Delhi District Court
Delhi Development Authority vs Pandit Munsi Ram & Associates (P) Ltd on 16 October, 2017
Page 1 of 20
IN THE COURT OF DR. NEERA BHARIHOKE, ADJ01 (SOUTH),
SAKET COURTS, NEW DELHI
ARBT no.84/17
Delhi Development Authority
Executive Engineer SWD2
Vasant Kunj, New Delhi
.............Petitioner
Versus
Pandit Munsi Ram & Associates (P) Ltd.
B27, Sarvodya Enclave
New Delhi110017
............Respondent
O R D E R:
1. Vide this order, I shall dispose of petition filed under Sec.34 of Arbitration & Conciliation Act for setting aside the arbitral Award dated 20.10.2010.
2. The grounds for filing the present petition are that the Ld. Arbitrator passed the award for a sum of Rs.3,39,928.32 under the claim no.9 for the loss of profitability/turnover due to prolongation of the contract and has legally misconducted in awarding the said claim on percentage basis whereas the Ld. Arbitrator has not considered the cost of the work done including the cost of material which is amounting to Rs.35,03,360/ which ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.Page 2 of 20
has not been deducted by the Ld. Arbitrator hence the claimant has nowhere claimed the loss of profitability.
2.1 Petitioner has further submitted that the claimant had not filed actual loss being suffered by him. Even no documentary evidence to show the loss of profit in the statement of account has been filed and still Ld. Arbitrator had granted 8% loss of profit to the work which includes cost of material which is against the provisions of law and public policy of India and the Ld. Arbitrator has legally misconducted on this account. 2.2 Petitioner has further submitted that the present claim is against Section 73 of Contract Act as the loss of profit is shown indirect damage for which claimant has to prove his case which the claimant has failed to do and also the claimant had nowhere pleaded that he suffered loss and has not placed any document to show that he had any other contract during the said period and could have utilized this amount in other contract, hence the present claim is liable to be set aside. 2.3 Petitioner has further submitted that the claim is false, frivolous and baseless as the claimant/respondent has not stated as to when it is deducted to mitigate the loss and the present claim is hypothecated, ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 3 of 20
erroneous and illegal without any evidence placed on record and also the Ld. Arbitrator had not considered the clause 10 & 13 of General Condition no.1 of Specification and Conditions and in view of this clause, the claimant is not entitled to any loss/compensation and hence the claim is liable to be set aside.
2.4 The petitioner has further submitted that the Ld. Arbitrator has not considered the cost of material as Rs.35,03,360/. Without prejudice to earlier submissions thus the cost of the material has to be reduced from the cost and also the Ld. Arbitrator has not considered that the excess period is required for the execution of the work beyond the tendered amount and hence the period so calculated is also correct and excess work done is for Rs.42,17,031 beyond tendered amount of Rs.96,94,048/ total work comes to Rs.1,39,11,079 and hence the award is liable to be set aside as the claimant is not entitled to any amount.
3. Detailed reply has been filed on behalf of respondent in which respondent has submitted that the Objection petition filed under Section 34 of the Arbitration & Conciliation Act, 1996 are in the nature of an appeal against the award passed by Learned Arbitrator and the grounds of objections ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 4 of 20
are totally outside the parameters of Section 34 of the Arbitration & Conciliation Act, 1996. The Objections are in the nature of appeal and are liable to be outrightly rejected.
