TaxTMI 
TaxTMI 
2023 (9) TMI 1186
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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, caus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rges 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.1,20,000.00 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 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/pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....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 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 refe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 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 organis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 contrac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 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 fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n deducted by the Arbitrator. Thus 49 - 22 - 3 = 24 Months extra work. (Pg.56 of SLP). 9. Overheads and profit expected during the extra period [(8) * (4)] 1,25,31,318.48 This is the amount for the extra time spent i.e. 24 Months. 244 Months multiplied by per month overhead and profit. 24 * Rs.5,22,138.27 = Rs. 1,25,31,318.48 10. Value of work executed during the 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 Arbitra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he parameters set out in Section 34 of the A&C Act. Further, loss on account of profit earning capacity is paid when the contractor's profit earning capacity is affected due to it being retained longer in the contract in question, without corresponding increase in the monetary benefit earned and without being free to move elsewhere to earn profit which it might otherwise be able to do. It is not the case of BEEL 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 reduci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t are based on factual assumptions, and therefore can produce three different and unrelated compensation/damages. Therefore, while applying a particular equation or method, the assumptions should be examined, and the satisfaction of the assumption(s) ascertained in the facts and circumstances. 22. The formula suggested by Hudson in his 10th edition of the book Building and Engineering Contracts for the computation of damages takes the 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in McDermott International Inc., Hudson's 11th Edition has referred to Eichleay formula, which gives the resultant figures with greater precision and accuracy. This formula, which emerged in 1960s The formula borrows the name from the Armed Services Board of Contract Appeals decision in Eichleay Corporation case, ASBCA No. 5183, 60-2 BCA, is far more nuanced and rigorous, as it requires the builder/contractor to itemise and quantify the total fixed overheads 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Rs.1,57,37,666/-. No justification for computation of the loss is elucidated or can be expounded. Even if one were to rely upon the chart given by the BEEL, and ignore the contradictions in findings, the amount awarded is highly disproportionate and exorbitant. It is clearly a case of overlapping or at least a part doubling of the loss/damages. 28. 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. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spute 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. 32. To disentangle 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter. (4) On receipt of an application under sub-section (1), the court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the Arbitral Tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of Arbitral Tribunal will 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t relates to confidentiality of the settlement proceedings and Section 81 deals with admissibility of evidence in conciliation proceedings. Suffice it is to note at this stage that while 'fraud' and 'corruption' are two specific grounds under 'public policy', these are not the sole and only grounds on which an award can be set aside on the ground of 'public policy'. 37. Act No. 3 of 2016 with retrospective effect from 23.10.2015 has substituted the explanation referred to above, by two new explanations that are differently worded. 25 Explanations 1 and 2 to sub-clause (ii) 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w in reaching the conclusion on the disputed question will not give jurisdiction to the court to interfere. However, this will depend on three aspects: (a) whether the reference was made in general terms for deciding the contractual dispute, in which case the award can be set aside if the award is based upon erroneous legal position; (b) this proposition will also hold good in case of a reasoned award, which on the face of it is erroneous on the legal proposition of law and/or its application; and (c) where a specific question of law is submitted to an arbitrator, erroneous decision on the point of law does not make 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y entitled to take a view after considering the material before him/her and interpret the agreement. The judgment should be accepted as final and binding. 41. Subsequently, in ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263, (for short, Western Geco) a three Judge Bench of this Court observed that the Court, in Saw Pipes Ltd., did not examine what would constitute 'fundamental policy of Indian law'. The expression 'fundamental policy of Indian law' in the opinion of this Court includes all fundamental principles providing as basis for administration of justice and enforcement of law in this country. There 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, reasona....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional and perverse if (a) it is based on no evidence; (b) if the arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or (c) ignores vital evidence in arriving at its decision. The standards prescribed in Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons 1992 Supp (2) SCC 312, (for short, Gopi Nath & Sons) and Kuldeep Singh v. Commissioner of Police (1999) 2 SCC 10 should be applied and relied upon, as good working tests of perversity. In Gopi Nath & Sons it has been held that apart from the cases where a finding of fact is arrived at by ignoring or excluding relevant 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 poli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is finally for the arbitrator to decide. The award can be only set aside under this sub-head if the arbitrator construes the award in a way that no fair-minded or reasonable person would do. 44. As observed previously, we need not examine the amendment made to the A&C Act vide Act No. 3 of 2016 with retrospective effect from 23.10.2015 and the judgments that deal with the amended Section 34 of the A&C Act. Pertinently, the amendment to Section 34 of the A&C Act was effected, pursuant to the observations of the Supplementary Report to Report No. 246 on Amendments to Arbitration and Conciliation Act, 1996 by the Law Commission 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 ....