Compensation Can Be Granted When Aggrieved Party Continues Service Due To Suppression Of Fact Of Contract's Termination: Telangana HC

Brief Facts:

In June, 2012, M/s. Gayathri Projects Limited (GPL)/Principal Employer issued a Tender Notification inviting bids for designs, engineering, supplies, erection, testing and commissioning of 4,000 TPH External Coal Handling Plant for construction of 2X660 MW Thermal Power Plant developed by NCC Power Projects Limited at Krishnapatnam.

M S NCC Limited (Appellant) and M/s. Elecon EPC Projects Ltd. (Respondent No.1) entered into a Consortium Agreement on 27.08.2012, with the appellant as lead partner.

On 29.08.2012, the appellant independently submitted a bid to GPL, intending to enter into a back-to-back contract with respondent No.1 for all works except civil construction. Before the contract with GPL was finalized, the appellant issued a Letter of Intent on 19.12.2012 to respondent No.1 for Rs.183 Crores, with a contract period of 22 months.

However, on 19.04.2014, GPL awarded the same scope of work to M/s. Macmet India Ltd., without formally terminating the contract with respondent No.1.

Subsequently, on 05.06.2014, the appellant invoked an Advance Bank Guarantee of Rs.15.48 Crores, prompting respondent No.1 to file petitions under Section 9 of the Arbitration Act, seeking injunctions against the invocation. On 05.07.2014, respondent No.1 also issued a notice of arbitration, raising a claim of Rs.101.68 Crores against the appellant.

The Award was passed on 17.12.2016 in favour of the respondent No.1 for an amount of Rs.5,09,49,625/- along with interest @ 12% per annum and Rs.5 Crores towards damages together with interest @ 12% per annum from the date of the Award till realization.

The Appellant filed a petition under section 34 of the Arbitration Act against the award which was dismissed. Against the above order, the present appeal has been filed.

Contentions:

The Appellant submitted that the Commercial Court travelled beyond the scope of the section 34 application in giving further reasons in support of the award of loss of profits by relying on Hudson's formula.

It was further submitted that Damages cannot be awarded under section 73 of the Indian Contract Act, 1872 in the absence of evidence of loss of profits.

Per contra, the Respondent submitted that the Tribunal correctly found that the appellant's failure to notify the respondent No.1 of the contract termination amounted to a material breach.

Lastly, it was submitted that the respondent No.1 continued to perform the work to the benefit of the appellant and that the Tribunal was justified in upholding the principal claims and awarding consequential damages for loss of profits.

Observations:

The court at the outset noted that the Indian Contract Act, 1872 does not define the word 'breach' as a standalone act or omission. Sections 73 and 74 of the Act ensure compensation as a consequence of breach.

It further observed that section 37 of the Act clarifies a pre-breach situation by declaring that the parties to a contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused under the provisions of the Act or under any other law.

It further added that section 39 gives the promisee the option to terminate the contract when the other party has refused to perform or has disabled himself/herself from performing the promise in its entirety. This option is subject to the promisee's acquiescence either by words, actions, or conduct.

The Supreme Court in A.T. Brij Paul Singh Vs. State of Gujarat (1984) held that a contractor is entitled to claim damages for loss of profit resulting from the breach of a works contract. Referring to Hudson's formula, the Court directed the State to pay Rs. 2,00,000/- as compensation. It noted that in a connected case involving the same scope of work, the High Court had accepted 15% of the value of the unexecuted work as a reasonable estimate for loss of profit.

The Apex Court further observed that the High Court had wrongly rejected the claim in the present case on the ground that relevant documents were not produced, despite the earlier decision. Therefore, the Court concluded that 15% of the value of the remaining work was a reasonable measure of damages.

The court further observed that neither Section 73 nor Section 55 of the Contract Act provides a specific mechanism for assessing damages in cases of breach or failure to perform a fixed-time contract, despite the legislative intent to compensate the aggrieved party.

It further added that the common objective of these provisions is to ensure that the innocent party is compensated for losses suffered due to the actions of the other party, whether due to breach, failure, or impossibility of performance.

It further opined that section 70 of the Contract Act mandates that a person who enjoys the benefit of a lawful, non-gratuitous act performed by another must compensate them for the benefit received.

Based on the above, the court held that this provision squarely applies to the present case, as it is undisputed that respondent No.1 continued to perform its contractual obligations while the appellant knowingly accepted the benefits of such performance, having deliberately suppressed the information about the short-closure of the contract from respondent No.1.

The court further said that the Arbitral Tribunal merely evened the scales of justice by awarding 5 Crores as loss of profits to the respondent No.1 for the balance work which the respondent No.1 could have performed had the contract not been short-closed.

It further added that failure to prove losses with granular certainty cannot prevent the Court from relying on a reasonable estimation for award of compensation. The bottomline is that the estimation of loss must be reasonable and not exaggerated. A party must suitably be compensated and the Court must draw upon attending facts with regard to the extent of loss.

Based on the above, the court held that GPL had short-closed the contract with the appellant, and the appellant was fully aware of this premature termination. However, the appellant failed to inform the respondent of the same, resulting in the respondent continuing to perform its contractual obligations.

It further opined that meanwhile, the appellant continued to derive benefit from the respondent's work and received payments from GPL for it. The Arbitral Tribunal held that the respondent was entitled to damages for loss of expected profits, as the appellant's deliberate suppression of the short-closure caused the respondent to remain engaged in the project under a mistaken belief.

Accordingly, the present appeal was dismissed.

Case Title: M S NCC Limited vs M S Elecon Epc Projects Limited

Case Number:COMCA No.29 of 2022

Judgment Date: 23/04/2025

Mr. Avinash Desai, learned Senior Counsel representing Mr. Mohammed Omer Farooq, learned counsel appearing for the appellant.

Mr. Dama Seshadri Naidu, learned Senior Counsel representing Mr. K. V. Pavan Kumar, learned counsel for the respondent No.1.

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