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TMI Blog2023 (9) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adv. JUDGMENT SANJIV KHANNA, J. This appeal by way of special leave by Batliboi Environmental Engineers Limited For short, BEEL takes exception to the judgment dated 02.11.2007, whereby the Division Bench of the High Court of Judicature at Bombay allowed the appeal Appeal No. 227 of 2001 in Arbitration Petition No. 280 of 1999 filed by Hindustan Petroleum Corporation Limited For short, HPCL under Section 37 of the Arbitration and Conciliation Act, 1996 For short, A C Act , and thereby has set aside the arbitral award dated 23.03.1999. 2. On acceptance of tender and in terms of the letter of intent dated 27.02.1992, HPCL had awarded to BEEL the turnkey contract for detailed engineering including civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity Sewage Water Reclamation Plant in Mahul Refinery area. The contract value was Rs.574.35 lakhs. The contract period was 18 months from the date of letter of intent, and accordingly the work was to be completed by 28.08.1993. There was delay in completion. On written requests/applications made by BEEL, the time for completion was extended on two occasions. Three revisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Owner Respondents are fully responsible for the huge delay that occurred by not taking proper and timely action in removing the various impediments and obstacles that stood in the way of completing the project in the given span of 18 months. The party had been tied down to a project, which was allowed to drift aimlessly, with the owner-respondents showing hardly any interest in completing it in time. Even the basic approval for the Electrical scheme, with numerous revisions was kept pending, till the end without any decision. The Claimants could not have expected to complete the project without these clearances. The Respondents have thus evaded their own responsibilities and committed breach of contractual obligations. As admitted by the Respondents, even the arrangement with MCGB for the supply of Sewage water for purification has not yet been finalised. This, as advised by the Respondents, is awaiting the intervention of the Chief Minister. It is any body s guess when this arrangement will be firmed up the necessary pumping station and underground pipelines etc. will be ready so that sewage water will flow to the plant being built for purification by the claimant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed, since escalation is not permitted as per the contract the claim stands rejected totally. Claim No.4 Compensation for carrying out Extra Work: Rs.19,00,225.00 The claim consists of the following 4 items: (i) Transportation of excavated earth Rs.12,05,000.00 (ii) Dewatering charges incurred during delayed period Rs.5,62,570.00 (iii) Shifting charges for material Rs.1,01,405.00 (iv) Shifting charges for Filter media Rs.31,250.00 The above jobs have been carried out in relation to the main contract, but have figured as extra items due to certain omissions and commissions by the owner-respondents. The claimants have compelled and produced vouchers and documents in support of their claim. I am not satisfied with all the details furnished. Therefore, against the above claim, I awarded to the extent I am satisfied with the documentation, as under: Item No.I Rs.1,20,000.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths. This finding, in our opinion, is bereft of analysis and examination of facts and contentions. The relevant and material facts and the respective stances of the parties are neither decipherable nor evaluated and no reason has been given for arriving at the conclusion. A conclusion without any discussion and reasons, is non-compliant and violates the mandate of sub - section (3) of Section 31 of the A C Act Section 31 - Form and contents of arbitral award - (3) The arbitral award shall state the reasons upon which it is based, unless (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30. , an aspect we would examine subsequently. 8. The second patent error relates to the computation and award of 10% of the contract value towards loss of overheads and another 10% towards loss of profits/profitability. The two amounts have been quantified at Rs.78,68,833/- each. Thus, Rs.1,57,37,666/- has been awarded and held as payable by HPCL to BEEL. The award is deficient being completely silent as to the method and the manner in which the arbitral tribunal has computed the figures. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tability is to be computed on the payments due for the un-executed work, and should exclude the payments received/receivable for the work executed. In other words, based on the value of the work executed by BEEL, the proportionate amount has to be reduced for computing the damage/compensation as a percentage of expenditure on overheads, and damages for loss of profit/profitability. Damages towards expenditure on overheads and loss of profit are proportionate, and not payable for the work done and paid/payable. Delay in payment on execution of the work has to be compensated separately. 