In India, most of the construction and infrastructure arbitrations arise from delays and disruptions in completion of the project. Because if the project gets delayed, the contractor overheads increases and he further loose profits that would have come from other potential projects if the project could have been completed within the originally scheduled time, without getting stuck with the project during the delayed period. A contractor shall make a claim for overheads and profit when it was delayed by a delay event or events for which employer is responsible. It is a separate and additional claim to those made for increased preliminaries or site over heads. The losses of the contractor are because it was stuck with the delayed project and it was unable to take on new work, which would have given profit and the opportunity is missed due to the delayed project. Hence, one of the important claims that arise from a delayed project is Head office overheads and loss of profit.

Arbitrators require to ascertain the correctness and reasonableness of the damages as computed by the parties. Hence an arbitrator in some cases may insist for some direct proof for damages and may not allow the parties to take recourse of one formula or other. The arbitral tribunal has the authority to apply its own computation methods including application of formula to arrive at the appropriate damage amount. Such application of formula for computation of damages does not amount to breach of Section.55 or Section 73 of the Contract Act,18721. At the same time to prove Loss of profit there should be reasonable evidence to show that the contractor had other tender opportunities during the delayed period but it could not bid for the same since their personnel and resources were stuck with the delayed project. Hence evidence of tenders at that point of time, purchasing of tender documents, communications with parties and minutes of the meetings etc., can be considered as proof for loss of opportunity. The Loss of profit claims also require pleading and evidence, even though the arbitrator is the final authority to decide the sufficiency of evidence but still giving an award without any evidence will be a misconduct on the part of the arbitrator2. In the case of MSK projects3, Supreme Court of India differentiated the damages as reimbursement damages where the direct proof is required for the loss incurred and compensatory damages where formula can be applied for computation of damages.

The most famous formulae include Emden formula, Hudson formula & Eichleay Formula are used widely in the arbitrations seated in India, for the computation of damages for head office overheads and loss of profit. Let us see how the formula works in the following paragraphs:

Hudson’s formula was published in the book Hudson’s Building and Engineering Contracts, as follows:

Head office Overhead percentage in the contract X Contract Sum/Contract Period X Period of delay

The said formula was accepted by several court judgments but recently, the formula has been criticized for using the Head Office Over heads percentage from the contract as the factor to calculate those costs that may have very little relation to the actual Head office overhead costs for the contractor during the extended or delayed period.

Emden Formula which was published in the book “Emden’s Building Contracts and Practice”, as follows:

Head office overhead and profit/100 X Contract Sum /Contract period X Period of Delay

In this formula Emden arrived at Head Office Overhead percentage by dividing the actual total overhead cost of the contractor’s company as a whole by the total amount of turnover in the audited accounts. Hence, recently the above formula has got endorsement of judicial verdicts.

Eichleay’s Formula is appropriate in cases where the loss of opportunity could not be proved by the contractor. Eichleay Formula may be used to assess the Head office Overheads, if the claims are based on actual costs. The formula is as follows: Head office Overhead allocated to the contract (A)= Value of work during the contract period/Total value of work for the company as a whole during the contract period X Total Head Office Overhead during the contract period

Total Head office overhead assessed = A X Period of Delay /Contract Period

The above formula fairly and reasonably assesses the Head office overheads since it compares the value of works carried out in the contract for the project for which the contractor claimed prolongation costs, to the total value of works carried out by the contractor as a whole during the above said contract period. Both the total value of works done and the total Head office overhead can be found in the contractor’s audited accounts.

Till now, Indian Courts are expecting strong proof with regard to loss of profit arising out of a loss of opportunity but the claim with regard to loss of profit due to termination, they have accepted the usage of formula. But with regard to computation of Head office over heads for the extended period, they are consistently approving the calculation based on formulas.