# CASE DETAILS BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN PETROLEUM CORPORATION LIMITED AND ANOTHER

- **Citation:** 2023 INSC 850
- **Court:** Supreme Court of India
- **Decided:** 2023-09-21
- **Case number:** Civil Appeal No. 1968 of 2012
- **Bench:** Sanjiv Khanna, M.M. Sundresh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/case-details-batliboi-environmental-engineers-limited-v-hindustan-petroleum-36486
- **Pages:** 36

## Headnote

Issue for consideration: Whether the Division Bench of the High
Court was justifi ed in allowing the appeal fi led by the respondents u/s. 37
of the Arbitration and Conciliation Act, 1996, and thereby setting aside the
arbitral award.
Arbitration and Conciliation Act, 1996 - s. 37 - Arbitral award
- Interference with - Award of turnkey contract to the appellant by
the respondents for a contract value to be completed within stipulated
period - Delay in project completion which was extended, and thereafter
the appellant abandoned the work, only 80% of the work was completed
- Matter proceeded for arbitration - Arbitral award dismissed the
respondent's claim for liquidated damages on the ground that the
delay was caused by respondent's omissions and commissions and its
other claim also rejected since they related to future works - Appeal
thereagainst allowed by the Division Bench setting aside the arbitral
award - Justifi cation of:
Held: Computation depends upon attendant facts and circumstances
and methods to compute damages - Determination of the quantum is a
matter which would fall within the domain and decision of the arbitrator -
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
- Computation of damages should not be disingenuous - Damages should
commensurate with the loss sustained - Arbitral tribunal gave a complete go
442
SUPREME COURT REPORTS
[2023] 12 S.C.R.
by to the principles well in place, overlooked care and caution required and
took a one-sided view, grossly and abnormally infl ated the damages - No
justifi cation for computation of the loss is elucidated or can be expounded
- Even if one were to rely upon the chart given by the appellant, and ignore
the contradictions in fi ndings, the amount awarded is highly disproportionate
and exorbitant - Patent fl aws and illegalities emanate from the award,
like the manifest lack of reasoning in arriving at the conclusions and the
calculation of amounts awarded, which, in fact, amount to double or partdouble payments, besides being contradictory - Thus, the award rightly held
to be unsustainable and set aside by the Division Bench of the High Court
exercising power and jurisdiction u/s. 37 rw s. 34. [Paras 15, 16, 27 and 45]
s. 34 - Post award interference - Scope and ambit of court's power:
Held: Foundation of arbitration is party autonomy - Parties have the
freedom to enter into an agreement to settle their disputes/claims by an arbitral
tribunal, whose decision is binding on the parties - Court must exercise its
powers when the award is unfair, arbitrary, perverse, or otherwise infi rm in
law - While arbitration is a private form of dispute 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 suffi ciently accommodated
in the arbitral proceedings and the outcome is marred, then the award should
invite intervention by the court. [Paras 31and 32]
Contract - Computation of damages - Method for - Usage
of formulae such as Hudson's, Emden's, or Eichleay's formulae to
ascertain the loss of overheads and profi ts:
Held: Three formulae deal with theoretical mathematical equations,
but are based on factual assumptions, and thus, can produce three diff erent
and unrelated compensation/damages - Thus, 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 - Hudson's
formula like other formulae, which are only rough approximations of the
cost impact of unabsorbed overhead, should be applied with great care and
caution to ensure fair and just computation. s. 34 - Public policy test to
443
an arbitral award - Expressio

## Text

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[2023] 12 S.C.R. 441 : 2023 INSC 850
441
CASE DETAILS
BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED
v.
HINDUSTAN PETROLEUM CORPORATION LIMITED AND
ANOTHER
(Civil Appeal No. 1968 of 2012)
SEPTEMBER 21, 2023
[SANJIV KHANNA AND M.M. SUNDRESH, JJ.]
HEADNOTES
Issue for consideration: Whether the Division Bench of the High
Court was justifi ed in allowing the appeal fi led by the respondents u/s. 37
of the Arbitration and Conciliation Act, 1996, and thereby setting aside the
arbitral award.
