The Delhi High Court has ruled that an arbitral award quantifying overhead damages by applying the Emden formula, without the contractor discharging the onus of proving actual loss suffered, is non-speaking and suffers from patent illegality under Section 31(3) of the Arbitration and Conciliation Act, 1996. The Court said that for damages under Section 73 of the Indian Contract Act, 1872, the twin conditions of breach of contractual conditions and proof of actual loss (or proof that actual loss is impossible to establish) must be satisfied.
The Court clarified that an architect’s statement in cross-examination that he ‘tried to convince the bank’ to grant Price Variation Adjustment (PVA) for a post-facto extension does not constitute an admission that the extension was granted subject to PVA, particularly where the contemporaneous recommendation letter expressly records that the extension was without monetary benefit and without PVA.
Further, the Court said that a plea based on a contractual clause barring interest, which was not raised before the arbitrator, cannot be raised for the first time in Section 34 proceedings, as it amounts to waiver or abandonment of the plea at the initial stage. At the same time, the proviso to Section 34(2)(a)(iv) of the Arbitration Act permits severance of invalid portions of an award from valid ones when the parts are not intricately connected, thereby allowing the court to set aside only the defective awards while preserving the sustainable ones.
For loss of overhead expenditure, a Single Judge Bench of Justice Avneesh Jhingan observed that for awarding damages under Section 73 of the Indian Contract Act, 1872, twin conditions must be fulfilled: first, breach of the contractual conditions; and second, actual loss or damage suffered, or proof that it is not possible to prove the actual damage. The Supreme Court in Kailash Nath Associates v. DDA [(2015) 4 SCC 136] held that where it is possible to prove actual damage or loss, such proof is not dispensed with, and it is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount can be awarded.
The Court further observed that in Unibros v. All India Radio [2023 SCC OnLine SC 1366], the Supreme Court held that reliance on a formula is not a substitute for establishing the loss actually suffered. Hudson’s formula, as well as other methods used to calculate claims for loss of overheads and profit, do not directly measure the contractor’s exact costs. Rather, they provide only an estimate, and credible evidence to substantiate the claim of loss is essential.
The Court noted that the award was non-speaking and no reasons were recorded for accepting the calculations based on the Emden formula and the CPWD manual. Section 31(3) of the Arbitration Act mandates a reasoned award, and even on a fair reading of the award as a whole, no reason emanated for the arbitrator accepting the calculation without evidence to prove the loss suffered. The award of claim no. 1 was held to suffer from patent illegality.
The Court observed that the arbitrator awarded PVA for the third extension solely relying upon the alleged admission of the architect in cross-examination. However, the answer to question that the architect ‘tried to convince the bank but could not convince them’, could not be construed as an admission that the third extension was subject to payment of PVA. The documentary evidence in the shape of the recommendation letter dated Nov 11, 2015, was relevant material on record and could not be ignored on the basis of an alleged admission.
The Court further observed that while deciding claim no. 1, the total delay of 380 days was attributed to both parties (175 days to SBI and 205 days to the contractor), but there was no discussion as to the time period for which the delay was attributable to SBI in respect of the third extension. The conclusion that SBI was responsible for the third extension was held to be without any basis and perverse.
For interest on delayed payment of running bills and final bills, the Court observed that clause 37 of the GCC prescribes the timeline of fourteen working days from the date of certificate issued by the architect for making payment to the contractor, and applies to both running bills and the final bill. There was a delay of 243 days in payment of the running bills and a further delay of 133 days in release of payment towards the final bill. The Court held that the contention of SBI that running bills were in the nature of advance payments lacked merit, as there was no clause in the present contract treating intermediary payments as advances against the final payment.
For interest on delayed refund of security deposit, the Court observed that the security deposit of 5% of the contract value was made by the contractor under clause 6 of the GCC. The first 50% of the security deposit was released on June 18, 2017, after a delay of 321 days, and the balance 50% on March 21, 2018, with a delay of 424 days. The Court further held that clause 6.2 of the GCC cannot be read in isolation. From a reading of clauses 6.1 and 6.2, it emerges that no interest shall be paid on the security deposit retained by the bank. Clause 6.1 stipulates the conditions for release of the security deposit, and admittedly, the security deposit was refunded beyond the period prescribed in clause 6.1. Clause 6.2 shall not apply in such a situation.
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Briefly, the State Bank of India (SBI) invited tenders for the construction of seventy-six flats for its officers at Sector-62, Noida, covering civil works, water supply, sanitary installations, and external development. M/s K.R. Anand emerged as the successful bidder and was awarded the work. The parties entered into a contract for a value of Rs. 19.81 crores, with a stipulated completion period of twenty-four months, i.e., by Jan 15, 2015.
The contractor failed to complete the work within the stipulated period and sought three extensions. The first extension was for eighty-five days with PVA; the second was for one hundred forty-five days with PVA; and the third post-facto extension was for one hundred fifty days without PVA. When extensions were granted, the contractor completed the work and submitted the final bill. The Virtual Completion Certificate was issued on Jan 11, 2017, and the defect liability period ended on Jan 23, 2017. The final bill was cleared on May 15, 2017, and payment was released on June 12, 2017.
Disputes arose between the parties regarding the cause of delay. The contractor attributed the delay to SBI’s failure to provide necessary drawings and approvals, while SBI contended that the approvals were issued after inspection and design preparation by the architect, M/s Taneja Associates (P) Ltd. The contractor raised claims which were rejected by SBI as time barred. Later, arbitration was invoked at the instance of the contractor under clause 38 of the General Conditions of Contract (GCC), and fourteen claims were raised aggregating to Rs. 4.92 crores. The arbitrator however, awarded a total sum of Rs. 1.42 crores in favour of the contractor.
