A percentage is not a loss: Karnataka High Court strikes down Rs 21.89 crore of an arbitral award against the Bangalore Development Authority
The contract said the employer would not be liable for overheads and profits whatever the cause of delay. Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha hold an arbitrator may interpret that clause but cannot neutralise it.
An arbitral award that gave a contractor Rs 20.49 crore as loss of profit on work it never executed, calculated at a flat ten per cent of the value of that work, has been set aside by a Division Bench of the Karnataka High Court. Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha held that the contract expressly excluded the employer's liability for overheads and profits, and that the arbitrator was required to decide whether that exclusion applied before awarding anything under those heads. The Bench added a second and independent ground: there was no evidentiary foundation for ten per cent, and a formula cannot itself constitute proof of loss. Interest on money the Authority had admittedly withheld was left untouched.
A theatre, four blocks, and vendors who would not move
The Bangalore Development Authority entrusted NCC Limited with the renovation and reconstruction of the Puttanna Kanagal Theatre and the adjoining shopping complexes at 4th Block, Jayanagar. The agreement of 27 June 2012 put the contract price at Rs 252.27 crore.
The work covered demolition and reconstruction of four blocks. Under the contract data, possession of Block 1 was to be handed over within seven days of the work order. Blocks 2 to 4 were to follow on the completion and rehabilitation of Block 1 — because the existing premises in those blocks were occupied by vendors and lessees who had to be relocated into the rebuilt Block 1 before the remaining work could begin.
Block 1 was to be finished within eight months of the notice to proceed. It was completed only in December 2014 or January 2015, and possession was handed to the Bruhat Bengaluru Mahanagara Palike on 6 January 2018. The relocation of the occupants of Blocks 2 to 4 did not happen within the time originally contemplated. In the interim, proceedings were initiated before the Lokayukta concerning the relocation, and the shifting of vendors was delayed further.
NCC invoked arbitration on 28 September 2018 and raised ten claims aggregating Rs 117,29,36,970 besides taxes. They ranged from the release of withheld bill amounts and interest on them, through the cost of extending bank guarantees and excess interest recovered on the mobilisation advance, to idle plant and machinery, site overheads and loss of profit on the balance work.
The sole arbitrator, a retired Chief Justice, partly allowed claims 1 to 4 and 7 to 9 by an award of 5 August 2024 and rejected claims 5 and 6 outright. Claim 1, the release of 40 per cent of bill amounts retained as deferred payment, had already been allowed by an interim award of 16 January 2021 and complied with. The amounts awarded under claims 2, 3, 4, 7, 8 and 9 came to Rs 26,86,80,705, with pendente lite interest on three of them, future interest at 11 per cent and costs of Rs 15,00,000.
The figures matter to what the High Court did with them. Against a claim of Rs 12.76 crore in interest on the deferred payment, the arbitrator awarded Rs 4,91,72,794. Against Rs 99.91 lakh claimed on one running account bill he awarded Rs 53,059 in interest, the principal having been reconciled and paid. Against Rs 24.66 lakh claimed for delay in paying running account bills he awarded Rs 5,15,760. Against Rs 12.45 crore claimed for idle plant and machinery he awarded Rs 61,12,080, and against Rs 17.86 crore claimed for site overheads, Rs 78,83,437. Only on loss of profit did he award close to what was asked — Rs 20,49,43,575, being ten per cent of a balance work value he put at Rs 204,94,35,755, against a claim of Rs 22.28 crore.
NCC relied on that pattern of reduction in its defence of the award, arguing that the amounts allowed were substantially lower than the amounts claimed, which showed that the arbitrator had scrutinised the claims rather than mechanically accepting its computation.
The Authority's petition under Section 34 of the Arbitration and Conciliation Act, 1996 was dismissed by the LXXXII Additional City Civil and Sessions Judge, Bengaluru on 24 February 2026. This appeal under Section 37(1)(c) read with Section 13(1A) of the Commercial Courts Act, 2015 followed.
The clause the award had to get past
Clause 7 of the Special Conditions of Contract states that the contractor shall not be entitled to any compensation for loss suffered on account of delays in commencing or executing the work, whatever the cause of delay may be, and that the employer does not accept any liability for any sum towards loss of overheads and profits of the contractor besides the tender amount.
Senior counsel for the Authority argued that claims 7, 8 and 9 — idle plant and machinery, site overheads and loss of profit — fell squarely within that exclusion, that the arbitrator is a creature of the contract, and that awarding amounts expressly excluded amounted to rewriting the parties' bargain. NCC's answer was that an exclusion clause cannot absolve the employer of the consequences of its own breach, that the arbitrator had made specific findings that the site was never made available in a condition in which the balance work could be executed, and that the Authority was in substance seeking a re-appreciation of evidence.
The Bench began by stating the limits of Section 37: the court does not sit as an appellate court and will not re-appreciate evidence merely because another view is possible. It then stated the limit of that limit. An award which disregards an express and binding contractual stipulation, or ignores material evidence bearing directly on entitlement, or awards damages without any evidentiary foundation, is not immune from scrutiny. Ssangyong Engineering and Construction Ltd. v. National Highway Authority of India holds that an arbitrator cannot award anything contrary to an express term of the contract and that an award ignoring such a stipulation may constitute patent illegality.
Interpretation is not rewriting
The judgment works through a genuine split in authority rather than reciting one side of it.