Arbitration and Conciliation Act, 1996 - s. 37 - Arbitral award
- Interference with - Award of turnkey contract to the appellant by
the respondents for a contract value to be completed within stipulated
period - Delay in project completion which was extended, and thereafter
the appellant abandoned the work, only 80% of the work was completed
- Matter proceeded for arbitration - Arbitral award dismissed the
respondent's claim for liquidated damages on the ground that the
delay was caused by respondent's omissions and commissions and its
other claim also rejected since they related to future works - Appeal
thereagainst allowed by the Division Bench setting aside the arbitral
award - Justifi cation of:
Held: Computation depends upon attendant facts and circumstances
and methods to compute damages - Determination of the quantum is a
matter which would fall within the domain and decision of the arbitrator -
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
- Computation of damages should not be disingenuous - Damages should
commensurate with the loss sustained - Arbitral tribunal gave a complete go
442
SUPREME COURT REPORTS
[2023] 12 S.C.R.
by to the principles well in place, overlooked care and caution required and
took a one-sided view, grossly and abnormally infl ated the damages - No
justifi cation for computation of the loss is elucidated or can be expounded
- Even if one were to rely upon the chart given by the appellant, and ignore
the contradictions in fi ndings, the amount awarded is highly disproportionate
and exorbitant - Patent fl aws and illegalities emanate from the award,
like the manifest lack of reasoning in arriving at the conclusions and the
calculation of amounts awarded, which, in fact, amount to double or partdouble payments, besides being contradictory - Thus, the award rightly held
to be unsustainable and set aside by the Division Bench of the High Court
exercising power and jurisdiction u/s. 37 rw s. 34. [Paras 15, 16, 27 and 45]
s. 34 - Post award interference - Scope and ambit of court's power:
Held: Foundation of arbitration is party autonomy - Parties have the
freedom to enter into an agreement to settle their disputes/claims by an arbitral
tribunal, whose decision is binding on the parties - Court must exercise its
powers when the award is unfair, arbitrary, perverse, or otherwise infi rm in
law - While arbitration is a private form of dispute 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 suffi ciently accommodated
in the arbitral proceedings and the outcome is marred, then the award should
invite intervention by the court. [Paras 31and 32]
Contract - Computation of damages - Method for - Usage
of formulae such as Hudson's, Emden's, or Eichleay's formulae to
ascertain the loss of overheads and profi ts:
Held: Three formulae deal with theoretical mathematical equations,
but are based on factual assumptions, and thus, can produce three diff erent
and unrelated compensation/damages - Thus, 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 - Hudson's
formula like other formulae, which are only rough approximations of the
cost impact of unabsorbed overhead, should be applied with great care and
caution to ensure fair and just computation. s. 34 - Public policy test to
443
an arbitral award - Expression 'public policy' u/s. 34 - Interpretation of -
Elucidated. [Para 21, 25, and 38]
LIST OF CITATIONS AND OTHER REFERENCES
McDermott International Inc. v. Burn Standard Company Limited and
Others (2006) 11 SCC 181:[2006] 2 Suppl. SCR 409; Associate Builders
v. Delhi Development Authority (2015) 3 SCC 49:[2014] 13 SCR 895; A.T
Brij Paul Singh and Others v. State of Gujarat (1984) 4 SCC 59; Vidya
Drolia and Others v. Durga Trading Corporation and Others, (2021) 2 SCC
1:[2020] 11 SCR 1001; ONGC Limited. v. Saw Pipes Limited. (2003) 5 SCC
705:[2003] 3 SCR 691; Hindustan Zinc Ltd. v. Friends Coal Carbonisation
(2006) 4 SCC 445; Centrotrade Minerals and Metals Inc. v. Hindustan
Copper Limited (2006) 11 SCC 245; Delhi Development Authority v. R.S.