4. Respondent has relied on law laid down in the case of Ispat Engineering & Foundry Works, B.S. City, Bokaro Vs. Steel Authority of India, B.S. City Bokaro, (2001) 3 SCR 1190 where the Hon'ble Supreme Court has held as under: "4. Needless to record that there exists a long catena of cases through which the law seems to be rather well settled that the re appraisal of evidence by the court is not permissible. This court in one of its latest decisions (Arosan Enterprise Ltd. Vs. Union of India & Anr. AIR 1999 SC 3804) upon consideration of decision in Champsey Bhara & Co. Vs. Jiraj Ballow Spg. & Wvg. Co. Ltd. (AIR 1923 PC 66 1923 AC 480), Union of dina V. Bugno Steel Furniture (P) Ltd. (1967) 1SCR 324, N. Chellappan V. Seev., Kerala SEB & Anr. (1975) 1 SCR 811, M/s. Sudarsan Trading Co. V. Government of Kerala and Anr.(1989) 1 SCR 665; State of Rajasthan V. Puri Construction Co. Ltd. & Anr. (1994) 6 SCC 485 as also in Olyphus Superstructures (P) Ltd. V. Meena Vijay Khetan & Ors. (1999) 3 SCR 490 has stated that reappraisal of evidence by the court is not permissible and as a matter of fact exercise of power to reappraise the evidence ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 5 of 20
is unknown to a proceeding under Section 30 of the Arbitration Act. This Court in Arosan Enterprise (supra) categorically stated that in the event of there being no reason in the award question of interference of the court would not raise at all. In the event however, there are reasons, interference would still be not available unless of course, there exist a total perversity in the award or the judgment is based on a wrong proposition of law. This court went on to record that in the event, however two views are possible on question of law, the court would not be justified in interfering with the award of the Arbitrator if the view taken recourse to is a possible view. The observations of Lord Dunedin in Champsey Bhara (supra) stands accepted and adopted by this court in Bungo Steel Furniture (supra) to the effect that the court had no jurisdiction to investigate into the merits of the case or to examine the documentary and oral evidence in the record for the purposes of finding out whether or not the arbitrator has committed an error of law. The court as a matter of fact cannot substitute its own evaluation and come to the conclusion that the Arbitrator had acted contrary to the bargain between the parties."
5. Respondent has averred that the petitioner has failed to point out any illegality or perversity in the Award. Respondent has also referred to case of State of U.P. Vs. Applied Construction, (2003) 7 SCC 396, where it was observed that "Once it is found that the view of the Arbitrator is a ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 6 of 20
plausible one, the court will refrain itself from interfering." It is a settled law that it is not for a court to interfere with an award merely on the basis that the court would come to a different conclusion on the basis of material available before the arbitrator. Respondent has also contended that referring to the judgment of Hon'ble Supreme Court in the case of Food Corporation of India Vs. Joginderpal, Mohinderpal & Anr. (1989) 2 SCC 347 Gujrat Water Supply and Sewerage Board Vs. Unique Erectors (Gujrat) (P) Ltd. And Anr, AIR 1989 SC 173. The Division Bench of this Hon'ble Court in FAO (OS) 147/2002 decided on 12.08.2011 observed as under: "In fact, it has been observed in a catena of judgments by the Supreme Court that in the absence of an award being absurd, reasonableness is not the matter to be considered by the court as appeasement of evidence by an arbitrator is not ordinarily a matter for the court.
6. Respondent has denied the submissions made in the reply and has submitted that the petitioner has failed to point out mistake in the calculation based on Hudson Formula before the Ld. Arbitrator. Respondent has also contended that the respondent was not required to ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 7 of 20
show any actual loss and produce documentary evidence to show the loss of profit and the arbitrator is entitled to make his assessment. The Ld. Arbitrator is competent to adopt any method to determine the actual amount of loss, as has been done in the present case. Further claimant is entitled to damages under Section 73 of the Contract Act and has rightly been awarded Rs.3,39,928.32 by the Ld. Arbitrator. In any event it is an admitted fact a work stipulated for 12 months was completed in 28 months. It is also an admitted fact that it was petitioner who was responsible for delay and the consequence thereof. It is also an admitted fact that contractor is bound to suffer losses if a work stipulated for 12 months prolonged by 15 more months. Therefore the Ld. Arbitrator is well within its jurisdiction to assess the loss. The respondent has prayed for dismissal of the present petition.
7. Arguments Heard. Record perused.
8. The petitioner is aggrieved by the allowing of claim number 9 by learned arbitrator in the impugned award dated 20.10.2010.
9. The respondent had raised claim of ₹ 3, 39, 928.32 on account of loss of profitability/turnover due to prolongation of the contract under claim ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 8 of 20
number 9. In support of this claim, respondent had submitted that immediately after expiry of stipulated date of completion, the respondent had informed the petitioner through letter dated 12.05.1991 that the work had delayed due to nonfulfillment of obligation on the part of the petitioner and the respondent is going to charge 40% above the quoted rates for the work done after stipulated date of completion. The respondent has submitted that the said notice is nothing but notice under Section 55 of the Indian Contract Act and the said notice was never replied by the petitioner implying that it was accepted by the petitioner. The respondent had submitted before Learned Arbitrator that the said 40% was informed taking into consideration that the said 40% will cater to loss on account of profitability/turnover for the prolonged period, loss due to underutilization of men, material and T&P etc. and increase in market rates of building materials and labour. The respondent had also relied on section 44 AD of Income Tax Act as well as submitted calculation sheet based on the formula specified in Hudson's Building and Engineering Contracts.
