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This article is written by Pranav Sethi, from SVKM NMIMS School of law, Navi Mumbai. This article deals with an overview of damages and their valuation during arbitral proceedings.


In arbitration, parties frequently use all of their efforts and abilities to prove a contract breach. They may, nevertheless, not always be successful in establishing a case for the amount of damages sought. This is more common when there is a liquidated damages clause in the contract, as the parties expect that the liquidated damages will follow if the violation is confirmed. Years of case laws have demonstrated that this is not the case. Due to the scarcity of records to support quantification of claims, the exact nature of the damages (such as loss of profit or non-exact evaluation of losses) cannot (or is difficult to) be proven by the parties in a majority of instances. 

Aside from the foregoing, this article will demonstrate how commonly used methods for calculating loss of profit and loss of overhead claims might assist the arbitral panel in its guesswork. However, a recent case of the Delhi High Court in M/S SMs Ltd. v. Konkan Railway Corporation Ltd. (2020) will be mentioned, in which the Court struck aside an arbitral tribunal’s award that calculated damages using a formula. As a result, an examination of this judgment will be carried out to determine what technique could be used to avoid such a conclusion if an award is challenged. 

Meaning of damages 

Damages are a type of compensation granted to the party who has been harmed to allow them to reclaim their position before the breach. Damages are claimed in different contracts for a variety of reasons, including loss of profit, opportunity, overheads, and so on. There are two sorts of damages: liquidated and unliquidated. The court may award unliquidated damages, the amount of which is not known ahead of time.

Liquidated damage

The term ‘Liquidated Damage’ is not specified in the Indian Contract Act, 1872, however, Section 74 defines the parts that make up the definition of liquidated damage. So, if a contract states that a certain number will be awarded in the case of a breach, the innocent party will be allowed to recover damages equal to or less than that amount, based on the facts and circumstances of each case, up to the maximum amount stated in the contract.

Black’s law dictionary definition for liquidated damages

According to Black’s Law Dictionary, liquidated damage is an amount contractually stipulated as a reasonable estimate of actual damages to be recovered by one party if the other party breaches; also, it is a sum fixed as a method of measuring damages for a breach of contract, but the actual amount of damage can be more or less than the amount of damage mentioned.

Damages are granted under Indian law to compensate the injured party and, as a result, it places the aggrieved party in the very same situation as it would have been if the breach had not occurred. However, no one is authorized to make an unfair advantage by claiming damages for breach of the condition.

The parties can agree on a monetary amount as liquidated damages for a breach and include it in the contract. When the real breach occurs, the actual harm may be less than or greater than the parties’ total amount. The goal of including a clause like this in a contract is to remove the need to demonstrate the very same.

Components helping in determining confirmation or rejection of a claim 

Specific components are drawn into consideration by arbitrators and courts in India to confirm or refute a claim for liquidated damages by a party in a legal proceeding. Namely, the sum of liquidated damages are those liberated from an indefinite quality and regulated by agreement, or it could be by the court, to demonstrate an accurate understanding of obligation, damages, or exact knowledge from which the real value is calculated. As a result, the overall amount must be acceptable and sufficient, not exorbitant.

Case laws related to liquidated damages

Maula Bux v. Union of India

Facts of the case 

  • In this case, on February 20, 1947, the plaintiff, Maula Bux, signed a contract with the defendant, the Government of India, to deliver potatoes to the Military Headquarters in the U.P. Area.
  • A deposit of Rs. 10,000 had been made as assurance for the contract’s timely completion. On March 4, 1947, the plaintiff engaged in a new contract with the Government of India to transport chicken, eggs, and fish to the same location. The plaintiff had invested an amount of Rs. 8,500/- for the contract’s proper fulfillment.
  • Clause 8 of the contract specified that if the plaintiff refuses to fulfill the demand or fails to make it in any other way, the defendant could terminate the contract. In this case, the security deposit will be forfeited to the government and will be available for their use. The plaintiff had a history of failing to supply the commodities on a regular and complete basis. As a result, the defendants cancelled their contracts, the first on November 23, 1947, and the second on December 2, 1947, and forfeited the money.
  • The plaintiff filed a lawsuit in the court of the Civil Judge, Lucknow, against the Union of India, seeking a decree for Rs. 20,000/-, representing the funds entrusted with the Government of India for the effective implementation of the contracts, plus interest at the rate of 6% per annum.
  • The claim was dismissed by the Trial Court, which concluded that the government was legitimate in cancelling the contracts, but that the deposit amounts could not be forfeited because the government had not incurred any loss as a result of the plaintiff’s mistake.
  • In an appeal, the High Court of Allahabad changed the decree, ruling that the forfeiture of the deposit money was legal, and awarding just Rs. 416.25, plus 3% interest from the date of the suit. The plaintiff has filed an appeal to the Supreme Court.

