Allowing Guesswork for Quantifying Damages: A Shot in the Dark?

Administrator
1 day ago
6 min read

Navya Pandey*

INTRODUCTION

A key requirement for succeeding in a claim for damages in cases of contractual breach is proving the actual loss suffered by the aggrieved party. Section 73 of the Indian Contract Act, 1872 (“Contract Act”), provides that to claim compensation for a breach of contract, the aggrieved party must establish that a legal injury occurred, that the injury was caused by the breach, and that the breach was the direct cause of the harm suffered. Further, Section 74 deals with the consequences of contractual breaches. It allows the aggrieved party to claim the sum stipulated in the contract, known as liquidated damages (“LD”), provided it represents a genuine pre-estimate of the loss if the actual loss cannot be proven. However, the problem arises in cases involving delays or loss of expected profits where proving actual loss can be challenging or even impossible. This issue was recently considered in Cobra Instalaciones Y Servicios, S.A. & Shyam Indus Power Solution (P) Ltd. v. Haryana Vidyut Prasaran Nigam Ltd. (“Cobra Instalaciones”), wherein the Delhi High Court ruled that guesswork is an acceptable way of quantifying damages where proving actual losses is difficult.

FACTUAL BACKGROUND

Haryana Vidyut Prasaran Nigam Ltd. (“HVPNL”) invited bids for multiple construction projects, and Cobra Instalaciones Y Servicios & Shyam Indus Power Solutions Pvt. Ltd. (“Cobra”) emerged as the successful bidders. However, the project was not completed within the agreed stipulated time. As a result of this contractual breach, HVPNL imposed the maximum LD for the delay, prompting Cobra to invoke arbitration. The Arbitrator determined that delay attributable to Cobra caused losses to HVPNL and allowed the LD, but refunded fifty percent (50%) of the same sincesome of the delay was caused by the sub-contractors. In doing so, the Arbitrator relied on the ratio of Construction and Design Services v. Delhi Development Authority, which allowed for guesswork in quantifying losses when proving the actual loss was difficult. However, it was also noted that the LD clause in the contract did not represent a genuine pre-estimate of the losses suffered by HVPNL. Although a Single Judge of the Delhi High Court initially set aside the award on account of inconsistencies, a Division Bench later reversed the decision, ruling that when proving actual loss is difficult, a court may fix damages based on “guesswork” and thus upheld the 50% LD award.

JUDICIAL OPINIONS: GUESSWORK VS EVIDENCE-BACKED DAMAGES

Judicial opinions are markedly divided on the validity of estimating losses through guesswork. One line of judgments supports the view that courts can rely on honest guesswork to determine compensation where evidence of the precise amount of loss cannot be presented. One of the earliest precedents endorsing this view was Mohd. Salamatullah v. Govt. of Andhra Pradesh, which awarded a rough figure as damages based on an estimate, when the exact quantum of loss could not be provided. Later, in A.T. Brij Paul v. State of Gujarat, the Supreme Court ruled that it is unnecessary to go into the minutest details of the work executed while estimating the loss of profit for breach of contract, and a broad evaluation is sufficient. In Construction and Design Services, which Cobra Instalaciones also relied upon, the Supreme Court held that if the party committing the breach is not able to provide any evidence to show that the aggrieved party did not suffer loss, the court has to rely on guesswork to determine the quantum of damages.

On the other hand, several judgments emphasize that in the absence of proof of actual loss, some evidence must be placed on record to estimate the losses incurred in order to award damages. In Fateh Chand v. Balkishan Das, the Supreme Court explained that Section 74 of the Contract Act, only dispenses with the need to prove actual loss, but proving that a legal injury was suffered due to a breach of contract is necessary to be awarded damages. Again, in Maula Bux v. Union of India, the Supreme Court held that if the loss can be determined in terms of money, the party claiming compensation must prove the same. This was reiterated in Kailash Nath Associates v. DDA. In this case, the Apex Court held that if the sum enumerated in the contract is a genuine pre-estimate of damages, then the party complaining of breach can receive the entire LD amount as reasonable compensation. Additionally, the Court also opined that where it is possible to prove actual loss, such proof must not be dispensed with. Only when proving loss or damage is impossible or difficult, can the LD named in the contract be awarded, provided the stipulated sum is found to be a genuine pre-estimate of the loss.

