India: The Hudson Formula For Calculating Overheads Upheld

In a recent development, the Hon'ble High Court of Bombay ("High Court") upheld the Hudson Formula for calculating overheads in construction contracts.¹

Facts

The arbitration proceeding was undertaken in light of the dispute pertaining to the project of construction of roads. As per the agreement, the respondent was required to complete the work in 30 months, starting from December 01, 1990. The work was delayed and the Petitioners extended the completion time. The disputes arose regarding the amounts due and payable to the Respondent for the work done during the extended time.

The Arbitral Tribunal ("Tribunal") passed the impugned award on March 29, 2002 wherein one arbitrator dissented while the majority (two) partly upheld the Respondent's claims. The Petitioners filed the petition under Section 34² of the Arbitration and Conciliation Act, 1996, ("the Act") to challenge the impugned award.

It is germane to note that the petition was admitted on November 18, 2002 where it was recorded that the challenge in the petition was limited to the majority award on claim no. 2 regarding compensation for losses incurred due to delay in completion of work.

Contentions of the Parties

The Petitioners contended that that the majority award erroneously allowed claim no. 2 as the Respondent was specifically informed in the tender notice that it shall be deemed to have full knowledge of the site, whether it was inspected or not, and no extra charges shall be allowed. The Respondent had raised claim no. 2, primarily on the ground that the delay occurred due to lack of clearances from State departments. It was submitted that having entered into the agreement as per the tender notice, it could not raise the present claim. Secondly, it was submitted that the Respondent had failed to place cogent material before the Tribunal.

The Petitioners emphasized that while considering a petition under Section 34 of the Act, the court was not precluded from considering the findings and conclusions of the dissenting opinion of the minority member of the Tribunal.³

The Respondent submitted that the court's jurisdiction under Section 34 of the Act for interfering with the arbitral award is narrow. The Respondent further contended that interference, even on the ground of 'patent illegality', is permissible only when the same goes to the root of the matter and only if the award appears to be so unfair and unreasonable that it would shock the conscience of the Court.⁴

It was further submitted that the majority members of the Tribunal had applied a reasonable formula for calculating the amount of compensation under claim no. 2 and that the same did not deserve interference from the Court.

Findings Of The High Court:

The High Court firstly noted that the extent of the controversy is limited to the correctness of the majority opinion to partly allow claim no. 2. The High Court proceeded on the established premise that under Section 34 of the said Act, a court is not precluded from considering the findings of the dissenting minority member of the Tribunal.

However, the High Court was mindful of the decision of the Supreme Court⁵ and was cognizant of the limited scope of interference available under Section 34 of the Act to consider the correctness of an arbitral award. The High Court concurred with the Supreme Court that the arbitrator is the ultimate master of the quantity and quality of evidence while drawing the arbitral award. The High Court further acknowledged that the court under Section 34 of the said Act, does not act as a Court of Appeal and the court must not re-appreciate the evidence.⁶

The High Court observed that upon appreciating the material on record, the majority members of the Tribunal found that the Petitioners placed no blame on the Respondent for delay in completion of the work and no fine was imposed on the Respondent. Instead, the Petitioners granted extensions. On this basis, it was found that delay in completion of the project was not attributable to the Respondent. The Respondent had also led evidence as regards the rate analysis for overheads that were suffered due to delay in completion of work.

The High Court further found that the majority opinion also took into consideration guidelines and recommendations concerning overheads prepared by the Ministry of Irrigation and Power, upon survey of various projects in the country and found that a particular formula could be applied. The majority members, referring and applying the Hudson Formula, found that the losses in connection with claim no. 2 would be certainly more than 10%, amounting to at least 15%. The majority members even explained the manner in which compensation towards such losses could be calculated. It was then held that after disallowing certain time periods, the Respondent could be compensated for loss on overheads at 15%. Thus, the Hudson Formula was applied and the figure was arrived at for partly allowing claim no. 2 in favour of the Respondent. It was also found that the Hudson Formula was widely accepted in construction contracts for computing increased overheads and losses and was also referred to by the Supreme Court as well.⁷

Conclusion:

The High Court, thus, opined that that the application of Hudson Formula by the majority members of the Tribunal was reasonable and hence, it could not be said that the Petitioners made out a case for interference under Section 34 of the Act. The High Court further asserted that applying the position of law that the arbitrator is the sole Judge of the quantity and quality of evidence before him, no interference was warranted. Therefore, dismissing the Petition, the High Court held that the Petitioners failed to make out a case for interference with the impugned award and found no merit in the petition.

It is pertinent to note that the Supreme Court, while examining the Hudson Formula, observed that "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. In Hudson's Building and Engineering Contracts, Hudson Formula is stated in the following terms:

Contract head office x Contract sum x Period of delay"⁸

overhead and profit Contract period

percentage

Footnotes

1. The State of Maharashtra and Anr. v. Bharat Constructions, Arbitration Petition No. 245 OF 2002, Bombay High Court.

2. Application for setting aside arbitral award.

3. Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd., 2021 SCC Online Sc 157.

4. McDermott International Inc. v. Burn Standard Co. Ltd. and others, (2006) 11 SCC 181.

5. Ibid.

6. Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49; and Madhya Pradesh Power Generation Company Limited and another v. Ansaldo Energia SPA and another, (2018) 16 SCC 661.

7. Ibid.

8. Id. at 4 (McDermott International (supra)).

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