AUTHOR: KAMALJEET KAUR, UNIVERSITY FIVE YEAR LAW COLLEGE, UNIVERSITY OF RAJASTHAN
ABSTRACT / HEADNOTE
This case of Batliboi Environmental Engineers Limited(BEEL)v. Hindustan Petroleum Corporation Limited and Another(HPCL) delves into a contractual dispute between the plaintiff (BEEL), and the defendants (HPCL) and Ar. This case revolves around the interpretation of some facts of a contract for some construction work that was entered by both the parties. Later on after some time, HPCL and Ar.was alleged by BEEL contending that it had breached the contract by failing to provide access to the construction site, as a consequence of delays and financial losses. Contrary to that, HPCL and Ar. alleged that BEEL’s claim was invalid due to its failure to fulfill certain conditions outlined in the contract signed by both the parties. The case analysis examines the contractual provisions, legal arguments and factual circumstances presented by both parties. Ultimately, the court’s ruling sheds light on the principles of contract interpretation, emphasizing the significance of clear and unambiguous contractual language. The analysis of case highlights the importance of precisely contract drafting and adherence to contractual obligations to avoid disputes and mitigate risks in commercial transactions undertaking the acts of Arbitration and Conciliation and contract act.
Keywords (Minimum 5): Contract, Arbitration & Conciliation, Batliboi Environmental Engineers Ltd., Hindustan Petroleum Corpn. Ltd., environmental legal dispute
CASE DETAILS
| Judgement Cause Title | Batliboi Environmental Engineers Ltd. vs Hindustan Petroleum Corp.Ltd. And Anr. |
| Case Number | Civil Appeal No. 1968 of 2012 |
| Judgement Date | 21ST September,2023 |
| Court | Supreme Court Of India |
| Quorum | Justices M.M. Sundresh and Sanjiv Khanna |
| Author | M.M. Sundresh |
| Citation | 2023INSC850 |
| Legal Provisions Involved | Indian Contract Act 1872, Special Relief Act 1963, Indian Evidence Act 1872 |
INTRODUCTION
The case of Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd. is a significant legal dispute in the that revolves around contractual obligations, arbitration & conciliation and the interpretation of clauses in a commercial agreement. BEEL, a reputable engineering firm specializing in environmental solutions, entered into a contract with HPCL, a prominent oil and gas corporation for the purpose of providing certain services and equipment related to environmental compliance and pollution control at Hindustan Petroleum’s manufacturing facilities which it failed to fulfill its obligations as a consequence resulted in loss and financial setbacks. After going through arbitration, Both parties approached the court seeking resolution. The legal battle is of divergent interpretations of contractual clauses, particularly those pertaining to indemnity provisions and the scope of responsibilities regarding environmental compliance As now a days environmental consciousness becomes increasingly central to business operations, this case serves as a poignant reminder of the importance of clarity in contractual agreements and the need for meticulous adherence to environmental standards.
BACKGROUND OF JUDGEMENT
Batliboi Environmental Engineers Ltd., (BEEL) a engineering firm named for environmental solutions, signed a contract with Hindustan Petroleum Corpn. Ltd., (HPCL) a major player in the oil and gas industry in india. The contract was to supply Batliboi’s services and equipment related to environmental compliance and pollution control at HPCL to facilitate manufacturing. Unfortunately, after some time issues emerged during the course of the contract’s execution, resulted in breakdown of the relationship between the two parties. HPCL claimed that BEEL for not fulfilling its contractual obligations due to which Hindustan Petroleum suffered financial losses and operational setbacks.
On the other hand, Batliboi denied the argument for not fulfilling the contractual obligations and argued that issues that arose were due to Hindustan Petroleum’s failure to provide necessary cooperation, maintain appropriate working conditions, or comply with the agreed-upon terms.
Both parties approached the judiciary to solve dispute . The court diligently examined the the contract, corss examined the evidences, actions and conduct of both parties. The judgment established important legal principles that would guide the courts in future contractual disputes and serve as a precedent in shaping the understanding and application of contract law in subsequent cases. It will also provide clarity on matters such as contractual interpretation, liability and performance standards.
FACTS OF THE CASE
1. Batliboi Environmental Engineers Ltd., an engineering firm specializing in environmental solutions, signed a contract with Hindustan Petroleum Corpn. Ltd., a prominent oil and gas corporation on 27.02.1992 for the purpose engineering civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity sewage water reclamation plant in mehul refinery area. The contract signed valued Rs. 574.35 lakhs and for a period of 18 months from the date of intent that was 28.08.1993
2. There was delay in completion and the time for completion was extended two times on the request of BEEL on account of that three revisions were also issued by the HPCL, last of that was dated 20.09.1994 that extended completion for 10 months.
