Name of Author- Vaibhav Pandey, Amity Law School, Amity University, Lucknow, Uttar Pradesh

Name of Editor- Sulesh Choudhary

ABSTRACT / HEADNOTE

In the case of Unibros vs All India Radio, (2007) 8 SCC 625, The Supreme Court of Indian had occasion to deal with a longstanding dispute emanating out from delayed completion of construction contract and lease deed relating Delhi Doordarshan Bhawan Phase-II. A crucial point of dispute was the arbitral award for loss of profit suffered due to delay, which tribunals at different levels had repeatedly set aside. The case showcases the nuances of arbitration, contractual interpretation and loss of profit principles i.e. Hudson formula in Indian legal context. Given the context in which this case would have to be decided, and also by virtue of being a construction dispute believed to be worth multiple crores (old currency) – dealing with arbitration is something mandatory for such contracts. The judgement is valuable for both legal practitioners and the construction industry as guidance on how loss of profit claims are to be treated in relation to contract delays.

Keywords: Arbitration, Loss of Profit, Hudson’s Formula, Construction Delay, Contract Law

CASE DETAILS

INTRODUCTION AND BACKGROUND OF JUDGEMENT

The legal battle between Unibros and All India Radio Delhi Doordarshan Bhawan construction contract, is a major historical landmark in the annals of Indian Law which took almost two decades to reach its ultimate legal conclusion. The dispute followed heavy delays on the project, causing Unibros to incur penalties due to its profit being eroded. The main point in controversy was the arbitral award which had been allowed to Unibros for loss of profit on account of delay, following Hudson’s formula. It argued that this award was invalid as not supported by ‘sufficient evidence’ and an arbitrarily determined. The arbitral award was challenged originally under Section 34 of the Arbitration and Conciliation Act, 1996 which led to its being set aside by a Single Judge of High Court. The Division Bench of the Delhi High Court confirmed this decision and Unibros filed an appeal with the Supreme Court to replace that award. The verdict by the Supreme Court of India itself reflects as well, on arbitration systems, contractual obligations and the recourse taken to breach in determination for calculation through various relevant learned principles.

FACTS OF THE CASE

Procedural Background of the Case

• Unibros was granted compensation for loss of profit due to delay by an Arbitral Award.
• Consequent to the Single Judge setting aside the award in a challenge under Section 34 of Arbitration and Conciliation Act, 1996 by AIR.
• The Division Bench of the Delhi High Court has upheld the decision of Single Judge.
• The appeal moved to the Supreme Court on behalf of Unibros.

Factual Background of the Case

• Unibros got a contract to build the Delhi Doordarshan Bhawan, Phase-II for which one year was given in start as milestone.
• This leaded for delay of around 42.5 months in the project which cost extra and loss from profit to Unibros.
• An arbitrator awarded Unibros Rs. 1,44,83,830 for loss of profit using Hudson’s calculation, which AIR challenged, alleging insufficient proof.

LEGAL ISSUES RAISED

In the light of Unibros vs All India Radio quite a few important legal questions were posed before our Lordships which warranted tread with caution. The case addressed fundamental issues of arbitration, contract law and the principles relating to damages for breach of contract (and in particular claims for loss of profit caused by construction delays). This was a significant factor in determining the legitimacy of this arbitral award, and wider implications for such cases.

• If the arbitrators outcome for loss of profit was justified upon evidence.
• How applicable is the Hudson formula this time to calculate loss of profit because there was construction delay.

PETITIONER / APPELLANT’S ARGUMENTS

• The award of the arbitrator was neither arbitrary nor capricious, but reasonable and supported by ample evidence, including Hudson’s formula.
• The courts have very limited right to interfere with arbitral awards except the arbitration amounts to patent perversity or capricious on the face of record.
• That the loss of profit was reasonably foreseeable and flowed directly from AIR’s breach by its failure to deliver a complete site drawing within agreed time limits.

