The Delhi High Court has reaffirmed that arbitral tribunals cannot award compensation for mesne profits through mere guesswork in the absence of any evidentiary foundation or reasoned analysis. This ruling clarifies the limits of judicial deference to arbitral awards under the Arbitration and Conciliation Act, 1996, and reinforces that even in cases of unliquidated damages, an award must be anchored in material on record.
Background & Facts
The Dispute
The dispute arose from a Collaboration Agreement dated 07.06.2016 between Radiance Infracon and Developers Pvt. Ltd. (Appellant), the landowner, and GLS InfraTech Pvt. Ltd. (Respondent), the developer, for the commercial development of land in Sector 16, Mehrauli Road, Gurugram. The Respondent was to pay a non-refundable consideration of Rs. 5.50 crore in instalments by December 2016 and complete construction within strict timelines under Clause 11 of the Agreement. In return, the Respondent was entitled to a 54% share in the built-up area and proportionate land, while the Appellant retained 46%.
Key Facts
- The Agreement required removal of a 66 kVA overhead electricity line and laying of underground cables by 06 months from the date of agreement (i.e., by 07.12.2016).
- Building plan approval was to be obtained within 2 months of removal of overhead wires.
- Construction was to be completed within 16 months of plan sanction.
- Completion and occupation certificates were to be obtained within 3 months of construction completion.
- By October 2016, the Respondent had paid only Rs. 1.15 crore against a contractual obligation of Rs. 3.50 crore.
- The Appellant issued a Notice of Breach on 13.02.2017, which the Respondent denied.
- An Addendum Agreement dated 15.11.2017 extended payment deadlines to 10.02.2018 and construction deadlines to 15.02.2020.
- The Respondent made the final payment of Rs. 4.35 crore on 15.06.2018, but no construction commenced.
- The Appellant issued a Termination Notice dated 15.06.2019, citing non-performance and failure to meet timelines.
- The Respondent refused to vacate the land.
- The Appellant invoked arbitration under Clause 21(f) of the Agreement on 04.07.2019.
Procedural History
- 07.06.2016: Collaboration Agreement executed.
- 13.02.2017: Notice of Breach issued by Appellant.
- 15.11.2017: Addendum Agreement executed, extending timelines.
- 15.06.2018: Final payment made by Respondent.
- 15.06.2019: Termination Notice issued by Appellant.
- 04.07.2019: Arbitration invoked.
- 27.02.2020: Justice A.K. Sikri (Retd.) appointed as Sole Arbitrator.
- 27.11.2023: Arbitral Award issued.
- 22.02.2024: Arbitral Award modified to clarify mesne profits calculation.
- 20.05.2024: Impugned Order passed by Single Judge setting aside Rs. 15.90 crore mesne profits award.
- 13.04.2026: Judgment pronounced by Division Bench of Delhi High Court.
The Parties' Positions
The Appellant contended that the Respondent’s repeated defaults in payment and failure to commence construction constituted a fundamental breach, entitling it to termination, possession, and compensation for loss of profits. The Respondent argued that delays were due to regulatory hurdles beyond its control and that it remained ready and willing to perform.
Relief Sought
The Appellant sought: (i) possession of the land; (ii) damages for loss of profits up to termination (rejected); (iii) mesne profits from 01.07.2019 till actual handover at Rs. 30 lakh per month; (iv) costs of arbitration. The Respondent sought specific performance, reimbursement of expenses, and damages for loss of profits.
The Legal Issue
The central question was whether an arbitral tribunal may award mesne profits in the absence of any evidentiary support or reasoned methodology, merely on the basis of "guesswork," and whether such an award constitutes patent illegality under Section 34 of the Arbitration and Conciliation Act, 1996.
Arguments Presented
For the Appellant
The Appellant argued that the Arbitral Tribunal’s award of Rs. 30 lakh per month as mesne profits was a reasonable estimation based on the Colliers Report (submitted by the Respondent), which indicated rental values of Rs. 50 - 80 per sq. ft. for a 60,000 sq. ft. area, yielding a range of Rs. 30 - 48 lakh per month. Reliance was placed on Cobra Instalaciones y Servicios S.A. v. Haryana Vidyut Prasaran Nigam Ltd., Bharat Heavy Electricals Ltd. v. Delkon India Pvt. Ltd., and DDA v. Anand and Associates to assert that where breach and loss are established but precise quantification is impossible, an arbitrator may use a "rough and ready" or "honest guesswork" method. It was further contended that the Single Judge erred in re-appreciating evidence and that the award must be read holistically, with adjustments between claims and counter-claims.
