Introduction
In the realm of Infrastructure Arbitration, claims and disputes relating to project delays and disruptions are not uncommon. These usually involve complex issues of derailment in completion of Project Schedules due to material defaults by the Employer in its obligations, having substantial impact on Project costs. In such scenarios, construction law recognises that owner-caused delay entitles the contractor to recover from the owner the increased overhead and loss of profit as part of damages. The present article aims to dissect the dichotomy in the claims pertaining to "Loss of Profits" and "Loss of Business Opportunity" in construction disputes.
Distinguishing Loss of Profits and Loss of Business Opportunity
At the outset, it is extremely pertinent to comprehend the fundamental difference between the terms "Loss of Profits" and "Loss of Business Opportunity."1 It is usual to observe the Courts interpreting both the terms interchangeably to allude to the same thing. However, it is required to be clarified that the former stands for the loss incurred by the Contractor due to the non-completion of the contract on account of breach committed by the Employer, and the latter refers to the loss incurred due to the delay in the Project attributable to the Employer, due to which the claimant lost the opportunity to earn profits through other projects after the stipulated contractual period.
These claims are not only intrinsically different in their nature but also have differing standards of proof for establishing them. While the Contractor is usually not required to prove losses in order to succeed in a claim for loss of profit,2 a claim of loss of profitability due to delays must be substantiated with cogent evidence to prove the actual loss which was likely to have been suffered.3
The Hon'ble Supreme Court while adjudicating a claim of Loss of Profits in a works contract held in in A.T. Brij Paul Singh v. State of Gujarat4 ("AT Brijpaul") that a contractor who submits a tender for a works contract reasonably expects to make a profit and if the employer is found guilty of breaching the contract, the contractor shall be entitled to compensation in the form of damages. In effect, the Hon'ble Supreme Court laid down the law that the contractor is not required to prove losses in order to succeed in a claim for loss of profit when it has been held that the employer is guilty of breaching the contract/prematurely terminating it. Therefore, in a loss of profit claim, the best evidence that a Contractor may adduce would be the bid document indicating the anticipated profit margin which was assumed therein or by adducing evidence of other similar contracts awarded to that Contractor or any other contractor.
However, the threshold for claiming damages on account of Loss of Business Opportunity is significantly higher than its counterpart. The Hon'ble Supreme Court relying on its seminal judgement in Bharat Coking Coal Ltd. v. L. K. Ahuja & Co.5 has reiterated in Unibros v. Air India6 that Courts could allow a claim for loss of profitability only where the Claimant is able to establish, through evidence, that because of the delay, it missed out on other available contracts or opportunities. Such a claim cannot be allowed on mere asking but only where it is supported by evidence.
This stark contrast in the standards of proof for the two distinct claims may be explained by categorizing them in the two limbs explained in Hadley v. Baxendale7 as "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." The text of Section 73 of the Contract Act is based on the aforesaid compartmentalisation as explained in Hadley v. Baxendale.8
While a claim on "Loss of Profits" would fall under the first limb being absolutely direct and consequential to the breach, warranting lesser scrutiny of evidence by the Court as per AT Brijpaul, a claim on "loss of profitability" would be covered by the second limb being relatively indirect or remote in nature. Consequently, these claims cannot be awarded unless they were in the contemplation of both the parties, at the time of entering the contract, as a probable result of the breach. Therefore, evidence would be required to be led not just on the quantum of damages but also to prove the factum of the contractor missing out on other available contracts.
This described bifurcation of the said claims in the context of Section 73 was implicitly applied by the Delhi High Court in the case of R.B Chy. Ruchi Ram Khattar v. Delhi Development Authority.9 The Court in the instant case categorized the claim on "Loss of Profitability" as a remote and indirect one, and consequently refused to apply the standard of proof for "Loss of Profits" as laid down in AT Brijpaul. It further held that the compensation awarded in AT Brijpaul flowed naturally from the breach of the contract in curtailing the scope of the work and not because of the loss of profitability on account of being prevented to take up another work.
Jurisprudence on Claiming Loss of Profits and Profitability Simultaneously
In the context of the abovesaid discussion, it is imperative to understand whether claims of Loss of Profits due to wrongful termination of Contract and Loss of Business Opportunities due to prolongation of a works contract can be maintained simultaneously in a Construction dispute.
The Hon'ble Bombay High Court in the case of Mahanagar Gas Ltd. v. Babulal Uttamchand10 categorically held that the claims of both Loss of Business Opportunities and Loss of Profits could not be claimed simultaneously by a Contractor as they were in principle one and the same. Similarly, in RITES Ltd. v. Subrata Kumar Ghose,11 the Delhi High Court took the view that there was essentially no distinction between the claims of loss of profits and loss of business.
