CMA/1376/2002 of V. Kodandarama Reddy (died) Vs The Andhra Pradesh State Road Transport Corporation Ltd on 30 December 2009

THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE B.N.RAO NALLA

CIVIL MISCELLANEOUS APPEAL Nos.1376 AND1405 OF 2002

BETWEEN:

V.Kodandarama Reddy

AND

… Appellant

The Andhra Pradesh State Road TransportCorporation Ltd,And another.

… Respondent

THE HON’BLE SRI JUSTICE V.V.S.RAOAND

THE HON’BLE SRI JUSTICE B.N.RAO NALLA

CIVIL MISCELLANEOUS APPEAL Nos.1376 AND1405 OF 2002

COMMON JUDGMENT: (per Hon’ble Sri Justice V.V.S.Rao)

These two appeals under Section 39 of the Arbitration Act,1940 (the Act, for brevity) is against common order dated 29.06.2001passed by Court of II Senior Civil Judge, City Civil Courts, Hyderabad, inO.P.Nos.146 of 1989 and 168 of 1990. Both the appeals filed bycontractor (hereafter called, the appellant/contractor) are against AndhraPradesh State Road Transport Corporation (hereafter called, RTC).During pendency of proceedings, the contractor died and his legalrepresentatives came on record as per order dated 7.9.2007 inC.M.A.M.P.No.1201 of 2007 in C.M.A.No.1405 of 2002. The disputes thatarose in the matter of construction of bus station complex were referred toarbitrator. Arbitrator passed award. Contractor filed O.P.No.168 of 1990for making the award rule of the Court with interest at 15% per annum from the date of reference till the date of decree and 12% per annum fromthe date of decree till the date of realisation. RTC filed O.P.No.146 of1989 under Section 30 of the Act to set aside the award. The learnedsenior civil Judge partly allowed both the O.Ps., only to the extent ofconfirming the arbitral award regarding payment of interest on thesecurity deposit.

RTC invited tenders for construction of bus station complex atTirumala. The contractor’s bid for Rs.49,00,000/- (Rupees forty nine lakhsonly) was accepted and after negotiations, the value of work was reducedto Rs.42,00,000/- (Rupees forty two lakhs only). EMD of Rs.40,500/- andsecurity deposit of Rs.27,000/- were given by contractor. On 26.02.1981contractor signed the stamp papers supplied by Corporation andsubmitted the same. A day thereafter, the Chief Civil Engineer informedacceptance of tender and the original contact period of 20 months wasreduced to 12 months for which contractor gave programme. As the offerwas accepted, contractor allegedly mobilized men, material andmachinery to the site. The site was not handed over and 7 months afteracceptance of contract, a communication dated 25.09.1981, GeneralManager of RTC informed that the order of acceptance was cancelled onthe ground that they were not in a position to take up the work atTirumala. Contractor made a representation on 24.11.1981 requestingpermission to commence the work, in vain. Without prejudice to his rights,contractor accepted refund of EMD and security deposit and filedO.P.No.165 of 1985 for appointment of arbitrator. The learned IIAdditional Senior Civil Judge by order 21.02.1986 appointed solearbitrator, who entered reference on 21.04.1987.

In his claim statement, the contractor raised four claims namely, (i)an amount of Rs.1,90,000/- towards loss suffered on engaging 100salem labour, advances paid, transportation charges and for erectingsheds for workers, (ii) an amount of Rs.46,000/- paid as advance toowners of lorries, for centring materials and establishment; (iii) an amountof Rs.5,25,000/- towards loss of profit at 12.5% per annum of the contractamount for breach of contract; and (iv) interest at 20% per annum from01.11.1980 to 28.01.1982 and from 010.3.1981 to 28.01.1982 onEMD/security deposit, and an amount of Rs.2,36,000/- towards intereston claim Nos.1 and 2 at 20% per annum from 01.06.1981 to 28.09.1987.

RTC opposed the claim inter alia on the ground that there was novalid agreement between parties and that all the claims are notsustainable.