10. The petitioner on the other hand had submitted that no such notice as contemplated by section 55 of the Contract Act was served upon the ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 9 of 20
petitioner by the respondent and in any case the respondent having been paid extra amount of wages of the labour and increase in price of material under clause 10 CC of the contract and going by the clause 1 of Additional Specifications and Conditions, the respondent is not entitled to have any reimbursement in respect of salaries paid to the staff more so when the respondent has not substantiated the claim by placing any cogent material in the shape of account books or other documents on record to show that he had to incur extra expenditure on salary etc.
11. Learned Arbitrator has observed that completion of work was delayed due to nonfulfillment of obligation on the part of petitioner and that the petitioner had extended the period for completion on the conditions notified by the respondent vide its letter dated 12 5 1991 wherein it was stated that:
"The above work was awarded to us with date of start as 26.01.1990 stipulated to be completed on 25.04.1991. As per the award letter the scope of work was construction of 288 Janta houses at the estimated cost of ₹ 96,94,047.
Even after various hindrances, not attributable to us, we have completed approximately same amount of work allotted to us within the ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.Page 10 of 20
stipulated period. However, it is pointed out here that a lot of further work is to be carried out at site to complete the allotted 288 houses.
As our stipulated time for completing the project is over and as we have completed the same quantum of work allotted to us on time therefore our responsibility as per the contract stands discharged.
However, we being the prudent contractors are interested to complete all the 288 houses allotted to us but on following conditions:
1.Extension of time without levy of compensation be given to us in accordance with the balance quantum of work.
2.You also know that in last few months rates of building materials and labour have risen sharply and the escalation under section 10 CC is not enough to compensate for this rise in the market. Therefore, we will be charging 40% above our quoted rates for the balance work to be done."
12. Learned arbitrator deemed it to be a notice under section 55 of the Contract Act and further observed that the claim could not have been rejected on the sole ground that no notice as envisaged by section 55 of the Contract Act was given by the contractor to the DDA. Learned arbitrator proceeded to say that the calculation submitted by the respondent is based on the formula specified in Hudson's Building and Engineering Contracts which has been approved by Apex Court in ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 11 of 20
various High Courts as the valid basis. The claim is also stated to be based on the provisions of section 44 AD of the Income Tax Act which provides the method of calculating contractor's profit at the rate of 8% of the work executed by him.
13. Learned arbitrator despite noticing the submission of the petitioner that claimant has not substantiated its claim by placing any cogent material in the shape of account books or other documents on record showing that he had to incur extra expenditure on salary etc. still held that respondent is entitled to this claim because there cannot be denial of the position that completion of work was delayed due to nonfulfillment of its obligation on the part of the petitioner - DDA and that is why they extended the period for completion on the conditions notified by the claimant vide its letter dated 12.05.19 91.
It was also observed that "There cannot be denial of the position that due to prolongation of the contract, the claimant must have suffered loss in his turnover/profitability because he was unable to utilize his resources for any other work which he could have undertaken to execute during the extended period. It is true that claimant has not produced his account books in order to show the actual loss of profitability/turnover due to prolonged nation of contract. Even then he ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 12 of 20
has worked out his claim based on Hudson formula which is stated in the following terms:
contract head office overhead and profit percentage into contract sum/contract period X period of delay This formula has been upheld by the Apex Court in the decision of McDermott International Inc versus Bernard Standard Company Ltd and Others 2006 (2) Arb. LR (SC) and allowed the claim of the respondent."
14. Thus it is clear that the claim of the respondent was allowed in absence of respondent leading any evidence and in the absence of respondent producing its account books.
15. The respondent has submitted that under section 34 of Arbitration and Conciliation Act, this court cannot reappraise the evidence as been held in catena of judgments that under section 34 of Arbitration and Conciliation Act grounds of objections have to be decided within the parameters of section 34 of Arbitration and Conciliation Act. However in the present case, the impugned sum awarded by the claimant/ respondent while allowing claim number 9 is not based on any evidence rather it has been allowed despite arbitrator specifically noticing that the ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 13 of 20
respondent has led no evidence to substantiate its claim under the said head. It is pertinent to note that Learned Arbitrator had specifically disallowed the sum claimed by the respondent towards claim for the work done after the stipulated date of completion on account of increase in market rate as well as claim number 11 raised on the ground of loss and damages due to under utilization of men, material and T and P etc. by observing that the respondent had received the amount under Clause 10 CC of the contract.
