Whether the Division Bench of the High Court was justified in allowing the appeal filed by the respondents u/s. 37 of the Arbitration and Conciliation Act, 1996, and thereby setting aside the arbitral award. Arbitration and Conciliation Act, 1996 – s. 37 – Arbitral award – Interference with – Award of turnkey contract to the appellant by the respondents for a contract value to be completed within stipulated period – Delay in project completion which was extended, and thereafter the appellant abandoned the work, only 80% of the work was completed – Matter proceeded for arbitration – Arbitral award dismissed the respondent’s claim for liquidated damages on the ground that the delay was caused by respondent’s omissions and commissions and its other claim also rejected since they related to future works – Appeal thereagainst allowed by the Division Bench setting aside the arbitral award – Justification of:

[2023] 12 S.C.R. 441 : 2023 INSC 850

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED

v.

HINDUSTAN PETROLEUM CORPORATION LIMITED AND

ANOTHER

(Civil Appeal No. 1968 of 2012)

SEPTEMBER 21, 2023

[SANJIV KHANNA AND M.M. SUNDRESH, JJ.]

Issue for consideration: Whether the Division Bench of the High

Court was justified in allowing the appeal filed by the respondents

u/s. 37 of the Arbitration and Conciliation Act, 1996, and thereby

setting aside the arbitral award.

Arbitration and Conciliation Act, 1996 – s. 37 – Arbitral award –

Interference with – Award of turnkey contract to the appellant

by the respondents for a contract value to be completed within

stipulated period – Delay in project completion which was

extended, and thereafter the appellant abandoned the work,

only 80% of the work was completed – Matter proceeded

for arbitration – Arbitral award dismissed the respondent’s

claim for liquidated damages on the ground that the delay

was caused by respondent’s omissions and commissions

and its other claim also rejected since they related to future

works – Appeal thereagainst allowed by the Division Bench

setting aside the arbitral award – Justification of:

Held: Computation depends upon attendant facts and circumstances

and methods to compute damages – Determination of the quantum

is a matter which would fall within the domain and decision of the

arbitrator – 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 – Computation of damages should

not be disingenuous – Damages should commensurate with the

loss sustained – Arbitral tribunal gave a complete go by to the

principles well in place, overlooked care and caution required and

took a one-sided view, grossly and abnormally inflated the damages

– 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 appellant, and ignore the contradictions in findings, the amount

* Author

442 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

awarded is highly disproportionate and exorbitant – Patent flaws

and illegalities emanate from the award, 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 – Thus, the award rightly

held to be unsustainable and set aside by the Division Bench of

the High Court exercising power and jurisdiction u/s. 37 rw s. 34.

[Paras 15, 16, 27 and 45]

s. 34 – Post award interference – Scope and ambit of court’s

power:

Held: 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 – 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. [Paras 31and 32]

Contract – Computation of damages – Method for – Usage of

formulae such as Hudson’s, Emden’s, or Eichleay’s formulae

to ascertain the loss of overheads and profits:

Held: Three formulae deal with theoretical mathematical equations,

but are based on factual assumptions, and thus, can produce

three different and unrelated compensation/damages – Thus,

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 – 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. s. 34 – Public

policy test to an arbitral award - Expression ‘public policy’ u/s. 34

– Interpretation of – Elucidated. [Para 21, 25, and 38]

McDermott International Inc. v. Burn Standard Company

Limited and Others (2006) 11 SCC 181:[2006] 2 Suppl. 

[2023] 12 S.C.R. 443

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

SCR 409; Associate Builders v. Delhi Development

Authority (2015) 3 SCC 49:[2014] 13 SCR 895; A.T Brij

Paul Singh and Others v. State of Gujarat (1984) 4 SCC

59; Vidya Drolia and Others v. Durga Trading Corporation

and Others, (2021) 2 SCC 1:[2020] 11 SCR 1001;

ONGC Limited. v. Saw Pipes Limited. (2003) 5 SCC

705:[2003] 3 SCR 691; Hindustan Zinc Ltd. v. Friends

Coal Carbonisation (2006) 4 SCC 445; Centrotrade

Minerals and Metals Inc. v. Hindustan Copper Limited

(2006) 11 SCC 245; Delhi Development Authority v.

