1 ARBP 313.

07
kambli

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

O.O.C.J.

ARBITRATION PETITION NO.313 OF 2007

...

M/s.Essar Projects Limited ...Petitioner

v/s.

M/s.Edifice Developers and Projects

Engineers Limited ...Respondent
...

Mr.Janak Dwarkadas, Sr.Advocate with Mr.Shaunak Thakkar,

Mr.Nimesh Bhatt, Mr.Nikhil Karnawat and Miss.Jinal Gorgi i/b Nivit
Srivastava for the Petitioner.

Mr.Ramesh Dhanuka i/b Vaishali Chaudhari for the Respondent.

...

CORAM: D.K.DESHMUKH, J.

DATED: 11th November,2011

JUDGMENT:

1. By this petition filed under Section 34 of the Arbitration

& Conciliation Act the Petitioner challenges the award made by the

sole Arbitrator dated 15-1-2007 directing the Petitioner to pay to the

Respondent an amount of Rs.1,93,04,481/- with further interest on

the aggregate principal sum of Rs.1,84,58,939/- at the rate of 10%

 2 ARBP 313.07

per annum from the date of the award till realisation and rejecting

the counter claim made by the Petitioner.

2. At the outset, it has to be made clear that so far as the

award rejecting the counter claim made by the Petitioner is

concerned, nothing was argued before me.

3. The learned Arbitrator in paragraphs 2 to 6 of the

award has narrated the events leading to the appointment of the

sole arbitrator. Before me, there was no dispute raised about what

is stated in paragraphs 2 to 6 of the award. Therefore, in my

opinion, it would be appropriate to reproduce those paragraphs,

which shows as to how the disputes between the parties relating to

construction of C-Building works came to be referred to the learned

sole arbitrator. Paragraphs 2 to 6 reads as under:

“2. In or about the month of October, 1994, a

contract was awarded to the Respondents by Messrs.Essar
Oil Limited for purposes of constructing at Vadinar (near
Jamnagar), State of Gujarat, an Oil Refinary Project and
various related facilities at their Refinery Complex
comprising, inter alia, of various oil refinery process units,
seawater intake, seawater basin; fire water basin and fire
water basin pump house; various plant buildings; warehouse
and administrative buildings, township comprising of 342 no.
of residential houses, etc.
 3 ARBP 313.07

3. Prior to awarding of the work of construction of

two Plant C Buildings, viz., Control Room Building and
Switch Gear Room Building in COT (Crude Oil Tanks) Area
at Vadinar, District Jamnagar (Gujarat) to the Claimants, one
Nagarjuna Construction Company Limited was awarded by
the Respondents the works of construction of the said Plant
C Buildings alongwith construction of other works thereat.
The Respondents withdrew the works of construction of the
said Plant C Buildings from the scope of works of the said
Nagarjuna Construction Company Limited and in the month
of February 1998, the balance of works in the said Plant C
Buildings were awarded to the Claimants after discussion
and mutual agreement on various terms and condition
stiuplated in the Letter of Intent bearing
th
No.EPL/JAM/2511/4A/01 dated 28 February, 1998 issued
by the Respondents to the Claimants and accepted by the
Claimants.

4. On 26th February, 1998, discussions between

Claimants’ representatives and Respondents’
representatives took place at Essar Oil Refinery Site,
Vadinar and agreements on points discussed were arrived at
as recorded in the Minutes of the said Meeting at page 208
of Exhibit U (Colly) ( of Respondents’ Compilation).
Pursuant thereto, on 28th February, 1998, the Respondents
issued the Letter of Intent (LOI) bearing Reference
No.EPL/JAM/2511/4A/01 (Exh.1 in Claimants’ Compilation
marked as C-2) to the Claimants whereunder work of
construction of the said Plant C Buildings at the said Essar
Oil Refinery Project (for short, “the said Work”) was awarded
by the Respondents to the Claimants for consideration and
on terms and conditions mentioned therein as also in
General terms and conditions of the Respondents for
construction contracts, the QA/QC Manual and SHE Manual
issued by the Respondents to the Claimants and the
agreements arrived between the parties as recorded in the
minutes of the said meeting held on 26th February, 1998. As
per the said terms and conditions”-