Rules covered in the case 

The particular phrase “whether or not real damage or loss is found to have been caused thereby” in Section 74 is designed to include a variety of contract types that may be brought before the courts:

  • In some circumstances, determining compensation for a breach of contract may be impossible for the court, while in others, compensation can be estimated according to the rules specified.
  • If the court is unable to assess the compensation, the amount stated by the parties may be considered as the measure of reasonable compensation if it is viewed as a true pre-estimate, but not if the sum named is in the form of a penalty.

The issue in the case 

  • Whether it would be possible for the defendants to forfeit the money provided by the plaintiff as a security deposit as a penalty?

​The decision in the case 

  • The Supreme Court ruled in favour of the plaintiff, ordering the defendants to pay Rs. 18,500/- to the plaintiff, plus interest at the rate of 3% per annum from the date of the suit until payment.
  • Earnest money is a deposit paid by a buyer to be applied toward a portion of the purchase cost when the contract is fulfilled and to serve as evidence of the buyer’s willingness to buy property or products until then. The forfeiture of earnest money under a contract for the sale of real estate does not fall under Section 74 of the Contract Act if the amount is reasonable.

Fateh Chand v. Balkishan Das

Facts of the case 

  • In this case, the plaintiff agreed to transfer leasehold ownership in an area of land and the structures built on it to the defendant in a contract effective March 21, 1949.
  • The plaintiff earned Rs 25,000/- under the agreement and gave the defendants ownership of the building and land in his occupation, but the transaction was not concluded even before the agreement’s deadline, and then each party accused the other of the failure.
  • The plaintiff filed an action in the Subordinate Judge’s court, alleging forfeiture of the sum of Rs. 25,000/- and seeking a decree for ownership of the land and building, as well as compensation for use and occupation of the building from the date of delivery of ownership to the defendants.
  • The defendant argued that because the plaintiff breached the contract, he could not seek compensation or forfeit the amount of Rs. 25,000/- that he had earned.
  • The trial judge found that the plaintiff had failed to bring the defendant in possession and thus could not retain Rs. 25,000/-, and ordered that the defendant put the plaintiff in possession upon the plaintiff depositing Rs. 25,000/- less Rs. 1,400/-, and awarded the plaintiff future mesne profits at the rate of Rs. 140/- permitters from the date of the suit until delivery of the possession.
  • On challenge, the High Court reversed the trial court’s decision and held that the plaintiff was obliged to claim a sum of Rs. 11,250/- from the Rs. 25,000/- paid by the defendant under the sale agreement, as well as remuneration to be used at the rate of Rs. 265/- per mensem from the defendant.

Issues in the case

  • In Indian law, when is a liquidated damages clause regarded as a punishment clause?
  • What is the burden of evidence for a party asserting a claim under a liquidated damages clause?
  • Is it necessary to prove real loss, as in a claim under Section 73 of the Indian Contract Act, or is there a different proof threshold?

Judgment in the case 

  • The Constitutional Bench was considering a condition in a sale contract that stated that if the vendee fails to register the sale deed by the deadline, the amount of Rs. 25,000 (given as earnest money and Rs. 24,000 paid out of the price on the transfer of possession) would be forfeited.
  • The aforementioned condition, which stipulated a forfeiture of Rs 24,000, was seen by the five-judge bench to be a punishment rather than liquidated damage by the five-judge court. The wording “as the case may be, the penalty stipulated for” is found in Section 74 of the Contract Act, according to the court.

