Delhi High Court Sets Aside Arbitral Award Against Indian Sugar Exim, Says Damages Cannot Be Based On Guesswork

The Delhi High Court has recently set aside an arbitral award passed against Indian Sugar Exim Corporation Ltd., holding that damages under Section 73 of the Indian Contract Act cannot be awarded on mere guesswork in the absence of proof of actual loss.

Justice Avneesh Jhingan held that “the law is well settled that for claiming damages under Section 73 of the Contract Act, actual loss or damage suffered is to be proved and only in cases where such proof is not possible, a honest genuine estimate may be made. In the case in hand, neither the actual damages were proved nor it was a case where damages/loss cannot be proved yet damages were awarded on sheer guesswork. The award of damages is vitiated being contrary to public policy and is set aside."

The dispute arose from a contract dated May 10, 2019 between Indian Sugar Exim Corporation Ltd. (petitioner) and Sakuma Exports Ltd. (respondent) for supply of 8,419 MT of sugar from Morna Sugar Mill.

Indian Sugar Exim Corporation Ltd., which exports sugar, had entered into a contract with Sakuma Exports Ltd., a commodity trader, on May 10, 2019. Under that arrangement, 8,419 metric tonnes of sugar were to be supplied from the Morna Sugar Mill within a fixed timeline.

Sakuma, in parallel, secured an export order from a UAE-based buyer for a slightly higher quantity. When the supply did not materialize, the export commitment fell through. The foreign buyer raised a claim, later reduced through negotiations, and issued a debit note. Sakuma passed on the liability, issuing a debit note of over Rs. 3.6 crore to Indian Sugar Exim and sought damages in arbitration, including loss of profit.

The arbitral tribunal accepted that the Morna contract had not been novated and held the petitioner in breach. It awarded about Rs. 1.4 crore towards loss of profit and another Rs. 2 crore linked to the export claim.

Indian Sugar Exim challenged this, pointing out that no material had been placed to show any actual loss. The debit note, it said, proved little without evidence of payment or adjustment. The company also argued that a credit note relied on by the tribunal had been issued under a mistaken assumption and withdrawn the next day. It further pressed the case that the contract had effectively become a non-starter.

Sakuma countered that some estimation is inevitable in calculating damages and that commercial practice, including debit notes, reflected the loss suffered. The court did not disturb the tribunal's conclusion that the Morna contract remained intact and was not replaced by later arrangements. Those subsequent contracts, it noted, stood on their own and did not reduce the original quantity.

The difficulty arose with the quantification. No books of account were produced. No figures were offered to show actual expenses or margins. This, the court said, was not a situation where such evidence was impossible to produce. On that footing, the award of around Rs. 1.4 crore towards loss of profit could not stand.

The court recorded,

“The present is not a case where the expenses could not have been proved, more so when the respondent was engaged in export business and was exporting sugar in pursuance of other contracts. No books of accounts were produced to prove the percentage of expenses incurred for exporting sugar. There cannot be a quarrel with the proposition that for quantification of damages a certain degree of guesswork is involved but it cannot be stretched to the extent that in the absence of evidence damages can be assessed solely on conjecture.”

The separate award of Rs. 2 crore met the same fate. A debit note by itself, the court observed, does not establish that a loss was actually suffered. There was nothing to show that the amount claimed by the foreign buyer had been paid or even adjusted. In a system of double-entry accounting, the absence of corresponding entries was telling.

The tribunal had treated a Rs. 2 crore credit note issued by Indian Sugar Exim as an admission of liability. The court found that conclusion unsustainable. The document referred broadly to “UP default” and not specifically to the Morna contract. More importantly, it was withdrawn the very next day, after the petitioner sought supporting documents that were never furnished.

The court observed, “It is relevant to note that in the arbitral award the reduction of the claim from Rs.3,61,20,000/- to rupees two crores is not on the basis of proof of actual loss but by holding that the petitioner by issuing credit note no.21 admitted the claim of rupees two crore and the respondent accepted the credit note no.21 without protest.”

On that reasoning, the court held that “the conclusion recorded by the tribunal that there was an admission by the petitioner to compensate rupees two crore rupees towards damages is perverse and as discussed above is recorded ignoring the relevant evidence on record.”

Accordingly, the court allowed the petition and set aside the arbitral award, concluding that it rested on assumptions rather than proof and overlooked material evidence.