A Defence of the Hudson in Computing Loss of Overheads and Profits
- The Competition and Commercial Law Review
- 23 hours ago
- 6 min read
[Aditi S Nair is a second-year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow]
Introduction
Delays are the bane of the Indian construction industry. A delayed project can wreak operational and financial havoc on stakeholders. When it is the contractor who alleges employer-led delay, he may be entitled to damages for Loss of Overheads and Profits (LOAP). Quantifying such losses is no easy task, and multiple formulae have emerged to approximate them. Of these, the Hudson formula (Hudson) is the most contentious.
Claims for Loss of Overheads and Profit
The Accounting Standard (AS) 7 imparts a handy definition of construction contracts, which we may advert to; it labels such contracts “agreements specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.” As with other contracts, breaches and disputes abound in Works contracts as well. Arbitration is the preferred mode of dispute resolution due to its expertise-centric and party-driven nature.
Contractual breaches owing to delays in project completion are one such set of disputes. Delays can be attributable to the employer (the owner), the contractor (the party engaged in construction), or both (labelled concurrent delays). Yet, in recent times, a trend of contractors claiming damages for delays or defaults attributable to the employer has been discerned. Delays in furnishing the project site or supplying drawings are common examples of employer-led delays. A claim of LOAP is a particular head of claim that contractors apply for – it is premised on the contractor’s expectation that revenue earned shall help:
Recover direct costs;
Recover on-site overheads/preliminaries (indirect costs attributable to a specific project, e.g., cartage associated with any civil works); and
Recover off-site overheads/Head Office Overheads (HOOH) (indirect costs not directly traceable to a specific project, e.g., rent, salaries); and
Generate profit.
Basis this expectation, the contractor builds into the tender an allowance for overheads. Things go awry when, on account of employer-caused delay, the contractor is unable to engage in new work and save his unabsorbed costs. A claim for LOAP thus makes that lost opportunity compensable.
A.T. Brij Paul Singh v. State of Gujarat (¶11, 14) was the first case wherein the Supreme Court validated a contractor’s claim for LOAP on account of the illegal discharge of the contract by the employer. Later judgments shaped India’s legal stance with respect to such claims.
Notably, profits and overheads are pursued as elements under a singular head of claim.
Measuring Loss via the Hudson
In computing damages for LOAP, an array of standard formulae may be utilised by an arbitrator. Although multiple formulae exist internationally, judicial recognition was afforded to three formulae – the Hudson, the Emden, and the Eichleay – by way of the McDermott International Inc. v. Burn Standard Co. Ltd. (McDermott) (¶104) judgement. This article’s scope is confined to a dissection of the Hudson; as such, the other two formulae are not the subject of scrutiny in this piece. However, some background is necessary. The Emden formula, though first published by Alfred Emden in his textbook on construction law, is largely credited to the Canadian courts. The Eichleay, meanwhile, is the result of a 1960 American decision in Appeal of Eichleay Corp., ASBCA No. 5183, filed before the Armed Services Board of Contract Appeals. The Hudson is a creature of academia. Since its inception in the 10th edition of the Hudson’s Building and Engineering Contracts (1970), it has been relied upon to compute damages for LOAP, primarily due to its simplicity and established place in legal tradition. The Hudson can be represented thus:
Head Office Overheads & Profit Percentage/100 Contract Value/Contract Period Delay Period
The Head Office Overheads & Profit Percentage refers to the allocation made in the tender to cover HOOH and anticipated profits.
Two features of the Hudson can be gleaned even from a cursory glance at the formula:
Firstly, the formula’s accuracy hinges on the HOOH and profit allowance being based on past contracts or records, so that it can reasonably be used as a proxy figure. This, of course, becomes necessary because the Hudson is the only ex-ante measure of loss. It is an estimate based on contract value - it is not related to actual costs.
Secondly, in line with a claim for LOAP, the formula assumes that a successor contract has been secured to replace losses from the prolongation of the original contract. The a) disparity in value of the old and the successor contract and b) a failure to secure said successor contract are two scenarios not envisaged by the formula.