Initially, on 13.10.1988 arbitral tribunal passed award allowing anamount of Rs.65,000/- under claim No.1, an amount of Rs.21,000/- underclaim No.2, an amount of Rs.2,50,000/- under claim No.3 and an amountof Rs.88,930/- under claim No.4. RTC filed O.P.No.146 of 1989 seeking to set aside the award. As the arbitral tribunal passed award withoutreasons, the civil Court remitted the matter to the arbitrator and with arequest to furnish reasons under the proviso to Section 14(1) of the Act.The arbitral tribunal later furnished reasons. Thereafter, the Court belowconsidered the matter and set aside the award insofar as claim Nos.1 to 3are concerned. The Court below set aside claim No.1 on ground that thereasons assigned are not satisfactory and that as per clause 58 ofA.P.M.D.S.S (APDSS) contractor is not entitled for any such amount, setaside claim No.2 on the ground that the question of paying advance tolorry owners does not arise and set aside claim No.3 on the ground thatthe reasoning of arbitrator is not sound. Claim No.4, interest on EMD andsecurity deposit, was allowed to the extent of Rs.7,930/- while denyinginterest awarded on claim Nos.1 and 2.

In these appeals, counsel for contractor submits that the arbitralaward for claim Nos.1 and 2 is supported by documentary evidence.When the award is made on considering such evidence, interference bycivil Court on the ground of sufficiency of reasons is erroneous especiallywhen arbitral tribunal as well as civil Court found that there was aconcluded contract between parties and the same was unilaterallycancelled in breach. Nextly, he contends that in respect of claim No.4which pertains to award of interest on security deposit and EarnestMoney Deposit as well as the amount under claim Nos.1 and 2, if thecontractor succeeds on claim Nos.1 and 2, interest has to be paid on theclaimed amount. Insofar as claim No.3 which deals with loss of profit isconcerned, the submission is that when there is a breach of contract, theother party is entitled to claim compensation towards loss of profit, whichwould have accrued to him under the contract. He placed reliance onvarious decisions to which reference is made subsequently.

The counsel for RTC submits that there was no concludedcontract between parties, that there was no proof of damages suffered bycontractor, that award of compensation towards loss of profit is illegal andthat the security deposit and EMD do not carry any interest as per theterms of contract. He also relies on clause 58 of Andhra PradeshDetailed Standard Specifications (APDSS) in support of the submissionthat the expenditure incurred by contactor before commencement ofcontract cannot be validly claimed.

Before arbitral tribunal as well as civil Court, RTC mainly rest theirobjections on the ground that there was no concluded contract. Oninterpreting the circumstances, commencing from calling tenders by RTCtill the cancellation of contract and thereafter, the arbitral tribunal as wellas Court below have found that there is a concluded contract betweenthe parties. In the impugned order, a reference has been made toR.Venkat Reddy v Andhra Pradesh State Road Transport

Corporation[[1]]to support the conclusion that the tender submitted bycontractor was accepted, that contractor signed the agreement on stamppaper and thereafter he was asked to give construction programme for 12months. Interpreting these documents, a conclusion was arrived at byCourt below that there was a concluded contract. This finding isunassailable because as per Section 4 of Indian Contract Act, 1872 theacceptance of proposal is complete when it comes to the knowledge ofthe person to whom it is made and communication of acceptance iscomplete as against the proposer when it is put in the course oftransmission to him and as against the acceptor when it comes to theknowledge of the proposer. In this case, contractor submitted tender on30.10.1980 undertaking to construct bus station complex forRs.49,00,000/- which was reduced to Rs.42,00,000. Thereafter, hecomplied with the requirement of furnishing security deposit and alsosigned the contract on stamped papers. In response to which, Chief CivilEngineer on 27.02.1981 informed the acceptance of contract. Thereforesigning of agreement submitted by contractor on 26.02.1981 byauthorized signatory of RTC is immaterial. Proposal was invited,proposal was made and the same was accepted without any demur.Therefore, the plea of counsel for RTC cannot be accepted.

