Non-Recoverable Contract Costs in Bangladesh’s Model PSC 2026

In last week’s post, we discussed various non-recoverable costs in the recent Sri Lankan Model Petroleum Resources Agreement. In this post, we discuss non-recoverable costs Bangladesh’s recent Model Offshore Production Sharing Contract (“PSC”).

Clause 14.3 of the Model PSC states:

“Subject to the Accounting Procedure and the auditing provisions of this Contract, Contractor shall recover all costs and expenses not excluded by the provisions of this Contract and the Accounting Procedure in respect of all the Exploration, Appraisal, Development, Production, Abandonment and related operations hereunder with respect to the Contract Area to the extent of and out of a maximum of seventy five percent(75%) of Petroleum from both shallow and deep sea blocks per Calendar Year of all Available Oil/ Natural Gas/ Condensate/ NGL from the Contract Area (hereinafter referred to as "Cost Recovery Petroleum").” (emphasis added)

Clause 14.3 excludes recovery of those costs which are held as such in the PSC and its Accounting Procedure (Annexure-B to the Model PSC). Section 7 of the Accounting Procedure contains a list of 26 heads of non-recoverable costs.

Similar to the exercise we did for Sri Lanka’s MPRA, we have classified these 26 heads into distinct buckets and have tabulated it:

Category	Description	Section 7 Items
Before Effective Date / Outside Bangladesh / Outside Measurement Point	Costs incurred before the Effective Date not incurred under Work Program and Budget; costs incurred beyond the measurement point; income tax and other taxes incurred outside Bangladesh; certain administrative overhead outside Bangladesh.	c, h, i, s
Financing and Fund-Raising Costs	Interest and financing charges; expenditure to negotiate, obtain or secure funds, exchange losses on financing, etc.; expenditure for furnishing and maintaining bank guarantees and indemnities	a, q, r
Unsupported / Unapproved Costs	Costs lacking proper original records; charges for goods & services unsupported by supplier/ sub-contractor agreement costs; not included in approved Work Program and Budget; emergency expenditure not timely reported to Petrobangla; donations and contributions not pre-approved by Petrobangla; benefits not identified as recoverable under Section 3.1(c).	b, e, m, n, p, v
Excess Costs / Gold-Plating / Unreasonable Expenditure	Goods and services priced above international market rates; material costs exceeding permitted values; costs not reasonably required for Petroleum Operations; materials and services exceeding allowable valuation principles.	d, f, g, t
Taxes and Contractual Payments	Income tax payable by Contractor; payments under Articles 20.1-20.4 (bonuses) and 25.6 (training of Petrobangla employees).	j, o
Dispute Resolution Costs	Costs of expert determination and arbitration.	k
Fines, Penalties; losses from PSC and third party contracts; negligence	Fines and penalties; Costs resulting from willful misconduct or negligence of Contractor; amounts paid with respect to non-fulfillment of a contractual obligation with third party and loss due to non-compliance of PSC	l, x, z
Partnership / Joint Venture / Acquisition Costs	Costs of creating or managing partnerships or joint ventures; acquiring interests in the Contract or Contract Area.	u
Insurance-Related Exclusions	Costs covered by insurance; losses resulting from failure to insure; recoverable insured losses not claimed; losses that would have been covered under approved self-insurance arrangements.	w(i)-(iv)
Committee and Governance Costs	Expenses of members of the Joint Management Committee (JMC) and Joint Review Committee (JRC).	y

Like the Sri Lankan MPRA, Bangladesh's Model PSC also displays a long list of items that are not cost recoverable.

Avoiding Serious Defects in Arbitral Awards: Updation of Checklist on drafting Arbitral Awards

Recently, the Delhi High Court in Eco Green Buildtech Pvt. Ltd. Vs. Vikartan Infrastructure Pvt. Ltd. set aside an arbitral award on two grounds.

• One, the arbitrator used his personal knowledge in deciding on a particular claim. This use of personal knowledge denied full opportunity to the petitioner to deal with the same. 
• The second ground was the use of the Hudson formula to decide on a claim for loss of profit without any evidence having been adduced by the Respondent Claimant.

