LI Network
Published on: November 25, 2023 at 07:30 IST
The Delhi High Court, underscored the challenging nature of proving loss of goodwill and emphasized that any party claiming such loss would find it difficult to establish the same with mathematical precision.
The bench of Justices Vibhu Bakhru and Amit Mahajan upheld an arbitral award in which the arbitrator allowed a party to retain a certain amount as a penalty, deeming it a genuine pre-estimate of the loss of goodwill without requiring proof of the quantum of actual loss suffered.
Case Background:
In 1997, Metal Engineering and Forging Company (MEFC) and Central Warehousing Corporation (CWC) entered into an agreement for handling and transporting containers. Disputes arose, and MEFC invoked arbitration, seeking a refund of withheld amounts and challenging penalties imposed by CWC.
First Arbitral Award (03.02.2003):
The arbitrator partially allowed MEFC’s claim, ordering a refund of Rs. 22 lakhs. However, a court in 2014 set aside the award, stating the Tribunal had relied too heavily on equity and lacked proof of damage.
Second Round of Arbitration:
In the subsequent arbitration, MEFC sought a refund of ₹49,89,124, arguing various grounds. The arbitral tribunal ruled that MEFC was entitled to the recommended refund of Rs. 22 lakhs by the Committee. It also upheld CWC’s withholding of the remaining amount as a genuine pre-estimate of the loss of goodwill due to delivery delays. The tribunal held that, in cases of goodwill loss, actual proof is difficult to establish.
Appeal and Grounds:
MEFC appealed, challenging the award on the grounds that CWC was allowed to retain the remaining amount without proof of actual loss. It argued that contractual penalties should require proof of loss.
Court’s Analysis:
The court acknowledged delays attributable to MEFC and referred to Section 74 of the Indian Contract Act. It clarified that if a compensation in the contract is a genuine pre-estimate of loss known to the parties, proof of actual loss is not required. Despite the difficulty in precisely proving goodwill loss, CWC had to establish it suffered a loss, and the tribunal concluded that it did due to MEFC’s breach.
The court found no patently illegal conclusion and dismissed the appeal.
Case Title: Metal Engineering and Forging Company v. Central Warehousing Corporation, FAO(COMM) 5 of 2023
