In the matter of Union of India v. Ahluwalia Contracts (India) Ltd1, the Hon'ble High Court of Delhi ("Court") addressed the evidentiary standards required for claiming loss of profits in arbitral proceedings. In the present case, Ahluwalia Contracts Ltd. ("Contractor") sought compensation for alleged loss of profits due to delays and non-performance by the Union of India The case serves as a timely reminder that while contractors may be entitled to damages for the prolongation of contracts, claims for loss of profits cannot be 'hypothetical and unreal' and must be substantiated by convincing and grounded evidence.
Background of the Dispute
The present matter arose out of a contract awarded to the Contractor for electrical services at AIIMS Patna under the Pradhan Mantri Swasthya Suraksha Yojana. The contract was awarded to the Contractor in August 2011 and was to be completed within 16 (sixteen) months. However, the project experienced substantial delays due to the Union of India's failure to provide necessary site access and infrastructure, particularly the substation buildings where electrical installations were to be carried out. Consequently, the Contractor was required to provide services beyond the original timeline anticipated thereby incurring additional costs. The Contractor invoked arbitration claiming amongst other things for costs incurred during this extended period and for loss of profits as well.
Contractor's Claim for Loss of Profits
Among the many claims submitted by the Contractor, the Contractor also prayed for loss of profits equivalent to a sum of Rs. 4,80,00,000/- (Rupees Four Crore Eighty Lakhs) for the 20 (twenty) month period during which the work was prolonged beyond the stipulated contract period. This figure was arrived at basis the average monthly profit of Rs. 24,00,000/- (Rupees Twenty Four Lakhs Only) earned by the Contractor. The assumption underlying the claim was that the Contractor, if not tied up with the delayed AIIMS project, could have deployed its manpower and resources elsewhere and earned the anticipated profits.
Arbitral Tribunal and Court Proceedings
The arbitral tribunal, while accepting several claims of the Contractor pertaining to actual expenses incurred during the extension period, rejected the claim for loss of profits. The tribunal reasoned that the contract already included a 15% (fifteen percent) markup on the cost of materials and labour, which was intended to cover all overheads and profits. It found that permitting a separate claim under the head of 'loss of profits' would amount to double dipping. This would be unfair particularly in the absence of any contractual commitment guaranteeing the claimed profit or documentary evidence establishing the actual loss suffered.
The Contractor challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act"), before a single judge of the High Court. The single judge set aside the rejection of several claims, including that for loss of profits, holding that the tribunal's reasoning was perverse and patently illegal. However, in an appeal under Section 37 of the Act, the division bench reversed this finding and reinstated the original finding of the award, thereby rejecting of the Contractor's claim for loss of profits.
Court's Analysis and Findings
The division bench's reasoning focused on the speculative nature of the Contractor's calculation. The Court found that the entire claim was premised on a notional figure; i.e. the average monthly profit of Rs 24,00,000 (Twenty Four Lakhs) per month, without any documentary evidence showing that such profit was earned historically or could have been earned on alternative projects during the extension period. The Court referred to multiple decisions of the Supreme Court, including Bharat Coking Coal Ltd. v. L.K. Ahuja2, Unibros v. All India Radio3 and Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corporation Ltd.4, to reiterate that claims for loss of profits cannot be based on mere extrapolation or theoretical formulas. The claimant must establish that the delay prevented it from undertaking other profitable work, and this must be substantiated with invitations to tender, past turnover records, or similar financial documentation. It emphasised that the burden lies on the claimant to establish that profits were lost due to the delay and that such loss is not merely theoretical. The Court emphasized that claims for loss of profit must be substantiated with concrete evidence. Merely presenting hypothetical or speculative figures is insufficient.
The Court also addressed the legal principles surrounding the Hudson and Eichleay formulas, commonly used in construction disputes to compute loss of profits or overheads due to delay. The court said that the use of these formulas must be supported by a factual foundation. In the present case, the assumptions required to apply such formulas, such as the availability of alternate work, the ability to deploy idle resources, and the loss of specific economic opportunities, were not demonstrated. The Court rejected the notion that loss of profit could be presumed based on industry standards or past performance.
The division bench emphasized that in arbitral proceedings, the tribunal is the final fact-finder, and its conclusions cannot be interfered with unless they are wholly irrational or violate basic principles of justice. The Court found that the tribunal's view, that the loss of profits claim was hypothetical and unsupported, was entirely reasonable and did not suffer from patent illegality. On that basis, it concluded that the single judge had erred in overturning the award on this point.
Conclusion
This judgment is significant for multiple reasons. It reinforces that for claims for loss of profits or missed opportunities, the claimant needs to present credible evidence to prove the loss of profits and opportunities it suffered.
In conclusion, this case upholds that claims for loss of profits cannot be presumed on hypothetical and unreal calculations. They must be grounded in contract, backed by evidence, and attributable to the delay. The judgment carefully balances the contractor's right to be compensated for prolongation with the principle that damages must reflect real, not imagined, loss.
Footnotes
1. 2025 SCC OnLine Del 4066
2. (2004) 5 SCC 109
3. (2023) INSC 931
4. (2023) INSC 850
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