Sharma and Co (2008) 13 SCC 80:[2008] 12 SCR 785; J.G. Engineers (P)
Ltd. v. Union of India and Another (2011) 5 SCC 758:[2011] 8 SCR 486;
Union of India v. L.S.N. Murthy (2012) 1 SCC 718:[2011] 13 SCR 295;
Renusagar Power Co. Limited v. General Electric Co 1994 Supp (1) SCC
644:[1993] 3 Suppl. SCR 22; Rashtriya Ispat Nigam Ltd. v. Dewan Chand
Ram Saran (2012) 5 SCC 306:[2012] 4 SCR 1; ONGC Ltd. v. Western Geco
International Ltd., (2014) 9 SCC 263:[2014] 12 SCR 1; Excise and Taxation
Offi cer-cum-Assessing Authority v. Gopi Nath & Sons 1992 Supp (2) SCC
312; Kuldeep Singh v. Commissioner of Police (1999) 2 SCC 10:[1998] 3
Suppl. SCR 594; MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163:[2019] 3
SCR 1023; Ssangyong Engg. & Construction Co. Ltd. v. National Highways
Authority of India (2019) 15 SCC 131:[2019] 7 SCR 522 - referred to.
Robinson v. Harman (1848) 1 Ex 850 at 855; Livingstone v. Rawyards
Coal Co (1879-80) L.R. 5880 cases 25; Peak Construction (Liverpool) Ltd
v. McKinney Foundations Limited (1970) 1 BLR 114; Whittal Builders v.
Chesterle-Street District Council (1987) 40 BLR 82; JF Finnegan Ltd v.
Sheffi eld City Council (1988) 43 BLR 124; Ellis- Don v. Parking Authority
of Toronto (1978) 28 BLR 98; Property and Land Contractors Ltd v. Alfred
McAlpine Homes North Ltd. (1995) 76 BLR 59; Associated Provincial
Picture Houses Ltd. v. Wednesbury Corporation., (1948) 1 KB 223: (1947)
2 All ER 680 (CA); Eichleay Corporation case, ASBCA No. 5183, 60-2
BCA - referred to.
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD.
444
SUPREME COURT REPORTS
[2023] 12 S.C.R.
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
CIVIL APPELLATE JURISDICTION : Civil Appeal No.1968 of 2012.
From the Judgment and Order dated 02.11.2007 of the High Court of
Judicature at Bombay in AN No.227 of 2001 in AP No.280 of 1999.
Appearances:
Shyam Divan, Sr. Adv., Amar Dave, Mahesh Agarwal, Ankur Saigal,
Aadil Parsurampuria, Ms. S. Lakshmi Iyer, Ms. Tanvi Manchanda, Nishant
Rao, E. C. Agrawala, Advs. for the Appellant.
N. Venkataraman, A.S.G., Sanjay Kapur, Ms. Megha Karnwal, Surya
Prakash, Arjun Bhatia, Ms. Akshata Joshi, Advs. for the Respondents.
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
SANJIV KHANNA, J.
This appeal by way of special leave by Batliboi Environmental
Engineers Limited1 takes exception to the judgment dated 02.11.2007,
whereby the Division Bench of the High Court of Judicature at Bombay
allowed the appeal2 fi led by Hindustan Petroleum Corporation Limited3
under Section 37 of the Arbitration and Conciliation Act, 19964, 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 Refi nery 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
1
 For short, BEEL.
2
 Appeal No. 227 of 2001 in Arbitration Petition No. 280 of 1999.
3
 For short, HPCL.
4
 For short, A&C Act.
445
work was to be completed by 28.08.1993. There was delay in completion.
On written requests/applications made by BEEL, the time for completion
was extended on two occasions. Three revisions were also issued by HPCL.
The last revision dated 20.09.1994 had extended the period for completion
from 26.09.1994 by 10 months beginning from the date on which approval
of electrical items was accorded by HPCL. BEEL carried on the work till
30.03.1996. Thereafter, BEEL abandoned the work. It is an accepted position
that as on 30.03.1996, 80% of the work was complete.
3. On 04.07.1996, BEEL made a formal claim to HPCL for breach
of contract on account of delay in execution, causing extra expenses and
losses. By the letter dated 16.05.1997, BEEL sought an advance payment of
Rs.50 lakhs to enable them to resume work, and simultaneously expressed its
desire to resolve the dispute through conciliation. BEEL by the same letter
also invoked the arbitration clause in the contract, if the proposal as given
by BEEL was unacceptable to HPCL. HPCL by the letter dated 05.05.1997
refused to make payment, and relying on the terms of the contract had
impressed upon BEEL to resume and complete the remaining work, even
if the matter was to proceed for arbitration. BEEL did not agree and resume
work.