i) the total contract price at Rs.1,63,61,703/- was arrived

at after detail bill of quantities by the item rate shown
therein for various items, which was subject to
variation depending on the actual quantity of work
 4 ARBP 313.07

executed by the Claimants;

ii) prices and rates indicated in priced bill of quantities
annexed to the LOI included cost of all materials,
labour, equipment, instruments, temporary works,
power, water, setting out, supervision, transport, taxes
and duties, royalties, octroi, insurance, sales tax on
works contract and everything though not specifically
mentioned in the said LOI but necessary for
performance of work thereunder;
iii) Cement, Reinforcement Bars and Structural Steel was
agreed to be issued as “FREE ISSUE” materials, at
Respondents; store;
iv) the work was to be completed within 4 months from
the date of the said LOI. Time was mentioned as
essence of the contract;
v) no mobilization advance was envisaged;
vi) no Idle time/Down time charges was to be paid for
claimants’ equipment and personnel;
vii) payment was to be made by the Respondents to the
Claimants on fortnightly RA Bills basis within 15 days
of certification of Bill by Engineer-in-charge.
viii)Defect liability period was of 12 months from the date
of certified completion;
ix) retention money at the rate of 5% of gross value of
each RA Bill was to be deducted from each RA Bill
which could be released against submission of Bank
Guarantee for the amount equivalent to 5% of the
Contract value;
x) the Retention money or Bank Guarantee in lieu of the
same was to be kept valid till the completion of defect
liability period of 12 months from the date of
certification of completion of work;
xi) liquidated damages for delay in completion as payable
by the Claimants was also provided;
xii) the rate and prices mentioned in the priced bill of
quantities was to remain firm and were not subject to
any escalation;

5. The Claimants accepted the said LOI and in

token of acceptance of the terms and condition mentioned
therein, the Claimants signed the duplicate copy thereof and
handed over the same to the Respondents. It constituted
contract by and between the Claimants and the
 5 ARBP 313.07

Respondents in respect of the said Work (for short “the said

Contract). The Claimants had commenced the said Work
with effect from 14th March, 1998.

6. The disputes and differences having arisen

between the Claimants and the Respondents touching or
concerning the interpretation or performance of the said
Contract or relating to the said Contract or in connection
therewith and there being no mutual settlement between the
Claimants and the Respondents in respect thereof, by their
letter dated 31st July, 2002 addressed to the Respondents,
the Claimants invoked arbitration as per the arbitration
agreement between the Claimants and the Respondents
incorporated in general terms and conditions of the said
Contract and suggested name of the person whom the
Claimants appointed arbitrator and requested the
Respondents to concur in his appointment as sole arbitrator
or else to name and appoint another arbitrator. The
Respondents were informed that in that event, the two
arbitrators would appoint the third arbitrator to complete
Constitution of the Arbitral Tribunal. Since the disputes and
differences by and between the Claimants and the
Respondents had arisen to respect of or relating to or
concerning to this contract as well as the works for
Construction of Residential Units, Fire Water Basin and Fire
Water Basin Pump House as per Letters of Intent bearing
Nos.WP/98/TWN/03, 922/10036 and 922/10037 to which,
according to the Claimants, the said General Conditions of
Contract applied, and the Respondents vide their letter dated
16th July, 2002 rejected the Claimants’ claim made in respect
thereof vide their letters dated 22nd May, 2002 and 27th June,
2002, the Claimants had invoked arbitration in respect of
their claims relating to all the said four works including this
work. By their letter dated 2nd September, 2002 addressed to
the Claimants, the Respondents declined to agree to
appointment of the named person as sole arbitrator. No
other suggestion was made by the Respondents in
constituting the Arbitral Tribunal. The Claimants, therefore,
filed an Arbitration Application bearing No.209 of 2002 before
the Hon’ble High Court at Bombay for appointment of an
arbitrator on behalf of the Respondents and also the
presiding arbitrator to adjudicate the disputes arisen by and
between the Claimants and the Respondents out of and/or
 6 ARBP 313.07

relating to and/or anywise concerning all the said Contracts.