R.S. Sharma and Co (2008) 13 SCC 80:[2008] 12

SCR 785; J.G. Engineers (P) Ltd. v. Union of India and

Another (2011) 5 SCC 758:[2011] 8 SCR 486; Union

of India v. L.S.N. Murthy (2012) 1 SCC 718:[2011] 13

SCR 295; Renusagar Power Co. Limited v. General

Electric Co 1994 Supp (1) SCC 644:[1993] 3 Suppl.

SCR 22; Rashtriya Ispat Nigam Ltd. v. Dewan Chand

Ram Saran (2012) 5 SCC 306:[2012] 4 SCR 1; ONGC

Ltd. v. Western Geco International Ltd., (2014) 9 SCC

263:[2014] 12 SCR 1; Excise and Taxation Officercum-Assessing Authority v. Gopi Nath & Sons 1992

Supp (2) SCC 312; Kuldeep Singh v. Commissioner

of Police (1999) 2 SCC 10:[1998] 3 Suppl. SCR 594;

MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163:[2019] 3

SCR 1023; Ssangyong Engg. & Construction Co. Ltd.

v. National Highways Authority of India (2019) 15 SCC

131:[2019] 7 SCR 522 – referred to.

Robinson v. Harman (1848) 1 Ex 850 at 855; Livingstone

v. Rawyards Coal Co (1879-80) L.R. 5880 cases

25; Peak Construction (Liverpool) Ltd v. McKinney

Foundations Limited (1970) 1 BLR 114; Whittal Builders

v. Chesterle-Street District Council (1987) 40 BLR 82;

JF Finnegan Ltd v. Sheffield City Council (1988) 43

BLR 124; Ellis- Don v. Parking Authority of Toronto

(1978) 28 BLR 98; Property and Land Contractors

Ltd v. Alfred McAlpine Homes North Ltd. (1995) 76

BLR 59; Associated Provincial Picture Houses Ltd. v.

Wednesbury Corporation., (1948) 1 KB 223: (1947) 2

All ER 680 (CA); Eichleay Corporation case, ASBCA

No. 5183, 60-2 BCA – referred to.

444 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

CIVIL APPELLATE JURISDICTION : Civil Appeal No.1968 of 2012.

From the Judgment and Order dated 02.11.2007 of the High Court of

Judicature at Bombay in AN No.227 of 2001 in AP No.280 of 1999.

Shyam Divan, Sr. Adv., Amar Dave, Mahesh Agarwal, Ankur Saigal,

Aadil Parsurampuria, Ms. S. Lakshmi Iyer, Ms. Tanvi Manchanda,

Nishant Rao, E. C. Agrawala, Advs. for the Appellant.

N. Venkataraman, A.S.G., Sanjay Kapur, Ms. Megha Karnwal, Surya

Prakash, Arjun Bhatia, Ms. Akshata Joshi, Advs. for the Respondents.

The Judgment of the Court was delivered by

SANJIV KHANNA, J.

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.

1 For short, BEEL.

2 Appeal No. 227 of 2001 in Arbitration Petition No. 280 of 1999.

3 For short, HPCL.

4 For short, A&C Act. 

[2023] 12 S.C.R. 445

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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 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 

446 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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 months for internal administrative process of the OwnerRespondents 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 

[2023] 12 S.C.R. 447

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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:

(i) Transportation of excavated earth Rs.12,05,000.00

(ii) Dewatering charges incurred during

delayed period

Rs.5,62,570.00

(iii) Shifting charges for material Rs.1,01,405.00

(iv) Shifting charges for Filter media Rs.31,250.00

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:

448 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

Item No.I Rs.1,20,000.00 towards transportation of excavated

earth dumped by other contractors in the work site,

prior to award of contract but after submission of the

offer.