4. The General Manager (Project), Mahul Refi nery, HPCL, appointed
Mr. K. Narayanan as the sole arbitrator to adjudicate upon the disputes and
diff erences in the execution of the contract. Claim was fi led by BEEL and
reply/counter claim was fi led by HPCL, to which rejoinder with supporting
documents and sur-rejoinders were fi led. In all about 14 hearings were held
before the arbitral tribunal between the period 12.03.1998 and 07.01.1999
and oral arguments were addressed. Ocular evidence was not led. The learned
arbitrator had conducted a site inspection on 24.12.1997.
5. The arbitral award dated 23.03.1999, substantially allows the Claims
Nos. 1,2, and 4 of the BEEL. The relevant portion of the award dealing with
the claims of the BEEL, reads:
"A. Claims of the Claimants:
Claim No.1 - Compensation for loss of Overhead and profi t and also
profi tability: Rs.3,38,38,460.00
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
446
SUPREME COURT REPORTS
[2023] 12 S.C.R.
The claim is forwards loss of Overheads and profi t/profi tability
calculated on the basis of 48 months delay as of 27.08.1997. The
Claimants have considered 10% of the Contract value towards
Overheads and another 10% towards profi t/profi tability to arrive at
the above fi gure, after taking into account the same percentages from
the payments already received by them.
My fi nding is that the Owner Respondents are fully responsible for
the huge delay that occurred by not taking proper and timely action
in removing the various impediments and obstacles that stood in the
way of completing the project in the given span of 18 months. The
party had been tied down to a project, which was allowed to drift
aimlessly, with the owner-respondents showing hardly any interest in
completing it in time.
Even the basic approval for the Electrical scheme, with 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 purifi cation has not yet been fi nalised.
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
fi rmed up the necessary pumping station and underground pipelines
etc. will be ready so that sewage water will fl ow to the plant being built
for purifi cation 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
profi t/profi tability. In arriving at the compensation, the period upto
30.03.1996, when the claimants discontinued the work is being
considered. The total period works out to 49 months. The original
contract period being 18 months, the extended period comes to
31 months. The claimants had stated in their claim statement that
they had provided for 22 months overheads in their estimate. I am
allowing 3 months for internal administrative process of the Owner-
447
Respondents and for unforeseen delays such as strike, red alerts etc.
I also consider 10% of contract value towards loss of overheads and
10% towards loss of profi t/profi tability as reasonable. On these (sic)
basis, the Compensation works out to Rs.78,68,833.00 towards loss
of overheads and an equal amount of Rs.78,68,833.00 towards loss of
profi t/profi tability, the total being Rs.1,57,37,666.00 after taking into
account the same percentage from payments already received by them
for the work done. I award this amount to the Claimants.
While awarding the above compensation, the existence of the means
to mitigate the loss has been considered. According to me, the only
means available to the claimants, was to work on Sundays and
Holidays, to make up for the lost time to some extent, which was
denied by the Respondents except for a brief period at the very end.
This brief relaxation was not of much signifi cance in determining the
compensation payable to the claimants.
Claim No.2 - Compensation for idle machinery and equipment:
Rs.84,59,615.00
This claim is for machinery and equipment deployed in the execution of
this contract, but had to idle for large part of the time, due to extended
contract period. I have inspected the site. I am of the opinion that there
is substance in the claim. After due consideration of all aspects, I award
an amount of Rs.50,000.00 per month for a period of 24 months which
comes to Rs.12,00,000.00
Claim No.3 - Compensation for losses incurred due to increased
cost of Materials and Labour: Rs.26,89,638.00
Even though the escalation in cost of material and labour is a normal
feature when Engineering Contracts such as this gets unduly delayed,
since escalation is not permitted as per the contract the claim stands
rejected totally.