As noticed supra, claim Nos.1 and 2 would certainly relate to theamounts incurred by contractor for procuring labour, men, materials andtowards advances paid to lorry owners and centring material. Evenaccording to contactor, after he received communication accepting thecontract on 27.02.1981 he paid these advances to labour as well as lorryowners. Whether he is entitled to claim such amounts? Clause 58(indisputably similar to APDSS) reads as under.

58. Date of commencement and completion: Onnotification of possession of the site (premises) being given tothe contractor by letter registered for acknowledgement asprovided in paragraph 10 supra, he shall forthwith begin thework, shall regularly and continuously proceed with them, andshall complete the same (except for painting or other workwhich, in the opinion of the Executive Engineer, it may bedesirable to delay) by the date of completion as defined in“Articles of Agreement”, subject, nevertheless, to the provisionsof extension of time mentioned in the next clause. The contractorshall under no circumstances be entitled to claim any damagesfrom Government if he incurs any expenses or liabilities topayment under the contract before the date of commencementdefined above. The contractor shall have the right to withdrawfrom the contract and obtain refund of his security deposit issuch intimation of handing over the site is delayed more than twomonths from the date of acceptance of the agreement bycompetent authority.

A plain reading of above preliminary specification, which formspart of contract, would show that the contractor shall not be entitled toclaim any damages if he incurs any expenses or liabilities to paymentunder the contract before the date of commencement of the contract work.It is nobody’s case that the contactor commenced the construction of busstation complex and mid way RTC cancelled the contract. Even beforethe work could commence, RTC decided not to go ahead with the workand on 25.09.1981 General Manager informed the contractor that theyare not in a position to proceed with the work. Therefore, the two aspectswhether the arbitral tribunal recorded reasons and whether such reasonsare sound and satisfactory strictly do not arise. Even assuming that thereasons of arbitral tribunal are satisfactory or sound still it makes nodifference. Indeed, as rightly pointed out by counsel for contractor, thesufficiency or otherwise of the reasons and the rationality of the reasons,cannot be gone into by civil Court. Indeed, as reiterated by Supreme Court in G.Ramachandra Reddy v Union of India[[2]], the interpretationof the contract and appreciation of evidence are exclusively in the realmof arbitral tribunal and an award containing reasons cannot be interferedwith unless the findings recorded are found to be perverse or based on awrong proposition of law. Even if two views are possible,confirming/reviewing Court cannot interfere with the award. Therefore, wehold that clause 58 of APDSS bars the contractor from claiming pre-commencement expenditure whatever it may be, and to that extent,though for different reasons, we are inclined to confirm the order of theCourt below setting aside the award. In this connection, we may refer to Ch.Ramalinga Reddy v Superintending Engineer[[3]], wherein it hasbeen conclusively held that when the contract plainly barred thecontractor from making any claim, it was impermissible for arbitral tribunalto make an award in respect thereof. In such event, the Court is entitled tointervene and set aside the award.

Next aspect of the matter is award of certain amount towards lossof profit. Indisputably, RTC cancelled the contract and therefore, the claimtowards loss of profit is a valid claim. The law in this regard is well settledand we may refer to some of the decisions cited across the bar. InHudson’s treatise on ‘Building and Engineering Contracts’ (tenth edn., byI.N.Duncan Wallace, 1970), it is pointed out that in completing contracts,a percent of profit varies from contractor to contractor and in Great Britain,as per the evidence given in litigation it ranges between 3% to 7% of thetotal prime cost of the project. In Mohd.Salamatullah v Government ofAndhra Pradesh[[4]],Supreme Court indicated that award amount of 15%towards loss of profit or towards quantum of damages would be justified.

In M/s.A.T.Brij Paul Singh v State of Gujarat[[5]], Supreme Court while upholding the principle that the contractor would be entitled toclaim damages for loss of profit which he expected to earn byundertaking the works contract, observed as under.