The court observed as follows: 

  • “The expression if the contract contains any other stipulation by way of penalty widens the operation of the Section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid.”
  • Also, while interpreting the phrase, “whether or not actual damage or loss is proved to have been caused thereby” the Court concluded that while the condition of evidence of actual loss or damages is waived, the requirement that the party has experienced a legal injury is still required before compensation can be granted under Section 74 of the Contract Act.

Key takeaways from the above-mentioned cases

When it came to liquidated damages, the Supreme Court held a similar position. Even if the offended party is unable to prove real loss or losses, the Apex Court ruled that in the context of a contract violation, the aggrieved party is obliged to get appropriate compensation. Because the court may make it challenging to measure the amount of compensation to be paid in some situations, a real pre-estimate of loss is taken into account, although a party must demonstrate the loss sustained in the case of a penalty.

ONGC v. Saw Pipes

In another landmark decision, ONGC v. SAW Pipes (2003), the Supreme Court held that before deciding whether a party is allowed to claim damages or not, the contract terms should be considered and it should be straightforward, asserting unambiguously that contracting parties will be paid in the event of a breach unless the contract expressly states otherwise. A party who breaches a contract is obliged to pay damages to the other party who suffers as a result of the violation, according to Section 73.

Both Sections 73 and 74 must be viewed together because the aggrieved person is not necessary to establish the actual damage caused before requesting the decree. Even if the actual loss sustained is not shown, the court has the right to provide adequate compensation to the aggrieved party. The court cannot decide damages where many contracts are breached, but if there is a true pre-estimated loss and the damages/compensation sought is not in the form of a penalty and is reasonable, the court can award the same. Even though the extent of liquidated damages is specified in the contract, the court or arbitrator must determine a fair amount of damages that do not exceed the amount specified in the contract.

The formula for calculation of damages

It is difficult to demonstrate the risk of damages experienced owing to the other party’s fault primarily on documented evidence in the event of a violation of construction contracts, thus in such circumstances, reliance is focused on well-established ideas and equations that are accessible for loss computation. In the case of AT Brij Paul Singh And Ors. vs State Of Gujarat (1984), the Supreme Court concluded that a broad review of the claim for loss of profit due to contract violation is sufficient instead of checking minute details of the loss incurred.

The following formula is used by the aggrieved party to calculate damage:

  1. Hudson Formula;
  2. Emden Formula;
  3. Eichleay Formula.

M/s SMS Ltd v. Konkan Railway Corporation Ltd

In the case of M/s SMS Ltd v Konkan Railway Corporation Ltd (2020), the Delhi High Court issued a decision on May 11, 2020, setting aside an arbitral award (Award) relating to a dispute over the construction of a railway line in Jammu and Kashmir (railway project). M/s SMS Limited (claimant) received compensation of roughly INR 1.73 crores, compared to its total claim of around 89 crores, according to the award.

  • The court overturned the award because the claimant was not at fault for the non-performance and subsequent termination of the rate contract between itself and Konkan Railway Corporation Limited (Respondent). 
  • The monetary compensation was indefensibly low. It went on to say that the arbitral tribunal’s use of the “notional proportional loss” calculation was irrational.

The factual background of the case 

  1. The claimant was granted the contract for work on a 5 km length of the railway project by the respondent, who was responsible for the implementation of a part of the railway project. As a result, the parties signed a rate contract on January 23, 2004 (Contract), which was expected to be delivered on December 26, 2006. (with a completion period of 36.5 months). 
  2. However, only 10% of the work envisioned under the Contract was accomplished on the anticipated date of completion due to the various problems caused by the difficult terrain in the Himalayas, legal and regulatory challenges, unrest among the local population, and so on.
  3. As a result, the respondent did not impose a penalty and instead awarded the claimant an extension until December 31, 2008. The claimants refused the extension, claiming that any of their proposed acceptable alternatives would necessitate a minimum of a 4-year extension (which would lapse in December 2011). Following that, in May 2007, the claimant ceased all project activity due to technical difficulties, and the Contract was terminated in October 2007.
  4. Following that, the claimant filed arbitration claims for, among other things, 
  • Compensation for idle machinery.
  • Compensation for idle labour.
  • Loss of profits, and so on.
  1. In a typical instance the claimant would have started working 85 percent of the machinery expenses under the Contract, or around INR 16,00,00,000. It thought the respondent was legally required to pay it for its loss because it only completed 10% of the task owing to no fault of its own.
  2. The arbitral tribunal determined that the respondent’s main delay in executing the Task was a 10-month delay in deciding to cancel the Contract and that the claimant was largely liable for all other losses suffered relating to the railway project. As a result, the tribunal used a method known as the “notional proportionate loss” formula to determine the amount of compensation payable to the claimant. The claimant was given an overall amount of INR 1,73,70,790 after applying the formula, which was much less than its total claim of INR 89,65,66,610.
  3. As a result, the claimant filed a petition with the court under Section 34 of the Arbitration and Conciliation Act 1996, requesting either: 
  • A declaration that the award was void; or 
  • An increase in the amount of compensation awarded therein.

