Hudson is just a formula used to calculate the loss of profit but such claim ought to be proved

Issue - Whether a claim on account of loss of profit is liable to succeed merely on the ground that there has been delay in the execution of the construction contract, attributable to the Employer and the Hudson formula?

It has not been now settled that Hudson is just a formula used to calculate the loss of profit but such claim ought to be proved along with following other conditions laid down by this Judgment of Unis bros Vs All India Radio (Decided on 19th October 2023 by Dipankar Dutta J.,:

1. Existence of delays in the execution of project, which are not attributable to Contractor.

2. The status of Contractor in handling substantial projects.

3. There is credible evidence such as: -

a. other potential projects that the contractor had in the pipeline that could have been undertaken if not for the delays,

b. the total number of tendering opportunities that the contractor received and declined owing to the prolongation of the contract,

c. financial statements (drop in turn over),

d. or any clauses in the contract related to delays, extensions of time, and compensation for loss of profit.

Background:

1. The AT had awarded Loss of profit which was set aside by Single Judge in Section 34 petition and the matter was remitted back for re-consideration, on grounds that Loss of profit was granted only relying on the Hudson Formula and there was no evidence adduced to substantiate the claim of Loss of profit. It is pertinent to note that while remitting the matter back for re-consideration, the Single Judge had given the following findings:

25. …………I set aside the award given by the arbitrator against Claim No.12 and remit the same for re-consideration by the arbitrator and to pass a fresh award in respect of the said claim without being in any manner influenced by such factors and on the basis of the evidence available on record.

2. However, the Second Award also was passed on same lines ignoring that the Arbitrator was required to proceed on the basis of evidence on record. The Arbitrator has held that Respondent has failed to complete site and hand over drawings leading to delays and thus entitled for loss of profit and that it was reasonable to assume earning of expected profits. Thus, the Award was once again set aside as again the same was based merely on the Hudson formula and again there was no evidence adduced by Contractor to substantiate the claim. The Award was essentially set aside on grounds of lack of records regarding utilization of men, material, machinery, overheads and other resources in contract performance, that could have been used for other profitable contracts.

3. The Contractor filed appeal under section 37 which upheld the Single Bench Judgment on grounds that no evidence was provided to support LOP during work prolonged and findings of Arbitrator are contrary to Indian Contract Act.

4. Before we delve in to the findings and conclusion, let us glance through the submissions and arguments.

Contractor’s Arguments

State’s Arguments

AT is sole judge of quality and quantity of evidence. Court cannot act as appellate or revisional court in absence of any perversity.

[Relied on Associated Judgment]

No evidence was adduced to prove that it was capable of earning such price elsewhere by way of any other contract that was available to it at that time, which it could not execute due to prolongation of the contract.

Court cannot reappraise the matter and no interference is called for. However, in case Arbitrator exceeds in terms of the agreement or awards in absence of evidence, which is apparent on the face of it, award could be set aside.

[Relied on Bharat Cooking Judgment]

Award cannot be modified and can only be set aside.

[Relied on Hakeem Judgment]

Main claims of price escalation and compensation for the establishment, machinery, centring/shuttering, etc. was dismissed due to the absence of credible evidence by the Arbitrator but proceeded to grant damages for loss of profit.

Contractor is entitled to damages for loss of expected profit on remaining work and only a broad evaluation is required to assess the amount of damages, instead of going in to minute details.

[Relied on Brij Paul Singh and Ors ]

In the absence of cogent evidence substantiating a genuine loss of profit or opportunity, it would be unjustifiable to permit the contractor to capitalize solely on the application of a formula.

Hudson formula is legally recognised and accepted in all courts.

Number of men, material and machinery is not relevant to calculate loss of profit due to breach of contract, else Hudson formula would be rendered redundant.

[Relied on Mc Dermott]

Hudson’s formula will have no application to award any amount for loss of profit without the aggrieved party leading any evidence as a condition precedent to the application of the said formula.

The application of Hudson’s formula hinges upon three essential conditions: -

a. Firstly, the profit awarded to the contractor must have been realistically attainable elsewhere had it been free to leave the contract at the appropriate time.

b. Secondly, the contractor should not have consistently underestimated his costs during pricing, ensuring that the profit percentage was genuinely viable at that point; (There was no wrong/ under estimation of calculation of profit).

c. Thirdly, there should have been no subsequent 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. (No market change was there that resulted in a situation that no other projects or contracts would be available).

Findings:

1. In the wake of authority of judicial determination made by the Courts of law, any award of an arbitrator or a tribunal that seeks to overreach a binding judicial decision, in our opinion, does conflict with the fundamental public policy and cannot, therefore, sustain.

2. In Bharat Cooking Coal relied by Contractor, this Court reaffirmed the principle that a claim for such loss of profit will only be considered when supported by adequate evidence. It was observed:

“24. ... It is not unusual for the contractors to claim loss of profit arising out of diminution in turnover on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilised the same for some other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profits could not have been granted. In this case, no such material is available on record. In the absence of any evidence, the arbitrator could not have awarded the same.”

3. To support a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts that the appellant could have earned elsewhere by taking up any, 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 by utilizing its existing resources elsewhere.

4. The Nature of evidence would be other potential projects that the contractor had in the pipeline that could have been undertaken if not for the delays, the total number of tendering opportunities that the contractor received and declined owing to the prolongation of the contract, financial statements, or any clauses in the contract related to delays, extensions of time, and compensation for loss of profit. While this list is not exhaustive and may include any other piece of evidence that the court may find relevant, what is cut and dried is that in adjudging a claim towards loss of profits, the court may not make a guess in the dark; the credibility of the evidence, therefore, is the evidence of the credibility of such claim.

5. While these formulae are helpful when needed, they alone cannot prove the contractor's loss of profit. They are useful in assessing losses, but only if the contractor has shown with evidence the loss of profits and opportunities it suffered owing to the prolongation.

6. The law, as it should stand thus, is that for claims related to loss of profit, profitability or opportunities to succeed, one would be required to establish the following conditions: first, there was a delay in the completion of the contract; second, such delay is not attributable to the claimant; third, the claimant’s status as an established contractor, handling substantial projects; and fourth, credible evidence to substantiate the claim of loss of profitability. On perusal of the records, we are satisfied that the fourth condition, namely, the evidence to substantiate the claim of loss of profitability remains unfulfilled in the present case.

Conclusion in the Judgment:

20. The arbitral award in question, in our opinion, is patently illegal in that it is based on no evidence and is, 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.