No Damages Without Proof Of Loss: Delhi High Court Partly Sets Aside Arbitral Award Against DJB

The Delhi High Court on Monday partly set aside an arbitral award in favour of a contractor against the Delhi Jal Board (DJB), holding that damages cannot be granted on the basis of projected turnover without proof of actual loss.

Justice Avneesh Jhingan held that "the award of damages in absence of evidence on record of actual loss suffered or a finding recorded that the loss suffered cannot be proved is in violation of Sections 73 and 74 of the Contract Act and against public policy. The tribunal awarded damages without considering the value of the machines, the usage these were put to, loss of business and other factors"

However, the court upheld the arbitral tribunal's findings that the termination of the contract by DJB was illegal, holding that the triggering conditions for termination under the contract were not satisfied.

DJB had awarded a contract to Metrro Waste Handling Pvt. Ltd. (MWHPL) for hiring and operating sewer cleaning machines on a per-hour basis for a period of seven years. The contract assured minimum usage of the machines at 200 hours per month, while payments were linked to actual working hours.

In November 2022, DJB claimed that the total contractual value had been exhausted and directed the contractor to restrict operations within the capped amount. MWHPL suspended work and invoked arbitration, alleging wrongful termination and claiming damages for the remaining contract period.

The arbitral tribunal ruled in favour of MWHPL and awarded damages, escalation charges, labour costs, interest and litigation expenses. DJB challenged the award under Section 34 of the Arbitration and Conciliation Act.

Before the Court, DJB argued that the contract was effectively capped at ₹59.64 crore and that the tribunal erred in awarding damages without proof of actual loss, relying instead on projected turnover. It also contended that the contractor had already received the assured contract value prior to termination.

The court, however, upheld the tribunal's finding that the agreement was an item-rate contract and not a lump sum contract. It noted that the tender was invited on an item-rate basis, bids were submitted on a per-hour basis, payments were linked to actual usage, and the contract expressly excluded lump sum provisions. It reiterated that interpretation of contractual terms falls within the domain of the arbitral tribunal and cannot be interfered with unless the view taken is perverse.

"It is an undisputed fact that the tender was invited on an item rate basis. The completion period was stated to be of seven years which could have been extended. The bid was quoted on per working hour basis. There was an assurance of minimum hiring of the machines for two hundred hours per month. The payments were to be made on actual working hours and SCC provided for payment on a pro-rata basis in case the deployment are less than eight hours a day” the court observed.

On termination, the court agreed with the tribunal that DJB's termination powers had to be read in conjunction with the specific contractual conditions, which were not satisfied in the present case. It held that “the tribunal rightly concluded that the eventualities mentioned in clause 11.1 of the GCC for termination of the contract never existed and the termination of the contract was illegal.”

On the issue of damages, however, the Court found the arbitral award unsustainable to the extent it granted damages. It held that the tribunal had wrongly treated the assured turnover for the remaining period of the contract as the loss suffered by the contractor.

The Court emphasised that under Sections 73 and 74 of the Contract Act, damages must be based on proof of actual loss, unless such loss is impossible to quantify. In the present case, no evidence of actual loss suffered by the contractor was placed on record.

It further observed that the contractor had already received the assured minimum contractual value before termination and that awarding damages based on gross turnover, without accounting for operational costs, would result in a windfall gain rather than compensation.

“The gross turnover for the remaining period of the contract was taken to be loss suffered by MWHPL. The awarding of damages without deducting expenses puts MWHPL in position of having a windfall gain rather than reimbursing the loss suffered,” the Court held.

Accordingly, the court set aside the award of damages for both the suspension period and the remaining tenure of the contract, along with the interest awarded on such damages.

At the same time, it upheld the arbitral tribunal's award of escalation charges, payments towards additional labour, interest on delayed payments, and litigation costs, finding no perversity in those findings.

Applying the principle of severability, the Court held that the invalid portion of the award relating to damages could be set aside without disturbing the rest of the award.

“The quashing of awarding of damages for the period of suspension and for the balance period of the contract along with the interest thereon are separable, not dependant on other claims awarded, and are not intricately connected with each other,” the court observed.

The petition was accordingly partly allowed.