MANU/SC/1043/2023

Equivalent/Neutral Citation: 2023/INSC /850

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 1968 of 2012
Decided On: 21.09.2023
Batliboi Environmental Engineers Limited Vs. Hindustan Petroleum Corporation Limited
and Ors.
Hon'ble Judges/Coram:
Sanjiv Khanna and M.M. Sundresh, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: Mahesh Agarwal, Ankur Saigal, Aadil Parsurampuria, S.
Lakshmi Iyer, Tanvi Manchanda, Nishant Rao, Advs. and E.C. Agrawala, AOR
For Respondents/Defendant: Sanjay Kapur, AOR, Megha Karnwal, Surya Prakash,
Devesh Dubey, Arjun Bhatia and Mahima Kapur, Advs.
JUDGMENT
Sanjiv Khanna, J.
1 . 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 filed 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 Refinery 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 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

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was to proceed for arbitration. BEEL did not agree and resume work.
4. The General Manager (Project), Mahul Refinery, HPCL, appointed Mr. K. Narayanan as
the sole arbitrator to adjudicate upon the disputes and differences in the execution of
the contract. Claim was filed by BEEL and reply/counter claim was filed by HPCL, to
which rejoinder with supporting documents and sur-rejoinders were filed. 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 profit and also
profitability: Rs. 3,38,38,460.00
The claim is forwards loss of Overheads and profit/profitability 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
profit/profitability to arrive at the above figure, after taking into account the
same percentages from the payments already received by them.
My finding 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 purification has not yet been finalised. 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 firmed up the necessary
pumping station and underground pipelines etc. will be ready so that sewage
water will flow to the plant being built for purification 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 profit/profitability. 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

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 months for internal administrative process of the Owner-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 profit/profitability 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 profit/profitability, 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 significance 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:

The above jobs have been carried out in relation to the main contract, but have
figured 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 satisfied with all the details
furnished. Therefore, against the above claim, I awarded to the extent I am
satisfied with the documentation, as under:

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 Total Claim amount awarded: Rs. 1,95,000.00 against Rs. 19,00,225.00
Claim No. 5 - Cost of repair and rectification: 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, effective 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 specifically 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 (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 rectification/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 findings and reasoning accorded by the
learned arbitrator, while allowing the Claim Nos. 1,2 and 4 of BEEL. The first egregious
and obvious flaw in the award is, the omnibus finding 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 finding, 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 profits/profitability.
The two amounts have been quantified 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
deficient being completely silent as to the method and the manner in which the arbitral
tribunal has computed the figures. Therefore, it leaves us and the parties to wonder the
basis for awarding and computing the amounts. We are not commenting or examining
the merits of the computation, but complete absence of any justification and reason to
allow the claim and quantification of the sum awarded. We would subsequently examine
the chart furnished by BEEL in support of the said computation, albeit at this stage we

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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 first paragraph of
the award quoted above, under the heading 'Claim No. 1 - Compensation for loss of
overhead and profit and also profitability'. BEEL had based Claim No. 1 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". 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 profits/profitability is 24 months.
10. BEEL had, as observed above, accepts the position that the loss towards overheads
and profits/profitability 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
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 executed. In other
words, based on the value of the work executed by BEEL, the proportionate amount has
to be reduced for computing the damage/compensation as a percentage of expenditure
on overheads, and damages for loss of profit/profitability. 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.
11. It is an accepted position and specifically 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 effective from
16.05.1997.
12. The award also reduces the performance bank guarantee amount by 50%, without
any discussion, elucidation and reason.

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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
Co. Limited and Ors. MANU/SC/8177/2006 : (2006) 11 SCC 181 (for short, McDermott
International Inc.), and Associate Builders v. Delhi Development Authority
MANU/SC/1076/2014 : (2015) 3 SCC 49 (for short, Associate Builders), in addition to
an earlier decision of this Court in A.T. Brij Paul Singh and Ors. v. State of Gujarat
MANU/SC/0081/1984 : (1984) 4 SCC 59, and a few judgments of the High Courts.
1 4 . 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
1 0 2 . [Ed.: Para 102 corrected vide Official 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.
[MANU/SC/0019/1972 : (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. [MANU/UKWA/0072/1966 : (1967) 1
QB 278 : (1966) 3 All ER 683 : (1966) 3 WLR 706 (CA)], All ER p. 690 G.)
1 0 3 . 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.
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
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 overheads and loss of profit. Mr. D.J. Parson is said to have brought
out the additional project management cost at US$ 1,109,500. We may at this
juncture notice the different formulas applicable in this behalf.
(a) Hudson Formula: In Hudson's Building and Engineering Contracts, Hudson
Formula is stated in the following terms:

In the Hudson Formula, the head office overhead percentage is taken from the
contract. Although the Hudson Formula has received judicial support in many