However, actual loss must be proved wherever possible. In Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., the Supreme Court held that in a claim for loss, the computation of damages resulting from a breach should not be whimsical or absurd, amounting to a windfall for one party at the expense of the other. Most recently, in Unibros v. All India Radio, the Apex Court ruled that damages cannot be awarded without proof that the claimant suffered injury. If damages are granted without sufficient proof, such an award will be considered patently illegal due to lack of evidence. Therefore, these judgments clearly enunciate the principle that quantifying the losses cannot be given a complete go-by while awarding damages.

CHALLENGES WITH THE GUESSWORK APPROACH

The decision in Cobra Instalaciones poses the following two challenges:

(a) It approved the use of “guesswork” for computing damages on the grounds that it was difficult to prove and quantify the losses. This must be seen in light of the fact that some losses were in fact quantifiable, a point acknowledged by the arbitral award as well as in both the appeals decided by the Delhi High Court. Therefore, some proof could have been placed on record by HVPNL to justify the monetary compensation it was demanding for the losses suffered. However, damages were awarded without credible proof, in contravention of the principle laid down in a catena of judgments like Maula Bux, Kailash Nath and Unibros. Therefore, Cobra Instalaciones establishes a principle that allows parties to avoid the burden of quantifying and proving the losses even when possible, and to claim amounts that they themselves may not be able to substantiate.

(b) The Arbitrator found that the sum mentioned in the contract as LD was not a genuine pre-estimate of the loss. Despite this, HVPNL was awarded fifty percent (50%) of the LD. However, if the LD amount itself was not a genuine estimate, could awarding half of it be considered reasonable compensation? The Arbitrator did not rely on calculations or adopt a systematic methodology to compute the damages. As a result, the estimation lacked “honest guesswork” and was rather a shot in the dark. This contravenes the principle, established in landmark cases such as Saw Pipes Ltd. and Kailash Nath, that LD can be awarded as compensation only when they constitute a genuine pre-estimate of the loss incurred.

Resorting to guesswork to quantify damages has its fair share of problems, which have not been contemplated by pro-guesswork judgments. Firstly, if damages are awarded without taking proof of loss into consideration, it can lead to the awarding of inflated damages, allowing the claimant to recover excessive amounts. This undermines the principle of awarding only reasonable compensation to the aggrieved party enshrined in Section 74 of the Contract Act. In each case, damages should be proportionate to the loss sustained. Secondly, absolving the parties of their duty to prove the measure of loss shifts the burden of identifying it on the arbitrator. In an arbitral proceeding, the parties are required to present material evidence to support their claims, and the arbitrator renders their award on the basis of this proof. However, the guesswork approach puts the entire burden of identifying and quantifying the losses on the arbitrator’s shoulders. Thirdly, doing away with proof of loss makes room for uncertainty and unpredictability in arbitral awards, thus reducing the parties’ confidence in the decisions, opening the floodgates of litigation and calling for frequent intervention of courts. This defeats the purpose of the Arbitration and Conciliation Act, 1996 which aims to minimise judicial intervention in the realm of arbitration.

CONCLUSION

The guesswork approach can give way to unpredictability, contradictions, and confusion. Therefore, it is about time that courts adopt a uniform approach to deal with this issue and provide clear guidelines for situations where parties attempt to evade their responsibility of proving losses while still pursuing claims for damages. Even when a loss is difficult to prove or is speculative in nature, courts should necessitate putting some relevant material on record as evidence. While mathematically precise evidence is not necessary or even possible in every case, credible proof must be mandated to justify awarding a particular sum as compensation. This will ensure that arbitrators do not impose arbitrary levies on the breaching party or take a one-sided view while awarding “reasonable compensation”.

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[*] Navya Pandey is a third-year law student at Dr. Ram Manohar Lohiya National Law University. Her interests lie in reading, watching films and discovering novel ways to while away the hours.