Explanation of the formula

Damages calculation is an important aspect of any dispute, and since McDermott International Inc v. Burn Standard Co Ltd & Ors (2006), the Indian judiciary has paid close attention to how such damages are estimated. To get at the damages computation, different treatises such as the “Standard Data Book of Ministry of Road Transport and Highways (MORTH)” or Hudson’s Building and Engineering Contracts are required, as well as other internationally approved valuation processes, and sufficient information is required.

However, as previously noted, the arbitral tribunal in the current instance arrived at the damages claim using a method known as “notional proportionate loss.” The idling charges of the machinery were used as an example in the ruling for the application of the formula for “notional proportionate loss.”

The following factors were considered by the arbitral tribunal:

  1. Under the contract, the claimant’s total machinery expenses are INR 16,00,00,000;
  2. Percentage of machinery costs projected to be worked off under the Contract: 85%;
  3. Compensation for a delay induced by the Respondent: 10 months;
  4. The total period for contract performance: 96 months (from January 2004 to December 2011, when the claimant’s planned four-year extension beyond 2007 would expire); and
  5. The claimant has 50 percent of the burden for delays and non-performance under the Contract.

As a result, according to the ‘notional proportionate loss’ calculation, the compensation required for the losses incurred by the machinery remaining idle = (85 / 100) x 16,00,00,000 x (10/96) x (50/100) = INR 70,83,000. Other forms of compensation, such as the sum payable for idle personnel, were calculated in the same way.

The court’s perspective

The court came to many judgments based on the complex facts of the case, the most important of which were:

  1. The appropriate expected period for execution of the Contract cannot exceed 96 months for the calculation of any compensation owed to the claimant, because the Contract was finally dissolved in October 2007 (and not the hypothetical extension until December 2011); and
  2. The claimant’s overall delay was substantially longer than 10 months as a result of technical difficulty or the Respondent’s defaults, and it had to be reimbursed accordingly.

The court’s decision on the “notional proportionate loss” formula for calculating compensation is, nevertheless, the most important legal aspect of this decision. The court found that this method assigns inappropriate variables to its parameters (such as 96 months for the whole period for contract fulfillment or 10 months for the entire slowdown) and that it was also “unknown.” 

The court further pointed out that in such cases, the Standard Data Book of the Ministry of Road Transport & Highway (MORTH) or the “Hudson Formula” was frequently used to calculate compensation, which the current Award failed to account for. The court decided that this Award was unreliable in law because the arbitral tribunal’s decision-making matrix of using “notional proportionate loss” was irrational and that it was, therefore, liable to be set aside under Section 34 of the Act on the grounds of patent illegality.

Legality to appeal an arbitral award

The legislature does not consider that the complainant should be left without a solution as a result of the arbitral judgment and has included a clause that allows appealing to higher courts in some situations for valid reasons, making it consistent with natural justice principles. If one of the parties believes or has reason to think that the arbitrator is prejudiced, biased, or lacks jurisdiction over the matter, an application is filed under Section 13 of the Act.