Claim No.4 - Compensation for carrying out Extra Work:
Rs.19,00,225.00
The claim consists of the following 4 items:
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
448
SUPREME COURT REPORTS
[2023] 12 S.C.R.
(i)
Transportation of excavated earth
Rs.12,05,000.00
(ii)
Dewatering charges incurred during
delayed period
Rs.5,62,570.00
(iii)
Shifting charges for material
Rs.1,01,405.00
(iv)
Shifting charges for Filter media
Rs.31,250.00
The above jobs have been carried out in relation to the main
contract, but have fi gured 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 satisfi ed with all the details furnished. Therefore, against the above
claim, I awarded to the extent I am satisfi ed 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 off er.
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 rectifi cation: Amount to be assessed.
No award on this as this refers to future course of action when project
work is resumed.
INTEREST: The Claimants are also entitled to 18% interest per annum
on all the claims awarded, eff ective from 16.05.1997, the date on which
the notice invoking Arbitration clause was served on the Respondents
(date on which cause of action arose) till the date of payment.
BANK GUARANTEE: The Claimants have specifi cally prayed for
reduction of the performance Bank Guarantee amount by 50%. In
view of the fact that about 80% of the work has been completed, and
449
(in) view (of) (sic) the huge delay that has occurred the amount shall
be reduced by 50%."
6. The award dated 23.03.1999 dismisses the counter claim of HPCL
for liquidated damages of Rs.57.40 lakhs, on the ground that the delay
was caused by omissions and commissions of HPCL. Claims by HPCL for
rectifi cation/rehabilitation cost of Rs.102.05 lakhs, costs of balance work of
Rs.160 lakhs and de-watering cost of Rs.9 lakhs were denied on the ground
that they relate to future works and therefore, would not fall within the ambit
of arbitration in question.
7. We have intentionally quoted the entire fi ndings and reasoning
accorded by the learned arbitrator, while allowing the Claim Nos. 1,2
and 4 of BEEL. The fi rst egregious and obvious fl aw in the award is, the
omnibus fi nding and conclusion that HPCL (referred to as the owner and
the respondent in the quoted portion of the award) was fully responsible
for the inordinate delay that had occurred by not taking proper and timely
action in removal of various impediments and obstacles that stood in the
way of completing the project within the stipulated period of 18 months.
This fi nding, in our opinion, is bereft of analysis and examination of facts
and contentions. The relevant and material facts and the respective stances
of the parties are neither decipherable nor evaluated and no reason has been
given for arriving at the conclusion. A conclusion without any discussion
and reasons, is non-compliant and violates the mandate of sub - section (3)
of Section 31 of the A& C Act5, an aspect we would examine subsequently.
8. The second patent error relates to the computation and award of
10% of the contract value towards loss of overheads and another 10%
towards loss of profi ts/profi tability. The two amounts have been quantifi ed
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 defi cient being completely
silent as to the method and the manner in which the arbitral tribunal has
computed the fi gures. Therefore, it leaves us and the parties to wonder the
5
 Section 31 - Form and contents of arbitral award - (3) The arbitral award shall state
the reasons upon which it is based, unless-
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under section 30.
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
450
SUPREME COURT REPORTS
[2023] 12 S.C.R.
basis for awarding and computing the amounts. We are not commenting
or examining the merits of the computation, but complete absence of any
justifi cation and reason to allow the claim and quantifi cation 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
fi rst paragraph of the award quoted above, under the heading 'Claim No.
1 - Compensation for loss of overhead and profi t and also profi tability'.
BEEL had based Claim No.1 for loss on account of overheads and profi ts/
profi tability upon 48 months delay as on 27.08.1997. BEEL for computation
had considered 10% of the contract value towards overheads and other 10%
towards profi ts/profi tability for arriving at the fi gure of Rs. 3,38,38,460/-,
after taking into "account the same percentages from the payments already
received by them". In the subsequent portion of the award, dealing with
Claim No. 1, the learned arbitrator has held that the total contract period
was 49 months. The original contract period being 18 months, the extended
period being 31 months. However, BEEL in the claim statement had accepted
that it had provided for 22 months towards overheads in the estimates.
