When proof matters: Delhi high court on damages and confidentiality in conciliation

Delhi High Court Deliberates on the Importance of Evidence in Conciliation Cases Involving Damages and Confidentiality.

Eco Green Buildtech Pvt. Ltd. v. Vikartan Infrastructure Pvt. Ltd.

The Delhi High Court, in Eco Green Buildtech Pvt. Ltd. v. Vikartan Infrastructure Pvt. Ltd., examined important issues concerning the award of damages in arbitration and the confidentiality of conciliation proceedings. The judgment highlights that while an arbitral tribunal may use its expertise in deciding a dispute, such expertise cannot replace the evidence required to establish actual loss or damage.

The dispute arose from a construction and development contract concerning Sikka Kamya Greens, Sector 10, Greater Noida. The contract, valued at approximately Rs. 53.73 crore, was to be completed within 34 months. During the execution of the work, disputes arose between the parties concerning delay, release of payments and responsibility for prolongation of the contract. The parties subsequently entered into a Memorandum of Understanding dated 27 September 2018, but disagreements continued regarding its effect.

Vikartan Infrastructure invoked arbitration on 13 July 2020. A sole arbitrator was appointed with the consent of the parties. During the proceedings, an independent engineer was appointed as Local Commissioner to measure the work executed at the site and prepare an inventory of the material, plant, machinery, tools and equipment belonging to Vikartan. Vikartan raised twelve claims amounting to approximately Rs. 15.07 crore, while Eco Green raised thirteen counterclaims amounting to approximately Rs. 4.02 crore. The principal controversy before the Tribunal concerned responsibility for the delay and the consequences arising from it.

The arbitral tribunal held Eco Green responsible for the delay and breach of contractual obligations. It held that the MOU was binding upon the parties but did not constitute novation of the original contract. Several claims of Vikartan were partly allowed, including claims relating to work executed, WCT, idling and under utilisation of machinery, additional overheads, material lying at the site and loss of profit. Eco Green's counterclaims were rejected. An additional award was subsequently passed to correct typographical and computational errors in the original award.

Eco Green challenged the awards under Section 34 of the Arbitration and Conciliation Act, 1996. Among other grounds, it contended that the Tribunal had relied upon matters discussed during conciliation proceedings and had relied upon the Local Commissioner's report without providing an adequate opportunity to object to it. It also challenged several claims on the ground that they had been awarded without sufficient evidence of actual loss.

One of the significant issues before the High Court concerned the conciliation proceedings undertaken during the arbitration. The Tribunal had attempted to facilitate an amicable settlement between the parties. A procedural order recorded that the parties had commenced conciliation and had discussed their respective claims and counterclaims. However, the settlement was unsuccessful.

The High Court held that the contents of the conciliation proceedings could not subsequently be relied upon while adjudicating the dispute in arbitration. The Court distinguished between the attempt to facilitate settlement and the subsequent adjudication of the dispute. It emphasised that confidentiality is an essential feature of mediation and conciliation. If statements or proposals made during settlement discussions could later be used against a party after settlement fails, parties would be discouraged from participating openly in the process.

The Court relied upon the Supreme Court's decisions in Moti Ram v. Ashok Kumar and Perry Kansagra v. Smriti Madan Kansagra, which emphasise the confidential nature of mediation and conciliation proceedings.

The judgment also examined the Tribunal's approach to claims for damages. In relation to the claim for idling of machinery and other resources, the Tribunal had awarded Rs. 1,04,29,203. However, there was no evidence establishing the actual rent paid or the actual loss suffered. The Tribunal had quantified the amount by relying upon its experience in the construction field.

The High Court held that the Tribunal's expertise could not substitute the claimant's obligation to establish actual loss or damage. Referring to Sections 55 and 73 of the Indian Contract Act, 1872, and the Supreme Court's decisions in Kailash Nath Associates v. DDA and Fateh Chand v. Balkishan Dass, the Court held that establishing a breach of contract and establishing the consequential loss or damage are both necessary for an award of damages. The award under this claim was therefore held to be patently illegal.

A similar issue arose in relation to the claim for additional overheads. The Tribunal had awarded Rs. 2,84,53,218 after quantifying the overhead expenses at 7.5 percent of the contract value. In doing so, it relied upon its personal experience, alleged trade practice and CPWD circulars. However, there was no evidence of the actual additional overhead expenditure incurred by Vikartan.

The High Court held that personal experience or expertise of the Tribunal could not replace evidence of the expenses actually incurred. The Court also noted that the alleged trade practice regarding staff deployment had not been established by evidence. Further, the CPWD circulars relied upon by the Tribunal had not been confronted to the petitioner, which the Court found to be contrary to Section 24(3) of the Arbitration and Conciliation Act. The award under this claim was therefore set aside.

The Court also considered the claim for loss of profit. Vikartan had relied upon the Hudson formula to quantify its loss. The High Court referred to the Supreme Court's decision in Unibros v. All India Radio and reiterated that a formula for calculating loss cannot by itself establish that the claimant actually suffered the alleged loss.

The Court stated that a claim for loss of profit requires the claimant to establish that there was delay in completion of the contract, that the delay was not attributable to the claimant, that the claimant was an established contractor handling substantial projects and that there was credible evidence substantiating the claimed loss of profitability. In the present case, the required evidence to substantiate the loss was absent.

The Tribunal had awarded loss of profit at 7.5 percent of the balance contract value, relying upon its personal experience and trade usage. The High Court held that such personal knowledge and expertise could not discharge the claimant's burden of proving its loss. The alleged trade practice was also not proved. Consequently, the award under this claim was held to be patently illegal.

The High Court further found deficiencies in the Tribunal's treatment of the claim relating to material lying at the site. The petitioner had not been provided an adequate opportunity to raise objections to the Local Commissioner's report in the arbitral adjudication. The Court held that treating the petitioner's position during the conciliation proceedings as acceptance of the report for the purposes of arbitration was impermissible. The Court also found that the respondent had failed to establish the ownership and value of the material through sufficient evidence. This was held to be contrary to the requirement of equal treatment and fair opportunity under Section 18 of the Arbitration and Conciliation Act.

Importantly, the Court did not interfere with every claim. In relation to the WCT claim, the petitioner did not dispute that the amount had been deducted and not deposited with the tax authorities. The Court found no sufficient ground to interfere with the award on that claim.

Ultimately, the Delhi High Court allowed the petition and set aside the arbitral award dated 28 February 2023 as well as the additional award dated 27 March 2023. The pending application was also disposed of.

The judgment reinforces an important principle in arbitration: a claimant seeking damages must establish the loss claimed through appropriate evidence. An arbitral tribunal's expertise, personal experience or reliance upon a formula cannot by itself replace that evidentiary burden. At the same time, the decision protects the confidentiality necessary for meaningful conciliation by making it clear that unsuccessful settlement discussions cannot simply be converted into material for subsequent adjudication.

The decision therefore carries significance beyond the individual dispute. It underlines the importance of maintaining procedural fairness in arbitration while ensuring that claims for damages are supported by evidence rather than estimation alone.