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 cases, it has been criticised principally because it adopts the head office
overhead percentage from the contract as the factor for calculating the costs,
and this may bear little or no relation to the actual head office costs of the
contractor.
(b) Emden Formula: In Emden's Building Contracts and Practice, the Emden
Formula is stated in the following terms:

Using the Emden Formula, the head office overhead percentage is arrived at by
dividing the total overhead cost and profit of the contractor's organisation as a
whole by the total turnover. This formula has the advantage of using the
contractor's actual head office overhead and profit percentage rather than those
contained in the contract. This formula has been widely applied and has
received judicial support in a number of cases including Norwest Holst
Construction Ltd. v. Coop. Wholesale Society Ltd. [Decided on 17-2-1998,
[1998] EWHC Technology 339], Beechwood Development Co. (Scotland) Ltd. v.
Mitchell [Decided on 21-2-2001, MANU/SCCS/0200/2001 : (2001) CILL 1727]
and Harvey Shopfitters Ltd. v. Adi Ltd. [Decided on 6-3-2003,
MANU/UKWA/0265/2003 : (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:

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 overhead 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

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 Eichleay Formula is regarded by the Federal Circuit Courts of America as the
exclusive means for compensating a contractor for overhead expenses.
1 0 5 . 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 [MANU/USFD/0240/2001 : 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 different formulae 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.
1 0 7 . 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 556 and 737 of the Indian Contract
Act, 18728, which deal with the effect of failure to perform at fixed 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.
1 6 . 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 suffered 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.9
17. We shall subsequently catechise the Hudson's formula, suffice at this stage is to
notice that the learned arbitrator does not specifically refer to any formula or the
method, and the figures to compute damages under the head of loss on account of
overheads and profits/profitability. 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 filed in the arbitration proceedings, to
which the column with the heading "explanation" has been added for the benefit of the

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court. The chart is as under:

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 19. The chart and explanations given in the chart, we believe, are an afterthought and
futile finagle 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 suffered 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. S.No. 7 fails to taken into consideration the
seven-month period, which as per the award has to be added.
(ii) The figure of Rs. 90,47,871/- would have been relevant, in absence of work
done and in fact payments post 01.09.1993. However, it is an accepted and
admitted position that payment of Rs. 2,92,07,619.13p was made on different
dates between 01.09.1993 till 30.03.1996 upon completion of the proportionate

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 value of the work. Claim on account of loss of profits/profitability and
overheads, as has been explained above and also elucidated herein-after with
reference to several judgments and treatise, is payable if and when there is an
increase in cost of off-site and on-site overheads due to delay in completion of
work post the agreed or contractual period which is caused by the employer. 10
Further, loss on account of profit earning capacity is paid when the contractor's
profit earning capacity is affected due to it being retained longer in the contract
in question, without corresponding increase in the monetary benefit earned and
without being free to move elsewhere to earn profit which it might otherwise be
able to do. It is not the case of BEEL that they are entitled to enhance or
increase in cost on account of delay in execution of the work. Pertinently, Claim
No. 3 for compensation of losses incurred due to increase in cost of material
and labour has been specifically rejected, as escalation in prices/costs are
barred by the terms of the contract.
(iii) The computation of loss under S.No. 7 of Rs. 90,47,871/- is, therefore,
unsustainable and cannot be justified by any calculation and in terms of the
Contract Act.
(iv) As per the chart, in addition to Rs. 90,47,871/-, the arbitrator has awarded
at S.No. 12, a further amount of Rs. 66,89,794.68p. on account of loss of
overheads and profits for the extra period of 24 months, that is, till 27.08.1997.
The figure as per S.No. 12 is arrived at after reducing pro rata overheads and
profits during the extended period as mentioned in S.No. 9. The computation
belies and defies logic. It clearly amounts to double payment towards
compensation and damages, as it fails to notice that the sum mentioned in
S.No. 7 of Rs. 90,47,871/- is on account of compensation towards overheads
and profits/profitability. Therefore, 20% of the value of the unfinished work had
already been included in the computation and awarded under S.No. 7. The date
27.08.1997 is at best, an assumption of BEEL and not mentioned anywhere or
decipherable from the award.
2 0 . We have briefly referred to the principle applicable for computing the claim for
compensation/damages in case of partial prevention, i.e., where the breach by the
employer is not fundamental and does not entitle the builder/contractor to cease the
work, or, being fundamental, is not treated as repudiation by the builder/contractor.
Measure of compensation/damages in such cases is the loss of profit arising from
reduced profitability or added expense of the work carried out.11 In a given case, where
there is a fundamental breach by the employer, albeit, the builder/contractor does not
immediately elect to treat the contract as repudiated, he may still be entitled to raise a
claim for loss of profit on the uncompleted work. Offsite expenses or overheads are all
administrative or executive costs incidental to the management supervision or capital
outlay as distinguished from operating charges. These charges cannot be fairly charged
to one stream of work or job, and rather be distributed as they relate to the general
business or the work of the contractor/builder being undertaken or to be undertaken, as
the overheads are relatable to the builder/contractor's business in entirety.
2 1 . 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 Limited (1970) 1
BLR 114, Whittal Builders v. Chesterle-Street District Council (1987) 40 BLR 82, and JF
Finnegan Ltd. v. Sheffield City Council (1988) 43 BLR 124 and in the Canadian case of
Ellis- Don v. Parking Authority of Toronto (1978) 28 BLR 98. The three formulae deal