RESPONDENT’S ARGUMENTS

• The results were arbitrary and evidence-free.
• Unibros had failed to show that it was actually damaged through the delay, and clearly Hudson’s formula has been applied erroneously.
• Thus, the High Court was right in setting aside that award given there had been no evidence or substantiation to demonstrate a loss of profit.

RELATED LEGAL PROVISIONS

• Section 37 of the Arbitration and Conciliation Act, 1996[1]
• Section 34 of the Arbitration and Conciliation Act, 1996[2]
• Section 73 of the Indian Contract Act, 1872[3]

JUDGEMENT

RATIO DECIDENDI

• The Supreme Court agreed with the lower courts that no adequate proof was available in support of these claim and there were not justified on principles of contract law or arbitration. The Court instead reiterated the need for reliable and material evidence to be capable of supporting contracts based claims for loss of profits.
• The Supreme Court had to determine if the arbitrator correctly applied Hudson’s formula and whether Unibros submitted sufficient evidence at law. It turns on whether the way in which it was formulated changed and, by extension is potentially fraudulent or otherwise dangerous, to use such formulas for a construction arbitration claim.
• In the Supreme Court case it was determined when Hudson’s formula should be used to determine a loss of profit. This formula that predicts the loss of profit according to the contractor’s turnover and deviation duration, should be used carefully due its dependance on concrete data. The Court stated that applying Hudson algorithm to derive the conspiracy does not meet legal standards in these types of claims, as this was an “unsupported assertion. This part of the Judgment is one that tribunals will rely on for direction as to how damages should be calculated in construction claims.

GUIDELINES

Utilizing Hudson’s formula generally necessitates clear evidence of the probable profit to be realized by a contractor and an equally identifiable loss or losses for which that expectancy was hindered due to delay.

OBITER DICTA

The Court noted the importance of maintaining a balance between minimal judicial intervention in arbitral awards and ensuring that such awards are based on sound and substantial evidence.

CONCLUSION & COMMENTS

The outcome of Unibros vs All India Radio is an illustrative example that demonstrates how a judicable issue might be prejudiced as well as the role played by credible evidence in arbitration and contractual disputes, particularly with regard to loss of profit. The judgment reiterates the narrow scope within which judicial intervention lies over arbitral awards and at the same time ensures that these are based on solid grounds and conform to principles of contract law. This judgment is important in that it provides welcome clarity on the high hurdles to clear when proving loss of profit from construction delay and how Hudson’s formula applies.The court reiterated that substantive, concrete and credible evidence should be the foundation of arbitral tribunals’ judgments, rather than theoretical calculations or mere claims which are based on sheer speculation. The one main lesson to take away from this case is that meticulous record-keeping and verifiable evidence of financial damage are key when seeking damages due to a lag in construction.Coming soon after, it is also a salutary reminder that while arbitration aims to provide an informal and expedious method of resolving disputes, this end must not be achieved at the expense of fairness or justice – nor yet by loose notions about what may make good limits evidence based decisions. The judgment also reiterates that the role of the judiciary in overseeing arbitrations is limited to verifying, through scrutiny under section 34, whether an award conforms with established legal principles or requirements cited above.This instance offers a lesson to contractors and businesses about the necessity of following proper procedures when submitting claims, verifying their eligibility to make those claims. It reminds lawyers of the importance to submit fully substantiated and persuasive arguments in arbitration. In sum, the judgement further adds to this developing legal jurisprudence in India on arbitration and marks another step towards making arbitration of contract disputes clearly defined and held accountable.

REFERENCES

Important Cases Referred

• Associated Builders vs. Delhi Development Authority (2015) 3 SCC 49
• Bharat Cooking Coal Limited vs. L.K. Ahuja (2004) 5 SCC 109
• The Project Director, NHAI vs. M. Hakeem and Another (2021) 9 SCC 1

Important Statutes Referred

• Arbitration and Conciliation Act, 1996
• Indian Contract Act, 1872

ENDNOTES:

[1] provides for filing of appeals against orders of the Court or for that matter an Arbitrator

[2] Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

[3] Compensation for loss or damage caused by breach of contract.