Background
Batliboi Environmental Engineers Limited (“Appellant”) was awarded a turnkey contract of Sewage Water Reclamation Plant in Mahul Refinery area by Hindustan Petroleum Corporation Limited (“Respondent”). The work was to be completed in 18 months i.e. by 28 August 1993, however, due to the delay in completion of the work, several extensions were sought by Appellant and granted by Respondent. Appellant carried on the work till 30 March 1996 and thereafter, abandoned the work. As on the date of abandonment, 80% of the work was complete.
On 04 July 1996, the Appellant alleged breach of contract by the Respondent and claimed expenses and losses. Thereafter, Appellant claimed an amount of Rs 50 Lakhs to resume the work and resolve the dispute through conciliation and also stated that in case, this proposal was unacceptable to Respondent, Appellant will invoke arbitration clause. However, Respondent stated that it would not make the payment, while also asserting that Appellant must resume the work, even if the matter is to proceed for arbitration. Appellant did not resume the work.
An arbitrator was appointed and claims by Appellant and counterclaims by Respondent were filed before the arbitral tribunal. The award was passed on 23 March 1999 vide which certain claims of Appellant were allowed and counterclaims filed by Respondent were dismissed.
Arbitral Award
The arbitral award granted Claim Nos. 1, 2 & 4 of the Claimant.
The Claim no. 1 was related to compensation for loss of overhead and profits/profitability for a delay of 48 months. The claim no. 2 related to compensation for idle machinery and equipment. The claim no. 4 related to compensation for carrying out extra work. On the other hand, the Respondent made a counterclaim for liquidated damages due to delay caused by appellant.
The arbitral tribunal rejected the counterclaim of the respondent and allowed the aforementioned claims of the claimant on the ground that the delay was caused due to acts and omissions of the respondent itself. The Tribunal found that the respondent did not take proper action to remove the impediments that obstructed the completion of the work within the 18-month time.
Challenge to arbitral award
Respondent challenged the award before the Bombay High Court, which upheld the award. Subsequently, Respondent filed an appeal against this decision before the division bench of the Bombay HC. The Bombay High Court’s Division Bench allowed the appeal by Respondent and set aside the arbitral award.
Against this decision, Appellant preferred the present appeal before the Supreme Court.
Issue and Decision
Whether the decision of the Bombay High Court setting aside the arbitral award should be upheld or set aside.
The court analysed the award and highlighted multiple flaws in the award. First, the court held that the finding of the arbitrator holding Respondent fully responsible for inordinate delay was devoid of any analysis and examination of facts by the Tribunal. The Tribunal reached this conclusion without giving any reasons and such an award is violative of Section 31(3) of the Arbitration and Conciliation Act (‘A&C Act’) (¶7).
The second error was highlighted in the award of overheads and loss of profits as no reason was specified in the award to allow this claim. Moreover, the award did not mention the method and manner for the computation of amounts towards overheads and loss of profits and awarded 10 percent of the contract value, each for overheads and profits (¶8).
Further, the Court pointed out that for calculation of loss on account of overheads and profit/profitability, it should have been calculated on payments due for unexecuted work and exclude the payments received for executed work. Therefore, proportionate amount had to be reduced for computing damages/compensation under this head (¶10).
Moreover, the Court found that the award reduces the performance bank guarantee amount by 50 % without any reason.
To offer a justification of the computation by the Tribunal, Appellant relied upon Hudson’s formula. However, the Court noted that the arbitrator did not specifically refer to any formula or method, and figures to quantify the damages while calculating loss on account of overheads and profit/profitability. The chart and explanations for award of various claims were found to be an afterthought and ex facie irrational by the Court.
Appropriate methods to calculate the quantum of damages
The Court while appreciating the judgment of Mc Dermott International Inc v Burn Standard Company Ltd (2006), laid down that since the computation is dependent on facts and circumstances as well as methods to compute damages, the determination of the appropriate method to compute those damages falls within the domain of the arbitrator (¶15). However, while determining the damages, the arbitrator is to make sure that they are not whimsical such that they result in windfall gain to one party at the expense of the other. The damages should be at par with the loss sustained. The Court stated that the award of damages should be such as to place the party at loss in the same situation, if it had not sustained the wrong in question (¶16).
The Court laid down that in cases where the breach by the employer is not fundamental or if it is fundamental yet the contractor does not treat the contract as repudiated, the damages awarded should be the amount which is equal to the loss of profits arising from reduced profitability or extra expense incurred for the work carried out. (¶20).
The three formulae- Hudson’s formula, Emden’s formula and Eichleay’s formula have been accepted as appropriate means to ascertain the loss of overheads and profits in English cases. Each of these formulae is based on different factual assumptions and therefore, produce different quantum of damages. In order to determine the most appropriate formula for calculation of damages in any set of facts and circumstances, the assumptions should be examined to determine if they hold true in the given facts and circumstances (¶21).
On Hudson Formula
The Hudson’s formula provides the computation of damages by taking the head office and profit percentage as a proportion of the contract value. The formula works on the assumption that the profit that is being claimed by the contractor is in fact capable of being earned by him elsewhere had he been free to leave the delayed contract at proper time. Three assumptions need to be satisfied before the Hudson’s formula is actually applied for calculating damages- first, contractor is not underestimating the cost when pricing, second, profit element was realistic at that time and third, no such fluctuation in market conditions had taken place which would affect the availability of work at general level of profitability (¶22).
The Court further laid down that when a contractor is claiming that a loss is suffered on account of delay in completion of the contract, he must prove that he would have secured other work if the delay had not taken place. Such availability of work may be proved by producing invitations to tender which could not be accepted due to insufficient capacity or from books of account demonstrating a drop in turnover due to the particular delay. If such loss of turnover or missing out on other work opportunities is not established, then it would only amount to being a delay in receipt of money. For such delay, an interest on capital employed may be claimed, however, profit cannot be claimed (¶23).
Hudson’s formula can result in double recovery as the profit is being added to the profit that is already included in ‘contract sum’. The formula should be modified in a manner such that the contract sum should exclude the sum on which ‘overhead and profit is being calculated’ (¶25).
The court found that the Tribunal in the present case completely overlooked care and caution and awarded an amount that is highly disproportionate and exorbitant. The amount awarded towards loss of overheads and profits was high i.e. greater than the balance amount which was unpaid for the work not executed. Moreover, the amount awarded for idle machinery was without any justification or reasons or specifying method of arriving at that particular amount.
In view of the above, the Court concluded that the award was correctly set aside in light of its patent flaws and illegalities. The appeal was dismissed, and the judgment of the Division Bench of the Bombay High Court was upheld.
Significance
In Batliboi v. HPCL, the Supreme Court clarified that damages for loss of overheads and profits cannot be awarded on the basis of percentages or standard formulas alone. The Claimant must establish actual loss through credible evidence, such as missed business opportunities. The judgment sets a higher bar for evidentiary rigor and discourages reliance on mechanical or assumptive methods for quantifying damages.
Case Details
Citation codes: 2023 INSC 85
Date of Judgment: 21 September 2023
Court: Supreme Court of India
Coram: Justice Sanjiv Khanna & Justice MM Sundresh
Author(s)
Sakshi Upadhyay
LLM candidate at NLSIU, Bengaluru