If the arbitrator dismisses it and extends the procedures, putting the party at a disadvantage as a result of the award, the arbitral award can be challenged in the High Court under Section 34, citing this prejudice as a preliminary ground. As a result, the legislation appears to have accomplished two goals: 

  1. Restricting the judiciary’s role in arbitration.
  2. Providing the appropriate remedy to the aggrieved parties. Section 34 of the act provides that an arbitral tribunal specifies that an award may be set aside by a court on the following grounds:
  1. The award’s execution would be against Indian public policy.
  2. The agreement’s parties are unable to carry out their obligations.
  3. Under Indian law, the subject matter of the issue cannot be resolved through arbitration.
  4. The contract is null and void.
  5. The award includes decisions on issues that aren’t covered under the arbitration agreement.
  6. A competent authority in the nation where the award was made has set it aside or suspended it.
  7. The arbitral authority’s composition or the arbitral proceedings did not comply with the arbitration agreement.

Furthermore, an explanation is given on the matter about what constitutes public policy, which substantiates that any award obtained through fraud or corruption, in violation of Sections 75 and 81 of the Act, or violation of the fundamentals of the public policy outlined in Indian law or the country’s moral code of conduct, would be considered against public policy.

Arbitrators’ award of interest on damages

Regarding direct claims for receivables, declarations, and payment due, the claim for interest on those due amounts and damages is an important aspect of any arbitration case. The interest component is paid as compensation for the claimant’s loss as a result of the delay in obtaining payments for the above-mentioned direct claims. In most arbitrations, in addition to the direct claims mentioned above, there can be a claim for damages for breach of contract. This section discusses the standards that arbitrators should follow when awarding interest on damages.

Relevance of damage clauses

Damage clauses are used in some contracts, and they quantify the damages owed to the other party. The breaching party must notify the impacted parties and specify an interest rate that can be paid on the debt. The contract’s stipulated liquidated damages There are several sorts of contracts that have clauses in them that one should be aware of. Negative covenants forbid any payment of interest or damages in addition to the principal. There is no option for interest in some other contracts, and there is no prohibition against paying interest on damages.

While reviewing the below-mentioned three categories of contracts cases, the Supreme Court of India established the legislation about the interest payment on damages deriving from the above-mentioned contracts. In the irrigation department, Govt of Orissa v. G.C. Roy (1992), Dhenkanal Minor Irrigation Division v. N.C. Budharaj (2001), Bhagawati Oxygen Ltd v. Hindustan Copper Ltd. (2005)., the Supreme Court of India’s Constitution Bench held that in the absence of an express bar, the arbitrator has the jurisdiction and authority to award interest for all three periods: pre-reference, pendente lite, and future. As a result, as long as there is no bar against granting interests, the arbitrator can grant interest at the rate provided in the contract or at a reasonable rate of interest.

However, it is important to remember that if the contract expressly prohibits the award of interest, then the award cannot include interest for pre-reference and pendente lite periods. However, future interest cannot be precluded by a contract term so the arbitrator retains complete discretion in determining future interest.

The situation concerning interest awards in damages

It is evident that before the quantification of damages by a court or an arbitration tribunal, the law held that interest was not applicable on damages awarded. The explanation for the aforementioned legal situation was that it would not be correct to claim that an individual who breaches a contract undertakes pecuniary liability, nor would it be true to argue that the other party to the contract that complaints of the violation owes him any money. As a result, the only recourse he has is to sue in a court of law for damage, as the High Court of Bombay found in the Iron and Hardware case. However, following the passage of the Interest Act of 1978, the following is the situation concerning interest awards:

  1. Interest on any debt or damages shall be paid in line with any contract provision for interest on such debt or damages.
  2. No interest shall be awarded where the contract specifically prohibits the interest payment on any obligation or damages.
  3. When there is no explicit restriction in the contract and no provision for interest payment, the pre-suit or pre-reference period will be founded on the principles of Section 3 of the Interest Act, and interest will be payable:
  • When the proceedings concern a debt (ascertained sum) due at a specific time under the terms of a written instrument, the period begins on the date the debt is due and ends on the date the procedures are commenced.
  • If the procedures are for the recovery of damages or a debt that is not due at a fixed time, interest will be sought from the date specified in a written notice delivered by the individual asserting the person accountable for the claims to the period of the commencement of proceedings.
  • Payment of interest pendente lite (from the date of institution of proceedings to the date of decree) and future interest (from the date of the decree to the date of payment) shall be based on Section 34 of the Code of Civil Procedure, 1908, or the requirements of the law governing arbitration as the case may be, rather than the Interest Act, 1978.

