Challenges in Proving and Recovering Loss of Profit Claims in Construction Contracts

Loss of profit claims are fairy common in construction projects, but proving and calculating them is often challenging. While profit and overhead calculations for change orders, acceleration claims and other types of direct cost claims are straightforward, quantifying and proving lost profits is more complex.

Unlike delay and disruption claims, loss of profit claims can be applicable both Employers and Contractors, often arising from project delays, material breaches, repudiation, or termination. Under most standard construction contracts, lost profits are typically unrecoverable, so contractors usually frame their claims as damages for breach of contract. For example, under FIDIC contracts, contractors may claim damages when works are wrongly omitted or when variation orders exceed contractual authority, allowing claims for breach of contract.

However, the right to claim loss of profit differs from the contractor's right to recover costs plus reasonable profit, as allowed under Sub-clause 1.9 [Delayed Drawings or Instructions] and similar Sub-clauses where the Employer is at fault.

There is often a misconception that FIDIC First Edition 1999 Sub-clause 17.6 gives an automatic right to claim loss of profit for Contractor’s in the event of termination. The said Sub-clause excludes liability for indirect or consequential losses, including loss of profit, but allows exceptions when the Contractor terminates the contract. In such cases, the Contractor may claim loss of profit, but the Employer lacks similar rights in termination scenarios under Sub-Clause 15. For instance, when the Employer terminates a Contractor for default under Sub-Clause 15.2, they can recover any losses and damages incurred by him and any extra costs of completing the Works, but Sub-Clause 17.6 triggers to limits the Contractor’s liability.

Regarding loss of profit as damages, the English case law Hadley v Baxendale[1] provides a very useful guidance. It defines two categories of recoverable damages: those that arise naturally from the breach (first limb) and those are in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of contract (second limb). While loss of profit claims may often seem to fall under the second limb, they can also fall within the first limb if the loss is a direct and natural result of the breach. Cases like Hotel Services Ltd v Hilton International Hotels (UK)[2] Ltd and Deepak Fertilizers v Davy McKee[3] show that loss of profit may be considered a direct, rather than consequential, loss. In the case, the loss of profit and wasted overheads incurred during the reconstruction of the plant were held by the court of appeal to be direct rather than indirect of consequential.

In addition to breach of contract, a claim for lost profits can arise from tortious actions. To establish such a claim, the claimant must prove that lost profits were foreseeable when the contract was formed, that the defendant's actions caused the lost profits, and that the loss can be proven with reasonable certainty.[4]

Under UAE law, lost profits are recognized under Articles 389 and 292 of the Civil Code[5]. However, beyond contractual limitations and burdens of proof as discussed above, practical difficulties often arise. These includes among the other things challenges in accurately quantifying losses, the need to mitigate damages by seeking alternative business opportunities, external factors like market conditions, and pre-existing business struggles. Proving that a breach directly caused the loss requires strong evidence, such as financial records and market data. Without precise documentation, claims for lost profits may be deemed speculative.

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[1] [1854] EWHC J70

[2] [2000] EWCA Civ 74

[3] [1989] 1 All ER 1135

[4] S.C. Anderson, Inc. v. Bank of Am. N.T. & S.A., 24 Cal. App. 4lh 529, 536 (1994)

[5] Articles 389 & 292 260 UAE Civil Transactions Code [Fed. Law 5 of 1985]