Loss of Profit claims in Construction Contracts - Judicial approach in India.

Loss of Profit claims in Construction Contracts - Judicial approach in India.

The judicial approach in India emphasizes fairness and equity in compensating parties for loss of profit arising from breaches of construction contracts, while also encouraging parties to mitigate their losses and adhere to the terms of their agreements.

In India, the judicial approach to loss of profit claims in construction contracts is governed by both statutory law and case law precedent. Here's a broad overview:

1. Indian Contract Act, 1872: The Indian Contract Act lays down the general principles governing contracts in India. Sections 73 and 74 of the Act deal with the consequences of breach of contract, including the right to claim damages. When a construction contract is breached, the innocent party has the right to claim damages, including loss of profit, incurred as a result of the breach.
2. Case Law Precedent: Indian courts have consistently upheld the principle that a party who suffers loss due to a breach of contract is entitled to be put in the same position they would have been in had the contract been performed. Therefore, if a contractor incurs loss of profit due to the owner's breach of contract (such as wrongful termination or delay in payments), the contractor can claim such loss of profit as damages.
3. Quantification of Loss of Profit: Courts in India adopt a pragmatic approach to quantify loss of profit in construction contracts. This often involves assessing the actual loss suffered by the contractor, taking into account factors such as the nature of the breach, the terms of the contract, the market conditions, the contractor's past performance, and the contractor's ability to mitigate the loss.
4. Duty to Mitigate: The innocent party has a duty to mitigate its loss. Therefore, a contractor who suffers loss of profit due to the owner's breach of contract is expected to take reasonable steps to minimize the loss. Failure to mitigate may affect the quantum of damages awarded by the court.
5. Evidence and Burden of Proof: The burden of proving the loss of profit lies on the claimant (usually the contractor). Therefore, the claimant must provide sufficient evidence to demonstrate the loss suffered as a result of the breach of contract. This may include financial records, project documents, expert testimony, etc.
6. Equitable Remedies: In addition to claiming damages for loss of profit, parties to construction contracts may also seek equitable remedies such as specific performance or injunctive relief to enforce their contractual rights.

Few landmark judgments as stated below enunciate judicial perspectives that the claimants should be wary of in their respective claims.

In?Mohd. Salamatullah?v.?Govt. of A.P.[1]?the Supreme Court considered a case of breach of contract for manufacture and supply of guns, as a result of which the contract could not be completed. The court approved the grant of 15% of the contract price as damages in case of breach of contract. It held that the appellate court was not justified in interfering with the finding of fact given by the trial court regarding quantification of the damages even if it was based upon guesswork.

In?A.T. Brij Paul Singh v. State of Gujarat[2], the Supreme Court recognized the position that in a works contract, if the party entrusting the work commits breach of the contract, the contractor is entitled to claim damages for loss of profit, which he expected to earn by undertaking the works contract. In said case, the Court without insisting?for direct proof the measure of profit lost, granted 15 per cent of the value of the remaining work, as damages for loss of profit.

In?Dwaraka Das v. State of M.P.[3], Supreme Court considered a case wherein the High court?had denied the contractor’s claim for loss of profit on the ground that the contractor did not place any material on record, but had only relied upon assessment of the profits by the Income Tax Officer while assessing the income of the contractors from building contracts.

The Supreme Court relying on decisions in?Mohd. Salamatullah?and?A.T. Brij Paul Singh?wherein it had granted 15% of the contract price as loss of profit, held the contractor to be entitled to 10% of the contract price. The court stressed that when the termination of the contract is contrary to the law and terms of the agreement, the erring party is legally bound to compensate the other party to the agreement. The court further emphasized that in estimating the amount of loss of profits, a court should make a broad evaluation instead of going into minute details

In?J.G. Engineers Pvt. Ltd., Vs Union of India[4]?the Supreme Court upheld the award of 10% of the value of incomplete portion of work, as loss of profit. In said case it was found that the employer was responsible for the delays/breaches; the contractor was not in the breach, and the employer had illegally terminated the contract.

The position as aforesaid is followed by several High Courts.[5]

In?Kanchan Udyog Limited vs. United Spirits Limited[6]?however Supreme Court insisted for proof of loss of anticipated profit. It did not accept profitability projections made in loan application, as proof of estimated profitability. In the said case the court also found that the party claiming compensation could not establish that the other party had committed any breach. Besides, the said case did not pertain to works contract.

Loss of profit not to be presumed where execution of contract was prolonged

There may be cases where the contractor completes the work, but the execution is delayed on account of breaches committed by the employer. In such cases, the contractor receives the full price including expected profits. The contractor can also prove and recover increased cost of execution (on account of escalation of cost of material and labour). Though it is possible for the contractor to recover loss of profit for prolonged period, the same may not be presumed. In order to claim loss of profit the contractor will have to lead cogent evidence. The position is succinctly stated by the Supreme Court in?Bharat Coking Coal Ltd. vs. L.K. Ahuja[7]?in the following words:

“Here when claim for escalation of wages bills and price for materials compensation has been paid and compensation for delay in the payment of the amount payable under the contract or for other extra works is to be paid with interest thereon, it is rather difficult for us to accept the proposition that in addition 15% of the total profit should be computed under the heading ‘Loss of Profit’. It is not unusual for the contractors to claim loss of profit arising out of diminution in turn over on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilised the same for some other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profits could not have been granted. In this case, no such material is available on record. In the absence of any evidence, the arbitrator could not have awarded the same. This aspect was very well settled in Sunleyn (B) & Co. Ltd. vs. Cunard White Star Ltd., [1940] 1 K.B. 740 by the Court of Appeal in England.”

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[1] (1977) 3 SCC 590

[2] (1984) 4 SCC 59

[3] (1999) 3 SCC 500

[4] (2011) 5 SCC 758

[5] Mahanagar Gas Ltd. v. Babulal Uttamchand and Co., (2013) 2 Mah LJ ; Himachal Joint Venture v. Panilpina World Transport AIR 2009 Del 88; and Delhi Development Authority vs. Polo Singh MANU/DE/1882/2002

[6] MANU/SC/0699/2017

[7] MANU/SC/0335/2004