11. It is an accepted position and specifically recorded in the award that the total value of the contract was Rs. 5,74,35,213.00p. In an earlier paragraph of the award, which has been not reproduced, the learned arbitrator has referred to R.A. Bill No.4 dated 31.08.1993, as per which BEEL had completed work of Rs.1,21,95,859.68p. It is also an accepted and admitted position that as on 30.03.1996, the date on which the work stopped, as per R.A. Bill No. 37, work valued at Rs. 2,92,07,619.13p had been executed. In other words, BEEL had executed and received payments of Rs. 2,92,07,619.13/- from HPCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [(1967) 1 QB 278 : (1966) 3 All ER 683 : (1966) 3 WLR 706 (CA)] , All ER p. 690 G.) 103. The arbitrator quantified the claim by taking recourse to the Emden Formula. The learned arbitrator also referred to other formulae, but, as noticed hereinbefore, opined that the Emden Formula is a widely accepted one. 104. It is not in dispute that MII had examined one Mr D.J. Parson to prove the said claim. The said witness calculated the increased overheads and loss of profit on the basis of the formula laid down in a manual published by the Mechanical Contractors Association of America entitled Change Orders, Overtime, Productivity commonly known as the Emden Formula. The said formula is said to be widely accepted in construction contracts for computing increased overheads and loss of profit. Mr D.J. Parson is said to have brought out the additional project management cost at US$ 1,109,500. We may at this juncture notice the different formulas applicable in this behalf. (a) Hudson Formula: In Hudson's Building and Engineering Contracts, Hudson Formula is stated in the following terms: Contract head office overhead and profit percentage Contract sum / Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he weekly amount to give the total sum claimed. The Eichleay Formula is regarded by the Federal Circuit Courts of America as the exclusive means for compensating a contractor for overhead expenses. 105. Before us several American decisions have been referred to by Mr Dipankar Gupta in aid of his submission that the Emden Formula has since been widely accepted by the American courts being Nicon Inc. v. United States [ Decided on 10- 6-2003 (USCA Fed Cir), 331 F. 3d 878 (Fed. Cir. 2003)] , Gladwynne Construction Co. v. Mayor and City Council of Baltimore [ Decided on 25-9- 2002, 807 A. 2d 1141 (2002) : 147 Md. App. 149] and Charles G. William Construction Inc. v. White [ 271 F 3d 1055 (Fed. Cir. 2001)] . 106. We do not intend to delve deep into the matter as it is an accepted position that different formulae can be applied in different circumstances and the question as to whether damages should be computed by taking recourse to one or the other formula, having regard to the facts and circumstances of a particular case, would eminently fall within the domain of the arbitrator. 107. If the learned arbitrator, therefore, applied the Emden Formula in assessing the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such person had contracted to discharge it and had broken his contract. Explanation - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. of the Indian Contract Act, 1872 For short, Contract Act , which deal with the effect of failure to perform at fixed time in contracts where time is of essence, and computation of damages caused by breach of contract, respectively, and states that these Sections neither lay down the mode nor how and in what manner computation of damages for compensation has to be made. As computation depends upon attendant facts and circumstances and methods to compute damages, how the quantum thereof should be determined is a matter which would fall within the domain and decision of the arbitrator. 16. This is without doubt, a sound legal and correct proposition. However, the computation of damages should not be whimsical and absurd resulting in a windfall and bounty for one party at the expense of the other. The computation of damages should not be disingenuous. The damages should commensurate with the loss sustai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Value of work done till R.A. Bill No.4 dated 31.08.1993 1,21,95,859.68 Contract period was up to 31.08.1993 i.e. 18 months from 22 February 1992 6. Pro-rata overheads and profits received till 31.08.1993 24,39,171.00 20% of (5). Since the Petitioner received payment of bill at (5), the overheads and profits for the work done covered by bill at (5) have been deducted by the Arbitrator in (7). 7. Net loss suffered as on 01.09.1993 [(2) (6)] 90,47,871.00 As above, for 22 months of work, the Petitioner was to get Rs. 1,14,87,042.00/- (2) towards overheads and profits. However, out of this, the Petitioner received Rs. 24,39,171.00/- (6), the same has been deducted. Rs.90,47,871.00/- is the outstanding receivable by the Petitioner towards overheads and profits for the contract period. 8. Delay in months 24 months Total time spent was 49 Months (Pg.56 of SLP) (22 February 1992 to 31 March 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,47,871/-as on 01.09.1993, that is for the period of 18 months. The computation ignores and does not add the period of 4 months as mentioned by BEEL in the claim statement. Further, the arbitrator had added another period of 3 months for internal administrative process and force majeure events. Thus, the date 01.09.1993 referred to in S.No.7 is incorrect and not the basis of the computation made in the award. S.No.7 fails to taken into consideration the seven-month period, which as per the award has to be added. (ii) The figure of Rs.90,47,871/- would have been relevant, in absence of work done and in fact payments post 01.09.1993. However, it is an accepted and admitted position that payment of Rs.2,92,07,619.13p was made on different dates between 01.09.1993 till 30.03.1996 upon completion of the proportionate value of the work. Claim on account of loss of profits/profitability and overheads, as has been explained