In a recent paper published by the India International Arbitration Centre, I came up with a checklist of about 70 items that arbitrators should take care of while writing arbitral awards. Item 32 of the Checklist states: "Whether analysis proceeds in the following manner: facts, law/ contract, application of law to facts, and conclusion?" Item 33 of the checklist states: "Whether the award deals with any argument or judgment which has not been raised or cited by the parties?"

If the arbitrator who wrote the award in the matter had taken care of these two items in the checklist, perhaps the defects which led the award to be set aside could have been avoided.

Given the number of awards set aside on the ground of lack of evidence in support of an awarded claim, a separate entry in the checklist is perhaps warranted. This separate entry will also act as a caution to arbitrators not to decide individual claims without evidence even if they rely on a formula.

I have updated the checklist by adding an Item after Item 32 and renumbering the checklist. The renumbered Item 33 reads: "Whether the arbitral awards decides on each claim/ counter-claim based on evidence and whether the evidence is clearly identified and evaluated?"

Now there are now 71 Items in the Checklist for Arbitral Awards, which can be downloaded from here. It would do well for arbitrators and arbitral institutions to use such a checklist for ensuring that arbitral awards are of the highest quality.

Formulaic Claims, Arbitral Awards and the Credibility of Arbitration

Richard Feynman made this statement criticising relying on formulas to study physics and instead focus on the underlying reality. He was of the view that one could not get anywhere merely based on the formulas. This criticism holds good for construction law too.

Indian courts have criticised claims by construction contractors based on formulae such as Hudson, Emden, etc, and have required evidence of losses. So many arbitral awards have been set aside on this ground. Some awards could escape courts’ attention.

Arbitral awards awarding claims based on formulae when there is no or inadequate evidence justify the Department of Expenditure’s Office Memorandum 03.06.2024 that discourages arbitration. One such case is SBI v. KR Anand, 2026:DHC:7793.

The Construction Contract

• Work: Construction of seventy-six flats for officers at Sector-62, Noida
• Letter of Award: 22.12.2012
• Agreement: 16.01.2013
• Contract Value: 19.81 crores
• Scheduled Contract Completion Date: 15.01.2015 (25 months)
• Extensions: 3
• Actual completion date: 23.08.2016

Arbitration and Challenge

Contractor, KR Anand, invoked arbitration and made several claims. There were a total of 17 claims. Arbitrator awarded Rs. 1.43 crores to the contractor. SBI challenged the award in the Delhi High Court on 3 claims.

Decision of the Delhi High Court on Award on Claim 1

Claim 1 was for loss of overhead expenditure of Rs. 65.81 lakhs. Rs. 20.27 lakhs was awarded. There were two main problems with this part of the award. The arbitrator attributed 205 days of delay to the contractor and 175 days to SBI but chose to decide the claim in favour of the contractor. Another problem was that there was no evidence of losses. The contractor chose do defend the award on the basis of the Emden formula. We are concerned in this post about the second limb of the arbitrator's reasoning: reliance on Emden formula.

Proof of actual loss is essential. The Delhi High Court reiterated the settled law that proof of losses is required through evidence and formulae cannot substitute evidence. The court cited the Unibros decision and held: “The Supreme Court in Unibros v. All India Radio (supra) held that reliance on a formula is not a substitute for establishing the loss actually suffered… 13. In the case in hand the damages awarded relying upon the Emden Formula in the absence of evidence to prove the actual loss suffered is contrary to the settled position of law”.

The court considered the award on this claim to have been given in disregard of the Contract Act, which required proof of losses (Para 11). The court gave another dimension to the matter: An award that relies on formula as a substitute for proof of actual losses suffers from lack of reasoning and violates Section 31(3) of the Arbitration and Conciliation Act, 1996:

“However, even on a fair reading of the award as a whole no reason emanates for the arbitrator accepting the calculation based on the Emden formula without there being evidence to prove the loss suffered or that it was difficult or impossible to prove the actual loss suffered. The award of claim no.1 falls within the teeth of Section 31(3) of the Act.”