Item No.II Nil amount

Item No. III Rs.50,000.00 towards shifting of materials manually

because of non-availability of approach to site for

vehicle.

Item No.IV Rs.25,000.00 towards charges for shifting the Filter

Media Several times for paucity of space.

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 

[2023] 12 S.C.R. 449

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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 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

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.

450 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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 

[2023] 12 S.C.R. 451

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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.

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

Company Limited and Others.6

, and Associate Builders v. Delhi

Development Authority7

, in addition to an earlier decision of this

Court in A.T Brij Paul Singh and Others v. State of Gujarat8

, and

a few judgments of the High Courts.

14. 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

102. [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. [(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.

6 (2006) 11 SCC 181 (for short, McDermott International Inc.).

7 (2015) 3 SCC 49 (for short, Associate Builders).

8 (1984) 4 SCC 59.

452 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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. [(1967) 1 QB 278 : (1966) 3 All ER 683 : (1966)

3 WLR 706 (CA)] , All ER p. 690 G.)

103.  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:

“Contract head office overhead

and profit percentage

× Contract sum

Contract period

× P e r i o d o f

delay”

In the Hudson Formula, the head office overhead percentage is taken

from the contract. Although the Hudson Formula has received judicial

support in many 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:

“Head office overhead and profit × Contract sum × P e r i o d o f

delay”

100 Contract period

[2023] 12 S.C.R. 453

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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, (2001) CILL

1727] and Harvey Shopfitters Ltd. v. Adi Ltd. [ Decided on 6-3-2003,

(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:

Step 1

Contract billings × Total overhead for

contract period

= Overhead allocable

to the contract

Total billings for contract

period

Step 2

Allocable overhead = Daily overhead rate

Total days of contract

Step 3

Daily contract

overhead rate

× Number of days

of delay

= Amount of

u n a b s o r b e d

overhead”

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 

454 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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 Eichleay Formula is regarded by

the Federal Circuit Courts of America as the exclusive means for

compensating a contractor for overhead expenses.

105. 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 [ 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.

107. 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 559

 and 7310 of

9 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.

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.

10 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 

[2023] 12 S.C.R. 455

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

the Indian Contract Act, 187211, 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.

16. 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.12

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.

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.

11 For short, Contract Act.

12 See - Robinson v. Harman (1848) 1 Ex 850 at 855 and Livingstone v. Rawyards Coal Co (1879-80)

L.R. 5880 cases 25

456 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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

court. The chart is as under:

Sr.

No.

Particulars Amount (Rs.) Explanation

1. Contract Sum 5,74,35,213.00 Total Contract Value

2. Overheads (10%) and

profits (10%) included in

the above sum

1,14,87,042.00 20% of Rs.5,74,35,213.00

(1) i.e. contract value

3. Time limit for completion of

the work

22 Months Though the contract was

for 18 Months, Petitioner

estimated that the site would

have to be maintained for

22 Months i.e. 4 months

over and above contract

term.

4. Overheads and Profits

per month [(2) divided

by (3)]

5 , 2 2 , 1 3 8 . 2 7

Per month

Total Overheads and

Profits divided by months

of work (22 Months)

5. Value of work done till

R.A. Bill No.4 dated

31.08.1993

1,21,95,859.68 Contract period was up to

31.08.1993 i.e. 18 months

from 22 February 1992

6. Pro-rata overheads

and profits received till

31.08.1993

24,39,171.00 20% of (5). Since the

Petitioner received payment

of bill at (5), the overheads

and profits for the work

done covered by bill at (5)

have been deducted by the

Arbitrator in (7).

[2023] 12 S.C.R. 457

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

Sr.

No.

