The Chhattisgarh High Court has reaffirmed that an arbitral tribunal cannot award damages for loss of profit in the absence of concrete evidence or a contractual obligation to perform the entire work. This judgment clarifies the boundaries of judicial intervention under Section 34 of the Arbitration and Conciliation Act, 1996, and underscores the principle that arbitrators are bound by the terms of the contract and cannot substitute their own assumptions for proven facts.
Background & Facts
The Dispute
Bharat Sanchar Nigam Limited (BSNL) invited tenders under Tender Notice No. W-2/34/Tender/TDM/Ambikapur/Cable Construction Work/10-/ for laying underground cables and jointing at multiple sites within the Ambikapur Telecom District, with an estimated contract value of ₹25,00,000. M/s Talat Construction, the lowest bidder, was awarded the tender and an agreement was executed on 06.11.2010. The agreement did not guarantee the entire scope of work to the claimant; it was contingent upon issuance of subsequent work orders.
Key Facts
- The claimant executed work worth ₹62,388/- and submitted bills, but payment was not released.
- The claimant deposited an Earnest Money Deposit (EMD) of ₹62,500/-, which was later converted into a Security Deposit.
- No work order was issued for the remaining work amounting to ₹24,37,612/-. BSNL cited a vigilance inquiry as the reason for non-issuance.
- The claimant claimed loss of profit at 15% on the unawarded balance work, totaling ₹6,59,337/-, along with interest and refund of the Security Deposit.
- The claimant did not plead or adduce any evidence demonstrating a viable alternative opportunity to utilize resources for profit.
- The claimant admitted to incomplete records and lack of documentation supporting the loss of profit claim.
Procedural History
- 06.11.2010: Agreement executed between BSNL and M/s Talat Construction.
- 23.08.2013: Notice invoking arbitration received by BSNL; arbitral proceedings commenced.
- 15.04.2017: Sole Arbitrator passed award directing payment of ₹62,500/- as Security Deposit, ₹2,43,761/- as loss of profit, 10% interest from 13.03.2013, and ₹2,00,000/- as costs.
- 11.09.2018: District Judge, Surguja, dismissed BSNL’s Section 34 application to set aside the award.
- 16.04.2026: Chhattisgarh High Court delivered judgment on appeal under Section 37 of the Act.
Relief Sought
BSNL sought setting aside of the arbitral award dated 15.04.2017 on grounds of patent illegality, lack of evidence, breach of contractual terms, and conflict with public policy. The claimant sought affirmation of the award.
The Legal Issue
Can an arbitral tribunal award damages for loss of profit when no work order was issued for the unperformed portion of the contract, no evidence of actual loss or alternative opportunity was adduced, and the contract expressly barred interest on the Security Deposit?
Arguments Presented
For the Appellant/BSNL
BSNL contended that the arbitral award suffered from patent illegality under Section 34(2A) because: (i) no enforceable contractual right arose for the unawarded work due to absence of a work order; (ii) the claimant failed to plead or prove any actual loss or viable opportunity for alternative profit; (iii) the award of interest at 10% per annum directly violated Clause 8.1 of the NIT, which expressly prohibited interest on bid security; and (iv) the award was based on conjecture, not evidence. Reliance was placed on Unibros v. All India Radio and Bharat Cooking Coal to argue that loss of profit claims require concrete proof.
For the Respondent/Claimant
The claimant argued that the arbitral proceedings commenced in 2013, prior to the 2015 Amendment, and therefore Section 29A’s time limits were inapplicable. It further contended that the award was within the arbitrator’s discretion and that the District Judge correctly applied the limited interference standard under Section 34. Reliance was placed on BCCI v. Kochi Cricket and Ssangyong v. NHAI to assert the prospective nature of the 2015 Amendment.
The Court's Analysis
The Court first addressed the applicability of Section 29A of the Arbitration and Conciliation Act, 1996, as amended in 2015. It held that since arbitral proceedings commenced on 23.08.2013 - well before the amendment’s effective date of 23.10.2015 - the time limits under Section 29A were not applicable. The Court relied on BCCI v. Kochi Cricket and Ssangyong v. NHAI to affirm the prospective nature of the amendment, rejecting BSNL’s challenge on this ground.
However, the Court turned to the core issue: the award of ₹2,43,761/- as loss of profit. It observed that the claimant had neither pleaded nor adduced any evidence demonstrating that it had suffered actual loss or that it had lost a specific, viable opportunity to earn profit elsewhere. The Court emphasized that a claim for loss of profit cannot be sustained on mere speculation. Quoting Unibros v. All India Radio, the Court stated:
"The arbitral award in question, in our opinion, is patently illegal in that it is based on no evidence and is, thus, outrightly perverse; therefore, again, it is in conflict with the 'public policy of India' as contemplated by section 34(2)(b) of the Act."
The Court further noted that the contract did not guarantee the entire work to the claimant. Absent a work order, no breach of contract occurred, and therefore no basis existed for claiming damages for unperformed work. The arbitrator’s award, therefore, was not merely erroneous - it was legally unsustainable.
Regarding interest, the Court examined Clause 8.1 of the NIT, which explicitly stated: "No interest shall be paid by the BSNL on the bid security for any period, whatsoever." The arbitrator’s award of 10% interest on the Security Deposit was held to be in direct contravention of this express contractual term. The Court held that an arbitrator, as a creature of contract, cannot grant relief contrary to the parties’ agreement.
The Court also criticized the District Judge for mechanically applying the limited interference standard under Section 34 without examining whether the award suffered from patent illegality or violated public policy. The failure to scrutinize the absence of evidence and contractual breach rendered the District Judge’s order unsustainable.
The Verdict
The appeal was allowed. The arbitral award dated 15.04.2017 and the District Judge’s order dated 11.09.2018 were set aside. BSNL was directed to refund the Security Deposit of ₹62,500/- to the claimant within 30 days. No interest was payable on the deposit, in accordance with Clause 8.1 of the NIT. The claim for loss of profit and costs was dismissed in its entirety.
What This Means For Similar Cases
Loss of Profit Claims Require Concrete Proof
- Practitioners must ensure that claims for loss of profit are supported by specific pleadings and documentary evidence of alternative opportunities, not mere estimates.
- Arbitrators cannot infer profit potential from the value of unawarded work alone.
- In construction and service contracts, absence of a work order negates any claim for damages on unexecuted portions.
Contractual Terms Bind Arbitrators Absolutely
- Arbitrators are not free agents; they are bound by express contractual terms, including clauses barring interest or limiting liability.
- Any award violating an express contractual provision is voidable under Section 34(2A) as patent illegality.
- Clause 8.1 of the NIT in this case was not a mere formality - it was a binding limitation on liability.
Judicial Review Under Section 34 Is Not Merely Procedural
- Courts must actively examine whether an award is based on no evidence or contradicts the contract - not just defer to the arbitrator’s discretion.
- Mechanical dismissal of Section 34 applications without substantive review invites appellate intervention.
- The "public policy of India" exception under Section 34(2)(b) is triggered when awards are based on conjecture or violate fundamental contractual norms.
