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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 ..... 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 were also issued by HPCL. The last revision dated 20.09.1994 had extended the period for completion from 26.09.1994 by 10 months beginning from the date on which approval of electrical items was accorded by HPCL. BEEL carried on the work till 30.03.1996. Thereafter, BEEL abandoned the work. It is an accepted position that as on 30.03.1996, 80% of the work was complete. 3. On 04.07.1996, BEEL made a formal claim to HPCL for breach of contract on account of delay in execution, causing extra expenses and losses. By the letter dated 16.05.1997, BEEL sought an advance p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. This is proof that the Respondents were not serious enough in implementing the project. For reasons given above, I consider that the claimants are legitimately entitled for compensation towards both loss of Overheads and profit/profitability. In arriving at the compensation, the period upto 30.03.1996, when the claimants discontinued the work is being considered. The total period works out to 49 months. The original contract period being 18 months, the extended period comes to 31 months. The claimants had stated in their claim statement that they had provided for 22 months overheads i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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.1,20,000.00 towards transportation of excavated earth dumped by other contractors in the work site, prior to award of contract but after submission of the offer. Item No.II Nil amount Item No. III Rs.50,000.00 towards shifting of materials manually because of non-availability of approach to site for vehicle. Item No.IV Rs.25,000.00 towards charges for shifting the Filter Media Several times for paucity of space. Total Claim amount awarded: Rs.1,95,000.00 against Rs.19,00,225.00 Claim No.5 - Cost of repair and rectification: Amount to be assessed. No award on this as this refers to future course of action when project work is resumed. INTEREST: The Claimants are also entitled to 18% interest per annum on all the claims awarded, effective from 16.05.1997, the date on which the notice invoking Arbitration clause was served on the Respondents (date on which cause of action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd is deficient being completely silent as to the method and the manner in which the arbitral tribunal has computed the figures. Therefore, it leaves us and the parties to wonder the basis for awarding and computing the amounts. We are not commenting or examining the merits of the computation, but complete absence of any justification and reason to allow the claim and quantification of the sum awarded. We would subsequently examine the chart furnished by BEEL in support of the said computation, albeit at this stage we would like to highlight the apparent contradiction in the award, which is the third ground to uphold the decision of the Division Bench of the High Court. 9. We begin our substantiation of the third ground, by referring to the first paragraph of the award quoted above, under the heading 'Claim No. 1 - Compensation for loss of overhead and profit and also profitability'. BEEL had based Claim No.1 for loss on account of overheads and profits/profitability upon 48 months delay as on 27.08.1997. BEEL for computation had considered 10% of the contract value towards overheads and other 10% towards profits/profitability for arriving at the figure of Rs. 3,38,38,460/-, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from time to time, between the period 01.09.1993 and 30.03.1996. Eighty percent of the work was complete. BEEL has received total payment of Rs.4,14,03,478.81p in terms of running account bills till R.A. No. 37. The balance work was Rs. 1,14,87,042.00p. Twenty percent of Rs.1,14,03,478.81 is Rs.22,97,408.40p. In addition, BEEL is entitled to compensation for the delay in execution of the work of Rs.2,92,07,619.13/- till the date payments were made, albeit, the award directs payment of Rs. 18% interest per annum on all claims awarded effective from 16.05.1997. 12. The award also reduces the performance bank guarantee amount by 50%, without any discussion, elucidation and reason. 13. In order to justify the computation made in the award and also the principle or the method adopted by the arbitral tribunal, BEEL has referred to the Hudson's formula and relied upon judgments of this Court in McDermott International Inc. v. Burn Standard Company Limited and Others. (2006) 11 SCC 181 (for short, McDermott International Inc.)., and Associate Builders v. Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following terms: "Contract head office overhead and profit percentage x Contract sum / Contract period x Period of delay" In the Hudson Formula, the head office overhead percentage is taken from the contract. Although the Hudson Formula has received judicial support in many cases, it has been criticised principally because it adopts the head office overhead percentage from the contract as the factor for calculating the costs, and this may bear little or no relation to the actual head office costs of the contractor. (b) Emden Formula: In Emden's Building Contracts and Practice, the Emden Formula is stated in the following terms: "Head office overhead and profit /100 x Contract sum / Contract period x Period of delay" Using the Emden Formula, the head office overhead percentage is arrived at by dividing the total overhead cost and profit of the contractor's organisation as a whole by the total turnover. This formula has the advantage of using the contractor's actual head office overhead and profit percentage rather than those contained in the contract. This formula has been widely applied and has received judicial support in a number of cases including Norw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, applied the Emden Formula in assessing the amount of damages, he cannot be said to have committed an error warranting interference by this Court." 15. McDermott International Inc. refers to Sections 55 Section 55 - Effect of failure to perform at fixed time, in contract in which time is essential - When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential.-If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than that agreed upon.