A division bench of the Delhi High Court in Cobra Instalaciones Y Servicios, S.A. & Shyam Indus Power Solution Pvt Ltd. v. Haryana Vidyut Prasaran Nigam Ltd. (“HVPNL”)[1] (“Cobra Case”)upheld the quantification of damages by an arbitrator through “honest guesswork” or a “rough and ready method” since it was difficult to quantify the precise amount of loss suffered by the party.
In this blog, we examine the rough and ready approach under Indian law for quantifying damages.
The Cobra Case
The Delhi High Court was deciding a petition under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), filed by the claimant joint venture, challenging the decision of a single judge of the Delhi High Court, partially setting aside the arbitral award. The award was set aside to the extent that it allowed 50% refund of the liquidated damages imposed by the respondent based on “guesswork”.
Parties had entered into a contract to improve the infrastructure and power situation in Haryana under the G09 project (“Contract”). The project had to be completed within 450 days. Because of delays in completion, the respondent withheld 10% of the project cost as liquidated damages. Disputes arose, including in relation to the levy of liquidated damages, leading to the petitioner invoking arbitration.
Arbitration Proceedings
The arbitrator found that both parties had failed to produce necessary evidence of the losses claimed to have been suffered/ not suffered. It held that the respondent did suffer losses, but did not provide details or even rough estimates of such losses, where possible. Interestingly, the Contract did not provide that the liquidated damages stipulated therein were a genuine pre-estimate of the damages that the respondent would suffer in case of breach. Taking all the facts and circumstances into account, the arbitrator held that the liquidated damages specified in the Contract, were not a reasonable amount of compensation. Thereafter, relying on the judgment of the Supreme Court in Construction and Design Services v. Delhi Development Authority[2] (“CDS“), the arbitrator held that he would “tend to make a guess and allow 50% of the liquidated damages levied as reasonable compensation”.
Challenge before single judge of the Delhi High Court
Aggrieved by the arbitral award, both parties filed petitions under Section 34 of the Arbitration Act before a single judge of the Delhi High Court. The judge set aside the arbitral award to the extent that it awarded refund of 50% of the liquidated damages to the claimant on the following grounds:
- Inconsistency in the award: After having found that the losses were incapable of being determined with any precision and that the respondent was entitled to be compensated, there was no reason or material on record for the arbitrator to assess the damages as half of the damages stipulated under the Contract.
- Arbitrator could not reduce quantum of damages based on “guesswork”: After having concluded that it was not possible for the respondent to quantify the damages suffered by it, it was not open for the arbitrator to reduce it to 50% based on “guesswork”.
- In CDS, the Supreme Court exercised exclusive powers under Article 142 of the Constitution of India, 1950, to hold that awarding half the damages was fair. This case was, therefore, not an authority for the proposition that “the Arbitral Tribunal can award damages on “guesswork”, where there is no material to assess the same”.
The judge went on to hold that “[m]aking an ad hoc assessment of damages at 50% of the Liquidated damages is arbitrary and plainly erroneous”. Accordingly, the arbitral award was set aside to such extent.
Appeal before division bench of the Delhi High Court
A division bench of the Delhi High Court set aside the judgment of the single judge and restored the arbitral award as regards levy of 50% liquidated damages, on the following grounds:
- As long as there is material available with the arbitrator that damages have been suffered, but it does not give them an insight into the granular details, the arbitrator is permitted the leeway to employ honest guesswork and/ or a rough and ready method for quantifying damages.
- Rough and ready method/ guesswork is a tool in the hands of an arbitrator that has received the imprimatur of various courts in India[3], even before the judgment of the Supreme Court in CDS.
- In CDS, the Supreme Court did not reduce “the burden of damages befalling the defaulting party by taking recourse to the powers conferred on it under Article 142 of the Constitution”. The Supreme Court made no such observation. Instead, it concluded that under certain circumstances (which circumstances also exist in the Cobra Case), the court could proceed based on “guesswork”, with regard to the “quantum of compensation to be allowed”.
- The arbitrator was “well within the bound of law to employ a rough and ready method for awarding a reasonable compensation” to the respondent.
Key Takeaways
Circumstances under which “guesswork” and/ or a “rough and ready method” may be applied for quantification of reasonable compensation/ damages under Indian law are summarised below:
- There is a breach of contract, which resulted in some loss to the party complaining of breach.
- The party that has suffered such loss is entitled to compensation to the extent of loss suffered.
- The liquidated damages stipulated under the contract, if any, are not a genuine pre-estimate of the damages that the party complaining of breach would suffer[4].
- It may not be possible[5] for the court/ arbitrator to quantify the exact amount of loss suffered by the party complaining of breach, either due to lack of specific evidence or otherwise.
- There shall be no interference with the guess of the arbitrator and the court cannot second-guess the quantum awarded, so long as it is not unreasonable.
Although in the above circumstances, the honest guesswork approach is a valid and practical method for quantifying damages, it would be prudent for parties claiming damages to lead evidence and establish the quantum of losses suffered, rather than leaving it to guesswork, which may lead to uncertain results. Similarly, parties against whom damages are sought must establish that no loss was suffered, where possible, rather than rely upon the counterparty’s inability to prove losses, to avoid grant of damages by way of guesswork.
For further information, please contact:
Gathi Prakash Karrah, Partner, Cyril Amarchand Mangaldas
gathi.prakash@cyrilshroff.com
[1] 2024 SCC OnLine Del 2755 – judgment delivered on April 10, 2024.
[2] (2015) 14 SCC 263.
[3] Mohd. Salamatullah v. Government of Andhra Pradesh, (1977) 3 SCC 590 (If the first was a guess, it was at least a better guess than the second one. We see no justification for the appellate court to interfere with a finding of fact given by the trial court unless some reason, based on some fact, is traceable on the record); Delhi Development Authority v. Anand and Associates, 2008 SCC OnLine Del 179 (court would not set aside an award simply because it was to an extent based upon some guesswork); National Highway Authority of India v. ITD Cementation India Ltd., 2010:DHC:404 (once there are reasonable materials available before the Arbitrators, then, Arbitrators are entitled to make further honest guesswork on the basis of such materials and thereafter arrive at its findings and conclusions more so because now in terms of Section 19 of the Arbitration and Conciliation Act, 1996, the provisions of Code of Civil Procedure, 1908 and the Evidence Act, 1872 do not strict senso apply to arbitration proceedings); Mahanagar Gas Ltd. v. Babulal Uttamchand and Co., 2012 SCC OnLine Bom 1254 (Once the Arbitrator arrives at a figure, even by guesswork, the Court may not interfere with it, if it is not unreasonable); Bata India Ltd. v. Sagar Roy, 2014 SCC OnLine Cal 17998 (In case of a conflict, the guess of the arbitrator must necessarily prevail over a guess by the court, since that is the intention of the parties once they agree to the determination of their disputes by the arbitrator).
[4] If the liquidated damages are found to be a genuine pre-estimate of the loss that is likely to be suffered, the actual loss need not be proved. However, the burden to prove that no loss was likely to be suffered is on the party committing breach.
[5] Whilst the Supreme Court in CDS has used the phrase “may not be possible” (at Para 17), the Delhi High Court in the Cobra Case has interpreted this to mean that an arbitrator may employ guesswork where “it was difficult, as opposed to impossible to quantify damages” (at Para 32).
