Author Details:-

Yashasvi
BA LLB 5^th sem PU, Chandigarh

Batliboi engineering works vs Hindustan petroleum corporation ltd, 2023.^[1]
2023 SCC Online SC 1208
Decided upon- 21-09-23

Overview

It is an established letter in law that the party which claims the losses needs to establish the reach of contract by the other party. Once the breach is established and substantiated by valid proofs by the Contactor, no further evidence as to proof of actual loss shall be required. The Hon’ble Supreme Court has in the cases of The Supreme Court observed that in Bharat Coking Coal Ltd. v. L. K. Ahuja & Co., it was held that a court could allow a claim for loss of profits only where the Claimant is able to establish, through evidence, that because of the delay, it missed out on other available contracts or opportunities.^[2] But In A.T. Brij Paul Singh v. State of Gujarat, (1984) 4 SCC 59 it was held by the hon’ble court that such compensation could be granted even though there is an absence of the evidence.

The claim for Loss of Profit has been duly upheld in subsequent cases by the Hon’ble High Court, and the High Courts have refused to interfere with the Loss of Profit awarded by Arbitral Tribunal’s in cases of National Highways Authority of India v. BEL-ACC(JV), 2012 SCC OnLine Del 5350 and National Highways Authority of India v. Afcons-Apil Joint Venture, 2018 SCC OnLine Del 7194 but in a contrary manner in cases of ajay singh vs Suneel darshan refused to grant compensation in case of failing to provide such evidence as to which would validate his claim.

The apex court in the recent Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., 2023 SCC OnLine SC 1208, has laid down a rigorous framework and set a precedent for other courts while dealing with these particular set of cases involving loss of profits and profitability.

Background:

BEEL¹ was awarded the turnkey contract for detailed engineering including civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity Sewage Water Reclamation Plant in Mahul Refinery area by HPCL², for a contract value of Rs.574.35 lakhs. The initial period of the contract period was 18 months, upto August 1993, however, there was delay in completion and the contract was extended by HPCL on various occasions on the request of BEEL, after which BEEL abandoned the work in March 1996, after completing 80% of the work. The total working period turned out to be 49 months, with the original contract period being extended to 31 months. BEEL in its claim stated that it had provided for 22 months period for overheads in their estimate.

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. According to beel it was HPCL who was responsible for the delays and Subsequently, BEEL invoked arbitration. An arbitral award dated 23.03.1999 was passed which allowed BEEL’s claims including claim for ‘Compensation for loss of Overhead and profit and also profitability. BEEL Computed the cost of overheads and loss of profit, profitability as 10% of the contract value. The appointed learned arbitrator awarded claimants the amount of 78,68,833.00 towards loss of overheads and an equal amount of Rs.78,68,833.00 towards loss of profit, profitability, the total being Rs.1,57,37,666.00. The claimant had already received payments from the respondent for the work executed and the claims put forward by the claimants are as follows,

1. Claims for overhead profit and profitability
2. Compensation for idle machinery and cost.
3. Compensation for loss incurred by increase rate of machinery and labor.
4. Compensation for extra work carried out, which consisted of following items
5. Transportation of excavated earth
6. Dewatering charges that occurred in the period of delay
7. Shifting charges of material
8. Shifting charges of filter media
9. Claim for repair and rectification amount but no award was granted as to this was to be assessed.

In the same manner, a 18% rate of interest was awarded by the arbitrator to the claimants from the date on which the cause of action arose i.e. 16-05-1997 till the date the sum is payed. Further the claimants have claimed for a reduction of bank guarantee from 80% to 50% without any justified reasoning. All the counter claims of hpcl amounting to Rs. 57.40 lakhs with the reasoning that all the omissions and delay happened on the behalf of the HPCL, were rejected. Additional to this claim, the claims for rehabilitation cost of 102.50 lakhs and cost of balance work was computed to 160 lakhs and de-watering costs were 9 lakhs which were also rejected. It was erroneously noted that all the delays occurred on the behalf of HPCL and then HPCL preferred an arbitration petition challenging the Award before the High Court of Bombay, which was dismissed. Thereafter, HPCL filed an appeal and in departure from the findings of Ld. Single Judge, the Arbitral Award was set aside by the Division Bench of the Hon’ble High Court exercising power under Section 37 read with Section 34 of the Arbitration and Conciliation Act. The SC judgement in ‘Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Another’ upholds the decision in of the Division Bench and also dismisses the civil appeal filed by BEEL to counter it.

Legal provisions;

§34 OF THE ARBITRATION AND CONCILATION ACT,1996– Application for setting aside the order

§37 OF THE ARBITRATION AND CONCILATION ACT,1996– Allowing appeals against orders from the arbitrators and courts

§55 of the indian contract act,1872 Effect of failure to perform at fixed time, in contract in which time is essential. Effect of such failure when time is not essential. Effect of acceptance of performance at time other than that agreed upon.

^[3]

ISSUES

• Whether the grounds of claims of BEEL were valid?
• Whether the award of the arbitrator valid?