Credibility of Arbitration

There are so many judgments that dealt with the proposition that the Delhi High Court was relying on. See, for instance, here and here. Despite this, the arbitrator chose to award this claim in favour of the Contractor. Such arbitral awards justify DOE’s OM of 03.06.2024.

Costs Not Recoverable under the Sri Lankan Model Petroleum Resources Agreement

 Sri Lanka's Model Petroleum Resources Agreement (2026) (SLMPRA) is one of the recent Production Sharing Contracts (PSC) published and available. Link to the SLMPRA is provided at the end of this post. For a PSC, the length of the SLMPRA is only 95 pages. Cost recovery is one of the important provisions of a PSC. Costs allowed to be recovered and costs not allowed to be recovered form some of the crucial provisions of a PSC. This post discusses the cost items which are not recoverable.

Article 21 of the SLMPRA deals with Recovery of Cost Petroleum. Article 1 defines "Agreement Costs" as "Exploration Costs, Development Costs and Production Costs as provided for in the PRA and which are deemed to be recoverable costs in terms of Article 21 of the PRA;". Article 21.2 classifies these costs into "Production Costs", "Exploration Costs" and "Development Costs" incurred by the Contractor.

Article 21.12 pertains to costs not recoverable. It contains a whopping list of 31 items! If these costs can be classified into distinct buckets, such a classification would be as follows:

Category	Description	Clause / Item Numbers
Before SLMPRA or outside Area/ Outside Sri Lanka	Costs before Effective Date, costs related to administrative overhead outside of Sri Lanka for specific items; Income/ other tax incurred outside Sri Lanka; Costs outside measurement point	1, 4, 9, 10, 19
Specific Payments/ Costs/ obligations under MPRA	Expenditure incurred in obtaining, furnishing and maintaining the guarantees, expenses of the members of the Advisory Committees and other Committee, Environment studies protection, Abandonment fund, Training costs. Production bonus, Signature bonus, royalty,	17, 25 to 31
Excess costs/ gold plating/ negligence/ misconduct/	costs of goods and services in excess of the international market price for goods or services; charges for goods and services not in accordance with the relevant agreement with sub-contractor or supplier; Charges for goods in excess of the amount allowed by Article 21.12; Costs not reasonably required for petroleum operations; costs of materials and services in excess of the values established under the principles in Article 21.12; costs and expenditure as result of wilful misconduct or negligence of Contractor;	5, 6, 7, 8, 20, 24
Unsupported/ Unapproved Costs	costs for which original records do not exist or are not correct in any material respect; any costs not included in approved work program and budget, unless resulting from an emergency; Emergency expenditure incurred but not reported within time	3, 14, 16,
Fines/ penalties	fines and penalties imposed by any Authority	12
Non-fulfilment of contractual obligations with third parties	amounts paid with respect to non-fulfilment of a contractual obligation to a third party; Indemnities spent on Non-fulfilment of contractual obligations with third parties	17, 22
Unrelated to petroleum operations	Expenditures for securing funds for petroleum operations; donations, contributions, or public expenditure; costs involved in creation and management of any partnership/ joint venture arrangement, or costs of acquisition of an interest under the Agreement	2, 13,21
Dispute resolution	Costs of expert determination of arbitration; attorney’s fee and other costs related thereto.	11, 18
Others	costs incurred which are covered by insurance for Included Risks, are a result of failure to insure where insurance is required pursuant to the Contract, etc.	23

The items not cost recoverable have been classified into nine distinct buckets. This PSC has one of the longest list of items that are not cost recoverable. Like in any other PSC, there are bound to be disputes on individual items in this long list. 

It would be interesting to see if the recent Model PSCs disclose such a trend, given their experience and experience of other countries in dealing with cost recovery related issues. 

Sri Lanka MPRA (2026) can be downloaded from here.