Arbitrator Can’t Decide Claims On Mathematical Derivations In Absence Of Evidence : Delhi High Court

The bench of Justice Sachin Datta held that an arbitral award when it involves financial claims relying on novel mathematical derivations, lacking a solid basis in the pleadings and/or without substantial supporting evidence, can result in significant prejudice to the opposing party. Accordingly, the Court set aside the award as based on no-evidence at all.

The disputes between the parties arose out of a contract for the construction of civil works related to the pressure shafts and powerhouse complex of the 'Nathpa Jhakri Hydro-Electric project.' The main subject of the disagreement revolves around the alleged increase in minimum wages payable to labor during the contract execution.

The respondent (referred to as the 'claimant' before the Arbitral Tribunal) contended that, thirty days before submitting the bid, the minimum wage for unskilled labor, as notified by the State Government of Himachal Pradesh, was Rs. 22/- per day. However, this wage was subsequently increased to Rs. 24/- per day from 14-11-1993 and then to Rs. 26/- per day from 01-10-1994. Eventually, the wage reached Rs. 45.75/- per day from 01-03-1996. According to the impugned award, the respondent/claimant incurred a total expenditure of Rs. 77.26 crores on labor wages during the contract's relevant period.

Out of this expenditure of Rs. 77.26 crores, Rs. 35.62 crores were included in the BOQ (Bill of Quantities) item rates and were realized during the contract execution. Additionally, the respondent received Rs. 14.21 crores through escalation payments under Clause 70 (iii) of the GCC (General Conditions of Contract). The actual escalation paid to the respondent, as per the formula in Clause 70 (iii) of the GCC, amounts to Rs. 43.18 crores. However, for the purpose of making the claim, the respondent assumed the labor escalation recovered to be only Rs. 14.39 crores, which is 1/3rd of Rs. 43.18 crores. This assumption was based on their contention that the price escalation formula was premised on the labor component being 30%, whereas they had indicated in a sealed cover during bid submission that the labor component was only 10%. Consequently, the labor escalation paid under Clause 70 (iii) was proportionately scaled down to calculate the claim. As a result, the total amount the respondent recovered towards labor was Rs. 49.83 crores (Rs. 35.62 crores + Rs. 14.21 crores).

The remaining balance of Rs. 27.42 crores represent the additional expenditure incurred due to the revision of minimum wages (the difference between the aggregate expenditure of Rs. 77.26 crores and the recovered amount of Rs. 49.83 crores). The Arbitral Tribunal adjusted some aspects to determine the respondent's entitlement, ultimately setting it at Rs. 26.90 crores.

The Court further observed that it is also unfathomable as to how and on what basis it has been concluded that 2/3rd of Rs. 43.18 crores (i.e. Rs. 28.78 crores), although paid to the Respondent under the head “labour escalation” was towards items “other than labour expenses”. It is completely perverse to proceed on the basis that the respondent/claimant realised only an amount of Rs.14.21 crores (and not 43.18 crores) through escalation payable under Clause 70 (iii) of the GCC. Thus, entertaining financial claims based on novel mathematical derivations, without proper foundation in the pleadings and/or without any cogent evidence in support thereof can cause great prejudice to the opposite party. Especially in the context of construction contracts where amounts involved are usually astronomical, any laxity in evidentiary standards and absence of adequate diligence on the part of an arbitral tribunal in closely scrutinizing financial claims advanced based on mathematical derivations or adoption of novel formula, would cast serious aspersions on the arbitral process…”

The Court held that the establishment of the extent of additional costs resulting from the revision of Minimum Wages, the respondent's initial formula, as well as the subsequent mathematical derivation in their statement, was rejected by the Arbitral Tribunal. Despite seeking to demonstrate the "actual amount paid towards enhanced wages," the respondent's mathematical derivation was similar to their earlier rejected formula. Therefore, the Arbitral Tribunal lacked a basis to conclude that the respondent had incurred an expenditure of Rs. 77.26 crores towards labor wages during the relevant claim period.

The Court held that concerning the amount of expenditure recovered by the claimant through BOQ item rates, the actual amount paid to the respondent towards labor escalation was Rs. 43.18 crores, but it was notionally reduced to Rs. 14.39 crores (1/3rd of Rs. 43.18 crores). This arbitrary reduction resulted in a rewriting of the contract between the parties. The assumption that out of the 30% labor escalation, only 10% pertained to labor costs and the remaining 20% to other expenses lacked a reasonable basis. It was perplexing to ignore 2/3rd of Rs. 43.18 crores (i.e., Rs. 28.78 crores) when assessing the Respondent/Claimant's compensation for the increase in minimum wages. Similarly, the conclusion that 2/3rd of Rs. 43.18 crores was towards items "other than labor expenses" was entirely arbitrary.

Lastly, the Court held that entertaining financial claims based on novel mathematical derivations without a proper foundation in the pleadings and a lack of cogent evidence can lead to significant prejudice to the opposing party. Particularly in construction contracts involving substantial amounts, the arbitral tribunal must diligently scrutinize financial claims based on mathematical derivations or novel formulas. The absence of such diligence casts doubts on the arbitral process.

As a result, the Court sets aside the arbitral award as it was found to be perverse, ex-facie arbitrary, and lacking in merits

Case Details: Satluj Vidyut Nigam Ltd v. Iaiprakash Hyundai Consrotium

Citation: 2023 LiveLaw (Del) 625

Date: 12.07.2023

Counsel for the Petitioner: Mr. Sanjay Jain, ASG, Mr.Uttam Datt, Ms. Sonakshi Singh, Ms. Tanya Aggarwal, Mr. K. K. Upadhiya and Mr. Kumar Bhaskar, Advs.

Counsel for the Respondent: Mr. A. S. Chandhiok, Sr. Adv., Mr. Lovkesh Sawhney, Sr. Adv., Ms. Simran Kohli, Ms. Vidushi Keshan, Mr. Durgesh Kr. Pandey and Mr. Rohit Kumar, Advs

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