16. The facts of the present matter are similar to the facts in the matter of Edifice Developers and Projects Engineers Ltd versus M/s Essar Projects (India) Ltd where the Hon'ble High Court of Bombay while deciding appeal number 11 of 2012 in Petitioner No. 313 of 2007 upheld the decision of Learned Single Judge setting aside the impugned award in similar set of facts and the Hon'ble High Court of Bombay has specifically dealt with Hudson's formula and the law laid down in judgment of Mcdermott International (Supra) on which learned Arbitrator has relied in allowing the claim under Claim 9 raised by the respondent/claimant before him.
ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 14 of 20
17. Hon'ble High Court of Bombay observed that the appellant had claimed an amount of ₹ 1,88,15,960 towards overhead losses on the basis of Hudson's formula. Learned single judge in that case while noting that the appellant had not produced either the basis of the accounts nor lead any oral evidence in support of the claim, the arbitrator nonetheless allowed the claim on the basis of a finding that Hudson formula is adopted for quantification of claims for overhead losses in India. The award contained the following finding:
"35(i) the claimants have claimed a sum of ₹1,88,15,9604 overhead loss on the basis of Hudson formula. The respondents have denied the liability and have stated that no evidence of actual loss alleged to have been suffered by the claimant have been led so as to entitle the claimants to claim the same from the respondents. It is correct that the claimant have not produced the basis of accounts nor led any oral evidence to prove the overhead loss caused to or suffered by the claimant. However in the construction industry where the resources are mobilized and the delay is caused in execution of work which is not attributable to the contractor, overhead losses consequently caused to the contractor, the contractor becomes entitled to same on the basis of Hudson formula even in want of direct evidence to prove the same"....
18. This formula is adopted for quantification of claim for overhead losses in ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 15 of 20
India. Even in the case of M/s Brij Paul Singh and Brothers versus State of Gujarat AIR 1994 SC 1703 on which reliance is placed by Dr Dave, learned Techno Legal Consultant for the claimant, this formula has been accepted by the Hon'ble Supreme Court for quantification of claims for overhead losses. On the basis of Hudson formula the claimants have claimed overhead losses up to 28 January 2002 amounting to ₹ 1, 88, 15, 960."
19. The Learned Single Judge while setting aside the arbitral award observed that
(i) The Respondent had specifically objected to the adoption of Hudson formula noting that this was not an accepted method or measure for the quantification of losses and that the appellant had in fact failed to produce any evidence in support of the claim. The Arbitral Tribunal had not dealt with the objections of the Respondent;
(ii) The finding of the Arbitrator that the Hudson's Formula had been accepted by the Supreme Court in the decision in M/s Brij Paul Singh and Brothers versus State of Gujarat was incorrect. As a matter of fact the judgment of Supreme Court in M/s Brij Paul Singh's case only noted that in that case the High Court had referred to Hudson Treatise on Building and Engineering Contracts as stating that in major contracts subject to a competitive tender, evidence given in litigation on many ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 16 of 20
occasions suggests that the head office overheads and profits are between 3 to 7% of the total price of cost which is added to the tender;
(iii) The Arbitrator has purported to rely on prevalent trade practice though as a matter of fact the Appellant was not able to demonstrate any material placed on record to show that any such practice prevailed or was accepted in the trade;
(iv) The Arbitrator had not considered any other formula and had proceeded on the erroneous premises that Hudson Formula is the only formula available and which is accepted by the Supreme Court. This, it was held, was contrary to the law laid down by the Supreme Court in Mc Dermott International Inc. versus Burn Standard Company Ltd. When this finding was assailed before Hon'ble High Court of Bombay, it was observed by Hon'ble High Court of Bombay as "The arbitral award, ex facie, demonstrates that the Arbitrator proceeded on the basis that the Appellant had not produced either the basis of the account or any oral evidence to prove the overhead losses caused to or suffered by it. Despite that finding, the arbitrator held that in the construction industry a contractor becomes entitled to overhead losses on the basis of Hudson Formula, even in the absence of direct evidence to prove such losses when resources are mobilized and delay is caused in the execution of work not attributable to the contractor. In holding this the Arbitrator relied upon the judgment of the Supreme Court in Brij Paul Singh's case (supra).
