Emden formula, being a construction contract tool, cannot be applied to assess damages in dealership agreements: Madras high court

Madras High Court Rules Emden Formula Not Applicable for Dealership Agreement Damages Assessment.

Case Title: Hyundai Motor India Ltd. v. St. Antonys Cars Pvt. Ltd.

Case Number: OSA No. 38 of 2021 | Madras High Court | Justice P. Velmurugan and Justice K. Govindarajan Thilakavadi The Madras High Court has set aside an arbitral award to the extent it awarded damages to a former automobile dealer by applying the Emden formula, holding that the formula, being confined to computation of overheads and loss of profit in construction contracts, cannot be mechanically applied to a commercial dealership agreement.

The Division Bench was hearing an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, against an order of the Single Judge which had upheld an arbitral award, except one head of claim, passed in favour of a former dealer of Hyundai Motor India Ltd.

Background

St. Antonys Cars Pvt. Ltd. was appointed as an authorized dealer of Hyundai in the Kollam territory under a Dealership Agreement dated 24.08.2009 for a period of three years. Alleging poor performance, non maintenance of inventory, diversion of funds and other defaults, Hyundai issued two Show Cause Notices and eventually terminated the dealership on 30 days notice, in accordance with the termination clause of the Agreement.

The dealer invoked arbitration, alleging that Hyundai had imposed unrealistic targets, withheld models, permitted competing dealerships in the same territory, and wrongfully terminated the agreement. The Arbitral Tribunal partly allowed the claim and awarded a total of Rs. 1,64,58,776 along with interest, applying the Emden formula to compute loss of business and expected profits. The Single Judge, in proceedings under Section 34, upheld the award except for the claim towards loss of future profit.

Contentions Of The Appellant

Hyundai contended that the Emden formula, evolved for computing head office overheads and loss of profit arising from employer caused delay in construction contracts, was wholly inapplicable to a dealership agreement, which involved neither prolonged deployment of construction resources nor a delayed project. It was submitted that the Arbitral Tribunal had rewritten the terms of a commercial contract that expressly permitted termination on 30 days notice without assigning reasons, and that this amounted to patent illegality.

Findings Of The Court

Referring to McDermott International Inc. v. Burn Standard Co. Ltd., the Court noted that the Supreme Court had recognized the Emden, Hudson and Eichleay formulae as tools for quantifying damages specifically in construction contracts involving employer caused delay, and had not laid down the Emden formula as a universal method applicable to every commercial contract.

The Court held that a dealership agreement stands on a different footing from a construction contract, since losses arising from wrongful termination of a dealership ordinarily consist of loss of commission, unsold inventory, investment in infrastructure and proved loss of future profits, governed by Sections 73 and 74 of the Indian Contract Act, 1872, and required to be proved through evidence.

The Court further held that since the Dealership Agreement contained a clause permitting termination on 30 days notice without assigning reasons, the termination could not be treated as wrongful, and holding otherwise amounted to the Arbitrator rewriting the contract, contrary to the settled position that an Arbitrator is bound by the terms of the agreement and is not a court of equity. Reliance was also placed on Kailash Nath Associates v. Delhi Development Authority to reiterate that compensation for breach must bear a reasonable nexus to actual proved loss.

The Court noted that the dealer had not produced independent evidence to establish the quantum of loss for application of the Emden formula, and that in the absence of such proof, the formula could not be invoked, relying on Braithwaite Burn and Jessop Construction Company Ltd. v. Ril Vikas Nigam Ltd. and Shah Jethabhai v. J.N. Construction.

Conclusion

Holding that the award suffered from patent illegality on this count, the Court allowed the appeal, set aside the order of the Single Judge, and confirmed the award only to the extent it rejected the claims relating to warranty and SARFAESI proceedings, while setting aside the remaining monetary awards granted by the Arbitral Tribunal.