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 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(s) ascertained in the facts and circumstances.
2 2 . The formula suggested by Hudson in his 10th edition of the book Building and
Engineering Contracts for the computation of damages takes the head office and profit
percentage as a proportion of the contract value. The formula assumes that the profit
judged by the builder/contractor is in fact capable of being earned by her/him
elsewhere had the builder/contractor been free to leave the contract at the proper time.
The formula is couched on three assumptions. First, that the contractor is not habitually
or otherwise underestimating the cost when pricing; secondly the profit element was
realistic at that time; and lastly, 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. Satisfaction of these assumptions should be ascertained
when we apply Hudson's formula for computing the damages. Material should be
furnished by the claimant to justify and assure that the assumptions for applying
Hudson's formula are met.
23. Ordinarily, when the completion of a contract is delayed and the contractor claims
that s/he has suffered a loss arising from depletion of her/his income from the job and
hence turnover of her/his business, and also for the overheads in the form of workforce
expenses which could have been deployed in other contracts, the claims to bear any
persuasion before the arbitrator or a court of law, the builder/contractor has to prove
that there was other work available that he would have secured if not for the delay, by
producing invitations to tender which was declined due to insufficient capacity to
undertake other work. The same may also be proven from the books of accounts to
demonstrate a drop in turnover and establish that this result is from the particular delay
rather than from extraneous causes. If loss of turnover resulting from delay is not
established, it is merely a delay in receipt of money, and as such, the builder/
contractor is only entitled to interest on the capital employed and not the profit, which
should be paid. The High Court of Justice Queen's Bench Division in the case of
Property and Land Contractors Ltd. v. Alfred McAlpine Homes North Ltd.(1995) 76 BLR
59 succinctly points the in-exactitude of Hudson's formulae, by observing:
Furthermore the Emden formula, in common with the Hudson formula (see
Hudson on Building Contracts, (11th edn, 1995) paras 8-182 et seq) and with
its American counterpart the Eichleay formula, is dependent on various
assumptions which are not always present and which, if not present, will not
justify the use of a formula. For example the Hudson formula makes it clear
that an element of constraint is required (see Hudson para 8.185) ie in relation
to profit, that there was profit capable of being earned elsewhere and there was
no change in the market thereafter affecting profitability of the work. It must
also be established that the contractor was unable to deploy resources
elsewhere and had no possibility of recovering cost of the overheads from other
sources, eg from an increased volume of the work.
Thus such formulae are likely only to be of value if the event causing delay is
(or has the characteristics of) a breach of contract.
24. As mentioned in McDermott International Inc., Hudson's 11th Edition has referred
to Eichleay formula, which gives the resultant figures with greater precision and
accuracy. This formula, which emerged in 1960s 12, is far more nuanced and rigorous,

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 as it requires the builder/contractor to itemise and quantify the total fixed overheads
during the contract period. It takes into consideration all the contracts of the
contractor/builder during the contract period with those of the individually delayed
contract to determine the proportionate faction of the total fixed overheads. However, in
both Hudson's and Eichleay's formulae, the amount to be recovered is determined
weekly or monthly, which the delay in the contract completion is expected to earn.
25. Hudson's formula might result in double recovery as the profit being added to the
profit is already subsumed within the 'contract sum'. To avert this double-recovery, it
has been suggested that the formula should be modified to 'contract sum less overhead
and profit'13. Any increase in the value of the final account for extra works such as
variations contain their own element of overheads and profits. Therefore, 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.14
26. Hudson in his 14th Edition refers to claim for management or overheads during the
period of delay. The author has referred to Hudson's formula as well as Eichleay's
formula, and observes that recently limitations of Hudson's approach have received
greater emphasis as the English courts have become more generous in their approach
and assessment of claims for time management. The authors accept what has been
highlighted above, and the need to take care in delay cases to avoid any double
recovery, overlap with other claims, or when payments are obtained by the contractor
on account of variation(s), or any damages for breach have to be concluded by using
contract price. "Thickening", by adding unreasonable expenses, should not be accepted.
It is observed that in the total cost method, there is difficulty in linking cause and effect
convincingly, albeit is more precise and factually accurate. Thus, Hudson's method
should be taken as the basis for computation with caution and as a last resort, where no
other way to compute damages is feasible or mathematically accurate. Inaccuracies in
Hudson's computation should not be overlooked, and should be accounted and
neutralized. Hudson's formula when applied should be with full care and caution not to
over-award the damages.
27. Arbitral tribunal in the present case has given complete go by to these principles
well in place, overlooked care and caution required and taken a one-sided view grossly
and abnormally inflated the damages. The figures quoted in paragraph 11 supra show
the over- statement and aggrandizement in awarding Rs. 1,57,37,666/-, towards loss of
overheads and loss of profits/profitability, in a contract of Rs. 5,74,35,213/-. Rs.
1,21,95,859.68/- was paid for the work done within the term. Rs. 2,92,07,619.13 was
paid for the work done post the term. Thus, Rs. 4,14,03,478.81/- was paid for 80% of
the work. The balance was Rs. 1,14,87,042.00/-. The amount awarded towards loss of
overheads and profits/profitability is Rs. 1,57,37,666/-. No justification for computation
of the loss is elucidated or can be expounded. Even if one were to rely upon the chart
given by the BEEL, and ignore the contradictions in findings, the amount awarded is
highly disproportionate and exorbitant. It is clearly a case of overlapping or at least a
part doubling of the loss/damages.
2 8 . The arbitral tribunal has accepted that principle of mitigation is applicable but
observes that the only way BEEL could have abased the loss, was to work on Sundays
or holidays. This reasoning is again ex facie fallacious and wrong. The principle of
mitigation with regard to overhead expenses does not mandate working on Sundays or
holidays.