It was not disputed before us that where in a works contract, theparty entrusting the work commits breach of the contract, thecontractor would be entitled to claim damages for loss of profitwhich he expected to earn by undertaking the works contract.What must be the measure of profit and what proof should betendered to sustain the claim are different matters. But the claimunder this head is certainly admissible. … What would be themeasure of profit would depend upon facts and circumstances ofeach case. But that there shall be a reasonable expectation ofprofit is implicit in a works contract and its loss has to becompensated by way of damages if the other party to thecontract is guilty of breach of contract cannot be gainsaid. In thiscase we have the additional reason for rejecting the contentionthat for the same type of work, the work site being in the vicinityof each other and for identical type of work between the sameparties, a Division Bench of the same High Court has accepted15% of the value of the balance of the works contract would notbe an unreasonable measure of damages for loss of profit. Weare therefore, of the opinion that the High Court was in error inwholly rejecting the claim under this head.party entrusting the work commits breach of the contract, thecontractor would be entitled to claim damages for loss of profitwhich he expected to earn by undertaking the works contract.What must be the measure of profit and what proof should betendered to sustain the claim are different matters. But the claimunder this head is certainly admissible. … What would be themeasure of profit would depend upon facts and circumstances ofeach case. But that there shall be a reasonable expectation ofprofit is implicit in a works contract and its loss has to becompensated by way of damages if the other party to thecontract is guilty of breach of contract cannot be gainsaid. In thiscase we have the additional reason for rejecting the contentionthat for the same type of work, the work site being in the vicinityof each other and for identical type of work between the sameparties, a Division Bench of the same High Court has accepted15% of the value of the balance of the works contract would notbe an unreasonable measure of damages for loss of profit. Weare therefore, of the opinion that the High Court was in error inwholly rejecting the claim under this head.

In Dwaraka Das v State of Madhya Pradesh[[6]], the work for theconstruction of hostel for hundred boys at Polytechnic Ujjain wasentrusted to the appellant therein. The work was to be completed withintwenty-nine months. Allegedly due to the reason that SuperintendingEngineer obstructed the progress of the work, the work could not becompleted and the contract between the parties was rescinded. Theappellant contended that termination of the contract was in breach thereofand claimed damages for breach of contract besides other amounts. Thesuit was decreed with 6% interest per annum. The High Court partlyallowed the appeal. Aggrieved by which, the contractor filed appeal.Before Supreme Court, one of the questions was whether the claim onaccount of damages as expected profit out of contract was illegal?Referring to Mohd.Salamatullah (supra) and Brij Paul Singh (supra),Supreme Court allowed the appeal observing as under.

This Court in A.T.Brij Pal Singh v State of Gujarat ((1984)4 SCC 59) while interpreting the provisions of Section 73 of theContract Act, has held that damages can be claimed by acontractor where the government is proved to have committedbreach by improperly rescinding the contract and for estimatingthe amount of damages court should make a broad evaluationinstead of going into minute details. It was specifically held thatwhere in the works contract, the party entrusting the workcommitted breach of contract, the contractor is entitled to claimthe damages for loss of profit which he expected to earn by undertaking the works contract. Claim of expected profits islegally admissible on proof of the breach of contract by the erringparty. ….. To the same effect is the judgment in Mohd.Salamatullah v Government of Andhra Pradesh ((1977) 3 SCC590 : AIR 1977 SC 1481). After approving the grant of damagesin case of breach of contract, the court further held that theappellate court was not justified to interfere with finding of factgiven by the trial court regarding quantification of the damageseven if it was based upon guess work. In both the cases referredto hereinabove. 15% of the contract price was granted asdamages to the contractor.

A Division Bench of this Court in Superintending Engineer v P.Radhakrishna Murthy[[7]], while following Brij Paul Singh (supra)held that compensation in the form of loss of profit could be legitimatelyawarded if as a result of breach of contractual obligations, the other partyis disabled from carrying out the work fully and the damages on accountof loss of profit cannot be considered to be too remote. Thus, the principleis well settled that when there is breach of works contract by employer,the contractor can claim loss of profit.

