In the UPSHA-Abhijeet Meerut-Karnal Toll Road dispute, the Allahabad High Court has upheld refund of the wrongfully encashed performance bank guarantee and EPC-related compensation, but held that a major loss of profit award could not stand when it was quantified mainly on assumptions and a financial model without sufficient supporting evidence. In this notable ruling for infrastructure and public-private partnership projects, the High Court has reaffirmed that claims for loss of profit cannot be sustained solely on project financial models and projections. It also highlighted the principles of severability in arbitral awards and underscores that a contracting authority cannot validly invoke a performance bank guarantee if it has failed to fulfil its own foundational conditions precedent.
The Court held that where the authority itself failed to fulfil its foundational condition precedent of providing right of way and the appointed date never occurred, it could not lawfully invoke the performance security against the concessionaire. At the same time, although the concessionaire may have suffered some commercial loss from that failure, a claim for loss of profits cannot be awarded merely on the strength of a financial model containing assumptions and projections. Such a claim must be backed by credible evidence, and an arbitral tribunal cannot quantify damages on bare guesswork or its own unsupported assumptions.
The Court also laid down that even if EPC contracts were entered into before formal execution of the concession agreement, project-related liabilities under those contracts could still be treated as recoverable expenditure where the contractors were in fact deployed for the project and the expenses were evidenced on record. It also confirms that expenses incurred by the authority toward land acquisition and clearances, being part of its own obligations for achieving conditions precedent, cannot be passed on to the concessionaire where the authority itself defaulted in fulfilling those obligations.
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On claim for refund of the performance bank guarantee, the Division Bench comprising the Chief Justice Arun Bhansali and Justice Jaspreet Singh examined the concession agreement and noted that UPSHA’s obligation to procure the right of way was a foundational condition precedent and that the appointed date was never fixed because these obligations were never fulfilled. Since the construction period never commenced and no work could start, the performance security, which was intended to secure the concessionaire’s obligations during commencement and execution, could not be invoked on the facts found. The High Court agreed with the tribunal and Commercial Court that UPSHA had wrongfully encashed the bank guarantee, and found no perversity or patent illegality in that conclusion.
The Court took a different view on claim for loss of profits. It accepted that UPSHA’s failure to provide the right of way meant the concessionaire did suffer some loss of profit or commercial opportunity. However, it found that the majority award quantified that claim mainly on the basis of the project financial model, which by definition was built on projections, assumptions and presumptions prepared for lender appraisal. The Court held that such a financial model could at best be corroborative evidence and could not by itself be the sole basis for quantifying a substantial claim for future profits.
The Court also reiterated that a claim for loss of profits requires credible evidence showing the existence of a real and viable lost opportunity, such as independent contemporaneous material, financial records, pipeline opportunities, or other proof of profitability. The Court found that the tribunal’s majority had scaled down the concessionaire’s claim from Rs.640.50 crores to Rs.157.57 crores on its own assumptions, without a clear evidentiary basis and without recording cogent reasons for the methodology adopted. If the later-filed documents were ignored, then the award rested only on the financial model; if those documents were relied on, they remained unproved.
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On claim relating to payments made to EPC contractors, the High Court upheld the award. It reasoned that even if the EPC contracts had been entered into 13 days before the formal concession agreement and even if prior approval requirements under Article 5 were not strictly complied with, the fact remained that EPC contractors had been engaged for the very project in question. Their deployment was supported by the third-party engineer’s report, and the conciliation awards between the concessionaire and the EPC contractors were on record. UPSHA had not seriously disputed the existence, authenticity or quantum of those liabilities. The Court therefore held that these were direct project-related expenses and a plausible view had been taken by the tribunal in awarding that amount.
The High Court also upheld rejection of UPSHA’s counter claim and observed that the amounts spent by UPSHA on land acquisition, forest clearance, utility shifting and allied steps were part of its own contractual obligations to achieve the condition precedent of providing 90% right of way. UPSHA had only proceeded up to a Section 4 notification under the Land Acquisition Act, 1894 and had not completed acquisition through a Section 6 notification. Since UPSHA itself failed to achieve its conditions precedent and the project never progressed to the stage of commencement, those expenses could not be shifted onto the concessionaire as compensation for any alleged default by the concessionaire.
In the concessionaire’s own appeal, the Court held that once the concessionaire had already claimed damages and loss of profit for UPSHA’s failure to satisfy conditions precedent, it could not duplicate the same grievance under multiple heads using different labels. As regards termination payment, the Court agreed with the tribunal that Article 37.3 applied only where termination occurred during the operation period. Since the operation period never commenced and the project had not started at all, the contractual trigger for termination payment never arose.
Briefly, the case arose from two connected Section 37 appeals filed against the Commercial Court’s orders dated May 31, 2023, which had upheld an arbitral award dated May 06, 2017 passed in disputes between U.P. State Highways Authority (UPSHA) and Abhijeet Meerut-Karnal Toll Road Limited, the concessionaire for the Meerut-Karnal Road project. UPSHA challenged the arbitral findings on procedural irregularity, wrongful grant of claims and rejection of its counter claim. The concessionaire separately challenged rejection of its claim.
The underlying project was a public-private partnership highway contract under which the concessionaire had to design, build, finance, operate and transfer the Meerut-Karnal Road section within 730 days from the appointed date, and in return it was to enjoy a 25-year concession period. The concessionaire claimed it had achieved financial closure, but asserted that UPSHA failed to satisfy its own conditions precedent, especially providing the required right of way to the project site, which prevented the project from moving forward in time.
The concessionaire had furnished performance security of Rs.29.16 crores. According to it, even after the contractual timeline had run substantially, UPSHA did not fulfil its foundational obligations. Treating UPSHA as being in default, the concessionaire invoked the contractual default mechanism and then terminated the concession agreement on Jan 13, 2014 on the ground of UPSHA’s default. It also invoked arbitration, following which a three-member arbitral tribunal was constituted. Before the tribunal could be constituted, UPSHA encashed the bank guarantee of Rs.29.16 crores alleging breach by the concessionaire.
Before the arbitral tribunal, the concessionaire made eight claims and UPSHA raised eight counter-claims. Thirteen issues were framed. The tribunal held that UPSHA had not fulfilled its conditions precedent, had defaulted in meeting obligations, and had illegally encashed the performance bank guarantee. The tribunal also held that the concessionaire had achieved financial closure, had not abandoned the project, and that its claims could still be considered on merits despite non-appointment of statutory auditors under Article 33. At the same time, it held that the concessionaire had not fulfilled certain other conditions precedent and could not have entered into EPC contracts before signing the concession agreement.
On the claims, the tribunal allowed claim for refund of the wrongfully encashed bank guarantee of Rs.29.16 crores. By majority, it allowed claim for loss of profit at Rs.78.84 crores and claim relating to EPC contractor payments at Rs.25.53 crores. It also granted simple interest at 10% per annum on the awarded amount. UPSHA’s counter claim was partly allowed to the extent of the concessionaire’s share in the independent engineer’s remuneration, but counter claim for land acquisition, forest clearance, utility shifting and similar expenses was rejected.