As a result of the Interest Act of 1978, the law governing the grant of interest on damages has changed. Interest can be awarded for a time frame before the beginning of evaluation of quantification under the Interest Act of 1978, if 

(a) the contract specifically provides for such payment from the date provided in the contract, or 

(b) a written demand for payment of interest on the payment made as damages until the commencement of the operation has been made. 

Interest shall be due on requests for established sums due from the date payment becomes due, as decided in the State of Rajasthan case. As a result, arbitrators must have in mind the aforementioned change in law while compounding interest on damages to accomplish a long-term award.

Grant of liquidated damages in arbitral proceedings in India 

Even now in arbitral awards, damages are an important remedy. In this regard, it’s worth noting that the principles regulating damages awards in civil cases will also apply to arbitral procedures. To claim damages, the person making the claim must present evidence and prove loss according to the rules regulating damages. In the situation of liquidated damages, the arbitrator must be satisfied that the claimant has shown the losses or injuries for which the liquidated damages are being sought, and such damages may only be given to the level of “fair recompense,” which cannot exceed the figure mentioned.

Except when actual damage from the breach of contract cannot be demonstrated or computed, the ultimate responsibility to prove such loss or damage continues. Based on this reasoning, a Division Bench of the Delhi High Court recently confirmed the decision of a Single Judge who had set aside the arbitral judgment because the award for liquidated damages was issued even though no evidence of loss or harm had been shown. As a result, a simple breach of contract does not automatically entitle you to liquidated damages until you can demonstrate actual loss or injury.

Valuation of damages in international arbitration

To commence with, no damages award could be made without a complex calculating procedure, which evaluates the harm that was inflicted on the claimant and resulted in his damage or harm. If it is decided that damages have been incurred, the tribunal must award them, even if the damages are difficult to quantify precisely.

The arbitral tribunal must take into account what it is intending to evaluate, especially the relevant indicator and the notion of value, as well as the evidence that it is calculated by when it comes to the lucrum cessans (expectation profit loss) damages, which is by far the most difficult challenging task. In the most complicated scenarios, there may be specialists who disagree about the valuation and are unsure about the outcomes.

The arbitrator is therefore faced with the task of arriving at a precise, dependable, and final assessment that has “at best the virtues of a good faith attempt at estimation” as previously stated, requiring an informed choice rather than a simple settlement.

The International Valuation Standards Committee (IVSC) has developed three main and widely used approaches to valuation, which can be used in financial statements and assist promote the adoption of valuation approaches around the world. Many corporations have signed on to the IVSC Guidelines and are now formally using them; also, these strategies have been recognized by the valuation industry, resulting in the formation of a ‘Valuation Mercatoria’.

Income-based approach 

This is a method in which specialists employ strategies to transform the expected future economic earnings and advantages into a single current value. It employs three distinct approaches:

Discounted cash flow

The DCF method is the most essential and prevalent in the business and financial community. When it comes to valuing acquisitions or capital market transactions, it is the most common strategy used by investment bankers. It’s also becoming more common in courts and other settings.

When it comes to determining the value of damages, courts have the final say. The DCF approach involves multiple steps:

  • First and foremost, the future cash flows of the firm being evaluated must be estimated, which may be done simply by subtracting expenses from revenues and making a few modifications over a set period.
  • After that, the present value of future cash flows must be determined, taking into account any potential risks and the time value of money.
  • In some cases, estimating the terminal value of cash flows after a set period is recommended.
  • The present value of the cash flows must then be aggregated throughout the period specified.
  • Finally, to arrive at a final net cash flow available to equity investors, the fair market value of the company’s debt must be removed.

Despite being complex, the DCF, according to the International Private Equity Valuation Guidelines, is a useful tool for valuing private equity investments. Quite versatile, but not always appropriate to employ; also, it was mentioned that when using this strategy, there may be a large danger of error in a few instances. Furthermore, the arbitrators have the authority to accept or reject any suggested valuation from both sides; for example, in the Tecmed case, the tribunal rejected a valuation of USD 52 million given by the investor-state and based on a DCF study.