Further, the learned arbitrator has allowed additional 3 months for internal
administrative process, and for unforeseen delays, such as strikes, red alerts,
and as force majeure events. In other words, the learned arbitrator, for the
purpose of default, had excluded the period of 18 months, i.e., the original
contract period, plus 4 months as provided by BEEL, and another 3 months
on account of internal administrative process and force majeure events.
Thus, the default period for which BEEL as per the award is entitled to claim
damages/compensation towards overheads and loss of profi ts/profi tability
is 24 months.
10. BEEL had, as observed above, accepts the position that the loss
towards overheads and profi ts/profi tability has to be arrived at by applying
the percentage formula, variant with the execution of the work. Thus, in
our opinion, the loss towards overheads and profi ts/profi tability is to be
computed on the payments due for the un-executed work, and should
exclude the payments received/receivable for the work executed. In other
words, based on the value of the work executed by BEEL, the proportionate
451
amount has to be reduced for computing the damage/compensation as a
percentage of expenditure on overheads, and damages for loss of profi t/
profi tability. Damages towards expenditure on overheads and loss of profi t
are proportionate, and not payable for the work done and paid/payable. Delay
in payment on execution of the work has to be compensated separately.
11. It is an accepted position and specifi cally recorded in the award
that the total value of the contract was Rs. 5,74,35,213.00p. In an earlier
paragraph of the award, which has been not reproduced, the learned
arbitrator has referred to R.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
eff ective from 16.05.1997.
12. The award also reduces the performance bank guarantee amount
by 50%, without any discussion, elucidation and reason.
13. In order to justify the computation made in the award and also the
principle or the method adopted by the arbitral tribunal, BEEL has referred to
the Hudson's formula and relied upon judgments of this Court in McDermott
International Inc. v. Burn Standard Company Limited and Others.6, and
Associate Builders v. Delhi Development Authority7, in addition to an
earlier decision of this Court in A.T Brij Paul Singh and Others v. State
of Gujarat8, and a few judgments of the High Courts.
6
 (2006) 11 SCC 181 (for short, McDermott International Inc.).
7
 (2015) 3 SCC 49 (for short, Associate Builders).
8
 (1984) 4 SCC 59.
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
452
SUPREME COURT REPORTS
[2023] 12 S.C.R.
14. In McDermott International Inc. this Court has referred to various
methods of computation of damages in paragraphs 102 to 107. In particular,
reference has been made to Hudson's formula, Emden's formula, and
Eichleay's formula in the following terms:
"Method for computation of damages
102. [Ed.: Para 102 corrected vide Offi cial Corrigendum No. F.3/
Ed.B.J./52/2006 dated 31-7-2006] . 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. [(1973) 3 SCC 406] this Court held that
the method used for computation of damages will depend upon the
facts and circumstances of each case.
102-A. 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 Lavarack v. Woods of Colchester
Ltd. [(1967) 1 QB 278 : (1966) 3 All ER 683 : (1966) 3 WLR 706
(CA)] , All ER p. 690 G.)
103. The arbitrator quantifi ed 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.
104. 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
overheads and loss of profi t 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 overheads
and loss of profi t. 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 diff erent formulas applicable in this behalf.
453
(a) Hudson Formula: In Hudson's Building and Engineering Contracts,
Hudson Formula is stated in the following terms:
"Contract head offi ce overhead
and profi t percentage
×
Contract sum
Contract period
×
Period of delay"
In the Hudson Formula, the head offi ce 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 offi ce overhead percentage from the contract as the
factor for calculating the costs, and this may bear little or no relation
to the actual head offi ce costs of the contractor.
(b) Emden Formula: In Emden's Building Contracts and Practice, the
Emden Formula is stated in the following terms:
"Head offi ce overhead and profi t
×
Contract sum
×
Period of delay"
100
Contract period
Using the Emden Formula, the head offi ce overhead percentage
is arrived at by dividing the total overhead cost and profi t of the
contractor's organisation as a whole by the total turnover. This
formula has the advantage of using the contractor's actual head
offi ce overhead and profi t 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. Coop. Wholesale Society Ltd. [ Decided on 172-1998, [1998] EWHC Technology 339] , Beechwood Development
Co. (Scotland) Ltd. v. Mitchell [ Decided on 21-2-2001, (2001) CILL
1727] and Harvey Shopfi tters Ltd. v. Adi Ltd. [ Decided on 6-3-2003,
(2004) 2 All ER 982 : [2003] EWCA Civ 1757] .
