoys a lawful,
non-gratuitous act of another or receives a benefit from such act
must compensate the latter for the benefit received. Section 70
would apply with full force to the facts of this case, since it is
undisputed that the respondent No.1 continued to perform its
contractual obligations while the appellant continued to reap
the benefits thereof, on a deliberate act of suppression of the
short-closure from the performing party/respondent No.1.
26. The Courts have therefore filled the lacuna by adopting a
fair means of assessing damages in suitable cases on the
overarching need to compensate the party who has suffered the
breach.
The Award for Loss of Profits should be placed in context
27. The respondent No.1 presented comprehensive evidence
in support of its claims forming the foundation for the loss of
profits. The Tribunal’s decision to allow less than 1/3rd of the
respondent No.1’s claim for loss of profits, that is, 5 Crores as
opposed to 18.30 Crores, certainly cannot be described either as
fanciful or arbitrary. It is relevant for contextual purposes that
even a conservative investment such as a fixed deposit would
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yield an annual return of 8%; whereas the respondent No.1 has
been awarded 2.75% of its claimed loss of profits. Hence, the
Award of 5 Crores, as against 18.30 Crores, represents
opportunity costs and essentially serves as compensation for
the untimely closure of the contract at the behest of the
appellant and GTL.
28. Opportunity costs, as a consequential damage, is a
remedy to which every business person is entitled to in
commercial contracts. The expectation aligns with the doctrine
of business prudence and the primary objective of a person to
enter into commercial transactions with another.
29. The award of 5 Crores must also be assessed against the
respondent No.1’s claim of 18.30 Crores which approximately
represented 10% of the total project cost of 183 Crores. The
Tribunal employed Hudson’s formula (without specifically
naming it) which is recognised as a fail-safe methodology for
assessing damages for loss of profit in major contracts arising
from competitive tenders which has been judicially endorsed in
McDermott International Inc Vs. Burn Standard Limited 2 .
Hudson’s formula calculates costs by using the percentage of
head office overheads and profits specified in the contract,
2
(2006)11 SCC 181
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multiplied by the contract sum, divided by the contract period
and further multiplied by the period of delay in days.
30. Hudson’s formula has also found mention in several other
cases as an indicator for measuring damages for loss of profits
in the face of rescission/breach of contract.
31. Hence, the Arbitral Tribunal cannot be faulted for
employing a formula for calculating just compensation to the
respondent No.1 after recording its satisfaction that there had
indeed been a material breach of the contract terms.
The Facts of the Case within the Statutory Framework:
32. It is undeniable that the Arbitral Tribunal found that the
appellant’s failure to notify the respondent No.1 of the
termination/short-closure of the contract amounted to a
material breach. The finding of material breach would
automatically trigger section 73 of The Indian Contract Act,
1872, which provides for compensation for loss or damage
consequent to breach of contract. Section 73 of the Act declares
that the party who suffers from the consequences of a broken
contract is entitled to receive compensation for any loss or
damage caused by the party who has caused the breach. The
loss would encompass the effect and consequences of the
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breach which was within the contemplation of the parties at the
time of entering into the contractual relationship.
33. Admittedly, the appellant abstained from meetings and
correspondence with the respondent No.1 from October 2013 to
April 2014 due to the change in the appellant’s management
commenced from October 2013. The respondent No.1
nonetheless continued to perform its contractual obligations
during this period and only came to know on 19.04.2014 that
GPL had awarded the same work to M/s.Macmet. The appellant
invoked the Advance Bank Guarantee of Rs.15.48 Crores much
later, on 05.06.2014. The respondent No.1 invoked the
arbitration clause on 05.07.2014. Hence, the respondent No.1
continued to work during the 6 months interregnum under the
belief that the contract subsisted between the appellant and the
respondent No.1 as executed in December 2012/March 2013.
34. The above facts would show that the Arbitral Tribunal
merely evened the scales of justice by awarding 5 Crores as loss
of profits to the respondent No.1 for the balance work which the
respondent No.1 could have performed had the contract not
been short-closed.
