Application Of Hudson's Formula For Computation Of Loss In Construction Contract, Not Unreasonable: Bombay High Court

The bench of Justice Manish Pitale observed that the majority opinion in the arbitral award, while computing the compensation to be awarded to the claimant for the loss suffered by it, had referred to the Hudson's formula. Referring to the Supreme Court's decision in McDermott International Inc. versus Burn Standard Co. Ltd. & Ors. (2006), the High Court held that Hudson's formula is widely accepted in construction contracts for computation of losses. Thus, the award passed by the majority members of the Arbitral Tribunal could not be said to be unreasonable so as to warrant interference under Section 34.

The Court reiterated that to exercise jurisdiction under Section 34, the violation of public policy must be so unfair and unreasonable that it shocks the conscience of the Court. It further noted that what would constitute 'public policy', would depend upon the nature of transaction between the parties.

The respondent- Bharat Constructions, submitted a bid to the petitioner/Public Works Department (PWD) for the execution of a project, which was accepted. Thereafter, a work order was issued in favour of the respondent and an agreement was executed between the parties.

Subsequently, certain disputes arose between the parties under the agreement, relating to the amounts due and payable to the respondent, which was referred for arbitration. The majority arbitrators partly upheld the claim of the respondent seeking compensation for the loss incurred due to delay in completion of work. However, a minority member of the Tribunal passed a dissenting award in favour of the petitioner.

The petitioner filed an application under Section 34 of the A&C Act before the Bombay High Court, challenging the arbitral award.

The petitioner State of Maharashtra submitted before the High Court that the majority members of the Arbitral Tribunal had erred in partly allowing the said claim of the respondent. It argued that the respondent had failed to place on record material before the Arbitral Tribunal in support of the specific amount of compensation claimed by it. It added that for the same reason, the minority award had rejected the claim of the respondent.

The State contended that while considering a petition under Section 34 of the A&C Act, the Court is not precluded from considering the dissenting opinion of the minority members of the Arbitral Tribunal.

Referring to the majority award, the respondent Bharat Constructions submitted that the arbitrators had applied a reasonable formula for calculating the amount of compensation payable to the respondent, which must not be interfered by the Court under Section 34.

The Court ruled that while deciding the petition under Section 34 of the A&C Act, the Court is not precluded from considering the findings and conclusions contained in the dissenting opinion of a minority member of the Arbitral Tribunal. Thus, it added that the Court can consider accepting the dissenting opinion in the arbitral award.

The Court reiterated that there is a limited scope of interference available to the Court under Section 34, to consider the correctness of an arbitral award.

Referring to the decision of the Apex Court in McDermott International Inc. versus Burn Standard Co. Ltd. & Ors. (2006), the Court observed that interference of an arbitral award on the ground of 'patent illegality' is permissible only if it goes to the root of the matter. Further, violation of public policy must be so unfair and unreasonable that it shocks the conscience of the Court. Also, it noted that what would constitute 'public policy', would depend upon the nature of transaction between the parties.

The High Court noted that after considering the material placed on record by the parties, the majority opinion in the arbitral award opined that the delay in completion of the work was not attributable to the respondent. Further, the majority opinion referred to the Hudson's formula for calculating the compensation to be awarded to the respondent for the loss incurred by it due to delay in completion of work.

The bench took into account that the minority opinion had rejected the respondent's claim on the ground that it had failed to lead detailed evidence with respect to the actual loss suffered by it.

Referring to the Supreme Court's decision in McDermott International Inc. (2006), the High Court ruled that Hudson's formula is widely accepted in construction contracts for computing losses. Thus, the High Court concluded that the said formula applied by the majority opinion in the arbitral award was reasonable in the facts and circumstances of the case. It held that the manner in which the evidence and material on record was appreciated by the majority opinion, could not be said to be unreasonable so as to warrant interference under Section 34.

While holding that the arbitrator is the sole Judge of the quantity and quality of evidence led before it, the Court dismissed the petition.

Case Title: The State of Maharashtra & Ors. versus Bharat Constructions

Dated: 06.12.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Kedar Dighe, AGP

Counsel for the Respondent: Mr. M. P. Vashi, Senior Counsel a/w. Ms. Prachi Khandge, i/by. M. P. Vashi & Associates

Citation: 2022 LiveLaw (Bom) 489

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