However, the Authors herein respectfully submit that the aforementioned judgements of the High Courts have failed to appreciate the true distinction between the two claims and have mistakenly conflated them. Practically, there ought not be any legal hurdle in claiming damages on account of loss of profits and loss of business opportunities together in a works contract, as they both cater to losses sustained on different counts. While damages on Loss of Profits aim to protect the innocent party's defeated financial expectation and compensate him for his loss of bargain due to wrongful termination in that undertaken Contract, damages for loss of business opportunity seek to compensate the Contractor for the lost opportunity to undertake other work sites and earn revenue due to its resources being tied up in the delayed Project. Pertinently, the Delhi High Court in Polosingh & Company v. Delhi Development Authority12 categorically held that the claim for loss of profit due to prolongation of work beyond stipulated date of contract would be entirely different from the claim for loss of profits due to illegal deprivation from completing the work. Similarly, in Devender Kumar Sharma v. Airports Authority of India,13it was held that Loss of profit due to a work being curtailed or totally abrogated is an entirely different issue vis-a-vis loss of profit on account of blocked capital.
However, for successfully claiming damages on both heads, there are two simple pre-requisites which would have to be factually proven: a) the Contract Agreement was pre-maturely terminated by the Employer unlawfully; and b) there was a prolonged deployment of the Contractor's resources at the Site due to delays attributable to the Employer. So long as these two conditions are met, the Courts/Tribunal may allow both these claims subject to appropriate evidence being furnished by the Contractor. For instance, in Ajay Kalra v. Delhi Development Authority,14 the Hon'ble Delhi High Court rightly allowed claims of both on Loss of Profits and Loss of Profitability in favour of the Contractor as the Contract in question was terminated unlawfully by the Employer, and the Contractor had consequently lost an opportunity to bid for a Tender.
Similarly, the Court in the case of Delhi Jal Board v. Subhash Pipes15 held that as there was no termination of the contract and the contractor was permitted to complete the full volume of the work, and was paid for the entire value of the work done, there was no question of awarding the Contractor any compensation for loss of Profit.16 However, the Court awarded loss on overheads sustained by the Contractor due to delayed completion of the Project.
Conclusion
The duality of Loss of Profits and Loss of Business Opportunity claims in construction arbitration reflects distinct legal principles and evidentiary thresholds. While Loss of Profits is a direct consequence of wrongful termination or curtailment of a contract, requiring minimal evidence beyond anticipated profit margins, Loss of Business Opportunity stems from delays attributable to the employer, necessitating robust proof of missed opportunities. Courts have often conflated these claims, deeming them overlapping. However, a careful analysis reveals their independent nature.
The discussed judicial precedents underscore this distinction, clarifying that claims on both grounds can coexist if two essential conditions are met:
- The contract was unlawfully terminated or prolonged due to employer defaults.
- The contractor's resources were unduly tied up, resulting in financial setbacks.
Therefore, to succeed on both claims simultaneously, contractors must substantiate:
- Anticipated profits lost from the breached contract.
- Evidence of alternative projects foregone due to employer-induced delays.
This nuanced understanding not only ensures fairness in awarding damages but also aligns with Section 73 of the Indian Contract Act. It provides contractors a comprehensive remedy for diverse financial losses arising from employer defaults in construction projects.
Footnotes
1. Please note that "Loss of Business Opportunity" is also referred as "Loss of Profitability" or simply "Loss of Profits due to Prolongation of Work."
2. (1999) 3 SCC 500.
3. Kabir Chaturvedi, Yash Saxena: "Loss of Profit" And "Loss of Profitability" – The Standard Of Proof And Need For Distinction, Mondaq, 20th September, 2024.
4. (1984) 4 SCC 59
5. (2004) 5 SCC 109
6. 2023 SCC OnLine SC 1366, decided on 19th October 2023.
7. [1854] EWHC Exch J70
8. Raghav Bhatia, Supreme Court on Grant of Loss of Profits Sans Evidence, IndiaCorpLaw, 24th April 2024.
9. 1997 DLT 65 240.
10. 2012 MHLJ 4 344
11. 2019 SCC ONLINE DEL 8606
12. 2001 ILR DEL 1 9
13. 2008 SCC ONLINE DEL 640.
14. Delhi HC, CS (Comm.) 249/2017.
15. 2005(2)ARBLR213(DELHI)
16. Abhijeet Kumar, Loss of Profit & Other Damages For Prolongation of the Contract, The Arbitration Workshop. 25 November, 2021.
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