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 29. We would like to refer to Claim No. 2 for idle machinery and equipment. This was
on account of extended period of contract. This claim of more than Rs. 84,00,000/- has
been accepted for Rs. 12,00,000/-, by simply stating that the learned arbitrator had
inspected the site and, in his opinion, there is substance in the claim. Inspection of the
site was post the appointment of the arbitrator after August 1997, whereas BEEL had
abandoned the contract more than a year ago in March 1996. The amount awarded is
merely on ipse dixit without giving any reasons and basis for awarding the amount.
30. The scope and ambit of the court's power to review the awards Under Section 34 of
the A&C Act has been contentious viz., on the interpretation to the expression 'in
conflict with the public policy of India'. There have been legislative interventions as well
as judicial pronouncements. In the context of the present case, we are required to
interpret the provisions as they existed on the date on which the objections to the
award were filed i.e., on 21.06.1999. Accordingly, the amendment introduced to Section
34 of the A&C Act vide Act No. 3 of 2016 with retrospective effect from 23.10.2015 and
the judgments of this Court examining the amended Section 34 of the A&C Act need not
be examined.
3 1 . Post award interference and the extent of the second look by the courts Under
Section 34 of the A&C Act has been a subject matter of perennial parley. The 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.15 It is argued that the purpose of arbitration is fast and quick one-stop
adjudication as an alternative to court adjudication, and therefore, post award
interference by the courts is un-warranted, and an anathema that undermines the
fundamental edifice of arbitration, which is consensual and voluntary departure from the
right of a party to have its claim or dispute adjudicated by the judiciary. The process is
informal, and need not be legalistic16. Per contra, it is argued that party autonomy
should not be treated as an absolute defence, as a party despite agreeing to refer the
disputes/claims to a private tribunal consensually, does not barter away the
constitutional and basic human right to have a fair and just resolution of the disputes.
The court must exercise its powers when the award is unfair, arbitrary, perverse, or
otherwise infirm 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 sufficiently accommodated in the arbitral
proceedings and the outcome is marred, then the award should invite intervention by
the court.
3 2 . To disentangle and balance the competing principles, the degree and scope of
intervention of courts when an award is challenged by one or both parties needs to be
stated. Reconciliation as a statement of law and in particular application in a particular
case has not been an easy exercise. We begin by first referring to the views expressed
by this Court in interpreting the width and scope of the post award interference by the
courts Under Section 34 of the A&C Act.
33. Section 34 of the A&C Act, prior to amendment effected vide Act No. 3 of 2016 with
retrospective effect from 23.10.2015, reads as under:
34. Application for setting aside arbitral award.-
(1) Recourse to a court against an arbitral award may be made only by

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 an application for setting aside such award in accordance with Sub-
section (2) and Sub-section (3).
(2) An arbitral award may be set aside by the court only if-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the
parties have subjected it or, failing any indication thereon, under the
law for the time being in force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not
falling within the terms of the submission to arbitration, or it contains
decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can
be separated from those not so submitted, only that part of the arbitral
award which contains decisions on matters not submitted to arbitration
may be set aside; or
(v) the composition of the Arbitral Tribunal or the arbitral procedure
was not in accordance with the agreement of the parties, unless such
agreement was in conflict with a provision of this Part from which the
parties cannot derogate, or, failing such agreement, was not in
accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by
arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.-Without prejudice to the generality of Sub-clause (ii), it is hereby
declared, for the avoidance of any doubt, that an award is in conflict with the
public policy of India if the making of the award was induced or affected by
fraud or corruption or was in violation of Section 75 or Section 81.
(3) An application for setting aside may not be made after three months have
elapsed from the date on which the party making that application had received
the arbitral award or, if a request had been made Under Section 33, from the
date on which that request had been disposed of by the Arbitral Tribunal:
Provided that if the court is satisfied that the applicant was prevented by
sufficient cause from making the application within the said period of three
months it may entertain the application within a further period of thirty days,
but not thereafter.
(4) On receipt of an application Under Sub-section (1), the court may, where it

