Supreme Court of India on Proof of Loss for LD Claim in Public Utility Services Contracts

In a recent post (22.01.2015), we had discussed the law of liquidated damages and rasied a few pertinent questions regarding proof of loss. In the said post, we had taken note of the decision in  ONGC v SAW Pipes where the court had provided a few illustrations of cases where actual losses need not be proved: a) Delay/ breach in contracts for construction of a road or bridge; b) Delay/ breach caused is one of the several reasons for the legal injury (for example, delay in sending casings was one of the several reasons for postponing deployment of rigs).

Recently (04.02.2015), the Supreme Court of India held in M/s. Construction & Design Services v DDA that in cases of delay/ breach in contract for construction of a public utility service, even in the absnece of specific evidence of loss suffered by the said party, the contractor would be liable for liquidated damages (if breach is established).

In the instant case, the contractor delayed in completing the contract for construction of sewerage pump within the contractually stipulated time. When liquidated damages were imposed, the contractor questioned the same before a Single Judge of the Delhi High Court which upheld the contractor's contentions. The Division Bench, on the other hand, reversed the decision of the Single Judge and held that there was no need of proof of loss in cases of public utility services (pdf).

However, the court held that it could even then determine whether the liquidated damages agreed in the contract was reasonable or not. Since the court felt that DDA never led any evidence to prove losses, the court deemed it fit to award half the sum agreed in the contract as reasonable. The court held:

"Evidence of precise amount of loss may not be possible but in absence of any evidence by the party committing breach that no loss was suffered by the party complaining of breach, the Court has to proceed on guess work as to the quantum of compensation to be allowed in the given circumstances. Since the respondent also could have led evidence to show the extent of higher amount paid for the work got done or produce any other specific material but it did not do so, we are of the view that it will be fair to award half of the amount claimed as reasonable compensation."

Supplementary Report of the Law Commission of India on Public Policy as a Ground for Setting Aside Arbitral Award

The Law Commission of India has taken exception to the recent developments in the Supreme Court of India in the ONGC v Western Geco (pdf)(3 Judge Bench) which was followed by DDA v Associated Builders (pdf) (2 Judge Bench) where the Supreme Court held that the sub-ground of fundamental policy law of India in the public policy ground under Section 34(2)(b)(ii) would include an award which was so unreasonable that it shocked the conscience of the court. 

The 246th Report of the Law Commission created an international public policy regime which restricted it to fraud or corruption or was in violation of Sections 75 or 81 of the 1996 Act. The domestic public policy regime allows a court to set aside arbitral awards on the ground that the award is patently illegal. Now, the Law Commission has come up with a Supplementary Report addressing these recent developments.

Para 10.6 of the Supplementary Report mentions the following as the effects of the aforesaid judgements:

• Further erosion of faith in Indian arbitral proceedings
• Reduction in popularity of India as a destination for international and domestic commercial arbitration
• Increased investor concerns about the speed and efficacy of dispute resolution in India
• Increase in judicial backlog

Hence, the Law Commission has proposed to add an Explanation to S. 34(2)(b)(ii): "For the avoidance of doubt the test as to whether there is a contravention with fundamental policy of Indian law shall not entail a review on the merits of the dispute."

I think this is an interesting and important development considering that Western Geco is a decision of a three judge Bench and it would probably take several years for a larger Bench of judges to reverse the same. Hence, the Supplementary Report is timely in adding the said Explanation. 

Law Commission's New Report Commercial Divisions Bill:

Another interesting development is the Law Commission's new Report on the Commercial Divisions Bill (pdf) which once again recommends setting up of Commercial Divisions and Commercial Appellate Divisions in High Courts but purportedly takes care of the criticisms of the previous Bill. Our post of the need for a Commercial Divisions Bill can be accessed from here.