In addition, to use a DCF analysis, the arbitrator and expert witness must address a variety of issues and questions, including double-counting, non-operating assets, foreign exchange rates, minority interests, direct vs indirect equity, and more. Furthermore, to propose an award primarily on the DCF, the entire tribunal must establish a consensus after arriving at a final valuation using this approach or any other way. As a result, it is a difficult process to do.

Adjusted present value

APV is a strategy for valuing projects and enterprises that combines the net present value NPV with the present value of debt financing costs, which includes interest tax shielding, debt issuance charges, financial distress costs, and so on. In highly leveraged transactions, the APV technique is favoured since it considers the advantages of rising debts, which net present value does not.

Capitalized cash flow

It’s also known as Cash Flow Capitalization, and it’s an income-based approach method, but it’s focused on the company’s ability to deliver cash flows in the future. When a fairly consistent number of margins and growth potential of a company is predicted, this strategy is adopted, since a single advantage stream is successfully taken into consideration, and then we begin presuming its constant rate into perpetuity rises. As a result, this capitalization of cash flow method tries to value a business based on a projected cash flow stream by capitalizing on a risk-adjusted rate of return.

Market-based approach 

Some conditions necessitate the adoption of this strategy, and specialists would advise against it in others. A comparison must be made between the subject and a similar business, interest, or security sold in the market using this method.

When engaging with the Market Based Approach, three key sources of data are typically used:

  1. The acquisition market rate is the price at which individual enterprises are sold and purchased.
  2. Public stock exchanges, where equivalent companies and ownership interests are exchanged.
  3. Previous ownership transactions in the subject company.

However, to use this strategy and achieve a precise answer, two conditions must be met: first, there must be a reasonable point of comparison, and second, there must be a dependence on similar businesses.

Asset-based approach 

In reality, this strategy may be related to a method known as the cost approach used to value various sorts of assets. The asset-based approach is focused on the conversion principle, which states that the value of an asset is equal to the cost of replacing all of its constituent elements. When using the asset-based method, the cost foundation balance sheet must be replaced by a balance sheet that reports all assets. It is sometimes assumed that the first and second aforementioned procedures are adequate and provide the greatest ways to value a corporation that offer the best outcomes, but in many cases, depending on specific proof difficulties and situations, the third strategy may be required.

It’s vital to understand that all valuation techniques are not necessarily contradictory; most evaluators use a combination of methodologies when attempting to estimate market worth. As a result, it is not a simple process; it is both intricate and demanding. Valuation is more than just a question of math, particularly when it comes to calculating a true market value; it is an applied science and it may even be considered a craft that demands a high level of talent.

Compania de Aguas del Aconquija S.A. & Others (CAA) v. Argentine Republic (2002)

In some cases, the tribunal may reject the valuation technique offered by the parties. Instead, the tribunal may adopt any approach it sees fit. In the case of Compania de Aguas del Acnoquija S.A. & Others (CAA) v. Argentine Republic, an ICSID Tribunal rejected the parties’ suggested methodologies. The claimants contended that the fair market value should be determined by the profits that the respondent would have made, but the tribunal denied this argument and chose a different strategy that is believed to be more appropriate.

Finally, while determining a final assessment, arbitrators must keep a practical approach in mind. A real dispute frequently occurs as a result of opposing viewpoints based on crucial variables; as a result, a range of plausible future earnings forecasts must be evaluated. It may also be necessary for arbitrators to direct the parties and expert witnesses at times to ensure that the results are clear and correct.


Damages for breach of contract have been seen to be preferable to other provisions relating to parties who have suffered losses as a result of a violation of the contract. One of the potential benefits is that a claim for damages can be filed as a matter of right, as opposed to other reliefs such as specific performance, which are subject to and heavily impacted by judicial independence and judgments. The Specific Relief Act, 1963, for example, states that the court may refuse to give specific delivery “where the execution of the contract would cause the defendant any hardship that he did not anticipate, whereas its non-performance would cause the plaintiff no such hardship.” Liquidated damages are useful in situations where determining the amount of damages is difficult since it is well before by including a provision in the contract that states “liquidated damages.” Liquidated damages clauses like this one try to avoid litigation as much as possible. This would also lessen the burden of proving real loss as a result of a breach to recover damages.


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