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 is appropriate and it is so requested by a party, adjourn the proceedings for a
period of time determined by it in order to give the Arbitral Tribunal an
opportunity to resume the arbitral proceedings or to take such other action as
in the opinion of Arbitral Tribunal will eliminate the grounds for setting aside
the arbitral award.
34. Sub-section (1) to Section 34 of the A&C Act requires that the recourse to a court
against an arbitral award is to be made by a party filing an application for setting aside
of an award in accordance with Sub-sections (2) and (3) of Section 34. Sub-section (2)
to Section 34 of the A&C Act stipulates seven grounds on which a court may set aside
an arbitral award. Sub-section (2) consists of two clauses, (a) and (b). Clause (b)
consists of two sub-clauses, namely, Sub-clause (i) which states that when the subject
matter of the dispute is not capable of settlement by arbitration under the law for the
time being in force, and Sub-clause (ii), which states that the court can set aside an
arbitral award when the award is 'in conflict with public policy of India'. We shall
subsequently examine the decisions of this Court interpreting 'in conflict with public
policy of India' and the explanation.
35. Under Sub-clause (a) to Sub-section (2) to Section 34 of the A&C Act, a court can
set aside an award on the grounds in sub-clauses (i) to (v) namely, when a party being
under some incapacity; arbitration agreement is not valid under the law for the time
being in force; when the party making an application Under Section 34 is not given a
proper notice of appointment of the arbitrator or the arbitration proceedings, or was
unable to present its case; and when the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the agreement between the parties,
unless such agreement was in conflict with the mandatory and binding non-derogable
provision, or was not in accordance with Part I of the A&C Act. Sub-clause (iv) states
that the arbitral award can be set aside when it deals with a dispute not contemplated
by, or not falling within the terms of submission of arbitration, or it contains a decision
on matters beyond the scope of submission to arbitration. However, the proviso states
that the decision in the matters submitted to arbitration can be separated from those not
submitted, then that part of the arbitral award which contains the decision on the matter
not submitted to arbitration can be set aside. In the present case, we are not required to
examine sub-clauses to Clause (a) to Sub-section (2) to Section 34 of the A&C Act in
detail. Hence, this decision should not be read as making any observation, even as
obiter dicta on the said clauses.
36. Explanation to Sub-clause (ii) to Clause (b) to Section 34(2) of the A&C Act, as
quoted above and before its substitution by Act No. 3 of 2016, had postulated and
declared for avoidance of doubt that an award is 'in conflict with the public policy of
India', if the making of the award is induced or affected by fraud or corruption, or was
in violation of Sections 75 or 81 of the A&C Act. Both Sections 75 and 81 of the A&C Act
fall under Part III of the A&C Act, which deal with conciliation proceedings. Section 75
of the A&C Act relates to confidentiality of the settlement proceedings and Section 81
deals with admissibility of evidence in conciliation proceedings. Suffice it is to note at
this stage that while 'fraud' and 'corruption' are two specific grounds under 'public
policy', these are not the sole and only grounds on which an award can be set aside on
the ground of 'public policy'.
37. Act No. 3 of 2016 with retrospective effect from 23.10.2015 has substituted the
explanation referred to above, by two new explanations that are differently worded.17
Sub-section (2-A) to Section 34 of the A&C Act, which was instituted by Act No. 3 of
2016 with retrospective effect from 23.10.2015, states that the arbitral award arising