For the Respondent
The Respondent argued that the Arbitral Tribunal itself admitted that no evidence was led by either party to substantiate the quantum of damages, and yet proceeded to award Rs. 15.90 crore through guesswork. Reliance was placed on Airwil JKM Infracon v. Cadillac Infotech, Edifice Developers v. Essar Projects, and P. Radhakrishna Murthy v. NBCC Ltd. to contend that entitlement to compensation does not automatically justify quantification without a rational basis. The Respondent emphasized that the Tribunal’s rejection of both the CBRE and Colliers reports left no material to anchor the award, rendering it speculative and patently illegal.
The Court's Analysis
The Delhi High Court, in a detailed analysis, examined the scope of judicial interference under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, and the limits of "honest guesswork" in arbitral awards. The Court reiterated that while courts must not sit in appeal over arbitral findings, they are empowered to set aside awards that suffer from patent illegality, including those based on no evidence or devoid of reasoning.
"Unfortunately, no evidence is led in this behalf by either party and therefore, there is no other alternative for the Arbitral Tribunal but to award some amount by making some guesswork."
The Court noted that the Arbitral Tribunal explicitly rejected both the CBRE report (relied upon by the Appellant) and the Colliers report (relied upon by the Respondent), and then proceeded to award Rs. 30 lakh per month without citing any benchmark, methodology, or reasoning. The Court held that this was not a case of "rough and ready" estimation, but of pure conjecture.
The Court distinguished Bharat Heavy Electricals Ltd. and Gemini Bay Transcription, where awards were upheld because the arbitrators had relied on contractual clauses, local commissioner reports, or unit rates. In contrast, here, the Tribunal had no material left to rely upon after rejecting all expert evidence. The Court emphasized:
"An award must stand or fall on the reasons contained therein, and it is impermissible for a party to supplement or reconstruct the reasoning by reference to material not relied upon by the learned Tribunal."
The Court further cited Ramesh Kumar Jain v. Bharat Aluminium Co. Ltd., holding that an arbitrator cannot conjure figures out of thin air. The absence of any discernible nexus between the award and the record rendered the quantification perverse and patently illegal under Section 34(2)(b)(ii). The Court also rejected the Appellant’s argument that the award should be read holistically, noting that the mesne profits award was independently adjudicated and did not depend on other findings.
The Court concluded that while estimation is permissible in unliquidated damages, it must be grounded in evidence or rational methodology. The Tribunal’s failure to provide any such basis transformed guesswork into arbitrariness, warranting interference.
The Verdict
The Appellant’s appeal was dismissed. The Delhi High Court upheld the Single Judge’s order dated 20.05.2024, setting aside the Arbitral Award to the extent of Rs. 15,90,00,000 awarded as mesne profits at Rs. 30,00,000 per month from 01.07.2019 to 30.11.2023 and beyond. The Court clarified that the Appellant retains the liberty to pursue its claim for mesne profits in accordance with law, but any future award must be supported by cogent evidence and reasoned analysis. There shall be no order as to costs.
What This Means For Similar Cases
Guesswork Without Evidence Is Patent Illegality
- Practitioners must ensure arbitral awards for unliquidated damages are supported by at least a minimal evidentiary anchor - even if it is a contractual rate, market data, or expert report.
- Tribunals cannot rely on the phrase "no evidence led" and then award damages through intuition; the reasoning must be disclosed.
- A mere reference to "all relevant facts and circumstances" is insufficient; the methodology must be articulated.
Rejection of Expert Reports Cannot Be Ignored
- If an arbitrator rejects all expert valuation reports, any subsequent award must be based on alternative, identifiable benchmarks - such as statutory rates, comparable leases, or industry standards.
- Parties should not assume that an arbitrator’s rejection of one report opens the door to unguided estimation; the burden remains to establish a rational basis.
Section 34 Interference Is Not Re-appreciation
- Courts are not re-evaluating evidence when they set aside awards lacking reasoning; they are enforcing the statutory requirement of reasoned determination.
- A party’s failure to object to the absence of reasoning during Section 34 proceedings does not cure the defect - patent illegality is a jurisdictional flaw.
No Automatic Adjustment of Claims
- Setting aside one component of an award (e.g., mesne profits) does not automatically require reopening of other claims or counter-claims unless they are interdependent and specifically challenged.
- Arbitrators must adjudicate claims independently and clearly delineate the basis for each award.
Practical Takeaway for Arbitrators
- When quantification is difficult, arbitrators should: (a) identify the closest available benchmark; (b) explain why it is applicable; (c) state the range considered and the rationale for the chosen figure.
- If no material exists, the arbitrator should decline to award damages rather than resort to guesswork.