3. BEEL worked till 30.03.1996 which was 80% of the total work done and after that abandoned the work.
4. HPCL’s General Manager of Mahul Refinery appointed Mr. K. Narayan as the sole arbitrator to adjudicate upon the dispute. First claim was filed by BEEL and later on by HPCL. Between the period of 12.03.1998 and 07.01.1998 a total of 14 hearings were held.
5. A site inspection was also conducted on 24.12.1997 and other oral arguments were addressed throughout the period. The arbitral award dated 23.02.1999 allowed overhead and profit loss of 1,57,37,666.00, compensation for idle equipment and machinery Rs. 84,59,615.00, compensation for extra work Rs. 19,00,225.00 which were claim Nos. 1,2,3 of claimants.
6. The court was tasked with interpreting the relevant contractual clauses, assessing the performance of both parties, and determining the rights and liabilities of each side. The former award dismissed on the counter claim on the ground that the delay caused by the omissions and commissions of HPCL and not taking timely actions in removal of various impediments and obstacles stood in way of completing the project Claims were denied on the ground that it relate to future work not fall within the ambit of arbitration.
7. HPCL preferred an arbitration petition challenging the Award before the High Court of Judicature at Bombay, which was dismissed by the Ld. Single Judge. Thereafter, HPCL filed an appeal and in departure from the findings of Ld. Single Judge, the Arbitral Award was set aside by the Division Bench of the Hon’ble High Court exercising power under Section 37 read with Section 34 of the Arbitration and Conciliation Act.
8. Thereafter, HPCL filed an appeal and in departure from the findings of Ld. Single Judge, the Arbitral Award was set aside by the Division Bench of the Hon’ble High Court exercising power under Section 37 read with Section 34 of the Arbitration and Conciliation Act
9. The SC judgement in ‘Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Another’ upholds the decision in of the Division Bench and dismisses the civil appeal filed by BEEL.
10. The decision helpwd in shaping the understanding and application of contract law in subsequent cases and served as a precedent judgement providing clarity on contractual disputes in the field of environmental solutions and pollution control.
LEGAL ISSUES RAISED
- Whether BEEL breached its contractual obligation to HPCL
- Whether the interpretation of clauses by the courts required to determine either party deviated from the contractual duties.
- Whether the BEEL be held liable for any financial losses or setbacks experienced by HPCL.
- Whether the BEEL met the quality and standaerd of equipments and services as of the conract.
- Whether the compliance of the contract was done fully by both the parties.
PETITIONER/ APPELLANT’S ARGUMENTS
The counsels for Petitioner / Appellant submitted that HPCL breached the contract by delaying approval and decision, not adhering upon agreed timelines, not providing necessary resources, not providing payment in stipulated time frame causing financial strain and also argued the court to consider only strict obligations and not the expectations. It also stressed on the emden formula widely used by American courts.
RESPONDENT’S ARGUMENTS
The counsels for Respondent submitted that foundation of arbitration is party autonomy, parties are free to settle their disputes by an arbitral award whose decision is binding on the parties and purpose of arbitration is fast and quick therefore post award interference by the court is un warranted and an anathema that undermine fundamental edifice of arbitration hence this process is informal and unlegastic.
RELATED LEGAL PROVISIONS
- Section 31(3)(a) of Arbitration and Conciliation Act, 1996:“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.”
- Section 34(2) in The Arbitration And Conciliation Act, 1996: An arbitral award may be set aside by the Court only if
- (a)the party making the application establishes on the basis of the record of the arbitral tribunal that:
- a party was under some incapacity; or
- 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
- 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
- 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
- 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
- the Court finds that
- the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
- the arbitral award is in conflict with the public policy of India.[Explanation 1. [Substituted by [1]Act No. 3 of 2016 dated 31.12.2015.] – For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-
- the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
- it is in contravention with the fundamental policy of Indian law; or
- it is in conflict with the most basic notions of morality or justice.
- (a)the party making the application establishes on the basis of the record of the arbitral tribunal that:
- Section 55 of Indian Contract Act,1872: “ Effect of failure to perform at a 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. “
- Section 73 of Indian Contract Act,1872: “ 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 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”
- Section 75 of The Arbitration And Conciliation Act, 1996[2]: “Confidentiality.– Notwithstanding anything contained in any other law for the time being in force, the conciliator and the parties shall keep confidential all matters relating to the conciliation proceedings. Confidentiality shall extend also to the settlement agreement, except where its disclosure is necessary for purposes of implementation and enforcement.”
- Section 81 of The Arbitration And Conciliation Act, 1996: “ Admissibility of evidence in other proceedings. The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the subject of the conciliation proceedings,(a)views expressed or suggestions made by the other party in respect of a possible settlement of the dispute;(b)admissions made by the other party in the course of the conciliation proceedings;(c)proposals made by the conciliator;(d)the fact that the other party had indicated his willingness to accept a proposal for settlement made by the conciliator.”