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 out of arbitrations other than international commercial arbitrations can be set aside by
the court, if it is vitiated by patent illegality appearing on the face of the award. The
proviso to Sub-section (2-A) to Section 34 of the A&C Act also states that the award
shall not be set aside merely on the ground of erroneous application of law or by
reappreciation of evidence. The aforesaid Sub-section need not be examined in the facts
of the present case, as we are not required to interpret and apply the substituted
explanations to (ii) to Sub-clause (b) to 34(2) of the A & C Act in the present case.
38. The expression 'public policy' Under Section 34 of the A&C Act is capable of both
wide and narrow interpretation. Taking a broader interpretation, this Court in ONGC
Limited v. Saw Pipes Limited MANU/SC/0314/2003 : (2003) 5 SCC 705 (for short, Saw
Pipes Limited), held that the legislative intent was not to uphold an award if it is in
contravention of provisions of an enactment, since it would be contrary to the basic
concept of justice. The concept of 'public policy' connotes a matter which concerns
public good and public interest. An award which is patently in violation of statutory
provisions cannot be held to be in public interest. Thus, expanding on the scope and
expanse of the jurisdiction of the court Under Section 34 of the A&C Act, it was held
that an award can be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Nevertheless, the decision holds that mere error of fact or law in reaching the
conclusion on the disputed question will not give jurisdiction to the court to interfere.
However, this will depend on three aspects: (a) whether the reference was made in
general terms for deciding the contractual dispute, in which case the award can be set
aside if the award is based upon erroneous legal position; (b) this proposition will also
hold good in case of a reasoned award, which on the face of it is erroneous on the legal
proposition of law and/or its application; and (c) where a specific question of law is
submitted to an arbitrator, erroneous decision on the point of law does not make the
award bad, unless the court is satisfied that arbitrator had proceeded illegally. In the
said case, the court set aside the award on the ground that the award had not taken into
consideration the terms of the contract before arriving at the conclusion as to whether
the party claiming the damages is entitled to the same. Reference was made to the
provisions of Sections 73 and 74 of the Contract Act, which relate to liquidated
damages, general damages and penalty stipulations. This view had held the field for a
long time and was applied in subsequent judgments of this Court in Hindustan Zinc Ltd.
v. Friends Coal Carbonisation MANU/SC/8095/2006 : (2006) 4 SCC 445, Centrotrade
Minerals and Metals Inc. v. Hindustan Copper Limited MANU/SC/8146/2006 : (2006) 11
SCC 245, Delhi Development Authority v. R.S. Sharma and Co. MANU/SC/3624/2008 :
(2008) 13 SCC 80, J.G. Engineers (P) Ltd. v. Union of India and Anr.
MANU/SC/0527/2011 : (2011) 5 SCC 758, and Union of India v. L.S.N. Murthy
MANU/SC/1377/2011 : (2012) 1 SCC 718.
39. In 2006, this Court in McDermott International Inc. despite following the ratio of
Saw Pipes Limited, made succinct observations regarding the restrictive role of courts in
the post- award interference. In addition to the three grounds introduced in Renusagar
Power Co. Limited v. General Electric Co. MANU/SC/0195/1994 : 1994 Supp (1) SCC
644, as noticed above, an additional ground of 'patent illegality' was introduced Saw

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 Pipes Limited, for exercise of the court's jurisdiction in setting aside an arbitral award.
This Court, in McDermott International Inc, held that patent illegality, must be such
which goes to the root of the matter. The public policy violation should be so unfair and
unreasonable as to shock the conscience of the court. Arbitrator where s/he acts
contrary to or beyond the express law of contract or grants relief, such awards fall
within the purview of Section 34 of the A&C Act. Further, what would constitute public
policy is a matter dependent upon the nature of transaction and the statute. Pleadings of
the party and material brought before the court would be relevant to enable the court to
judge what is in public good or public interest, or what would otherwise be injurious to
public good and interest at a relevant point. So, this must be distinguished from public
policy of a particular government.
40. A similar view was expressed in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram
Saran MANU/SC/0327/2012 : (2012) 5 SCC 306 with the clarification that where a term
of the contract is capable of two interpretations and the view taken by the arbitrator is a
plausible one, it cannot be said that the arbitrator travelled outside the jurisdiction or
the view taken the arbitrator is against the terms of the contract. The court cannot
interfere with the award and substitute its view with the award and interpretation
accepted by the arbitrator, the reason being the court does not sit in appeal over the
findings and decision of the arbitrator, while deciding an application Under Section 34
of the A&C Act. The arbitrator is legitimately entitled to take a view after considering the
material before him/her and interpret the agreement. The judgment should be accepted
as final and binding.
4 1 . Subsequently, in ONGC Ltd. v. Western Geco International Ltd.
MANU/SC/0772/2014 : (2014) 9 SCC 263, (for short, Western Geco), a three Judge
Bench of this Court observed that the Court, in Saw Pipes Ltd., did not examine what
would constitute 'fundamental policy of Indian law'. The expression 'fundamental policy
of Indian law' in the opinion of this Court includes all fundamental principles providing
as basis for administration of justice and enforcement of law in this country. There were
three distinct and fundamental juristic principles which form a part and parcel of
'fundamental policy of Indian law'. The first and the foremost principle is that in every
determination by a court or an authority that affects rights of a citizen or leads to civil
consequences, the court or authority must adopt a judicial approach. Fidelity to judicial
approach entails that the court or authority should not act in an arbitrary, capricious or
whimsical manner. The court or authority should act in a bona fide manner and deal
with the subject in a fair, reasonable and objective manner. Decision should not be
actuated by extraneous considerations. Secondly, the principles of natural justice should
be followed. This would include the requirement that the arbitral tribunal must apply its
mind to the attending facts and circumstances while taking the view one way or the
other. Non- application of mind is a defect that is fatal to any adjudication. Application
of mind is best done by recording reasons in support of the decision. As noticed above,
Section 31(3)(a) of the A&C18 states that the arbitral award shall state the reasons on
which it is based, unless the parties have agreed that no reasons are to be given. Sub-
clauses (i) and (iii) to Section 34(2) also refer to different facets of natural justice. In a
given case Sub-clause to Section 34(2) and Sub-clause (ii) to Clause (b) to Section
34(2) may equally apply. Lastly, is the need to ensure that the decision is not perverse
or irrational that no reasonable person would have arrived at the same or be sustained
in a court of law. Perversity or irrationality of a decision is tested on the touchstone of
Wednesbury principle of reasonableness19. At the same time, it was cautioned that this
Court was not attempting an exhaustive enumeration of what would constitute
'fundamental policy of Indian law', as a straightjacket definition is not possible. If on

