Allahabad High Court Partly Sets Aside ₹157.57 Cr Arbitral Award Against U.P. State Highways Authority

The Allahabad High Court on 23 July held that a financial model based on assumptions cannot, by itself, quantify a claim for loss of profits in arbitration, and set aside the Rs. 157.57 crore loss of profits award against the U.P. State Highways Authority.

A Division Bench of Chief Justice Arun Bhansali and Justice Jaspreet Singh partly allowed the Authority's appeal under Section 37 of the Arbitration and Conciliation Act, 1996, severed the loss of profits component of the arbitral award, upheld the remaining findings and remitted the loss of profits claim to an arbitral tribunal constituted in accordance with law for fresh determination. The judges held:

“….the financial model could only be a piece of corroborative evidence, but in absence of any other cogent evidence, it could not be made the sole basis of quantifying claim relating to loss of profits,”

Abhijeet Meerut Karnal Toll Road Limited and the U.P. State Highways Authority entered into a public private partnership concession agreement on 16 December 2011 for the four laning of the Meerut Karnal Road Section (SH 82) on a design, build, finance, operate and transfer basis. The concessionaire had to complete the project within 730 days from the appointed date and operate the concession for 25 years. However, the U.P. State Highways Authority never fixed the appointed date.

The concession agreement required the U.P. State Highways Authority to procure 90 per cent of the right of way before the project could commence. The Authority issued a notification under Section 4 of the Land Acquisition Act, 1894 (which initiates land acquisition proceedings), but did not issue the declaration under Section 6 required to complete the acquisition process. Abhijeet Meerut Karnal terminated the concession agreement on 13 January 2014 and invoked arbitration. Before the arbitral tribunal could enter upon the reference, the Authority encashed the performance security of Rs. 29.16 crores.

The arbitral tribunal delivered a split award. The majority reduced the concessionaire's loss of profits claim from Rs. 640.50 crores to Rs. 157.57 crores and awarded that amount. It also awarded Rs. 25.53 crores towards payments made to EPC contractors. The Presiding Arbitrator dissented and rejected both claims. Commercial Court No. 2 at Lucknow dismissed challenges filed by both parties under Section 34 of the Act (which allows courts to set aside arbitral awards on limited grounds). Both parties then filed appeals under Section 37.

The Court found that the concessionaire had relied primarily on the financial model to prove its claim for loss of profits. It held that the tribunal treated the financial model as the sole basis for quantifying damages even though the document merely projected the project's financial viability for senior lenders. It also found that the tribunal conflated the distinct issues of wrongful encashment of the performance guarantee and loss of profits while computing damages.

Further, the tribunal reduced the claim period from 25 years to five years on its own assumption even though the concessionaire neither pleaded nor argued that basis and led no evidence to support it. It also relied on the Constitution Bench decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. and held that the loss of profits award suffered from “the vice of ipse dixit” and amounted to a case of no evidence. It therefore severed that part of the award, preserved the remaining findings and remitted the loss of profits claim to a newly constituted arbitral tribunal for fresh adjudication.

Moreover, the Bench upheld the tribunal's finding that the U.P. State Highways Authority had wrongfully encashed the performance security. It held that the guarantee secured the concessionaire's obligations only after work commenced. Since the Authority failed to procure the site and never fixed the appointed date, the concessionaire could not have committed any default.

The judges also upheld the award of Rs. 25.53 crores towards payments made to EPC contractors. The U.P. State Highways Authority issued the letter of award on 17 November 2011, the concessionaire accepted it on 18 November 2011 and executed the EPC contracts on 3 December 2011. A third party engineer's report corroborated that the contractors had mobilised and carried out work at the project site. They noted that the Authority never disputed the quantum, authenticity or admissibility of the conciliation awards between the concessionaire and its contractors.

Rejecting the U.P. State Highways Authority's counterclaim of Rs. 49,53,66,822 towards land acquisition, forest clearance and shifting of utilities, the Bench held that the Authority incurred those expenses to fulfil its own contractual obligations. It also held that Article 35.1 of the concession agreement allowed recovery only if the concessionaire committed a material default, which it had not. It observed:

“The Concessionaire could not be permitted to seek damages for the very same default under two or more different heads, hence, once a reasoning has been given in the award by the Arbitral Tribunal which is a plausible one and it cannot be said that the reasoning adopted and the finding given could not have been arrived at by any prudent person or the finding is based on no evidence, such findings of the Arbitral Tribunal are final and cannot be assailed either under Section 34 or Section 37 of the Act of 1996.”

Accordingly, the High Court partly allowed the U.P. State Highways Authority's appeal by setting aside the award of Rs. 157.57 crores towards loss of profits and remitting that claim for fresh determination, while dismissing Abhijeet Meerut Karnal Toll Road Limited's appeal.

Counsel for Appellant(s): Apoorva Tewari, Dipak Seth, Harsh Vardhan, Pranjal Krishna