2023 (9) TMI 1186 - SC - Indian Laws

Validity of Arbitral Award - High Court had set aside the arbitration award - inordinate delay that had occurred by not taking proper and timely action in removal of various impediments and obstacles that stood in the way of completing the project within the stipulated period of 18 months - computation and award of 10% of the contract value towards loss of overheads and another 10% towards loss of profits/profitability - HELD THAT - Ordinarily, when the completion of a contract is delayed and the contractor claims that s/he has suffered a loss arising from depletion of her/his income from the job and hence turnover of her/his business, and also for the overheads in the form of workforce expenses which could have been deployed in other contracts, the claims to bear any persuasion before the arbitrator or a court of law, the builder/contractor has to prove that there was other work available that he would have secured if not for the delay, by producing invitations to tender which was declined due to insufficient capacity to undertake other work. Hudson s formula might result in double recovery as the profit being added to the profit is already subsumed within the contract sum . To avert this double-recovery, it has been suggested that the formula should be modified to contract sum less overhead and profit Ibid . Any increase in the value of the final account for extra works such as variations contain their own element of overheads and profits. Therefore, Hudson s formula like other formulae, which are only rough approximations of the cost impact of unabsorbed overhead, should be applied with great care and caution to ensure fair and just computation. Arbitral tribunal in the present case has given complete go by to these principles well in place, overlooked care and caution required and taken a one-sided view grossly and abnormally inflated the damages. The arbitral tribunal has accepted that principle of mitigation is applicable but observes that the only way BEEL could have abased the loss, was to work on Sundays or holidays. This reasoning is again ex facie fallacious and wrong. The principle of mitigation with regard to overhead expenses does not mandate working on Sundays or holidays. The scope and ambit of the court s power to review the awards under Section 34 of the A C Act has been contentious viz., on the interpretation to the expression in conflict with the public policy of India . There have been legislative interventions as well as judicial pronouncements. In the context of the present case, we are required to interpret the provisions as they existed on the date on which the objections to the award were filed i.e., on 21.06.1999. Accordingly, the amendment introduced to Section 34 of the A C Act vide Act No. 3 of 2016 with retrospective effect from 23.10.2015 and the judgments of this Court examining the amended Section 34 of the A C Act need not be examined. Post award interference and the extent of the second look by the courts under Section 34 of the A C Act has been a subject matter of perennial parley. The foundation of arbitration is party autonomy. Parties have the freedom to enter into an agreement to settle their disputes/claims by an arbitral tribunal, whose decision is binding on the parties - While arbitration is a private form of dispute resolution, the conduct of arbitral proceedings must meet the juristic requirements of due process and procedural fairness and reasonableness, to achieve a judicially sound and objective outcome. If these requirements, which are equally fundamental to all forms of adjudication including arbitration, are not sufficiently accommodated in the arbitral proceedings and the outcome is marred, then the award should invite intervention by the court. The calculation of amounts awarded, which, in fact, amount to double or part-double payments, besides being contradictory etc. - the award has been rightly held to be unsustainable and set aside by the division bench of the High Court exercising power and jurisdiction under Section 37 read with Section 34 of the A C Act. Appeal dismissed.

Summary

Issues Involved:
1. Responsibility for Delay in Project Completion
2. Computation of Compensation for Overheads and Profits
3. Validity of Arbitral Award under Section 34 of the A&C Act
4. Scope of Judicial Review of Arbitral Awards

Summary:

1. Responsibility for Delay in Project Completion:
The Supreme Court examined the arbitral award which held HPCL fully responsible for the delay in project completion. The Court found the arbitral award's conclusion to be "bereft of analysis and examination of facts and contentions," violating Section 31(3) of the Arbitration and Conciliation Act, 1996 (A&C Act), which mandates that an arbitral award must state the reasons upon which it is based.

2. Computation of Compensation for Overheads and Profits:
The arbitral award granted BEEL Rs.1,57,37,666/- for loss of overheads and profits. The Supreme Court found the award deficient as it lacked any justification or reason for the computation. The Court criticized the use of Hudson's formula without proper validation of its assumptions and found the awarded amount to be "highly disproportionate and exorbitant." The Court noted that the computation resulted in double recovery, which is unsustainable.

3. Validity of Arbitral Award under Section 34 of the A&C Act:
The Supreme Court upheld the High Court's decision to set aside the arbitral award under Section 34 of the A&C Act. The Court highlighted that the award was "patently illegal" due to lack of reasoning, contradictory findings, and unjustified computation of damages. The Court emphasized that the arbitral tribunal failed to apply judicial principles and natural justice, leading to an award that was irrational and perverse.

4. Scope of Judicial Review of Arbitral Awards:
The Court discussed the scope of judicial review under Section 34 of the A&C Act, emphasizing that while arbitration is based on party autonomy, courts must intervene when an award is "unfair, arbitrary, perverse, or otherwise infirm in law." The Court referred to previous judgments, including ONGC v. Saw Pipes and Associate Builders, to underline that an award can be set aside if it is contrary to the "fundamental policy of Indian law," "interest of India," "justice or morality," or if it is "patently illegal."

Conclusion:
The Supreme Court dismissed the appeal, affirming the High Court's decision to set aside the arbitral award. The Court found that the arbitral tribunal's award was unsustainable due to its lack of reasoning, unjustified computation of damages, and failure to adhere to judicial principles.