(c) Eichleay Formula: The Eichleay Formula was evolved in America
and derives its name from a case heard by the Armed Services Board of
Contract Appeals, Eichleay Corporation. It is applied in the following
manner:
Step 1
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
454
SUPREME COURT REPORTS
[2023] 12 S.C.R.
Contract billings
×
Total overhead for
contract period
=
Overhead allocable
to the contract
Total billings for contract
period
Step 2
Allocable overhead
=
Daily overhead rate
Total days of contract
Step 3
Daily contract
overhead rate
×
Number of days
of delay
=
Amount of
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 offi ce overhead during the contract period is
fi rst 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
offi ce overheads for the contractor is allocated in the same ratio
and expressed as a lump sum to the particular contract. The amount
of head offi ce 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.
105. 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 10-6-2003 (USCA Fed Cir), 331 F.
3d 878 (Fed. Cir. 2003)] , Gladwynne Construction Co. v. Mayor and
City Council of Baltimore [ Decided on 25-9-2002, 807 A. 2d 1141
(2002) : 147 Md. App. 149] and Charles G. William Construction
Inc. v. White [ 271 F 3d 1055 (Fed. Cir. 2001)] .
106. We do not intend to delve deep into the matter as it is an
accepted position that diff erent formulae can be applied in diff erent
455
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 559 and 7310 of the
Indian Contract Act, 187211, which deal with the eff ect of failure to perform at
9
 Section 55 - Eff ect of failure to perform at fi xed time, in contract in which time is
essential - When a party to a contract promises to do a certain thing at or before a specifi ed
time, or certain things at or before specifi ed times, and fails to do any such thing at or
before the specifi ed 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.
Eff ect of such failure when time is not essential.-If it was not the intention of the parties
that time should be of the essence of the contract, the contract does not become voidable
by the failure to do such thing at or before the specifi ed time; but the promisee is entitled to
compensation from the promisor for any loss occasioned to him by such failure.
Eff ect of acceptance of performance at time other than that agreed upon.-If, in case of
a contract voidable on account of the promisor's failure to perform his promise at the
time agreed, the promisee accepts performance of such promise at any time other than
that agreed, the promisee cannot claim compensation for any loss occasioned by the nonperformance of the promise at the time agreed, unless, at the time of such acceptance, he
gives notice to the promisor of his intention to do so.
10 Section 73 - Compensation for loss or damage caused by breach of contract. - When
a contract has been broken, the party who suff ers by such breach is entitled to receive, from
the party who has broken the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such breach, or which the
parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.
When an obligation resembling those created by contract has been incurred and has not
been discharged, any person injured by the failure to discharge it is entitled to receive the
same compensation from the party in default, as if such person had contracted to discharge
it and had broken his contract.
Explanation - In estimating the loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by the non-performance of the
contract must be taken into account.
11 For short, Contract Act.
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
456
SUPREME COURT REPORTS
[2023] 12 S.C.R.
fi xed time in contracts where time is of essence, and computation of damages
caused by breach of contract, respectively, and states that these Sections
neither lay down the mode nor how and in what manner computation of
damages for compensation has to be made. As computation depends upon
attendant facts and circumstances and methods to compute damages, how
the quantum thereof should be determined is a matter which would 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 suff ered 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.12
17. We shall subsequently catechise the Hudson's formula, suffi ce at
this stage is to notice that the learned arbitrator does not specifi cally refer to
any formula or the method, and the fi gures to compute damages under the
head of loss on account of overheads and profi ts/profi tability. The award, as
quoted above, does refer to Sections 55 and 73 of the Contract Act.
18. Having examined the award and the contents, we would now
like to refer to the chart produced by BEEL by way of additional or new
material, which it is claimed, is drawn on the basis of the statement of claims
fi led in the arbitration proceedings, to which the column with the heading
"explanation" has been added for the benefi t of the court. The chart is as
under:
12 See - Robinson v. Harman (1848) 1 Ex 850 at 855 and Livingstone v. Rawyards Coal
Co (1879-80) L.R. 5880 cases 25
457
 Sr.