Counsel for RTC relies on Marimuthu Gounder v RamaswamyGounder[[8]]and Bharat Coking Coal Limited v L.K.Ahuja[[9]], tocontend that in the absence of any proof as to actual damage, contractoris not entitled to loss of profit.

In Marimuthu Gounder (supra), plaintiff entered into agreement ofsale with defendant and alleging that there was a breach of contract, hefiled suit for recovery of Rs.10,000/- with interest from the date ofpayment. The suit was opposed inter alia on the ground that there wasno breach and that the plaintiff can file a suit for specific performance,and that amount can be forfeited. The suit was dismissed by SubordinateJudge. Learned single Judge of High Court decreed the suit for return ofthe money. Aggrieved by the same, defendant went in Letters PatentAppeal. It was urged that the amount was in the nature of Earnest Moneyand therefore in the absence of proof of damage, it is not returnable to theplaintiff. The plea was not accepted by Division Bench and LPA wasdismissed. The question whether contractor can claim loss of profit didnot arise though the learned single Judge observed that in the absenceof any proof of damage suffered by defendants, the plaintiff would beentitled to recover the money, which was accepted by Division Bench.

In Bharat Coking Coal (supra), the contractor under claim No.9sought an amount of Rs.10,00,000/- for loss arising out of turnover due toprolongation of work. The arbitrator passed award for Rs.6,000/- for thesame being 15% of the total profit. While deleting the same from theaward, Supreme Court observed as under.

Here when claim for escalation of wages bills and price

Conclusion

for materials compensation has been paid and compensation fordelay in the payment of the amount payable under the contractor for other extra works is to be paid with interest thereon, it israther difficult for us to accept the proposition that in addition 15%of the total profit should be computed under the heading 'Loss ofProfit'. It is not unusual for the contractors to claim loss of profitarising out of diminution in turn over on account of delay in thematter of completion of the work. What he should establish insuch a situation is that had he received the amount due underthe contract, he could have utilised the same for some otherbusiness in which he could have earned profit. Unless such aplea is raised and established, claim for loss of profits could nothave been granted.

As seen from the facts of the case, the work assigned to contractorwas completed and 15% was claimed as a loss due to prolongation ofwork. As the case of the contractor was very specific, he incurred lossdue to prolongation of work, proof was insisted upon. But as held bySupreme Court in other cases referred to hereinabove, when there is abreach of contract, in that contract was terminated by employer, a claimfor damages towards loss of profit is a valid claim. In the case on hand,the arbitrator awarded 12.5% towards loss of profit, which appears to bereasonable. Any contract work would certainly fetch profit anywherebetween 3% to 7% as observed by Hudson and as inMohd.Salamatullah (supra) and Brij Paul Singh (supra), SupremeCourt accepted loss of profit at 15%. Therefore, the award of 12.5% of thevalue of the work by the arbitral tribunal is reasonable and justifiedbecause RTC cancelled the contract even without notice to thecontractor. To that extent, contractor must succeed.

The last issue is regarding interest. As we agreed with the Courtbelow insofar as claim Nos.1 and 2 are concerned, the question ofpayment of interest on the said amount would not arise. Insofar as claimNo.4, interest on EMD and security deposit, is concerned, having regardto the facts and circumstances of the case, we are not inclined to interferewith the arbitral tribunal as well nor counsel for RTC is able to persuadeus on this.

In the result, for the above reasons, we set aside the order of Courtbelow insofar as claim No.3 is concerned, duly confirming the award ofarbitrator regarding loss of profit. We confirm the impugned order insofaras claim Nos.1, 2 and 4 are concerned. Both the appeals filed bycontractor are partly allowed.

_______________

(V.V.S.RAO, J)

.12.2009

pln

[1]2000 (2) An.W.R. 61

[2]AIR 2009 SC 2629

[3](1999) 9 SCC 610

[4]AIR 1977 SC 1481[5](1984) 4 SCC 59 : AIR 1984 SC 1703[6](1999) 3 SCC 500[7]1996 (3) ALT 1137 (DB)[8]AIR 1979 Madras 189

[9](2004) 5 SCC 109

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(B.N.RAO NALLA, J)