On 24th January, 2003, His Lordship Mr.Justice Rebello of
Bombay High Court passed order on the said Arbitration
Application and, since the Claimants and the Respondents
agreed to have appointment of a sole arbitrator for
adjudication of all disputes including claims and counter-
claims arising from all the said Contracts, appointed me as
Sole Arbitrator to decide all claims and counter-claims
arising therefrom, which appointment I accepted. At the
preliminary hearing held on 3rd March, 2003 at the request of
the parties, directions were given to file separate Statement
of Claim and separate Statement of Defence in relation to
claims and defences pertaining to each of the said four
contracts for the sake of convenience so that separate
awards on adjudication thereof could be made.

4. The learned Arbitrator has observed in paragraph 7

that after the Statement of Claim was filed by the Respondent and

reply was filed; by the Petitioner, including counter claims, by

consent of parties certain documents were marked as Exhibits. The

learned Arbitrator has further observed that the Respondent who

was claimant before the learned Arbitrator did not lead any oral

evidence. Oral evidence was led by the Petitioner. Deposition of

Mr.D.S.V.S.Narayanmurthy was recorded. The learned Arbitrator by

his award has awarded several claims in favour of the Respondent.

5. The claim of the Respondent for refund of retention

money of Rs.1,43,028/- has been awarded in favour of the

Respondent with interest. It was the case of the Respondent that

 7 ARBP 313.07

the Petitioner foreclosed the contract within defect liability period of

365 days, no defects were pointed out by the Petitioner. The

retention money was deducted from R.A.Bill Nos. 1 to 6. The

Petitioner did not ask the Respondent to restart the work though

assured and ultimately foreclosed the contract on 28-1-2002. The

learned Arbitrator held by his award that the retention money which

was deducted is liable to be refunded to the Respondent. So far as

this aspect of the matter is concerned, it was claimed before me

that the claim for refund of retention money was not raised in the

letter dated 22nd May, 2002, by which the arbitration clause was

invoked, and therefore, the learned Arbitrator could not have

awarded this amount. So far as this aspect of the matter is

concerned, it is an admitted position that this claim was raised by

the Respondent in the Sttement of Claim and in the reply filed by

the Petitioner, the Petitioner did not raise the question of jurisdiction

of the learned Arbitrator to decide this claim on the ground that it

was not raised in the letter dated 22nd May, 2002. In substance, the

submission of the learned Counsel appearing for the Petitioner was

that as the claim was not included in the letter by which the

arbitration was invoked the arbitrator had no jurisdiction to award

any sum on this count. Thus, the objection is to the jurisdiction of

the learned Arbitrator to award the amounts. If that is so, in view of

 8 ARBP 313.07

the provisions of sub-section 2 of Section 16 of the Arbitration Act,

this objection should have been raised by the Petitioner in their

statement of defence. Sub-section 3 of Section 16 also lays down

that a plea that the arbitral tribunal is exceeding its scope of

authority has to be raised as soon as the matter alleged to be

beyond the scope of its authority is raised during the arbitral

proceedings. Sub-section 4 of Section 16 permits the arbitral

tribunal to consider the objection to the jurisdiction of the learned

Arbitrator, notwithstanding what is contained in sub-sections 2 and 3

of Section 16, if the party raising the objection satisfies the learned

Arbitrator that it has sufficient cause for not raising the plea earlier.

It is common ground before me that before the learned Arbitrator an

objection to the jurisdiction of the learned Arbitrator to consider this

claim was never raised. Therefore, in my opinion, the Petitioner

cannot be permitted to raise such an objection in a petition filed

under Section 34 of the Act. In my opinion, therefore, there is no

reason to interfere with the award of the learned Arbitrator directing

refund of retention money with interest. It is further to be seen that

if such an objection was raised at an early stage, it was possible for

the Claimant-Respondent to invoke the arbitration clause in relation

this claim by writing a letter. Because the Petitioner did not raise an

objection , the Respondent could not do it. In any case, the learned
 9 ARBP 313.07

Arbitrator has held that as the dispute arises out of the contract

which contains an arbitration clause, which is in wide terms, the

claim is arbitrable. The conclusion reached by the learned

Arbitrator, in my opinion, is possible conclusion to be reached on

the basis of the material on record and therefore, in my opinion,

award in that regard cannot be interfered with.

