Can an arbitrator quantify a contractor’s overhead losses using a standard costing formula without any evidence of the actual loss suffered? The Delhi High Court answered no in State Bank of India v K R Anand1 (judgment dated 15 September 2026), partly setting aside an arbitral award that had granted a construction contractor over Rs 1.43 crore, including amounts for overhead expenditure and price variation. Justice Avneesh Jhingan held that reliance on the Emden formula cannot substitute for proof of actual loss, and applied the Supreme Court’s guidance on severability to strike down only the unsustainable portions of the award while preserving the rest.
SBI awarded K R Anand a contract in December 2012 to build seventy-six flats for its officers in Noida, valued at roughly Rs 19.81 crore, with a stipulated completion period of twenty-four months. The work ran late, and the contractor was granted three extensions, the first two with Price Variation Adjustment and the third, covering a further hundred and fifty days, expressly without it. The contractor completed the work in January 2016 and, after SBI rejected its claims as time-barred, invoked arbitration in January 2019, raising fourteen claims totalling nearly Rs 4.92 crore. The arbitrator awarded Rs 1.43 crore, and SBI challenged four claims: overhead expenditure, price variation for the third extension, interest on delayed bill payments, and interest on the delayed release of the security deposit.
Observation on Overhead Expenditure
The arbitrator found two hundred and five days of delay attributable to the contractor and a hundred and seventy-five days to SBI, and awarded overhead expenditure for the latter period using the Emden formula together with the CPWD manual, arriving at Rs 30,27,231. The Emden formula estimates a contractor’s loss of head office overheads and profit caused by delay not attributable to it, here calculated as 7.5% of the tender’s prime cost applied across the delay period. The arbitrator’s own award had treated the formula as accepted, citing McDermott International v Burn Standard 2and Associate Builders v DDA.3
The Court held that damages under Section 73 of the Contract Act4 require a breach and proof of actual loss, or at minimum proof that such loss was difficult or impossible to prove. Drawing on Kailash Nath Associates v DDA5 and State of Rajasthan v Ferro Concrete Construction6, it held the arbitrator had quantified the claim without the contractor discharging this burden, contrary to the Contract Act. It also relied on Unibros v All India Radio7, which held a costing formula only estimates costs and cannot substitute for evidence of loss actually suffered, the formula can seize a loss once shown to exist, but cannot itself prove one occurred.
The Court tied this to Section 31(3) of the Arbitration Act8, which requires a reasoned award. Citing Dyna Technologies v Crompton Greaves9, it held that “… 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..” and the award fell “within the teeth of Section 31(3) of the Act.”
The Court’s Reasoning on Price Variation for the Third Extension
The price variation claim had two parts: a shortfall for the first two extensions, unchallenged by SBI, and a separate amount for the third extension, granted expressly without price variation. The arbitrator awarded the latter relying on the architect’s cross-examination answer, treating it as an admission that the extension was meant to carry price variation. The Court disagreed; the architect had only said he tried and failed to convince SBI, and set this against his own recommendation letter proposing the extension “without any monetary benefit and without PVA to the contractor.” Finding no explanation for why delay attributable to SBI entitled the contractor to price variation for this specific extension, the Court held the conclusion unsupported by evidence and perverse.
Claims Upheld: Delayed Bills and the Security Deposit
Two of the four challenged claims survived. Interest for delayed payment of running and final bills was upheld as a plausible view based on the contract’s fourteen-working-day payment timeline, relying on Prakash Atlanta v NHAI.10 On interest for the delayed security deposit, SBI argued Clause 6.2 barred it entirely. The Court rejected this on two grounds: the clause had never been pleaded before the arbitrator, so could not be raised for the first time under Section 3411, per Union of India v Susaka Private Limited;12 and separately, Clause 6.2 could not be read apart from Clause 6.1’s release timeline, the no-interest bar did not apply once release itself was delayed, here by 321 and 424 days for the deposit’s two halves.
Severing the Award
The Court considered whether the two unsustainable claims could be severed rather than striking down the whole award, relying on Gayatri Balasamy v ISG Novasoft Technologies,13 which held the proviso to Section 34(2)(a)(iv)14 permits severing unsustainable portions, since the power to set aside an award includes the lesser power to set it aside in part. Finding the overhead and third-extension PVA claims not intricately connected to the interest claims, the Court set aside only those two, leaving the rest, including the unchallenged PVA for the first two extensions, undisturbed.
Practical Takeaways
The order draws a clear evidentiary line for costing formulas in construction arbitration: a formula like Emden’s can estimate a loss once actual loss is established, but cannot itself supply that proof, and skipping this step risks an award vulnerable under both Section 73 and Section 31(3). The Court’s use of the Gayatri Balasamy severability doctrine is equally notable, showing that an award need not be unsettled wholesale merely because some claims are unsustainable; where claims are severable, only the defective portions need go.
Citations
Expositor(s): Adv. Pratistha Dahiya