-If, in case of a contract voidable on account of the prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mages should commensurate with the loss sustained. In a claim for loss on account of delay in work attributable to the employer, the contractor is entitled to the loss sustained by the breach of contract to the extent and so far as money can compensate. The party should to be placed in the same situation, with the damages, as if the contract had been performed. The principle is that the sum of money awarded to the party who has suffered the injury, should be the same quantum as s/he would have earned or made, if s/he had not sustained the wrong for which s/he is getting compensated. See - Robinson v. Harman (1848) 1 Ex 850 at 855 and Livingstone v. Rawyards Coal Co (1879-80) L.R. 5880 cases 25 17. We shall subsequently catechise the Hudson's formula, suffice at this stage is to notice that the learned arbitrator does not specifically refer to any formula or the method, and the figures to compute damages under the head of loss on account of overheads and profits/profitability. The award, as quoted above, does refer to Sections 55 and 73 of the Contract Act. 18. Having examined the award and the contents, we would now like to refer to the chart produced by BEEL by way of additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extended period upto 30.03.1996 (R.A. Bill No.37) 2,92,07,619.13 This is the amount received for the work done during extended period i.e. August 1993 to March 1996. 11. Pro-rata overheads and profits received during the extended period. 58,41,523.80 This is 20% of 2,92,07,619.13 (10). Since the petitioner received payment of bill at (10), the overheads and profits for the work done covered by bill at (10), have been deducted by the Arbitrator in (11) 12. Net loss suffered till 27.08.1997 [(9) - (11)] 66,89,791.68 This is loss of overhead and profits for the extra period of 24 Months. As stated in (9), overheads and profits for extra time of 24 months was Rs.1,25,31,318.48. Since, the Petitioner received a sum of Rs.58,41,523.80 (11), the same has been deducted by the Arbitrator. 13. Total loss on overheads and profit on this count till 27.08.1997 [(7) - (12)] 1,57,37,665.68 This amount is the sum of overhead and profits due during contract period plus the overhead and profits for the extra period of 24 Months. Awarded by the Arbitrator (Pg.56 of SLP) 19. The chart and explanations given in the chart, we believe, are an afterthought and futile finagle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EEL that they are entitled to enhance or increase in cost on account of delay in execution of the work. Pertinently, Claim No. 3 for compensation of losses incurred due to increase in cost of material and labour has been specifically rejected, as escalation in prices/costs are barred by the terms of the contract. (iii) The computation of loss under S.No.7 of Rs.90,47,871/- is, therefore, unsustainable and cannot be justified by any calculation and in terms of the Contract Act. (iv) As per the chart, in addition to Rs.90,47,871/-, the arbitrator has awarded at S.No.12, a further amount of Rs.66,89,794.68p. on account of loss of overheads and profits for the extra period of 24 months, that is, till 27.08.1997. The figure as per S.No.12 is arrived at after reducing pro rata overheads and profits during the extended period as mentioned in S.No.9. The computation belies and defies logic. It clearly amounts to double payment towards compensation and damages, as it fails to notice that the sum mentioned in S.No.7 of Rs. 90,47,871/- is on account of compensation towards overheads and profits/profitability. Therefore, 20% of the value of the unfinished work had already been included i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he head office and profit percentage as a proportion of the contract value. The formula assumes that the profit judged by the builder/contractor is in fact capable of being earned by her/him elsewhere had the builder/contractor been free to leave the contract at the proper time. The formula is couched on three assumptions. First, that the contractor is not habitually or otherwise underestimating the cost when pricing; secondly the profit element was realistic at that time; and lastly, there was no fluctuation in the market conditions and the work of the same general level of profitability would be available to her/him at the end of the contract period. Satisfaction of these assumptions should be ascertained when we apply Hudson's formula for computing the damages. Material should be furnished by the claimant to justify and assure that the assumptions for applying Hudson's formula are met. 23. 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verheads during the contract period. It takes into consideration all the contracts of the contractor/builder during the contract period with those of the individually delayed contract to determine the proportionate faction of the total fixed overheads. However, in both Hudson's and Eichleay's formulae, the amount to be recovered is determined weekly or monthly, which the delay in the contract completion is expected to earn. 25. 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. Claims for head office overheads - alternatives to formulae, John W. Pettet, 1999 26. Hudson in his 14th Edition refers to claim for management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 29. We would like to refer to Claim No.2 for idle machinery and equipment. This was on account of extended period of contract. This claim of more than Rs.84,00,000/- has been accepted for Rs.12,00,000/-, by simply stating that the learned arbitrator had inspected the site and, in his opinion, there is substance in the claim. Inspection of the site was post the appointment of the arbitrator after August 1997, whereas BEEL had abandoned the contract more than a year ago in March 1996. The amount awarded is merely on ipsi dixit without giving any reasons and basis for awarding the amount. 30. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngle and balance the competing principles, the degree and scope of intervention of courts when an award is challenged by one or both parties needs to be stated. Reconciliation as a statement of law and in particular application in a particular case has not been an easy exercise. We begin by first referring to the views expressed by this Court in interpreting the width and scope of the post award interference by the courts under Section 34 of the A&C Act. 33. Section 34 of the A&C Act, prior to amendment effected vide Act No. 3 of 2016 with retrospective effect from 23.10.2015, reads as under: "34. Application for setting aside arbitral award.- (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). (2) An arbitral award may be set aside by the court only if- (a) the party making the application furnishes proof that- (i) a party was under some incapacity; or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) the party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll eliminate the grounds for setting aside the arbitral award." 