Introduction
The Supreme Court, in a recent judgment, set aside part of an arbitral award concerning idling of manpower and machinery, attributed to delays in completing the work beyond the stipulated period, which was passed without any evidence and solely relied upon Hudson's formula, deeming it in conflict with the public policy of India as contemplated under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.

Facts in a Nutshell
An arbitration was invoked by the contractor, M/s Unibros against All India Radio, in respect of certain disputes that had arisen concerning a civil works contract. Among various claims, there were claims for damages under Section 73 of the Indian Contract Act made on account of delay and resultant losses. These claims were attributable to the marked escalation in prices/rates for the work executed beyond the stipulated contractual period, substantial expenses associated with establishment machinery, centring, shuttering, and other vital aspects, and thirdly, on account of loss of profit and the undue claimant's protracted retention on the contract without any corresponding increase in monetary benefits earned. The arbitrator rejected the claims on account of escalation in prices and expenses associated with establishment machinery, etc. However, the claim for damages pertaining to loss of profit was allowed. Here, the arbitrator held that the loss of profit was worked out on a profit allowance of 7.5 percent per annum, which, according to the arbitrator, was reasonable in the said contract, applying the Hudson formula. Being aggrieved by this award, the respondent challenged the award in a petition under Section 34 of the Arbitration Act before the High Court. The High Court remitted the matter back to the arbitrator for reconsideration, instructing the arbitrator to pass a fresh award in respect of the claim without being influenced by prior factors and based on the evidence available on record. Thereafter, the arbitrator passed a fresh award, maintaining the award for loss of profit and interest in favour of the claimant. Being aggrieved by the fresh award passed by the arbitrator, the respondent/employer challenged the award before the High Court under Section 34 of the Arbitration Act. The High Court, in its order, allowed the petition under Section 34 and set aside the claim for loss of profit, which was awarded by the arbitrator. This judgement was challenged before the division bench of the high court under section 37 of the arbitration act which was dismissed by the division bench. It was this decision of the High Court that was challenged by the claimant before the Hon'ble Supreme Court.

Contentions of the Claimant
Before the Supreme Court, the claimant argued that the arbitrator's decision was fair and well-reasoned, based on thorough examination of the evidence. It was emphasized that the court has limited authority to interfere with an arbitrator's award, which, under Section 34 of the 1996 Act following the UNCITRAL Model Law, can only be set aside for specific reasons, not modified. The claimant referenced the Supreme Court's ruling in N/S Sattyapal Singh and Others vs. State of Gujarat to argue that a contractor is entitled to damages for lost profit, requiring only a general assessment of damages. Additionally, it was highlighted that Hudson's Formula is legally recognized and widely used to calculate loss of profit, with McDermott International Inc. vs. Burn Standard Co. Ltd. (2006) 11 SCC 181 cited to support this contention.

Contentions of the Respondent
On behalf of the respondent, it was argued that in the case at hand, as the claim was simpliciter for delay, Hudson's Formula would have no application to award the amount of loss of profit without the aggrieved party leading any evidence as a condition precedent for the application of the formula. The application of Hudson's Formula hinges upon essential conditions: firstly, the profit that the contractor must have been realistically attainable elsewhere had he been free to leave the contract at the appropriate time; secondly, the contractor should not have consistently underestimated his costs during pricing, ensuring that the profit percentage was genuinely viable at that point; thirdly, there should have been no significant changes in the market such that work of a comparable level of profitability would have been available to the contractor at the time of the conclusion of the contract. It was further submitted that to fulfil these conditions satisfactorily, coherent evidence is a sine qua non to ensure that the loss is not of a remote or imaginary nature. It was also urged on behalf of the state that no evidence was led by the claimant, far less any cogent evidence, to prove that there were scales of earning surprise elsewhere by way of any other contract that was available at the time, which it could not execute due to the prolongation of the contract. Only such awarding of loss of profit conflicts with the public policy of India under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.

Decision of the Supreme Court
While deciding the matter, the Supreme Court relied upon the decision in ONGC Ltd. vs. Saw Pipes Ltd. (2003) 5 SCC 705, which dealt with the interpretation of the term "public policy of India" used in Section 34 of the Arbitration Act. It was held that the term is required to be given a wide meaning and can be seen that the concept of public policy promotes a matter which concerns the public good and the public interest. What is for public or in public interest, or what would be injurious or harmful to the public good or public interest, has varied from time to time. However, an award which is, on the face of it, in patent violation of statutory provisions cannot be said to be in the public interest. Such an award is likely to adversely affect the administration of justice.

The Supreme Court held that subsequent decisions of the Supreme Court have interpreted "public policy of India" to include arbitrariness, non-compliance with the fundamental policy of Indian law, statutes, and judicial precedents, the need for a judicial approach, compliance with natural justice, manifest unreasonableness, and patent illegality. This was elucidated in the decision of Associated Builders (2015) 3 SCC 49.

The Supreme Court held that the second award was no better than the first award, for it was equally in conflict with the public policy of India. The Supreme Court had noted from the earlier order of the single judge of the High Court that, while remanding the matter back to the arbitrator for reconsideration, the arbitrator was warned not to be influenced by the factors that weighed in his mind while making the first award. The arbitrator was required to proceed only on the basis of evidence on record. Yet, regrettably, the arbitrator went on to ignore the judicial decision of the High Court with impunity. The arbitrator once again emphasized the delay caused by the respondent in the completion of the works entrusted to the claimant by not providing complete site and drawings within the stipulated contract period, and that non-handing over of the site certainly constituted a fundamental breach of contract, initiating the entire contract. He then referred to Hudson's exposition of fundamental breach of contract, which, according to him, was the standard text of all engineering and building contracts. It is, therefore, apparent that the factors which weighed in the arbitrator's mind in the first and second rounds are one and the same. To avoid any charge of being regarded as a mirror image of the first, the second award appears to have been expressed in language somewhat different from the earlier ones, without, however, there being any change in substance.

The Supreme Court further referred to the judgment of the Hon'ble Supreme Court in Bharat Coking Coal (2004) 5 SCC 109, where the Hon'ble Supreme Court had held that it is not unusual for contractors to claim loss of profit arising out of diminution of turnover on account of delay in the matter of completion of the work. What needs to be established in such a situation is that, had the contractor received the amount due under the contract, he should have utilized the same for some other business in which he could have earned profit. Unless such a basis is reasonably established, a claim for loss of profits could not have been granted. In this case, no such material was available on record. In the absence of any such evidence, the arbitrator could not have awarded the same.

The Supreme Court held that to support a claim for loss of profit arising from a contract delay or missed opportunities from other available contracts that the claimant could have earned elsewhere by undertaking, it becomes imperative for the claimant to substantiate the presence of a viable opportunity through compelling evidence. This evidence should convincingly demonstrate that, had the contract been executed promptly, the contractor could have secured supplementary profits utilizing its existing resources elsewhere. The Supreme Court further held that Hudson's Formula, while having attained acceptability and being well understood in the trade, does not, however, apply in a vacuum. Hudson's Formula, as well as other methods used to calculate claims for loss of off-site overheads and profit, do not directly measure the contractor's exact costs. Instead, they provide an estimate of the losses the contractor may have suffered. While these formulae are helpful, they can only support the contractor's claim for loss of profit if the contractor has shown, with evidence, the loss of profit and opportunities it suffered owing to the prolongation.

The Supreme Court therefore held that the arbitral award in question, was patently illegal in that it was based on no evidence and was, thus, outrightly perverse; therefore, again, it is in conflict with the "public policy of India" as contemplated by section 34(2)(b) of the Act.¹

By - Chaitanyaa Bhandarkar