Formula-based quantification cannot substitute proof of actual loss in contractual damages claims.

State Bank of India (“SBI”) awarded the respondent a contract for constructing 76 flats at Sector-62, Noida, for ₹19,81,39,324, with completion scheduled by 15 January 2015.

The respondent completed the work on 23 January 2016. SBI granted three extensions: the first two with price variation adjustment (“PVA”) and the third, up to 28 January 2016, without PVA.

After disputes arose concerning delay, payment of PVA, delayed payments, and release of security deposit, the respondent invoked arbitration and raised fourteen claims aggregating to ₹4,92,35,263.

The arbitrator awarded ₹1,42,95,725, including amounts under claims 1, 3, 7 and 10.

SBI challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, with the challenge confined principally to those claims and the consequential interest.

1. Whether the award of ₹30,27,231 towards overhead expenditure under claim no. 1 was sustainable in the absence of evidence proving the actual loss suffered, merely because the Emden formula was applied?

2. Whether the award of PVA under claim no. 3 for the third extension was sustainable when that extension was granted without PVA and the contractual clause restricted PVA to the contract period and authorised extensions?

3. Whether interest awarded under claim no. 7 for delayed payment of running bills and the final bill was legally sustainable under clause 37 of the GCC?

4. Whether interest awarded under claim no. 10 for delayed release of the security deposit was barred by clause 6.2 of the GCC, which provided that no interest would be paid on the security deposit?

5. Whether the court could set aside only the severable invalid portions of the arbitral award under Section 34?

The court applied Sections 34 and 31(3) of the Arbitration and Conciliation Act, 1996, holding that an arbitral award may be interfered with where it suffers from patent illegality, perversity, or lack of intelligible and adequate reasons, but a plausible factual or legal view of the arbitrator is ordinarily not disturbed.

Under Section 73 of the Indian Contract Act, 1872, a party claiming damages must establish breach and actual loss, unless the loss is difficult or impossible to prove; a formula such as the Emden formula assists in quantification but cannot itself prove loss, as recognised in Kailash Nath Associates v. DDA , State of Rajasthan v. Ferro Concrete Construction (P) Ltd. , and Unibros v. All India Radio .

Section 31(3) requires a reasoned award, as explained in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.

Contractual provisions governing PVA and payment timelines must be given effect, including clause 44.3 restricting PVA and clause 37 prescribing payment within fourteen working days.

Under Section 31(7), the arbitrator’s power to award interest may be excluded by an express contractual bar, but such a plea must be raised before the arbitral tribunal; a plea raised for the first time under Section 34 may be treated as waived under Union of India v. Susaka Private Limited .

Finally, relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd. , the court held that severable invalid portions of an award may be set aside without disturbing valid and independent portions.

For claim no. 1, although the arbitrator attributed 175 days of delay to SBI and applied the Emden formula at 7.5% of the tender prime cost, the respondent did not produce evidence establishing the actual overhead loss suffered during the prolongation period.

The formula could quantify a proved loss but could not substitute for proof of loss; the absence of adequate reasons for adopting the formula rendered the award contrary to Sections 31(3) and 73 and patently illegal.

For claim no. 3, the arbitrator relied on an alleged admission by the architect, but the architect’s letter expressly recommended the third extension without monetary benefit or PVA, and the cross-examination answer did not amount to an admission of entitlement to PVA.

The award also failed to identify the period of delay attributable to SBI and therefore lacked a rational basis for awarding PVA for the third extension.

However, the separately calculated PVA amount relating to the first two extensions was not challenged and was severable.

In contrast, claim no. 7 was upheld because clause 37 required payment within fourteen working days of the architect’s certificate, applied to running as well as final bills, and the delay in payment was undisputed.

Claim no. 10 was also upheld because SBI had not pleaded clause 6.2 before the arbitrator and, in any event, that clause concerned security retained in accordance with the contractual release mechanism; it did not justify delayed release beyond the stipulated period.

The court set aside the award of claim no. 1 for overhead expenditure and the portion of claim no. 3 awarding PVA for the third extension.

The PVA awarded for the first two extensions remained undisturbed, as did the awards under claims no. 7 and 10 for delayed payment of bills and delayed release of the security deposit, respectively.

The court consequently upheld the severable valid portions of the award and disposed of the pending application.