Apart from the assumptions inherent in Hudson’s form, possibly its most glaring drawback remains the risk of double-counting. The Contract Value already includes an allowance for overheads and profit; the formula then proceeds to multiply that by the HOOH and profit percentage derived from the Contract Value. The Society of Construction Law (SCL) Delay and Disruption Protocol has noted this defect and advised against using the formula.
Criticism & Response
In India, judicial attitude has been one of caution and, at times, bordered on a dismissal of the Hudson. In McDermott and Unibros v. All India Radio (Unibros) (¶18), the Supreme Court stressed that such formulae couldn’t function as standalone measures of damages – material substantiating the claim had to be adduced. Stricter still, in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd. (Batliboi) (¶26), the Court declared the Hudson fit only as a last resort.
Indeed, the formula suffers from its share of limitations. Yet, this judicial scrutiny seems mistargeted and excessive, focusing disproportionately on the Hudson’s cons. The author has ventured to establish a case for the Hudson, arguing for its accuracy, in three submissions below:
The Hudson’s dependency on the Contract Value is not inherently bad, despite what the Protocol asserts. A contractor’s deliberate estimate of his HOOH and profits, and so, the pricing of his tender is based on previous work contracts and earlier records. For example, where a contractor engaged to build a bridge for a local government consistently allocates 15% of the tender value as HOOH and profits as per past projects, his 15% valuation is not an inaccurate figure.
Additionally, an arbitrator’s blind reliance on other formulae or a static ‘reasonable’ amount could inflate the loss. Consider, if prescribed rates of 20% overhead for the widening of a bridge are adverted to, as per the MoRTH Standard Data Book, the contractor allocating 15% would’ve received a windfall. Or, even when different formulae were used to calculate overheads on the same data set, it was the Emden formula that yielded the highest HOOH recoverable. Again, a contractor would’ve wrongfully gained by applying the Emden. Hudson thus cannot be unfairly criticized as a measure that wrongly simulates loss or is selectively favoured by contractors.
The formula also accounts for a contractor’s commercial sense. During an economic downturn, a contractor’s decision to include a lower percentage of HOOH and profit to successfully secure a bid should be adequately reflected in the award of damages. The same is true of a higher-priced tender during boom times. Often, it is the contractor’s own estimate of what he deems suitable that is a more reliable assessment of HOOH and profits. The crux of the Hudson is this very element of intentionality that it honours; due weight is given to the contractor’s expectations and experiences, which ensures accuracy.
Even if overestimation of loss is a concern, the SCL Modified Hudson formula, which deducts HOOH and profit from Contract Value (Contract Value less HOOH and profits), effectively eliminates the issue of double-counting.
The Hudson in India & Way Forward
Every formula has its own set of merits and demerits. Though a study of all three formulae (the Hudson, Emden, and Eichleay) wasn’t within this article’s scope, it can be stated with absolute certainty that these formulae, as well as others not listed here, are simply approximations of the recovery of unabsorbed HOOH and lost profits. As such, they are all rooted in assumptions that must be addressed for their application in any given case.
In Batliboi, the Supreme Court noted three assumptions the satisfaction of which a contractor must ensure before endeavouring to use the Hudson:
The contractor does not underestimate the cost while pricing, and
The profit margin was realistic at the time, and
Market conditions are not in flux such that similarly profitable work can be availed by the contractor upon the project’s completion.
The question of application of a formula has been held to fit squarely within the purview of the arbitrator’s discretion (¶106), yet recent jurisprudence has burdened the contractor with furnishing evidence as to a particular formula’s suitability. In Edifice Developers and Project Engineers Ltd. v. Essar Projects (India) Ltd. (¶11), the Bombay High Court struck down an award wherein the Hudson formula was applied sans evidence. Similar judgements of the Bombay (¶ 106) and Delhi (¶12) High Courts mandate the production of proof to justify a formula’s use.
Any formula must be applied keeping its limitations in mind, not just the Hudson. Unfortunately, Indian courts have dithered in assessing these formulae in a holistic and nuanced manner. The SCL Protocol, meanwhile, suggests cross-checking the output of one formula with another to prevent instances of “anomalous results”. This may be a workable solution to arrive at the quantum of damages. Still, diligence ought to be exercised by both the contractor and the employer in choosing and approving a formula, because no single formula is universally applicable.

Comments