6. The learned Arbitrator has directed payment to the

Respondent of an amount of Rs.1,32,53,248/- on account of

overhead loss. Payment of Rs.13,50,715/- to the Respondent

towards loss of profit. The learned Arbitrator has further directed

payment of Rs.7,50,786/- to the Respondent towards Pendente lite

interest on account of loss of profit. The learned Arbitrator has also

directed payment of amount of Rs.35,11,531/- for loss because of

underutilisation of plant and equipment. The learned Arbitrator has

also directed payment of Rs.2,01,417/- towards reimbursement of

infrastructure expenses. The learned Arbitrator has awarded all

these aforementioned sums after recording findings that the

Petitioner is guilty of breach of contract.

7. It was submitted before me that even assuming that the

finding of the learned Arbitrator that the Petitioner is guilty of

 10 ARBP 313.07

committing breach of the contract, then also the learned Arbitrator

was not justified in awarding various sums indicated above towards

damages relying solely on Hudson formula. It was submitted that

in the statement of claim the Respondent has not even referred to

Hudson formula. On the contrary in the statement of claim

reference is made to Eichleasy formula. At a subsequent stage,

after the Petitioner led oral evidence, abstract of claim was filed and

in that abstract of claim reference was made to Hudson formula. In

the reply filed to abstract of claim the Petitioner objected to the

adoption of Hudson formula for various reasons. It was contended

that best evidence has not been produced and no evidence has

been led to explain and show why the best evidence available has

not been made available and reliance should be placed on Hudson

formula. It was contended that Hudson formula is not accepted

method/measure for quantification of loss to be awarded. The

learned Arbitrator in paragraph 35 of the award has admittedly

awarded the amount of damages relying on Hudson formula. It was

contended before me by the learned Counsel appearing for the

Petitioner that the learned Arbitrator has recorded a finding in

paragraph 35 that the Hudson formula is adopted for quantification

of claim and for overhead loss in India on the basis of the judgment

of the Supreme Court in the case of M/s.A.T.Brij Paul Singh and

 11 ARBP 313.07

Bros. v/s. State of Gujarat, AIR 1984 SC 1703. It was submitted

that the observations of the learned Arbitrator in paragraph 35 of his

award that in construction industires in India a contractor becomes

entitled to damages on the basis of Hudson formula even in the

absence of direct evidence cannot be accepted is contrary to what

is observed by the Supreme Court in its judgment in the case of

Mcdermott International Inc. v/s. Burn Standard Co.Ltd. And ors,

2006(2) Arb.LR 498 (SC), page 498.

8. On behalf of the Respondent it was contended that the

Hudson Formula was relied upon as an evidence in support of the

calculating the quantum of the claim made by the Respondents and

was not required to be specifically pleaded in the Statement of

Claim and even admittedly the amount of claim as mentioned in the

statement of claim was calculated on the basis of Hudson formula.

Both parties relied upon Hudson formula as per their calculation. It

was thus not necessary for the learned Arbitrator to deal with

several other formulas relied upon in construction contracts such as

Emden formula, Eichleay formula etc. in the impugned award since

both parties did not place reliance on any other formula other than

Hudson formula.
 12 ARBP 313.07

9. Now, if in the light of these rival submissions if one

goes through the award, one finds that the learned Arbitrator has

observed “ It is correct that the claimants have not produced their

books of account nor led any oral evidence to prove the overhead

loss caused to or suffered by the claimants.” The learned Arbitrator,

thereafter, observed “ However in the construction industries when

resources are mobilised and the delay is caused in execution of

work which is not attributable to the contractor, overhead losses

consequently caused to the contractor, the contractor becomes

entitled to same on the basis of Hudson formula even in want of

direct evidence to prove the same. Hudson formula has received

judicial support in India. “ The Respondent was unable to show any

material on record to support these general observations made by

the learned Arbitrator that in India in the construction industries for

calculating overhead losses caused to the contractor Hudson

formula is the only formula applied and no direct evidence of loss is

required to be produced. The learned Arbitrator further observed

“This formula (Hudson formula) is adopted for quantification of

claims for overhead losses in India. Even in the case of M/s.A.T.Brij

Paul Singh & Brothers v/s. State of Gujarat (AIR 1994 SC 1703) on

which reliance is placed by Dr.Dave, learned Techno-Legal

Consultant for the Claimants, this formula has been accepted by the
 13 ARBP 313.07

