Delhi High Court: Arbitrator Authorized To Award Compensation Based On 'Rough And Ready Method' Or 'Guesswork' When Loss Is Hard To Prove

Delhi High Court: Arbitrator Authorized To Award Compensation Based On 'Rough And Ready Method' Or 'Guesswork' When Loss Is Hard To Prove

The Delhi High Court has affirmed that an arbitrator possesses the authority to grant compensation to a party that has incurred losses, even if the exact extent of the loss is challenging to establish, using methods such as 'rough and ready' estimations or 'guesswork'.

The Bench comprising of Justices Rajiv Shakdher and Amit Bansal ruled that if the arbitrator possesses evidence indicating that damages occurred yet lacks intricate details, they are authorized to use reasonable estimation or a pragmatic approach to assess the damages.

The parties signed a contract on April 8, 2012, wherein the appellant company committed to finishing the project work within 450 days. This project formed a component of the Haryana Power System Improvement Project, supported by the International Bank for Reconstruction and Development.

The appellant initiated work on April 8, 2012, with an original deadline set for June 27, 2013. However, delays ensued, leading to a postponement of the actual completion. Discussions between the parties ensued regarding the delays and the deferral of liquidated damages (L.D.). The appellant sought to defer L.D. payments and requested extensions, citing reasons beyond their control.

At first, the respondent postponed the imposition of LD. However, it later opted to enforce the maximum LD. Dissatisfied with this decision, the appellant invoked arbitration.

The arbitrator examined the delays and issues related to LD. The joint venture (J.V.) company argued that the delays were caused by factors beyond their control, such as issues with transmission line contractors.

The arbitrator determined that although delays occurred, some were due to actions by the appellant, such as not addressing certain issues promptly. It concluded that, as a result of faults from the appellant and other entities, the respondent incurred damages, though proving such losses was challenging. Concerning LD, the arbitrator recognized the respondent's right to impose LD according to the contract terms. However, it reconsidered the amount of LD imposed and decided to refund 50% of the LD, along with interest.

Unsatisfied with the ruling, both parties submitted Section 34 petitions. The individual judge annulled the decision and referred the matter back to the tribunal for fresh evaluation. Dissatisfied with this ruling, the appellant filed an appeal under Section 37 of the Act.

The petitioner argued that the respondent did not incur any legal injury or loss and, hence, lacked the authority to levy liquidated damages (L.D.). L.D. must be quantified if possible, similar to damages under Section 73 of the Indian Contract Act, 1872. Since the respondent failed to quantify the losses, it was not eligible for any compensation, regardless of the tribunal's findings on its losses.

The tribunal's decision to refund 50% of the L.D. amount was based on an evaluation of evidence and in accordance with a Supreme Court ruling. Therefore, it should not have been interfered with.

The respondent countered by asserting that the Court's authority under Section 37 does not encompass re-evaluating evidence.

They argued that the appellant breached the contract, warranting the respondent's entitlement to claim the maximum LD, which was a genuine pre-estimate of the losses.

Furthermore, the decision of the single bench to annul the award and refer the matter back to the arbitrator is justified under Section 34(4) of the Arbitration and Conciliation Act.

The Court noted that the arbitrator determined that the respondent incurred losses resulting from breaches by both the appellant and other contractors involved in the project execution. However, proving these losses posed a challenge, leading to the decision that compensation should be shared among all responsible contractors on a pro-rata basis.

The Court affirmed that an arbitrator possesses the authority to grant compensation to a party experiencing losses using a "rough and ready method" or "guesswork" in situations where proving the loss is challenging.

The Court ruled that if the arbitrator possesses sufficient evidence of incurred damages but lacks intricate details, they are allowed the flexibility to utilize honest guesswork and/or a rough and ready method to quantify the damage.

The Court further emphasized that the onus is on the breaching party to demonstrate that no loss was inflicted upon the aggrieved party due to its breach.

The Court determined that the arbitral tribunal's decision to grant 50% damages and refund the remaining 50% based on guesswork was not irrational. It clarified that the notion that guesswork could only be utilized by the Supreme Court under Article 142 of the Constitution was erroneous. Therefore, based on the aforementioned reasons, the court allowed the appeal, overturned the challenged judgment, and reinstated the position regarding L.D. as established in the award.