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.

Do Courts Comply with S. 11(8) While Appointing Arbitrators?

 Section 11(8) of the Arbitration and Conciliation Act, 1996 ("Act"), as it exists now, reads:

"(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator."

This provision contemplates that before appointing a person as arbitrator, the Supreme Court or the High Court should seek a disclosure in writing in terms of S. 12(1) of the Act and have due regard to qualifications requirement for the arbitrator under the arbitration agreement and the contents of the disclosure and other conditions which are likely to secure and independent and impartial arbitrator.

This provision was introduced through the 2015 amendments and is effective from 23.10.2015. However, rarely does the Supreme Court or the High Courts mention compliance of S. 11 in their orders appointing arbitrator under Section 11. See, for instance, the order of the SC dt. 02.02.2026 in OT Technology Inc. v. HDFC Bank Ltd., Arb. Pet. 8/2026, which makes no mention of S. 11(8) explicitly or impliedly. 

Likewise, see this Order dt. 03.02.2026 of the Delhi High Court in Paramjit Singh v. FITTJEE Limited, Arb. Pet. 2/2026, which also does not make any reference to S. 11(8) nor complies with it. Worse, the High Court appoints the arbitrator and postpones compliance with S. 11(8) to after the appointment. It also states: 

"13... iv) The Sole Arbitrator is requested to furnish a declaration in terms of Section 12 of the Arbitration Act prior to entering into the reference. In the event of any impediment to the Arbitrator’s appointment on that count, the parties are given liberty to file an appropriate application before this Court."

The effect of this is to cast the burden on the parties for non-compliance by the High Court of the statutory mandate provided in S. 11(8)! That is not the correct approach. 

Contrarily, a perusal of the recent orders of the MP High Court, reveals compliance by the High Court of the mandate under S. 11(8). For instance, in JVS Foods Pvt. Ltd. v. MP State Agro Industries Development Corporation Ltd., 2026:MPHC-JBP:42122, the High Court observes in its Order dt. 17.06.2026:

"19. Considering the list of empanelled Arbitrators issued by the M.P. Arbitration Centre, Jabalpur, following order is passed : (i) Shri Alok Verma, Former Judge, High Court of M.P., AddressAkar, HIG, 1/463, Arvind Vihar, Baghmogaliya, Bhopal (MP)-462043, Mobile No. 79748-54407, 94250-07479, Tel. No.0755-4930600, Email - alokver55@gmail.com, who has consented in terms of Section 11(8) of the Act of 1996, is appointed as sole Arbitrator to resolve the dispute between the parties in the case." (emphasis added).

Whether this amounts to a complete compliance of S. 11(8) is not apparent from the aforesaid observations. However, the attempt to comply with the statutory mandate is at least clear from this Order, in contrast with the orders of the Supreme Court and the Delhi High Court.

Readers may throw more light on whether High Courts and the Supreme Court complies with the statutory mandate under S. 11(8).

Referencing Errors in the Third Schedule to the Arbitration & Conciliation Act, 1996

Third Schedule to the Arbitration & Conciliation Act, 1996 ("1996 Act") is the Geneva Convention of on the Execution of Foreign Arbitral Awards. Article 3 to the III Schedule reads:

"If the party against whom the award has been made proves that, under the law governing the arbitration procedure, there is a ground, other than the grounds referred to in Article 1(a) and (c), and Article 2(b) and (c), entitling him to contest the validity of the award in a Court of Law, the Court may, if it thinks fit, either refuse recognition or enforcement of the award or adjourn the consideration thereof, giving such party a reasonable time within which to have the award annulled by the competent tribunal." (emphasis added)

Article 1 is quoted in its entirety at the end of this blog post. In the III Schedule, it is divided into Articles 1(1) and 1(2). Article 1(1) deals with arbitral awards which are recognisable and enforceable and Article 1(2) concerns the conditions for recognition and enforcement. 

The text of the Geneva Convention does not seem to make this division. Article 1 of the text of the Conventions consists of two paragraphs as noted below:

"In the territories of any High Contracting Party to which the present Convention applies, an arbitral award made in pursuance of an agreement, whether relating to existing or future differences  hereinafter called "a submission to arbitration") covered by the Protocol on Arbitration Clauses, opened at Geneva on September 24, 1923, shall be recognised as binding and shall be enforced......

To obtain such recognition or enforcement, it shall, further, be necessary..."

As would be apparent Article 1 of the Convention was not divided in two sub-articles. However, in the III Schedule this subdivision has resulted in a referencing error in Article 3- there is no Article 1(a) or (c)- there are only Articles 1(2)(a) and 1(2)(c).

The referencing error was not in the Arbitration (Protocol and Convention) Act, 1937. The Second Schedule to the 1937 Act did not divide Article 1 into two parts:

"Article I.-In the territories of any High Contracting Party to which the present Convention applies, an arbitral award made in pursuance of an agreement, whether relating to existing or future differences (hereinafter called " a submission to arbitration ") covered by the Protocol on Arbitration Clauses opened at Geneva on September 24th, 1923, shall be recognised as binding and shall be enforced...

To obtain such recognition or enforcement, it shall, further, be necessary..." 

Hence, Article 3 to the Second Schedule to the 1937 Act did not contain this referencing error. On the other hand, III Schedule to the 1996 Act contains this referencing error in view of the division of Article 1 into two sub-Articles.  The Arbitration and Conciliation (Amendment) Bill, 2024 does not seem to address this referencing error. Somehow, this error seems to have escaped the attention of everyone in the last thirty years. The division in Article 1 to the Third Schedule, not being a reflection of the Convention's text, should be removed in the upcoming amendments to the 1996 Act. 

Article I of III Schedule to the 1996 Act:

"ARTICLE 1.—(1) In the territories of any High Contracting Party to which the present Convention applies, an arbitral award made in pursuance of an agreement whether relating to existing or future differences (hereinafter called “a submission to arbitration”) covered by the Protocol on Arbitration Clauses opened at Geneva on September 24th,1923, shall be recognised as binding and shall be enforced in accordance with the rules of the procedure of the territory where the award is relied upon, provided that the said award has been made in a territory of one of the High Contracting Parties to which the present Convention applies and between persons who are subject to the jurisdiction of one of the High Contracting Parties.

(2) To obtain such recognition or enforcement, it shall, further, be necessary:—

(a) that the award has been made in pursuance of a submission to arbitration which is valid under the law applicable thereto;

(b) that the subject-matter of the award is capable of settlement by arbitration under the law of the country in which the award is sought to be relied upon;

(c) that the award has been made by the Arbitral Tribunal provided for in the submission to arbitration or constituted in the manner agreed upon by the parties and in conformity with the law governing the arbitration procedure;

(d) that the award has become final in the country in which it has been made, in the sense that it will not be considered as such if it is open to opposition, appeal or pourvoi en cassation (in the countries where such forms of procedure exist) or if it is proved that any proceedings for the purpose of contesting the validity of the award are pending;

(e) that the recognition or enforcement of the award is not contrary to the public policy or to the principles of the law of the country in which it is sought to be relied upon."