Hon’ble Supreme Court for quantification of claims for overhead

losses.” The learned Arbitrator has thus recorded a finding that the

Hudson formula is generally adopted in India for quantification of

claim for overhead loss, and in support of this submission the

learned Arbitrator has relied on the judgment in Brij Paul Singh’s

case. Perusal of the reply to the abstract of claim filed by the

Respondent shows that first objection raised was that in the

absence of any evidence being led for loss or damages actually

suffered no amount can be awarded. So far as adoption of Hudson

formula is concerned, following objections were raised by the

Respondent.

“(a) Best Evidence has not been produced and No evidence has

been led to explain and show why the Best evidence available

should not be made available and reliance should be placed on a

formula.

No case has been made out for dispensing with need of

establishing quantum of damages on basis of evidence of actual

loss and instead adopting use of a formula.

(b) A Calculation by a formula is not evidence of Loss suffered.

(c) Loss suffered has to be established in any event, and that has

not been done.

(d) The Claimant has by adopting a formula has dispensed with

 14 ARBP 313.07

proof of loss which he required to establish (onus) in order to be

become entitled to adopt some measure for arriving at quantum of

Loss to be awarded.

(e) In India, Hudson formula is not an accepted method/measure of

quantification of Loss to be awarded.

Numerous Court judgments have been cited but there is No Indian

Court decision has been cited by Claimants showing that Indian

Courts have recognised and adopted use of Hudson formula for

quantification of claims for Overhead Losses in India.

Reliance has been placed on Supreme Court of India Judgment in

case of Brij Paul Singh & Bros. v. State of Gujarat AIR 1994 SC

703.

That case does not recognize nor does it adopt use of Hudson

formula.

That judgment only recognizes that head of claim namely

“Overhead Losses” is recognized in construction contract claims

and for that purpose a passage of Hudson’s text book is cited.”

10. Perusal of the above objection raised on behalf of the

Petitioner shows that it was specifically contended that in India

Hudson formula is not accepted method. It was also contended that

 15 ARBP 313.07

the Supreme Court in its judgment in Brij Paul’s case has not

accepted Hudson formula. Perusal of the award of the learned

Arbitrator, however, shows that this contention has not been dealt

with at all. Now, so far as the observations of the learned Arbitrator

that the Hudson formula has been accepted by the Supreme Court

for quantification of claim for overhead loss is concerned, perusal of

the above quoted portion from the reply of the Petitioner shows that

it was specifically contended before the learned Arbitrator that the

Supreme Court in its judgment in Brij Paul’s case does not

recognise nor does it adopt the Hudson formula. It only recognises

that head of claim namely overhead loss is recognised in contract

claims and for that purpose the passage of Hudson’s text book is

cited. The learned Arbitrator has, however, chosen not to deal with

this contention. Now, perusal of the judgment of the Supreme Court

in Brij Paul Singh’s case shows that a contract was entered into

between the erstwhile State of Saurashtra and the Appellant before

the Supreme Court M/s.A.T.Brij Paul Singh & Brothers for providing

cement concrete surface to Rajkot Jamnagar road for miles 18 to

40. The contractor did not complete the work within the time

mentioned in the contract. Therefore, the Respondent before the

Supreme court rescinded the contract. The final bill in respect of

work done by the contractor was accepted by the contractor under

 16 ARBP 313.07

protest. Thereafter, the contractor filed a civil suit claiming Rs.7

lakhs by way of damages, goodwill, prestige and loss of expected

profit, Rs.3 lakhs by of damages on account of loss sustained hile

executing the work and Rs.1 lakh as damages for extra work. The

total claim was Rs.11 lakhs.. The suit was defended by the State of

Bombay. The trial court dismissed the suit. Against the judgment of

the trial court dismissing the suit, an appeal was preferred before

the High Court. The High Court which decided the Appeal

substantially dismissed the Appeal, but allowed the appeal for few

items and decreed the Plaintiff’s suit to the extend of Rs.12,05,590/-

The Plaintiff feeling aggrieved by the judgment of the High Court

preferred an appeal before the Supreme Court. The same

contractor was awarded contract for providing cement concrete

surface in another protion of the same road. That contract was also

rescinded by the State. The contractor filed a suit for damages.

