Cases referred :
1. M/s. A.T. Brij Paul Singh and Bros. Vs. State of Gujarat, A.I.R. 1984 S.C. 1703.
2. Mcdermott International Inc. Vs. Burn Standard Co.Ltd., 2006(2) Arb.L.R. 498(S.C.) 498 : 2006(11) S.C.C. 181.
3. M.N. Gangappa Vs. Atmakur Nagabhushanam Setty & Co., (1973)3 S.C.C. 406.
4. Lavarack Vs. Woods of Colchester Ltd., (1967)1 Q.B. 278.
5. Norwest Holst Construction Ltd. Vs. Co-operative Wholesale Society Ltd., dtd. 17-2-1998.
6. Beechwood Development Company (Scotland) Ltd. Vs. Mitchell, dtd. 21-2-2001.
7. Harvey Shoplifters Ltd. Vs. Adi Ltd., dtd. 6-3-2003.
8. Nicon Inc. Vs. United States, USCA Fed. Cir.
9. Gladwynne Construction Company Vs. Balmimore, dtd. 25-9-2002.
10. Charles G. William Construction Inc. Vs. White, 271 F. 3d 1055. Advocates appeared : Janak Dwarkadas, Sr.Adv. Shaunak Thakkar, Nimesh Bhatt, Nikhil Karnawat & Miss Jinal Gorgi i/b. Nivit Srivastava, for petitioner. Ramesh Dhanuka i/b. Vaishali Chaudhari, for respondent. DESHMUKH D.K., J.: - 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% 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. 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 stipulated in the Letter of Intent bearing No. EPL/JAM/2511/4A/01 dated 28th 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/2511/4-A/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 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 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 Honble 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 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 counterclaims 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 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 Statement 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 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 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 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 Bros. Vs. State of Gujarat)1, A.I.R. 1984 S.C. 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. Vs. Burn Standard Co.Ltd. and ors.)2, 2006(2) Arb.L.R. 498(S.C.) 498 : 2006(11) S.C.C. 181.
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.
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 Vs. State of Gujarat, A.I.R. 1994 S.C. 1703 on which reliance is placed by Dr. Dave, learned Techno-Legal Consultant for the claimants, this formula has been accepted by the Honble 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 Singhs 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 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. Vs. State of Gujarat, A.I.R. 1994 S.C. 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 Hudsons 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 the Supreme Court in its judgment in Brij Pauls 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 Pauls 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 Hudsons 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 Singhs 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 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 Plaintiffs 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 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 damages 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 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 Hudsons 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 suggest 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 contractors 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 Hudsons 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 suggests 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 Pauls case which refers to Hudsons 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 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.
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.)3, (1973)3 S.C.C. 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 McDermotts 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:
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 Vs. Atmakur Nagabhushanam Setty & Co. and another, (1973)3 S.C.C. 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 Vs. Woods of Colchester Ltd.)4, (1967)1 Q.B. 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 Hudsons Building and Engineering Contracts, Hudson formula is stated in the following terms: Contract head contract sum period office overhead & X ------- X of delay Profit Percentage 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 Emdens Building Contracts and Practice, the Emden formula is stated in the following terms: Head office Contract sum period overhead & profit of delay
--------- X ------------- X
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 contractors 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. Vs. Co-operative Wholesale Society Ltd.)5, decided on 17 February, 1998, (Beechwood Development Company (Scotland) Ltd. Vs. Mitchell)6, decided on 21 February, 2001 and (Harvey Shoplifters Ltd. Vs. Adi Ltd.)7, 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: Step 1 Contract Billings Total over- Overhead Total Billings for X head for = allocable contract period contract to the period contract Step 2 Allocable overhead Total days of contract = Daily Over- head rate Step 3 Daily Contract Number of Amount of Overhead Rate X Days of = Unabsorbed delay 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.Vs. United States)8, decided on 10 June, 2003 (USCA Fed. Cir.), (Gladwynne Construction Company Vs. Balmimore)9, decided on 25 September, 2002 and (Charles G. William Construction Inc. Vs. White)10, 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 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-A. 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 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. Petition allowed.
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