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 facts proved before them, the arbitrators fail to draw an inference which ought to have
been drawn or if they have drawn an inference which on the face of it, is untenable
resulting in injustice, the adjudication made by an arbitral tribunal that enjoys
considerable latitude and play at the joints in making awards, may be challenged and
set aside.
42. The decision of this Court in Associate Builders elaborately examined the question
of public policy in the context of Section 34 of the A&C Act, specifically under the head
'fundamental policy of Indian law'. It was firstly held that the principle of judicial
approach demands a decision to be fair, reasonable and objective. On the obverse side,
anything arbitrary and whimsical would not satisfy the said requirement.
43. Referring to the third principle in Western Geco, it was explained that the decision
would be irrational and perverse if (a) it is based on no evidence; (b) if the arbitral
tribunal takes into account something irrelevant to the decision which it arrives at; or
(c) ignores vital evidence in arriving at its decision. The standards prescribed in Excise
and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons 1992 Supp (2) SCC
312, (for short, Gopi Nath & Sons) and Kuldeep Singh v. Commissioner of Police
MANU/SC/0793/1998 : (1999) 2 SCC 10 should be applied and relied upon, as good
working tests of perversity. In Gopi Nath & Sons it has been held that apart from the
cases where a finding of fact is arrived at by ignoring or excluding relevant materials or
taking into consideration irrelevant material, the finding is perverse and infirm in law
when it outrageously defies logic as to suffer from vice of irrationality. Kuldeep Singh
clarifies that a finding is perverse when it is based on no evidence or evidence which is
thoroughly unreliable and no reasonable person would act upon it. If there is some
evidence which can be acted and can be relied upon, however compendious it may be,
the conclusion should not be treated as perverse. This Court in Associate Builders
emphasised that the public policy test to an arbitral award does not give jurisdiction to
the court to act as a court of appeal and consequently errors of fact cannot be
corrected. Arbitral tribunal is the ultimate master of quality and quantity of evidence. An
award based on little evidence or no evidence, which does not measure up in quality to
a trained legal mind would not be held to be invalid on this score. Every arbitrator need
not necessarily be a person trained in law as a Judge. At times, decisions are taken
acting on equity and such decisions can be just and fair should not be overturned Under
Section 34 of the A&C Act on the ground that the arbitrator's approach was arbitrary or
capricious. Referring to the third ground of public policy, justice or morality, it is
observed that these are two different concepts. An award is against justice when it
shocks the conscience of the court, as in an example where the claimant has restricted
his claim but the arbitral tribunal has awarded a higher amount without any reasonable
ground of justification. Morality would necessarily cover agreements that are illegal and
also those which cannot be enforced given the prevailing mores of the day. Here again
interference would be only if something shocks the court's conscience. Further, 'patent
illegality' refers to three sub-heads: (a) contravention of substantive law of India, which
must be restricted and limited such that the illegality must go to the root of the matter
and should not be of a trivial nature. Reference in this regard was made to Clause (a) to
Section 28(1) of the A&C Act, which states that the dispute submitted to arbitration
under Part I shall be in accordance with the substantive law for the time being in force.
The second sub-head would be when the arbitrator gives no reasons in the award in
contravention with Section 31(3) of the A&C Act. The third sub-head deals with
contravention of Section 28(3) of the A&C Act which states that the arbitral tribunal
shall decide all cases in accordance with the terms of the contract and shall take into
account the usage of the trade applicable to the transaction. This last sub-head should
be understood with a caveat that the arbitrator has the right to construe and interpret