The trial court decreed that suit and awarded a sum of Rs.

1,20,053.20 in favour of the contractor. The State Government filed

an appeal before the High Court challenging the decree passed by

the trial court. The Division Bench of the Gujarat High Court which

heard the Appeal held that the Defendant was guilty of breach of the

contract and the Plaintiff was entitled to damages for loss of

expected profits reasonably calculated at 15% of the balance of the

 17 ARBP 313.07

value of the works contract. The decree was, however, modified by

deleting certain items awarded by the trial court on the ground that

they were barred by limitation. Against the decree passed by the

High Court the contractor filed an appeal before the Supreme Court.

The Supreme Court in paragraph 7 of its judgment recorded its

agreement with the finding recorded by the High Court that it was

the State Government which was guilty of breach of contract and in

paragraph 8 the Supreme Court observed that once it is held that it

was the State Government which was guilty of breach of contract,

part of which was already performed and for performing the

remaining part the contractor has already moved his men and

machineries. One of the heads of damages under which the claim is

made is “loss of expected profit in the work”. Then in paragraph 9

the Supreme Court refers to the judgment of the High Court.

Paragraph 9 of the judgment of the Supreme Court reads as under:

“9. It was not disputed before us that where in

a works contract, the party entrusting the work commits
breach of the contract, the contractor would be entitled
to claim damagtes for loss of profit which he expected to
earn by undertaking the works contract. What must be
the measure of profit and what proof should be tendered
to sustain the claim are different matters. But the claim
under this head is certainly admissible. Leaving aside
the judgment of the trial Court which rejected the claim
for want of proof, the High Court after holding that the
respondent was not justified in rescinding the contract
 18 ARBP 313.07

proceeded to examine whether the plaintiff-contractor

was entitled to damages under the head loss of profit.
In this connection, the High Court referred to Hudson’s
Building and Engineerings Contract (1970), tenth edition
and observed that “In major contracts subject to
competitive tender on a national basis, the evidence
given in litigation on many occasions suggets that the
head-office overheads and profit is between 3 to 7% of
the total price of cost which is added to the tender.” In
other words, the High Court, however, addressed itself
to the question whether adequate proof is tendered to
sustain the claim. In this connection, it was observed
that the loss of profit when it is sought to be recovered
on the percentage basis has to be proved by proper
evidence. Having settled the legal position in this
manner, the High Court proceeded to reject the claim
observing that the bare statement of the partner of the
contractor’s firm that they are entitled to damages in the
nature of loss of profit @ 20% of the estimated cost is
no evidence for the purpose of establishing the claim.
The High Court further observed that the appellant has
not proved by any primary documents the basis of its
pricing for the purpose of quotation in reply to the tender
and more so when it has quoted at 7&1/2% less than the
original estimated cost and in this view of the matter the
claim for loss of profit is unsustainable.