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The Compensation awarded does not amount to an Unexpected
Windfall
35. Reasonable compensation for an injury suffered by a
contracting party may be assessed by an estimation based on a
practical, rough and ready approach for compensating the
innocent party without delay for the loss already suffered by
that party. The law permits a reasonable degree of estimation
for quantification of damages once the Arbitrators are satisfied
of the fact of breach by one of the parties to the contract and
damage suffered by the other. Formulae such as Hudson’s
formula come to the aid in situations where the Tribunal may
not have exact figures at its disposal or where the evidence
produced lacks a precise estimation of foreseeable losses.
36. The question is: Would a party in such cases be left in the
lurch of this uncertainty? The answer must be in the negative
since failure to prove losses with granular certainty cannot
prevent the Court from relying on a reasonable estimation for
award of compensation. The bottomline is that the estimation of
loss must be reasonable and not exaggerated. A party must
suitably be compensated and the Court must draw upon
attending facts with regard to the extent of loss. In the present
17
case, the respondent has presented its quantum of damages in
a tabular format which the Award records as Document C-88.
37. In any event, the award of 5 Crores which is less than 3%
of the contract value cannot, under any circumstances, be
termed as irrational or legally unsound.
The Award for Loss of Profits is not bereft of Reasons
38. Breach of contractual obligations can assume various
forms. Disabling another party from performing his/her
contractual obligations or disabling oneself from performing,
would also amount to breach. In other words, self-induced
frustration of a contract would also amount to breach.
39. The appellant’s failure to inform the respondent of short-
closure of the contract at the relevant time, despite being privy
to the same, amounts to disablement of performance as
contemplated under section 39 of the 1872 Act. In other words,
once the contract between the GPL and the appellant was closed
on 26.10.2013, the appellant as the promisor, had an obligation
to communicate this fact to the respondent, namely, that the
appellant was disabled from performing its promise in its
entirety.
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40. GPL short-closed the contract with the appellant; the
appellant was aware of the said untimely-closure. The appellant
however failed to communicate this fact to the respondent
which resulted in the respondent continuing to perform its
obligations under the contract and the appellant reaping the
benefit of the same. The Arbitral Tribunal found that the
respondent was entitled to damages for expected profits due to
the appellant’s suppression of the fact of short-closure which
kept the respondent engaged in the work while the appellant
continued to collect payment from GPL for the work done by the
respondent.
41. The reasons given by the Arbitral Tribunal for
compensating the respondent for the projected loss are perfectly
justifiable in the above factual matrix. In fact, we find that the
relevant part of the Award outlines the basis for grant of
compensation to the respondent on account of loss of profits
contrary to the allegations made on behalf of the appellant.
Damages were not awarded in a vacuum or without any
application of mind. The Arbitral Tribunal clearly articulated its
reasons for doing so, namely, that
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(i) The respondent made necessary preparations for the
work expecting substantial profit.
(ii) The respondent had executed the work for the
benefit of the appellant but had not been paid for it.
(iii) The respondent continued to work despite short-
closure of the contract which was not communicated
to the respondent.
(iv) The appellant benefited from the work done by the
respondent and was rewarded for the same.
(v) The appellant did not suffer any loss due to the
closure of the contract.
(vi) The project was conceived on a large scale requiring
specialized technical expertise. Hence, the
respondent was entitled to damages on expected
profits.
42. These reasons are not only rational but reasonable with
reference to the quantum. The fact that the respondent incurred
substantial expenditure on account of the project is evident
from the other heads of claims which were allowed by the
Arbitral Tribunal. In our view, the award for loss of profits
should be seen as concomitant to the other claims allowed by
the Arbitral Tribunal in favour of the respondent.
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43. It is imperative that the Arbitral Tribunal be allowed a free
play in the joints in its assessment of the facts and conclusions
therefrom. A paralysis in its ability to arrive at well-considered
decisions would be contrary to the object of the 1996 Act. A
common business sense for arriving at broad estimates without
granular accuracy is within the settled contours of the arbitral
domain.
44. In essence, the award does not give any reason to hold
that the Arbitral Tribunal transgressed beyond its domain.
The Perimeter of Interference narrows down as the proceedings
move up the hierarchy of Courts.