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 the terms of the contract in a reasonable manner. Such interpretation should not be a
ground to set aside the award, as the construction of the terms of the contract is finally
for the arbitrator to decide. The award can be only set aside under this sub-head if the
arbitrator construes the award in a way that no fair-minded or reasonable person would
do.
44. As observed previously, we need not examine the amendment made to the A&C Act
vide Act No. 3 of 2016 with retrospective effect from 23.10.2015 and the judgments
that deal with the amended Section 34 of the A&C Act. Pertinently, the amendment to
Section 34 of the A&C Act was effected, pursuant to the observations of the
Supplementary Report to Report No. 246 on Amendments to Arbitration and Conciliation
Act, 1996 by the Law Commission of India, titled 'Public Policy - Developments post-
Report No. 246' published in February 2015. This Supplementary Report observed that
the power to review an arbitral award on merits Under Section 34 of the A&C Act, as
elucidated in the case of Western Geco, subsequently followed in Associate Builders, is
contrary to the object of the A&C Act and international practice on minimization of
judicial intervention. A reference can also be conveniently made to MMTC Ltd. v.
Vedanta Ltd. MANU/SC/0221/2019 : (2019) 4 SCC 163 (for short, MMTC Ltd.), and
Ssangyong Engg. & Construction Co. Ltd. v. National Highways Authority of India
MANU/SC/0705/2019 : (2019) 15 SCC 131(for short, Ssangyong Engg), which examine
the scope of intervention of courts Under Section 34 of the A&C Act as amended by Act
No. 3 of 2016. MMTC Ltd. and Ssangyong Engg., and other judgments which deal with
the amended Section 34 of the A&C Act that are not applicable in the present case.
4 5 . We have extensively analysed the award, its patent flaws and illegalities which
emanate from it, like the manifest lack of reasoning in arriving at the conclusions and
the calculation of amounts awarded, which, in fact, amount to double or part-double
payments, besides being contradictory etc. In view of our aforesaid reasoning, the
award has been rightly held to be unsustainable and set aside by the division bench of
the High Court exercising power and jurisdiction Under Section 37 read with Section 34
of the A & C Act.
46. In view of the aforesaid discussion, the appeal is dismissed without any order as to
costs.

1 For short, BEEL.

2 Appeal No. 227 of 2001 in Arbitration Petition No. 280 of 1999.
3 For short, HPCL.
4 Forshort, A&C Act.
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.
6 Section 55 - Effect of failure to perform at fixed time, in contract in which time is
essential - When a party to a contract promises to do a certain thing at or before a
specified time, or certain things at or before specified times, and fails to do any such
thing at or before the specified 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.

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 Effect 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 specified time; but the
promisee is entitled to compensation from the promisor for any loss occasioned to him
by such failure.
Effect 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 non-
performance 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.
7 Section 73 - Compensation for loss or damage caused by breach of contract. - When a
contract has been broken, the party who suffers 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.
8 For short, Contract Act.
9 See - Robinson v. Harman MANU/ENRP/0108/1848 : (1848) 1 Ex 850 at 855 and
Livingstone v. Rawyards Coal Co (1879-80) L.R. 5880 cases 25
10 In this case, as noticed, the contract bars claims for compensation for losses due to
enhancement/escalation of costs etc. We make no comments in this regard.
Interpretation and validity of such clauses is not subject matter of this appeal. When
such clauses, which are apparently one- sided and absolve breach with immunity, are
subjected to judicial scrutiny, the courts/tribunals invariably tend to interpret the
clauses in a restrictive manner to grant just and fair relief. Courts should be slow to
interfere, unless the award falls within the ambit of the parameters set out in Section 34
of the A&C Act.
11 See Hudson's Building Contracts (10th edn) pp 450, 596.
12 The formula borrows the name from the Armed Services Board of Contract Appeals
decision in Eichleay Corporation case, ASBCA No. 5183, 60-2 BCA.
13 Ibid.
14 Claims for head office overheads - alternatives to formulae, John W. Pettet, 1999.
15 See Vidya Drolia and Ors. v. Durga Trading Corporation and Ors.
MANU/SC/0939/2020 : (2021) 2 SCC 1, which examines arbitrability and non-
arbitrability of subject matters and claims, which aspect will not be examined in this
case.
16 The expression "judicially", does not equate arbitration with formal/court
proceedings, and would include a just and fair decision.
17 Explanations 1 and 2 to Sub-clause (ii) to Clause (b) to Section 34(2) of the A&C Act

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 substituted vide
Act No. 3 of 2016 read as under:
Explanation 1.-For the avoidance of any doubt, it is clarified that an award is in conflict
with the public policy of India, only if,-
(i) the making of the award was induced or affected by fraud or corruption or was in
violation of Section 75 or Section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.-For the avoidance of doubt, the test as to whether there is a
contravention with the fundamental policy of Indian law shall not entail a review on the
merits of the dispute.
Sub-section 2A to Section 34(2) of the A&C Act inserted vide Act No. 3 of 2016 reads as
under:
(2-A) An arbitral award arising out of arbitrations other than international commercial
arbitrations, may also be set aside by the court, if the court finds that the award is
vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous
application of the law or by reappreciation of evidence.
18 Supra footnote 5.
19 As expounded in the case of Associated Provincial Picture Houses Ltd. v. Wednesbury
Corporation, MANU/UKWA/0002/1947 : (1948) 1 KB 223 : (1947) 2 All ER 680 (CA).
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