The Learned Single Judge was justified in coming to the conclusion that ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 17 of 20
the arbitrator was manifestly in error in awarding the claim for overhead losses in spite of the fact that no oral evidence was adduced on behalf of the Appellant. In Brij Paul Singh's case, the Supreme Court noted that it was not disputed that where in a work contract a party entrusted with the work commits a breach of the contract, the contractor would be entitled to claim the damages for loss of profit which he expected to earn while undertaking the contract.
The Supreme Court however noted that what must be the measure of the profit and what evidence should be tendered to sustain the claim are different matters. The judgment of the Supreme Court adverts to the fact that in that case the High Court had referred to Hudson's Treatise on Building and Engineering Contracts. Hudson states there that in major contracts subject to competitive tender on national basis, the evidence given in litigation on many occasions suggests that the head office overheads and profits are between 3 to 7% of the total price of cost which is added to the tender. The High Court in that case had rejected the claim of the contract. The Supreme Court noted that in an identical contract with regard to another portion of the same road and for the same type of work, the High Court had accepted loss of profit at 15% of the price of the balance of work as a reasonable measure of damages if the State is guilty of breach of contract. It was on this basis that the Supreme Court came to the conclusion that since for the same type of work, between the same parties involving a nearby portion of the same road a certain measure of damages had been adopted by the High ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 18 of 20
Court, the same measure ought to have been adopted in that case as well."
20. It was further observed by Hon'ble High Court of Bombay that "Brij Paul Singh's case therefore does not stipulate as a doctrine of law that the formula which has been prescribed in Hudson's treatise must invariably be accepted in all cases as a measure of damages sustained on account of loss of overheads. On the other hand in the subsequent decision of the Supreme Court in McDermott International (Supra) the Supreme Court has relied upon the following observations contained in the earlier decision in M.N. Gangappa versus Atmakur Nagabhushanam Setty and Company as "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 obligation to do."
21. The judgment in McDermott International (Supra) considers various formulae including Hudson Formula, Emdun Formula and Eichleay Formula. As regards Hudson Formula, the Supreme Court has noted that although it has received judicial support in many cases it has been the subject matter of criticism principally because it adopts the head Office overhead percentage from the contract as a factor for calculating the costs and this may bear little or no relation to the actual head office costs of the contractor." (emphasis supplied)."
ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 19 of 20
22. In McDermott international (supra) that 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 other formula, having regard to the facts and circumstances of a particular case, would fall within the domain of the arbitrator."
23. After recording these observations, Hon'ble High Court of Bombay observed that In the case i.e. Edifice Developers and Projects Engineers Ltd versus M/s Essar Projects (India) Ltd, no other formula other than Hudson formula has been considered in the arbitral award. In the present case the arbitrator proceeded on the basis that it was only Hudson formula which was to be applied and that even though no direct evidence had been adduced on behalf of the appellant, nonetheless the appellant would be entitled to damages measured with reference to the aforesaid formula. This approach of the arbitrator is manifestly in the teeth of the law laid down by the Supreme Court in McDermott international. Section 28 (1) (a) requires that the arbitral tribunals shall decide a dispute submitted to arbitration in accordance with the substantive law for the time being in force in India. Section 28 (3) requires the arbitral tribunal to decide in accordance with the terms of the ARBT no.84/17 DDA Vs. Pt. Munshi Ram Associates Pvt. Ltd.
Page 20 of 20
contract and take into account the usages of the trade applicable to the transaction. The arbitral terminal under section 28 (2) can act as amiable compositeur and can decide ex aequo et Bono only if parties have expressly authorized it to do so. Thus the Hon'ble High Court of Bombay upheld the decision of learned single judge.
24. Thus the impugned award having been passed in absence of any evidence by relying on Hudson's Formula and in violation of section 28 (1) (a) and section 28 (3) of Arbitration and Conciliation Act is liable to be set aside in view of aforesaid observations and the cited case law.
25. Vide Award dated 20.10.2017 claim no.9 of respondent was allowed, whereas claim no.8, 10 & 11 were disallowed. The award dated 20.10.2010 is set aside to that extent while the remaining part of award in relation to claim no.8, 10 & 11 is affirmed. The present petition is disposed of in these terms. File be consigned to record room.
(Announced in open
Court on 16.10.2017) (Dr. Neera Bharihoke)
ADJ01, South District
Saket Courts, New Delhi
ARBT no.84/17
DDA
Vs.
Pt. Munshi Ram Associates Pvt. Ltd.