45. It is well settled that a Court hearing an Appeal under
section 37 of the 1996 Act should be more circumspect in
matters of interference as the scope for such is narrower than in
an application for setting aside of an Award under section 34 of
the 1996 Act. An appeal from a decision upholding an award
calls for greater caution as the grounds for interference are
restricted to absence of reasons, patent illegality or perversity.
Section 37 of the 1996 Act does not contemplate the Court
embarking on a fact-finding exercise for re-appraising the
21
evidence, unless the Arbitral Tribunal has ignored the evidence
before it or has arrived at findings contrary to the evidence.
46. Simply put, the appellate Court would strive to preserve
the Award and the order of the section 34 Court unless they are
found to be perverse, patently illegal or in conflict with the
public policy of India in all respects.
47. The Referral Court should therefore restrain itself from
interfering with the discretion exercised by the Arbitral Tribunal
unless the discretion is found to be unreasonable and in
defiance of logic.
48. The law with regard to the Appeal Court steering clear of
interference was articulated by the Supreme Court in NTPC Ltd.
Vs. M/s.Deconar Services Pvt. Ltd. 3 and Dyna Technologies
Private Limited Vs. Crompton Greaves Limited 4 . The principal
consideration before the Supreme Court was whether the
Arbitrator’s opinion reflected a possible view on the evidence as
opposed to the Court higher up in the hierarchy finding a
different conclusion to be equally possible. The Supreme Court
negatived the inclination to interfere in such cases and
reinforced the authority of the Arbitral Tribunal as master of the
3 (2006) 11 SCC 181
4 (2019) 20 SCC 1
22
evidence. Oil & Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd 5
held that interference on the grounds of fundamental policy of
Indian law is only warranted in exceptional cases where the
finding given by the Arbitral Tribunal is ex facie contrary to
public policy or against the basic notions of justice and
morality.
49. The reliance placed by the appellant on Unibros Vs. All
India Radio 6 must be seen within the context of the particular
facts before the Supreme Court where the computation of loss of
profit was assessed in a case of delay in performance of the
contract attributable to the employer. Moreover, in Unibros, the
Supreme Court was confronted with two Awards arising from
the same claim i.e., for loss of profit and found the second
Award to be a virtual reproduction of the first. The Supreme
Court however accepted Hudson’s Formula as a credible method
for computing loss of off-site overheads and profits.
50. In the present case, the appellant seeks to segregate the
Award of loss of profits from the other parts of the Award. This
Court is unable to accept the stand as that would cause a
chasm between the reasons and the underlying factual context.
Moreover, slicing the Award into unnatural wedges would result
5 (2003) 5 SCC 705
6 2023 SCC OnLine SC 1366
23
in an incomplete reading of the reasons for allowing the claims.
In fact, restricting our gaze only to the award for loss of profits
would reflect only a part of the justification for allowing the
claim. The award for loss of profits cannot be divorced from the
overall factual context underscoring the findings given by the
Tribunal for allowing the other claims of the respondent No.1.
Conclusion
51. We do not find the impugned order passed by the
Commercial Court on 30.03.2022 falling foul of any of the
grounds on which the award would fail under section 34 of the
Act. The Commercial Court upheld the Award after recording
its satisfaction with the reasons given by the Arbitral Tribunal.
The Commercial Court also found that the findings of the
Arbitral Tribunal were supported by evidence. The Commercial
Court relied on section 70 of the 1872 Act to conclude that the
respondent is entitled to compensation for the work done and
the expenses incurred for performing the contract. We do not
find the reasons given by the Commercial Court to be perverse
or against the law as discussed in the preceding paragraphs of
this judgment.
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52. The impugned order dated 30.03.2022 passed by the
Commercial Court does not warrant any interference. The
Award dated 17.12.2016 likewise shuns any form of
interference. The above discussion gives the reasons for this
view. In any event, upending the entire Award only on one head
i.e., award of damages for loss of profits is an unnatural
procedure for assessment and contrary to the statutory
mandate.
53. COMCA No.29 of 2022 is accordingly dismissed. All
connected applications are disposed of. Interim orders, if any,
shall stand vacated.
_________________________________
MOUSHUMI BHATTACHARYA, J
_________________________________
B.R.MADHUSUDHAN RAO,J
Date: 23.04.2025
va/bms
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