Friday, 19 June 2015

Supreme court judgment on calculation of damages in case of breach of construction contract

"The discussion covering earlier issues establishes that BSCL was guilty of delays and disruptions. Proceeding from there, the question is whether MII is entitled to an amount on account of increased overhead and loss of profit and additional project management costs? MII states that construction law recognizes that construction contractor incurs two general jobs of costs in the course of its operation; the operating costs that are attributable to a particular project, and costs such as overhead that are expended for the performance of the business as a whole, including t`he particular project. Consequently, construction law recognizes that owner caused delay entitles the contractor to recover from the owner the increased overhead and loss of profit as part of damages. Reference has been made to Hudson's building and Engineering Contracts. Article 8.176-91 pp. 1074-81 (11th edn.), Molly J.B., "A formula for Success". Three formulae have been evolved for computation of a claim for increased overhead and loss of profit due to prolongation of the works : the Hudson Formula; The Emden Formula and Eicheay Formula. Of these three, the Emden Formula is the one widely applied and which has received judicial support in a number of cases."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 overhead 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 overhead 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 & x contract sum x period of delay"
Profit percentage contract period 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 criticized 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 & profit x Contract sum x 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 organization as a whole by the total turnover. This formula has the advantage of using the contractors actual head office 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. Cooperative Wholesale Society Ltd., decided on 17 February, 1998, Beechwood Development Company (Scotland) Ltd. v. Mitchell, decided on 21 February, 2001 and Harvey Shoplifters Ltd. v. Adi Ltd., decided on 6 March, 2003.
(c) Eichley Formula: The Eichleay formula was evolved in America and derives its name from a case heard by Armed Services Board of Contract Appeals, Eichleay Corp. It is applied in the following manner:
Step 1 Contract Billings Total overhead for Overhead allocable Total Billings for contract x contract period = to the contract period Step 2 Allocable overhead Total days of contract = Daily Overhead rate Step 3 Daily Contract Overhead Number of Days Amount of Unabsorbed Rate x of delay = 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 overheads 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.
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 June, 2003 (USCA Fed. Cir.), Gladwynne Construction Company v. Balmimore, decided on 25 September, 2002 and Charles G. William Construction Inc. v. White, 271 F.3d 1055.
We do not intend to delve deep into the matter as it is an accepted position that different formulas 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.
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.
Supreme Court of India
Mcdermott International Inc vs Burn Standard Co. Ltd. & Ors on 12 May, 2006

Bench: B.P. Singh, S.B. Sinha
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