above and also elucidated herein-after with reference to several judgments and treatise, is payable if and when there is an increase in cost of off-site and on-site overheads due to delay in completion of work post the agreed or contractual period which is caused by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for computing the claim for compensation/damages in case of partial prevention, i.e., where the breach by the employer is not fundamental and does not entitle the builder/contractor to cease the work, or, being fundamental, is not treated as repudiation by the builder/contractor. Measure of compensation/damages in such cases is the loss of profit arising from reduced profitability or added expense of the work carried out. See Hudson s Building Contracts (10th edn) pp 450, 596 In a given case, where there is a fundamental breach by the employer, albeit, the builder/contractor does not immediately elect to treat the contract as repudiated, he may still be entitled to raise a claim for loss of profit on the uncompleted work. Offsite expenses or overheads are all administrative or executive costs incidental to the management supervision or capital outlay as distinguished from operating charges. These charges cannot be fairly charged to one stream of work or job, and rather be distributed as they relate to the general business or the work of the contractor/builder being undertaken or to be undertaken, as the overheads are relatable to the builder/contractor s business in entirety ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured if not for the delay, by producing invitations to tender which was declined due to insufficient capacity to undertake other work. The same may also be proven from the books of accounts to demonstrate a drop in turnover and establish that this result is from the particular delay rather than from extraneous causes. If loss of turnover resulting from delay is not established, it is merely a delay in receipt of money, and as such, the builder/ contractor is only entitled to interest on the capital employed and not the profit, which should be paid. The High Court of Justice Queen s Bench Division in the case of Property and Land Contractors Ltd v. Alfred McAlpine Homes North Ltd. (1995) 76 BLR 59 succinctly points the in-exactitude of Hudson s formulae, by observing: Furthermore the Emden formula, in common with the Hudson formula (see Hudson on Building Contracts, (11th edn, 1995) paras 8 182 et seq) and with its American counterpart the Eichleay formula, is dependent on various assumptions which are not always present and which, if not present, will not justify the use of a formula. For example the Hudson formula makes it clear that an element of constraint is required (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch have received greater emphasis as the English courts have become more generous in their approach and assessment of claims for time management. The authors accept what has been highlighted above, and the need to take care in delay cases to avoid any double recovery, overlap with other claims, or when payments are obtained by the contractor on account of variation(s), or any damages for breach have to be concluded by using contract price. Thickening , by adding unreasonable expenses, should not be accepted. It is observed that in the total cost method, there is difficulty in linking cause and effect convincingly, albeit is more precise and factually accurate. Thus, Hudson s method should be taken as the basis for computation with caution and as a last resort, where no other way to compute damages is feasible or mathematically accurate. Inaccuracies in Hudson s computation should not be overlooked, and should be accounted and neutralized. Hudson s formula when applied should be with full care and caution not to over-award the damages. 27. Arbitral tribunal in the present case has given complete go by to these principles well in place, overlooked care and caution required and ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide 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. 31. 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. See Vidya Drolia and Others v. Durga Trading Corporation and Others, (2021) 2 SCC 1, which examines arbitrability and non-arbitrability of subject matters and claims, which aspect will not be examined in this case It is argued that the purpose of arbitration is fast and quick one-stop adjudication as an alternative to court adjudication, and therefore, post award interference by the courts is unwarranted, and an anathema that undermines the fundamental edifice of arbitration, which is consensual and voluntary departure from the right of a party to have its claim or dispute adjudicated by the judiciary. The process is informal, and need not be legalistic The express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v) the composition of the Arbitral Tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the court finds that (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation. Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not given a proper notice of appointment of the arbitrator or the arbitration proceedings, or was unable to present its case; and when the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement between the parties, unless such agreement was in conflict with the mandatory and binding non-derogable provision, or was not in accordance with Part I of the A C Act. Sub-clause (iv) states that the arbitral award can be set aside when it deals with a dispute not contemplated by, or not falling within the terms of submission of arbitration, or it contains a decision on matters beyond the scope of submission to arbitration. However, the proviso states that the decision in the matters submitted to arbitration can be separated from those not submitted, then that part of the arbitral award which contains the decision on the matter not submitted to arbitration can be set aside. In the present case, we are not required to examine sub-clauses to clause (a) to sub-section (2) to Section 34 of the A C Act in detail. Hence, this decision should not be read as making any observation, even as obiter dicta on the said clauses. 36. Explanation to sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by Act No. 3 of 2016 with retrospective effect from 23.10.2015, states that the arbitral award arising out of arbitrations other than international commercial arbitrations can be set aside by the court, if it is vitiated by patent illegality appearing on the face of the award. The proviso to sub-section (2-A) to Section 34 of the A C Act also states that the award shall not be set aside merely on the ground of erroneous application of law or by reappreciation of evidence. The aforesaid sub-section need not be examined in the facts of the present case, as we are not required to interpret and apply the substituted explanations to (ii) to sub-clause (b) to 34(2) of the A C Act in the present case. 38. The expression public policy under Section 34 of the A C Act is capable of both wide and narrow interpretation. Taking a broader interpretation, this Court in ONGC Limited. v. Saw Pipes Limited., (2003) 5 SCC 705 (for short, Saw Pipes Limited) held that the legislative intent was not to uphold an award if it is in contravention of provisions of an enactment, since it would be contrary to the basic concept of justice. The concept of public policy connotes a matter which co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectric Co 1994 Supp (1) SCC 644 , as noticed above, an additional ground of patent illegality was introduced Saw Pipes Limited, for exercise of the court s jurisdiction in setting aside an arbitral award. This Court, in McDermott International Inc, held that patent illegality, must be such which goes to the root of the matter. The public policy violation should be so unfair and unreasonable as to shock the conscience of the court. Arbitrator where s/he acts contrary to or beyond the express law of contract or grants relief, such awards fall within the purview of Section 34 of the A C Act. Further, what would constitute public policy is a matter dependent upon the nature of transaction and the statute. Pleadings of the party and material brought before the court would be relevant to enable the court to judge what is in public good or public interest, or what would otherwise be injurious to public good and interest at a relevant point. So, this must be distinguished from public policy of a particular government. 40. A similar view was expressed in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran (2012) 5 SCC 306 with the clarification that where a term of the contract is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no reasons are to be given. Sub-clauses (i) and (iii) to Section 34(2) also refer to different facets of natural justice. In a given case sub-clause to Section 34(2) and sub-clause (ii) to clause (b) to Section 34(2) may equally apply. Lastly, is the need to ensure that the decision is not perverse or irrational that no reasonable person would have arrived at the same or be sustained in a court of law. Perversity or irrationality of a decision is tested on the touchstone of Wednesbury principle of reasonableness As expounded in the case of Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation., (1948) 1 KB 223: (1947) 2 All ER 680 (CA) . At the same time, it was cautioned that this Court was not attempting an exhaustive enumeration of what would constitute fundamental policy of Indian law , as a straightjacket definition is not possible. If on facts proved before them, the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which on the face of it, is untenable resulting in injustice, the adjudication made by an arbitral tribunal that enjoys considerable latitude and play at the joints in making awards, may be ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s approach was arbitrary or capricious. Referring to the third ground of public policy, justice or morality, it is observed that these are two different concepts. An award is against justice when it shocks the conscience of the court, as in an example where the claimant has restricted his claim but the arbitral tribunal has awarded a higher amount without any reasonable ground of justification. Morality would necessarily cover agreements that are illegal and also those which cannot be enforced given the prevailing mores of the day. Here again interference would be only if something shocks the court s conscience. Further, patent illegality refers to three sub-heads: (a) contravention of substantive law of India, which must be restricted and limited such that the illegality must go to the root of the matter and should not be of a trivial nature. Reference in this regard was made to clause (a) to Section 28(1) of the A C Act, which states that the dispute submitted to arbitration under Part I shall be in accordance with the substantive law for the time being in force. The second sub-head would be when the arbitrator gives no reasons in the award in contravention with Section 31(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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