JUDGEMENT OF THE APEX COURT

The Hon’ble Supreme Court has extensively analysed the findings in the Award and in depth discussed the reasoning given by the arbitration tribunal regarding passing of award in favor of the claimants. They questioned the reasoning and method applied while computing the awarded by the tribunal. The supreme court couldn’t be satisfied by the reasoning behind an declared the award devoid of any merits. He bench refused to comment upon the nature of cases which can be taken up by the arbitrators and affirmed the autonomy of the arbitrary tribunals. While interpreting §34 of the arbitration and concillation act court framed that unless and until public policy is at risk, an erroneous decision by an arbitrator proceeding with legality does not make the award bad and special ground of patent irregularity were considered,

The SC has observed that the Award is deficient as it is particularly silent as to the method and manner in which the arbitrator had computed damages and there is lack of justification as regards the method adopted by the arbitral tribunal. BEEL had based for loss on account of overheads and profits/profitability 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 profits/profitability for arriving at the figure of Rs. 3,38,38,460/-, after taking into “account the same percentages from the payments already received by them” but BEEL was paid the full amount for work done between 1.09.1993 to 30.03.1996. the claims of BHEEL for overhead cost of machines and equipment was rejected by the bench as it is as a set notion that in order to claim so there has to be an increase in the cost of equipment and machinery in the market as such escalation of prices is barred by the terms and conditions of the contract.

The Supreme Court has noted that the loss towards overheads and profits/profitability is to be computed on the payments due for the un-executed work, and should exclude the payments received/receivable for the work that has already been executed. In other words, damages towards expenditure on overheads and loss of profit 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. The Court has further opined that the computation of damages shall not be unreasonable 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 be more or less equivalent with the loss sustained.

It was held that application of any of such formulae as the Hudson’s, Emden’s, or Eichleay’s formulae are applied considering and examining the individual facts of the case as . In its verdict, the Supreme Court has cautioned that these formulae when applied should be with full care and caution not to over-award the damages to the claimants The usage of formulae such as Hudson’s, Emden’s, or Eichleay’s formulae to ascertain the loss of overheads and profits has been judicially approved in the English cases of Peak Construction (Liverpool) Ltd v. McKinney Foundations Limited15, Whittal Builders v. Chesterle-Street District Council16, and JF Finnegan Ltd v. Sheffield City Council17 and in the Canadian case of EllisDon v. Parking Authority of Toronto18. The three formulae deal with theoretical mathematical equations, but are based on factual assumptions, and therefore can produce three different and unrelated compensation/damages. Therefore, while applying a particular equation or method, the assumptions should be examined, and the satisfaction of the assumption ascertained in the facts and circumstances. The arbitrator had overlooked the fact that BHEEL in its claim had admitted having a period of 22 months for overheads and additional period of 3 months for administrative processes and unforeseeable circumstances that of red alert, strikes and force marjeure events. Therefore the compensation must be awarded for the period for 24 months,the balnce which was to be paid was Rs.1,14,87,042/-. And overhead which were paid were Rs. 1,57,37,666, which can be taken as double payment or part payment .

The Hon’ble Apex Court has therefore laid down a very strict criteria for determination of the quantum of damages by the arbitral tribunal for such claims of loss of profit. Hon’ble Supreme Court in this case contemplated usage of some prominent formulas which have been employed since ages has analysed the Hudson’s formula which is widely used for computation of such claims and observed that Hudson’s formula, Hudson formula as mr Duncan Wallace puts it is a formula formally used by contractors in order to calculate and access the loss in completion of tasks. While applying husdon’s formula one puts together overheads and profits together termed as gross profit.^[4] There are four assumptions on which the formula stands are as follows:

1. First, that the contractor is not habitually or otherwise underestimating the cost when pricing;
2. secondly the profit element was realistic at that time; and
3. thirdly, there was no fluctuation in the market conditions and the work of the same general level of profitability would be available to her/him at the end of the contract period.

The Court also noted that the Eichleay’s Formula is more precise and accurate in calculating loss of profits since it requires the contractor to itemise and quantify the total fixed overheads during the contract period. It takes into consideration all the contracts during the delay period to determine the proportionate fraction of the total fixed overheads. ^[5]

Conclusion:

Therefore, the court in this case undertook some substantial questions of law but also refrained from commenting on the interpretation of some statues. The apex court highlighted the importance of furnishing the necessary documents and evidence in order to substantiate their claims. This observation of the Hon’ble Supreme Court is accordance with the principles propounded in the Section 73 of the Indian Contract Act, 1872, that states that a party may be awarded damages only for those losses that it has been able to prove that it has suffered. The apex court took in consideration various grounds for setting aside the order and extensively analyzed principles that are heavily employed while calculating the costs and awarded in these cases. The case highlighted the loss of profit principle and the importance of accurately employing any of these formulae with reasonability. the court interpreted §34 of arbitration and conciliation with a broad minded approach to create a precedent for the future litigations especially in regard to treat cases of such nature with a rational approach and not over-award the claimants.

Footnotes

1. Batliboi Environmental Engineers Limited.

2. Hindustan Petroleum Corporation Limited.

1. Editor_4. (2023, September 28). SC discusses scope of Judicial Interference with arbitral awards | SCC Blog. SCC Times.  ↑
2. Guest. (2024, April 24). Supreme Court on grant of loss of profits sans evidence – IndiaCorpLaw. IndiaCorpLaw.↑
3. THE INDIAN CONTRACT ACT, 1872. (1872). In THE INDIAN CONTRACT ACT, 1872.  ↑
4. Ntshangase, L. (2024) Is there still a role for the Hudson Formula?, HKA. (Accessed: 21 August 2024). ↑
5. KHANNA, S., BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED, & HINDUSTAN PETROLEUM CORPORATION LIMITED. (2023). JUDGMENT – BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN PETROLEUM CORPORATION LIMITED AND ANOTHER. In IN THE SUPREME COURT OF INDIA (C.A. No. 1968 of 2012; pp. 1–50). ↑