Particulars Amount (Rs.) Explanation

7. Net loss suffered as on

01.09.1993 [(2) – (6)]

90,47,871.00 As above, for 22 months

of work, the Petitioner was

to get Rs. 1,14,87,042.00/-

(2) towards overheads and

profits. However, out of

this, the Petitioner received

Rs. 24,39,171.00/- (6), the

same has been deducted.

Rs.90,47,871.00/- is the

outstanding receivable

by the Petitioner towards

overheads and profits for

the contract period.

8. Delay in months 24 months Total time spent was 49

Months (Pg.56 of SLP) (22

February 1992 to 31 March

1996).

Out of this, since 22 months

were contemplated by the

Petitioner for the work, the

same have been deducted

from 49 months by the

Arbitrator. (Pg.56 of SLP).

A further period of 3 months

on account of Force Majeure

has been deducted by the

Arbitrator.

Thus 49 – 22 – 3 = 24

Months extra work. (Pg.56

of SLP).

458 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

Sr.

No.

Particulars Amount (Rs.) Explanation

9. Overheads and profit

expected during the

extra period [(8) * (4)]

1,25,31,318.48 This is the amount for the

extra time spent i.e. 24

Months.

244 Months multiplied by

per month overhead and

profit.

24 * Rs.5,22,138.27 =

Rs. 1,25,31,318.48

10. Value of work executed

during the extended

period upto 30.03.1996

(R.A. Bill No.37)

2,92,07,619.13 This is the amount received

for the work done during

extended period i.e. August

1993 to March 1996.

11. Pro-rata overheads and

profits received during

the extended period.

58,41,523.80 This is 20% of 2,92,07,619.13

(10).

Since the petitioner received

payment of bill at (10), the

overheads and profits for the

work done covered by bill at

(10), have been deducted by

the Arbitrator in (11)

12. Net loss suffered till

27.08.1997 [(9) – (11)]

66,89,791.68 This is loss of overhead

and profits for the extra

period of 24 Months.

As stated in (9), overheads

and profits for extra

time of 24 months was

Rs.1,25,31,318.48.

Since, the Petitioner received

a sum of Rs.58,41,523.80

(11), the same has been

deducted by the Arbitrator.

[2023] 12 S.C.R. 459

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

Sr.

No.

Particulars Amount (Rs.) Explanation

13. Total loss on overheads

and profit on this count

till 27.08.1997 [(7) –

(12)]

1,57,37,665.68 This amount is the sum of

overhead and profits due

during contract period plus

the overhead and profits

for the extra period of 24

Months.

Awarded by the Arbitrator

(Pg.56 of SLP)

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

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.13

13 In this case, as noticed, the contract bars claims for compensation for losses due to enhancement/es-

460 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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.

20. 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

calation 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. 

[2023] 12 S.C.R. 461

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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.14 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.

21. The usage of formulae such as Hudson’s, Emden’s, or Eichleay’s

formulae to ascertain the loss of overheads and profits has been

judicially approved in the English cases of Peak Construction

(Liverpool) Ltd v. McKinney Foundations Limited15, Whittal

Builders v. Chesterle-Street District Council16, and JF Finnegan

Ltd v. Sheffield City Council17 and in the Canadian case of EllisDon v. Parking Authority of Toronto18. The three formulae deal

with theoretical mathematical equations, but are based on factual

assumptions, and therefore can produce three different and unrelated

compensation/damages. Therefore, while applying a particular

equation or method, the assumptions should be examined, and

the satisfaction of the assumption(s) ascertained in the facts and

circumstances.

22. 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

14 See Hudson’s Building Contracts (10th edn) pp 450, 596.

15 (1970) 1 BLR 114.

16 (1987) 40 BLR 82.

17 (1988) 43 BLR 124.

18 (1978) 28 BLR 98. 

462 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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.19 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

19 (1995) 76 BLR 59.