In Ramnath International Construction (P) Ltd. v. Union of India, the Supreme Court construed clauses governing delay and extension of time as barring damages even where the delay was attributable to the employer. In Asian Techs Limited v. Union of India, a similar clause was read as restricting only the departmental authorities from entertaining a claim, and not as denuding the arbitrator of the power to award damages otherwise recoverable. A single judge of the Delhi High Court in Simplex Concrete Piles (India) Limited v. Union of India noted the conflict and held that a clause disentitling a party to the benefits of Sections 55 and 73 of the Indian Contract Act, 1872 would be hit by Section 23 of that Act.
The Bench then turned to a Division Bench decision of the Delhi High Court in Plus91 Security Solutions v. NEC Corporation India Private Ltd., noting that Chief Justice Bakhru was a member of that Bench. That judgment recorded reservations about Simplex Concrete Piles, held that a clause limiting liability is part of the contractual bargain and cannot be disregarded, and pointed out that Simplex drew no distinction between a clause excluding an entire liability and one excluding compensation only for a specified category of breach. It also noted that in Asian Techs the officials had represented that separate rates would be negotiated, which was why the contractor continued the work, and that Ramnath had not been cited to the Court in that case.
In Oil and Natural Gas Corporation v. Wig Brothers Builders and Engineers Private Limited, the Supreme Court held that an arbitrator exceeded his jurisdiction by ignoring an express bar on compensation for delay and awarding Rs 9.5 lakh.
Applying all of this, the Bench found that clause 7 is of the narrower kind: it excludes specific categories of damages — compensation for delay, and overheads and profits — while preserving any right specifically provided for elsewhere in the contract. The arbitral tribunal was undoubtedly entitled to interpret it. But the power of interpretation does not extend to neutralising an express exclusion, and Section 28(3) of the Act requires a tribunal to take the terms of the contract into account while making an award.
The procedural failure was therefore specific. The tribunal was required at the threshold to determine the applicability and effect of clause 7 before examining whether claims 7, 8 and 9 could be awarded at all. An award granting compensation under those heads without first recording a sustainable finding on why the exclusion was inapplicable cannot be saved merely because the tribunal adopted one possible reading of the contract. As the judgment puts it, interpretation is not synonymous with rewriting.
The Bench also recorded that clause 8 of the contract data, which fixed the time and sequence for handing over the blocks, was not an incidental provision. The parties had consciously agreed to the consequences of delay.
Where the ten per cent came from
The second ground is about proof, and the Bench treated it as sufficient on its own.
The tribunal had relied on K.N. Sathyapalan v. State of Kerala. The Bench held that the principle there concerns reimbursement of additional expenditure actually incurred and established by evidence, and is not authority for awarding notional loss of profit calculated as a percentage of the value of unexecuted work.
Nor does A.T. Brij Paul Singh v. State of Gujarat assist. The Bench followed Nandi Infratech Pvt. Ltd. v. R.K. Bararia, another Delhi Division Bench of which the Chief Justice was a member, which held that Brij Paul Singh is not authority for discarding an express contractual bar on overheads and profits, and that a percentage built into a rate or a standard formula cannot by itself establish that the contractor actually suffered the corresponding loss. The same reasoning applies to the Hudson Formula, which McDermott International had noted has been criticised precisely because it takes the head office overhead percentage from the contract, which may bear little or no relation to actual costs. The Bombay High Court in Edifice Developers and Projects Engineers Ltd. v. Essar Projects (India) Ltd. had faulted a tribunal for awarding overhead losses with no evidence at all, and a recent Karnataka decision in N.N. Constructions v. Union of India laid the same emphasis: loss of profit is not a presumptive entitlement and requires cogent evidence of financial injury.
On claims 7 and 8 — Rs 61,12,080 for idle plant and machinery and Rs 78,83,437 for site overheads — the Authority had specifically disputed whether machinery was actually kept idle during the relevant period and whether the additional overhead expenditure had actually been incurred. The Bench drew a distinction that decided those claims: being contractually required to maintain certain machinery at site is one thing, and establishing that such machinery was kept idle for the period claimed, resulting in a quantifiable loss, is another. The latter required proof, and there was no evidence of actual expenditure.
On claim 9 the infirmity was more pronounced. There was no material showing that NCC's actual profit margin on this contract was ten per cent, and none showing that it had suffered loss of profit to that extent. The tribunal had moved from the fact that the balance work remained unexecuted straight to the conclusion that ten per cent profit on it had been lost. That claim failed on two independent grounds: it was hit by the express prohibition in clause 7, and the quantum was not established by evidence.
What survived
The challenge to claim 2 was rejected. Under clause 37.1 of the General Conditions of Contract, the employer pays 60 per cent of a certified bill within sixty days, with the balance 40 per cent released after completion of the work up to forty-eight months — inclusive of a twenty-four-month defect liability period — from the certified date of completion, in sixteen equal quarterly instalments. The tribunal had awarded Rs 4,91,72,794 as interest on the deferred payment for the period from 1 February 2019 to 22 February 2021.
The Authority relied on a resolution of 9 June 2017 by which it had resolved to release the outstanding deferred amount subject to NCC furnishing a bank guarantee for 40 per cent of it, and on the consequential communication calling upon NCC to furnish that guarantee and collect the money. Its argument was that having failed to furnish the guarantee, NCC could not claim interest for the later period.
The Bench did not accept it. Liability for the principal amount being undisputed, the Authority could not avoid the consequences of delayed payment, and the two documents did not by themselves establish either of the circumstances relied on.
Order
The appeal was partly allowed. The judgment of the Commercial Court was set aside to the extent that it upheld the arbitral award under claims 7, 8 and 9, and the award was set aside to the extent of the amounts awarded under those three claims — Rs 21,89,39,092 in all.
The direction for future interest will operate only on the amounts surviving after that severance. The award of costs was not disturbed. The pending interlocutory application was disposed of.