34. Sub-section (1) to Section 34 of the A&C Act requires that the recourse to a court against an arbitral award is to be made by a party filing an application for setting aside of an award in accordance with sub-sections (2) and (3) of Section 34. Sub-section (2) to Section 34 of the A&C Act stipulates seven grounds on which a court may set aside an arbitral award. Sub-section (2) consists of two clauses, (a) and (b). Clause (b) consists of two sub-clauses, namely, sub-clause (i) which states that when the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, and sub-clause (ii), which states that the court can set aside an arbitral award when the award is 'in conflict with public policy of India'. We shall subsequently examine the decisions of this Court interpreting 'in conflict with public policy of India' and the explanation. 35. Under sub-clause (a) to sub-section (2) to Section 34 of the A&C Act, a court can set aside an award on the grounds in sub-clauses (i) to (v) namely, when a party being under some incapacity; arbitration agreement is not va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clause (b) to Section 34(2) of the A&C Act substituted vide Act No. 3 of 2016 read as under: Explanation 1.-For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,- (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Explanation 2.-For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. Sub-section 2A to Section 34(2) of the A&C Act inserted vide Act No. 3 of 2016 reads as under: (2-A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence. Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the award bad, unless the court is satisfied that arbitrator had proceeded illegally. In the said case, the court set aside the award on the ground that the award had not taken into consideration the terms of the contract before arriving at the conclusion as to whether the party claiming the damages is entitled to the same. Reference was made to the provisions of Sections 73 and 74 of the Contract Act, which relate to liquidated damages, general damages and penalty stipulations. This view had held the field for a long time and was applied in subsequent judgments of this Court in Hindustan Zinc Ltd. v. Friends Coal Carbonisation (2006) 4 SCC 445, Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited (2006) 11 SCC 245, Delhi Development Authority v. R.S. Sharma and Co (2008) 13 SCC 80., J.G. Engineers (P) Ltd. v. Union of India and Another (2011) 5 SCC 758, and Union of India v. L.S.N. Murthy. (2012) 1 SCC 718 39. In 2006, this Court in McDermott International Inc. despite following the ratio of Saw Pipes Limited, made succinct observations regarding the restrictive role of courts in the postaward interference. In addition to the three grounds introduced in Renusagar Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re were three distinct and fundamental juristic principles which form a part and parcel of 'fundamental policy of Indian law'. The first and the foremost principle is that in every determination by a court or an authority that affects rights of a citizen or leads to civil consequences, the court or authority must adopt a judicial approach. Fidelity to judicial approach entails that the court or authority should not act in an arbitrary, capricious or whimsical manner. The court or authority should act in a bona fide manner and deal with the subject in a fair, reasonable and objective manner. Decision should not be actuated by extraneous considerations. Secondly, the principles of natural justice should be followed. This would include the requirement that the arbitral tribunal must apply its mind to the attending facts and circumstances while taking the view one way or the other. Nonapplication of mind is a defect that is fatal to any adjudication. Application of mind is best done by recording reasons in support of the decision. As noticed above, Section 31(3)(a) of the A&C Supra footnote 5 states that the arbitral award shall state the reasons on which it is based, unless the partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant materials or taking into consideration irrelevant material, the finding is perverse and infirm in law when it outrageously defies logic as to suffer from vice of irrationality. Kuldeep Singh clarifies that a finding is perverse when it is based on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it. If there is some evidence which can be acted and can be relied upon, however compendious it may be, the conclusion should not be treated as perverse. This Court in Associate Builders emphasised that the public policy test to an arbitral award does not give jurisdiction to the court to act as a court of appeal and consequently errors of fact cannot be corrected. Arbitral tribunal is the ultimate master of quality and quantity of evidence. An award based on little evidence or no evidence, which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Every arbitrator need not necessarily be a person trained in law as a Judge. At times, decisions are taken acting on equity and such decisions can be just and fair should not be overturned under Section 34 of the A&C Act on the ground that the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of India, titled 'Public Policy - Developments post-Report No. 246' published in February 2015. This Supplementary Report observed that the power to review an arbitral award on merits under Section 34 of the A&C Act, as elucidated in the case of Western Geco, subsequently followed in Associate Builders, is contrary to the object of the A&C Act and international practice on minimization of judicial intervention. A reference can also be conveniently made to MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163 (for short, MMTC Ltd.) and Ssangyong Engg. & Construction Co. Ltd. v. National Highways Authority of India (2019) 15 SCC 131(for short, Ssangyong Engg), which examine the scope of intervention of courts under Section 34 of the A&C Act as amended by Act No. 3 of 2016. MMTC Ltd. and Ssangyong Engg., and other judgments which deal with the amended Section 34 of the A&C Act that are not applicable in the present case. 45. We have extensively analysed the award, its patent flaws and illegalities which emanate from it, like the manifest lack of reasoning in arriving at the conclusions and the calculation of amounts awarded, which, in fact, amount to double or part-double payments, besides ..... X X X X Extracts X X X X X X X X Extracts X X X X
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