[2023] 12 S.C.R. 463

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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

1960s20, is far more nuanced and rigorous, 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’21.

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.22

20 The formula borrows the name from the Armed Services Board of Contract Appeals decision in

Eichleay Corporation case, ASBCA No. 5183, 60-2 BCA.

21 Ibid.

22 Claims for head office overheads - alternatives to formulae, John W. Pettet, 1999.

464 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

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.

28. The arbitral tribunal has accepted that principle of mitigation is

applicable but observes that the only way BEEL could have abased 

[2023] 12 S.C.R. 465

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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.

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 ipsi 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.

31. 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.23 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

23 See Vidya Drolia and Others v. Durga Trading Corporation and Others, (2021) 2 SCC 1, which

examines arbitrability and non-arbitrability of subject matters and claims, which aspect will not be examined

in this case. 

466 [2023] 12 S.C.R.

SUPREME COURT REPORT: DIGITAL

to have its claim or dispute adjudicated by the judiciary. The process

is informal, and need not be legalistic24. 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.

32. 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 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

24 The expression “judicially”, does not equate arbitration with formal/court proceedings, and would

include a just and fair decision.

[2023] 12 S.C.R. 467

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

(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.

468 [2023] 12 S.C.R.

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(4) On receipt of an application under sub-section (1), the court may,

where it 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 subsections (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 

[2023] 12 S.C.R. 469

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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.25 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 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

25 Explanations 1 and 2 to sub-clause (ii) to clause (b) to Section 34(2) of the A&C Act 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.

470 [2023] 12 S.C.R.

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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.,

26

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

26 (2003) 5 SCC 705 (for short, Saw Pipes Limited). 

[2023] 12 S.C.R. 471

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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 Carbonisation27, Centrotrade Minerals and

Metals Inc. v. Hindustan Copper Limited28, Delhi Development

Authority v. R.S. Sharma and Co29., J.G. Engineers (P) Ltd. v.

Union of India and Another30, and Union of India v. L.S.N. Murthy.31

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 Co32, as noticed above, an additional ground of

‘patent illegality’ was introduced Saw 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.

27 (2006) 4 SCC 445.

28 (2006) 11 SCC 245.

29 (2008) 13 SCC 80.

30 (2011) 5 SCC 758.

31 (2012) 1 SCC 718.

32 1994 Supp (1) SCC 644. 

472 [2023] 12 S.C.R.

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40. A similar view was expressed in Rashtriya Ispat Nigam Ltd. v.

Dewan Chand Ram Saran33 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.

41. Subsequently, in ONGC Ltd. v. Western Geco International Ltd.,34

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. Nonapplication of mind is a defect that is fatal to any adjudication.

Application of mind is best done by recording reasons in support

33 (2012) 5 SCC 306.

34 (2014) 9 SCC 263, (for short, Western Geco)

[2023] 12 S.C.R. 473

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

of the decision. As noticed above, Section 31(3)(a) of the A&C35

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 reasonableness36. 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 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 &

35 Supra footnote 5.

36 As expounded in the case of Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation., (1948) 1 KB 223: (1947) 2 All ER 680 (CA). 

474 [2023] 12 S.C.R.

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Sons37 and Kuldeep Singh v. Commissioner of Police38 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

37 1992 Supp (2) SCC 312, (for short, Gopi Nath & Sons).

38 (1999) 2 SCC 10. 

[2023] 12 S.C.R. 475

BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN

PETROLEUM CORPORATION LIMITED AND ANOTHER

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 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.,39 and Ssangyong Engg. & Construction Co.

Ltd. v. National Highways Authority of India40, 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.

39 (2019) 4 SCC 163 (for short, MMTC Ltd.).

40 (2019) 15 SCC 131(for short, Ssangyong Engg). 

476 [2023] 12 S.C.R.

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45. 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.

Headnotes prepared by: Nidhi Jain Result of the case : Appeal dismissed.