No.
Particulars
Amount (Rs.)
Explanation
1.
Contract Sum
5,74,35,213.00 Total Contract Value
2.
Overheads (10%) and
profi ts (10%) included
in the above sum
1,14,87,042.00 20% of Rs.5,74,35,213.00
(1) i.e. contract value
3.
Time limit for completion
of the work
22 Months
Though the contract
was for 18 Months,
Petitioner estimated that
the site would have to be
maintained for 22 Months
i.e. 4 months over and
above contract term.
4.
Overheads and Profi ts
per month [(2) divided
by (3)]
5,22,138.27
Per month
Total Overheads and
Profi ts divided by months
of work (22 Months)
5.
Value of work done till
R.A. Bill No.4 dated
31.08.1993
1,21,95,859.68 Contract period was up to
31.08.1993 i.e. 18 months
from 22 February 1992
6.
Pro-rata overheads and
profits received till
31.08.1993
24,39,171.00
20% of (5). Since the
Petitioner received payment
of bill at (5), the overheads
and profits for the work
done covered by bill at (5)
have been deducted by the
Arbitrator in (7).
7.
Net loss suff ered as on
01.09.1993 [(2) - (6)]
90,47,871.00
As above, for 22 months
of work, the Petitioner was
to get Rs. 1,14,87,042.00/-
(2) towards overheads and
profits. However, out of
this, the Petitioner received
Rs. 24,39,171.00/- (6), the
same has been deducted.
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
458
SUPREME COURT REPORTS
[2023] 12 S.C.R.
 Sr.
No.
Particulars
Amount (Rs.)
Explanation
Rs.90,47,871.00/- is the
outstanding receivable
by the Petitioner towards
overheads and profi ts for
the contract period.
8.
Delay in months
24 months
Total time spent was 49
Months (Pg.56 of SLP)
(22 February 1992 to 31
March 1996).
Out of this, since 22 months
were contemplated by the
Petitioner for the work,
the same have been
deducted from 49 months
by the Arbitrator. (Pg.56
of SLP).
A further period of 3
months on account of
Force Majeure has been
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 profi t.
24 * Rs.5,22,138.27 =
Rs. 1,25,31,318.48
459
 Sr.
No.
Particulars
Amount (Rs.)
Explanation
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
profi ts 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 profi ts for the
work done covered by bill at
(10), have been deducted by
the Arbitrator in (11)
12.
Net loss suff ered till
27.08.1997 [(9) - (11)]
66,89,791.68
This is loss of overhead
and profi ts for the extra
period of 24 Months.
As stated in (9), overheads
and profits for extra
time of 24 months was
Rs.1,25,31,318.48.
Since, the Petitioner received
a sum of Rs.58,41,523.80
(11), the same has been
deducted by the Arbitrator.
13.
Total loss on overheads
and profi t on this count
till 27.08.1997 [(7) -
(12)]
1,57,37,665.68 This amount is the sum of
overhead and profi ts due
during contract period
plus the overhead and
profi ts for the extra period
of 24 Months.
Awarded by the Arbitrator
(Pg.56 of SLP)
BATLIBOI ENVIRONMENTAL ENGINEERS LTD v.
HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.]
460
SUPREME COURT REPORTS
[2023] 12 S.C.R.
19. The chart and explanations given in the chart, we believe, are
an afterthought and futile fi nagle to work backwards to somehow justify
the computation and award of damages. These explanations are ex facie
irrational and eristic for the following reasons:
(i)
S.No.7 computes the net loss suff ered by BEEL as Rs.90,47,871/-
as on 01.09.1993, that is for the period of 18 months. The
computation ignores and does not add the period of 4 months
as mentioned by BEEL in the claim statement. Further, the
arbitrator had added another period of 3 months for internal
administrative process and force majeure events. Thus, the date
01.09.1993 referred to in S.No.7 is incorrect and not the basis
of the computation made in the award.