- Section 34(2) in The Arbitration And Conciliation Act, 1996: An arbitral award may be set aside by the Court only if
JUDGEMENT
The Hon’ble Supreme Court in the case of Batliboi Environmental Engineers Ltd. vs Hindustan Petroleum Corp.Ltd. And Anr. has extensively analysed the findings in the Award and inter alia discussed the principles and formulae for computing a claim for increased overheads and loss of profit in a works contract as done by substantial courts and emphasized on the need for giving reasoning and justification for the amount of damages awarded by the Arbitral Tribunal and upheld setting aside of the Award for the lack thereof.
Hon’ble Justices on account of calculation done by arbitration stated-
“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 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 profi t, that there was profi t capable of being earned elsewhere and there was no change in the market thereafter aff ecting profi tability 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 19 (1995) 76 BLR 59. BATLIBOI ENVIRONMENTAL ENGINEERS LTD v. HINDUSTAN PETROLEUM CORP. LTD. [SANJIV KHANNA, J.] 464 SUPREME COURT REPORTS [2023] 12 S.C.R. such formulae are likely only to be of value if the event causing delay is (or has the characteristics of) a breach of contract.”
The Supreme Court has noted that the loss towards overheads and profits/profitability is to be computed on the payments due for the un-executed work, and should exclude [3]the payments received/receivable for the work that has already been executed. Delay in payment on execution of the work has to be compensated separately. It also opined that computation should not be whimsical, disingenuous and absurd resulting in a windfall and bounty for one party at the expense of the other.
The Hon’ble Apex Court has held that even to ascertain the loss of overheads and profits if formulae such as the Hudson’s, Emden’s, or Eichleay’s formulae are applied, the factual assumptions should be examined while applying a particular equation or method and laid down a more stringent criteria for determination of the quantum of damages by the arbitral tribunal for such claims of loss of profit.
Hon’ble Supreme Court has analysed the Hudson’s formula which is widely used for computation of such claims and observed that Hudson’s 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 thirdly, 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.
The Court also noted that the Eichleay’s Formula is more precise and accurate in calculating loss of profits since it requires the contractor to itemise and quantify the total fixed overheads during the contract period. It takes into consideration all the contracts during the delay period to determine the proportionate fraction of the total fixed overheads.
CONCLUSION & COMMENTS
The case of Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Ar. marks as an important judgement for fair and just computation of damages in arbitration disputes. The court focused that the computation of damages should not be whimsical, disappropriate or disingenuous, but rather commensurate with the loss sustained. The High Court set aside the arbitral award due to disproportionate damages awarded without any basis.
Further, the case underscores the significance of due process and procedural fairness in arbitral proceedings. Arbitration is a private form of dispute resolution constituted by the statute, the court has the power under the arbitration and conciliation act to intervene if the outcome is unfair, arbitrary, or perverse. The court emphasized that the conduct of arbitral proceedings should be of the juristic requirements
The Hon’ble Supreme Court discusses the usage of formulae to compute damages in contractual disputes. This case highlights the need for careful examination of factual assumptions and adherence to fair and just computation principles when applying formulae such as Hudson’s, Emden’s, or Eichleay’s formulae for the substantial courts.
REFERENCES
Important Cases Referred
McDermott International Inc. v. Burn Standard Company Limited and Others (2006) 11 SCC 181
Associate Builders v. Delhi Development Authority (2015) 3 SCC 49:
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
ONGC Limited. v. Saw Pipes Limited. (2003) 5 SCC 705
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
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 Offi cer-cum-Assessing Authority v. Gopi Nath & Sons 1992 Supp (2) SCC 312[4]
Kuldeep Singh v. Commissioner of Police (1999) 2 SCC 10:[1998] 3 Suppl. SCR 594[5]
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
Important Statutes Referred
(a) Hudson Formula: In Hudson’s Building and Engineering Contracts, Hudson Formula is stated in the following terms:
“Contract head office overhead and profi t percentage × Contract sum Contract period × Period of 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 offi ce 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 × Period of delay”
100 Contract period 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 offi ce overhead and profit percentage rather than those contained in the contract.
(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 over head 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 unabsorbed 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 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.
[1][1] https:indiankanoon.org/doc/1034395
[2] https:indiankanoon.org/doc/1034395
[3] a55a6f573ac695e9213d43ada28f15229ddfa600e4b1f33c6ef919d086f56aaa1708872010.pdf
[4][4][4] a55a6f573ac695e9213d43ada28f15229ddfa600e4b1f33c6ef919d086f56aaa1708872010.pdf
[5] a55a6f573ac695e9213d43ada28f15229ddfa600e4b1f33c6ef919d086f56aaa1708872010.pdf