LOSS OF PROFIT

Preamble:?

Few of the commercial construction contracts/signed Agreement/ LOA/LOI are terminated/repudiated by the Employer for the conveyance of the Employer citing the administrative reasons. Under such conditions the contractor suffer losses. In such cases, if breach is in part of the Employer, then the Contractor becomes eligible for the loss suffered due to termination.

?Herein we wish to examine the fact whether compensation (up to actual losses) is an actual measure of damages suffered by the Contractor or alternatively he is eligible for loss of profit claim and what are the legal precedence supporting loss of profit.

?Studies:

(1) Most of the government tenders in India contain a clause in the tender document which states that the Employer can terminate the process of bidding as per their conveyance without assigning any reasons whatsoever. In such cases, the Employer can repudiate/ terminate/ cancel the complete bidding process and the EMD of bidders is returned to them.

?The courts have held that till the process of bidding is completed or LOI/LOA is issued, or intimation of the lowest bidder is issued to the successful bidder there is no relationship in existence between the parties. The courts have clarified that at this stage there is an offer, but acceptance of an offer is missing. Hence, the parties are not in contractual agreement.

?Under such circumstances the bidder is not entitled to claim anything from the Employer as basic conditions of the Indian Contract act to create a contract between parties has not been fulfilled.

??(2) In another scenario, when intimation of Lowest bidder/ LoI/LoA has been issued, the courts have held that in such case offeree has offered and the offer has been accepted. Thus, a relationship has been established between the parties. In such a case, parties are bound by the terms of the tender documents irrespective of whether an agreement has been signed or not. In many cases, courts have held that from this stage state cannot step back and is responsible to fulfil its promise.

However, in many cases even at this stage, the Employer terminates the Contract or abundant the project. In a few cases, we have noticed that the Employer terminates the Contract due to viability of the project/ inability to fulfill reciprocal obligations citing administrative reasons, resulting from losses to the Contractor.

?The commercial Contracts try to mitigate such losses through principles of Quantum meriut. Through this principle, the incurred direct cost (based on work done & work in progress) gets compensated to the Contractor. However, there are other costs which remains unrecovered. This indirect cost can be under head of administrative expenses, HO overheads, financial cost, capitalized cost etc. Had the Contractor executed the complete project he would have recovered the indirect cost and also earned reasonable profit. Thus, the actual damages suffered by the bidder/contractor is directly related to expectation loss or loss of business opportunity or loss of profit.

(3) In judgments courts while interpreting the provisions of Section 73 of the Contract Act, has held that damages can be claimed by a contractor where the Employer is proved to have committed a breach by improperly rescinding the contract. Based on this principle in some cases courts have allowed the loss of profit claim. However, in a few cases due to the inability of the claimant to substantiate/ quantify the loss of opportunity/ loss of profit the courts disallowed the claim stating the burden of proof in such case lies on the claimant.

?Some of the judicial pronouncement in this regard are as follows: ????

???A.T Brij Paul Singh Ors. Vs State of Gujrat on 25th July 1984 supreme court

In this case supreme court allowed reasonable loss of expected profit at 15% of the balance value of work which was to be executed by the contractor (plaintiff) as damages recoverable. The supreme court did not elaborated principle on adoption of 15%. However, relied on the calculation as suggested by High court.

???State of Kerala Vs K. Bhaskaran on 31 August 1984, Kerla High court :

?Matter decided by the court was whether the 10% profit claimed by plaintiff as loss of gain prevented can fairly and reasonably be considered as a loss “arising naturally”, i.e according to usual course of things.

?In conclusion court held that based on declaration of plaintiff that estimate of the contract was made considering 10% profit, court accepted it as reasonable and arising naturally.

??State of Andhra Pradesh vs T.V Krishna Reddy in 1997 it was held that the termination of contract against the contractor is breach of contract. Hence, the contractor is entitled to recover the damages. One of such damage is loss of profit for which trail court has granted a decree for sum of 10% of the contract value, following the decision of the Apex court in Dwarka Das vs State of Madhya Pradesh & State of Kerala vs K. Bhaskaran and also a notification issued by the Government of India, Ministry of Irrigation and Power wherein the Government of India directed the departments to make allowance at 10% towards overheads of the contractor and also another 10% towards profit.

?Accordingly, court awarded the loss of profit @10% of the contract value.

???Dwaraka Das vs State Of Madhya Pradesh And Anr on 10 February, 1999. The supreme court held that the contractor had preferred his claim on the ground that had he carried out the contract he would have earned profit of 10% on the value of the contract. Claim of expected profits is legally admissible on proof of the breach of contract by the erring party.

???Delhi High court on 11 January 2008 in a petition under section 34 for Himachal Pradesh Joint Venture (Respondent) vs Panilpina World Transport (Petitioner) observed that loss of profit @ 10% considering the judgement in the case of Dwarka Das is justifiable. In this case petitioner counsel even contended that the respondent is claiming loss of profit @ 10% of the contract value, whereas the respondent has produced a copy of balance sheet, according to which, profit was indicated to the extent of 1.25% of the total revenues whereas learned arbitrator has proceeded to award 10% of the contract value as damages.

???In National Highway Authority of India (Petitioner) vs Hindustan Construction Co. Ltd on 12th Jan 2022, High Court of Delhi held that to avail loss of profit, the contractor must establish that he could have deployed its resources for executing another contract and earned profit but was deprived of availing that opportunity on account of being held up in executing the contract in question.

Conclusion:

?(A) To be eligible for loss of profit party shall prove that another party has breached the contract.

(B) Party claiming loss of profit is in obligation to prove with reasonable certainty, not with fatalistic sureness that defendant’s breach prevented gains, nor party is bound to prove with mathematical exactitude the amount of gains or loss.

?(C) Party needs to show convincingly that in normal course of events, he would have realized a gain which he estimates, had the defendant performed his part of the contract.

(D) The possible profit percentage considered shall be from the contract or supported with government notifications.?

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