11. Perusal of the observations of the Supreme Court

quoted above shows that the High Court after holding that the State

Government was guilty of breach of contract, proceeded to examine

whether the contractor was entitled to damages under the head loss

of profit, and in that connection the High Court referred to Hudson’s

Building and Engineerings Contract (1970), tenth edition, and

observed ““In major contracts subject to competitive tender on a

notional basis, the evidence given in litigation on many occasions

 19 ARBP 313.07

suggets that the head-office overheads and profit is between 3 to

7% of the total price of cost which is added to the tender.” The

Supreme Court then observed that the High Court held that though

the contractor was entitled to claim amount for loss of profit, that in

the absence of proper evidence led, the contractor was not entitled

to any amounts against the head loss of profit and it is only

paragraph 9 of the judgment of the Supreme Court in Brij Paul’s

case which refers to Hudson’s Building and Engineerings Contract

(1970), tenth edition. What is observed by the Supreme Court in

paragraph 9 of its judgment shows that the High Court referred to

that Book. However, did not award any amount to the contractor on

account of loss of profit in the absence of any evidence being led by

the contractor. By no stretch of imagination, on the basis of this

judgment of the Supreme Court, one can conclude that, as has

been done by the learned Arbitrator, that the Hudson formula has

been accepted by the Supreme Court for quantification of claims for

overhead loss. The learned Arbitrator in paragraph 35(ii) observed

that “ The loss of overhead at the rate of 10% of the gross value of

the contract is generally accepted in the construction industry which

also is based on Hudson Formula.” Now for this general statement

the learned Counsel appearing for the Respondent was not able to

demonstrate any evidence on record. The learned Arbitrator in

 20 ARBP 313.07

paragraph 36(iv) observed “As the claim for delay damages made

by the Claimants has been made on Hudson Formula. Taking the

prevalent trade practice into consideration, the question of

Claimants proving actual damages caused to or suffered by them

by leading separate evidence in this regard did not arise.” The

learned Arbitrator has , thus, relied on prevalent trade practice. The

learned Counsel appearing for the Respondent was not able to

show any material placed on record by the Respondent to

demonstrate that any such practice is prevailing and accepted in

the trade. The learned Arbitrator has also relied on prevailing

market rate for awarding interest at the rate of 15% pendente lite.

The entire award, in so far as various sums awarded under various

heads after recording a finding that the Petitioner is guilty for

committing breach of contract , is based on a basic premise that

Hudson Formula has received judicial support in India and this

Formula is adopted for quantification of claim for overhead loss in

India. And these observations are made by the learned Arbitrator

on the basis of the judgment of the Supreme Court in the case of

Brij Paul. As observed above, perusal of that judgment shows that

the Supreme Court in that judgment does not lay down any such

proposition.
 21 ARBP 313.07

12. The judgment of the Supreme Court, which was relied

on before me by the learned Counsel appearing for the Petitioner in

the case of Mcdermott, referred to above, shows that there are

various formula in existence which are applied for calculating the

amount of damages resulting from wrongful termination of a

contract. The Supreme Court has referred with approval, in

paragraph 109, to the following observations of the Supreme Court

in its judgment in the case of M.N.Gangappa vs. Atmakur

Nagabhushanam Setty & Co. and anr. (1973) 3 SCC 406:

“In the assessment of damages, the court must consider only strict

legal obligations, and not the expectations, however reasonable, of

one contractor that the other will do something that he has assumed

no legal obligation to do.”

13. The judgment of the Supreme Court in McDermott’s

case shows that the Supreme Court considered various formala

which are prevalent and in that case the Arbitrator was justified in

adopting the Emden formula for quantification of loss. In my

opinion, what is observed by the Supreme Court in paragraphs 109,

110, 111, 112, 113, 114, 115 & 122 is relevant. Those paragraphs

read as under:
 22 ARBP 313.07

109. What should, however, be the method of

computation of damages is a question which now arises for
consideration. Before we advert to the rival contentions of
the parties in this behalf, we may notice that in M.N.
Gangappa v. Atmakur Nagabhushanam Setty & Co. and
Another [(1973) 3SCC 406], this Court held:

"In the assessment of damages, the court must consider

only strict legal obligations, and not 'the expectations,
however reasonable, of one contractor that the other will do
something that he has assumed no legal obligation to do.

[See also Lavarack v. Woods of Colchester Ltd (1967) 1 QB

278]

110. 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.

111. 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 overhead 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 overhead 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:
 23 ARBP 313.07

"Contract head office overhead & contract sum period of

Profit Percentage X ------------------- X delay"
contract period

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
criticized 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 & profit Contract sum period of

--------------------------------------- X ------------------ X delay”
100 contract period

Using the Emden formula, the head office overhead

percentage is arrived at by dividing the total overhead cost
and profit of the contractor's organization as a whole by the
total turnover. This formula has the advantage of using the
contractors actual head office 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 Norwest Holst Construction Ltd.
v. Cooperative Wholesale Society Ltd.,decided on 17
February, 1998, Beechwood Development Company
(Scotland) Ltd. v. Mitchell, decided on 21 February, 2001
and HarveyShoplifters Ltd. v. Adi Ltd., decided on 6 March,
2003.

(c) Eichley Formula: The Eichleay formula was evolved

in America and derives its name from a case heard by
Armed Services Board of Contract Appeals, Eichleay Corp.
It is applied in the following manner:
 24 ARBP 313.07

Step 1

Contract Billings Total overhead for Overhead allocable

Total Billings for x contract period = to the contract
contract period

Step 2

Allocable overhead
Total days of contract = Daily Overhead rate

Step 3

Daily Contract Overhead Number of Days Amount of

Rate x of delay = Unabsorbed
overhead"

This formula is used where it is not possible to prove loss

of opportunity and the claim is based on actual cost. It can
be seen from the formula that the total head office
overheads during the contract period is first determined by
comparing the value of work carried out in the contract
period for the project with the value of work carried out by
the contractor as a whole for the contract period. A share
of head office overheads for the contractor is allocated in
the same ratio and expressed as a lump sum to the
particular contract. The amount of head office overhead
allocated to the particular contract is then expressed as a
weekly amount by dividing it by the contract period. The
period of delay is then multiplied by the 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.

112. 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 June, 2003 (USCA Fed. Cir.),
 25 ARBP 313.07

Gladwynne Construction Company v. Balmimore, decided

on 25 September, 2002 and Charles G. William
Construction Inc. v. White, 271 F.3d 1055.

113. We do not intend to delve deep into the matter

as it is an accepted position that different formulas 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.

114. 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.

ACTUAL LOSS : DETERMINATION OF

115. A contention has been raised both before the

learned Arbitrator as also before us that MII could not
prove the actual loss suffered by it as is required under the
Indian law, viz., Sections 55 and 73 of the Indian Contract
Act as Mr. D.J. Parson had no personal knowledge in
regard to the quantum of actual loss suffered by the MII.
D.J. Parson indisputably at one point of time or the other
was associated with MII. He applied the Emden Formula
while calculating the amount of damages having regard to
the books of account and other documents maintained by
MII. The learned Arbitrator did insist that sufferance of
actual damages must be proved by bringing on record
books of account and other relevant documents.

122. A court of law or an arbitrator may insist on

some proof of actual damages, and may not allow the
parties to take recourse to one formula or the other. In a
given case, the court of law or an arbitrator may even prefer
one formula as against another. But, only because the
learned arbitrator in the facts and circumstances of the case
 26 ARBP 313.07

has allowed MII to prove its claim relying on or on the basis

of Emden Formula, the same by itself, in our opinion, would
not lead to the conclusion that it was in breach of Sections
55 or Section 73 of the Indian Contract Act.

14. It is clear from the observations of the Supreme Court

quoted above that in that case the learned Arbitrator before

adopting Emden formula considered other formula and then after

reaching the conclusion that the Emden formula is widely accepted

and suitable for that case adopted that formula. Perusal of the

award in the present case shows that the learned Arbitrator did not

consider any other formula and accepted Hudson formula as if it is

only formula available and accepted by the Supreme Court in India.

15. On the question of necessity of the learned Arbitrator

considering all relevant formulas and picking up most suitable

formula on the basis of the evidence on record for adoption, only

submission made on behalf of the Respondent was that both the

parties relied upon Hudson formula for their calculation.

15. This submission, however, ignores that in the reply filed

to the abstract of claim, where calculations were for the first time

submitted by the Respondent on the basis of Hudson formula, the

Petitioner on several grounds opposed the adoption of Hudson

 27 ARBP 313.07

formula.

16. In my opinion, therefore, the learned Arbitrator was not

at all justified in awarding various sums on account of damages only

on the basis of Hudson formula and therefore that part of the award,

in my opinion, will have to be set aside.

17. In the result, therefore, the petition succeeds in part

and is allowed. The award made by the learned Arbitrator awarding

various sums in favour of the Respondent, save and except

awarding of Rs.1,43,028 with interest and awarding of Rs.94,756/-

as interest on principal of retention money till the date of award, is

set aside.

(D.K.Deshmukh, J.)