As a general rule, a party claiming damages for loss of profit is required to establish breach. As long as the breach is established by the Contactor, no further evidence as to proof of actual loss is required. The Hon'ble Supreme Court has in the cases of A.T. Brij Paul Singh v. State of Gujarat, (1984) 4 SCC 59 and Dwaraka Das v. State of M.P., (1999) 3 SCC 500, laid down the law w.r.t to Loss of Profit, wherein it considered granting damages for loss of profit justified and has held that reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract.
The claim for Loss of Profit has been duly upheld in subsequent cases by the Hon'ble High Court, and the High Courts have refused to interfere with the Loss of Profit awarded by Arbitral Tribunal's in cases of National Highways Authority of India v. BEL-ACC(JV), 2012 SCC OnLine Del 5350 and National Highways Authority of India v. Afcons-Apil Joint Venture, 2018 SCC OnLine Del 7194, thus fortifying the foundation for claim by private parties who were obstructed from executing work contracts in time, for delays not attributable to them.
However, in its recent judgment in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., 2023 SCC OnLine SC 1208, the Hon'ble Supreme Court has laid down a more stringent criteria for determination of quantum of damages for loss of profit. It is therefore important to examine the legal development on this aspect and the same is being analysed in the present article.
Background of the Dispute:
BEEL1 was awarded the turnkey contract for detailed engineering including civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity Sewage Water Reclamation Plant in Mahul Refinery area by HPCL2, for a contract value of Rs.574.35 lakhs. The initial period of the contract period was 18 months, upto August 1993, however, there was delay in completion and the contract was extended by HPCL on various occasions on the request of BEEL, after which BEEL abandoned the work in March 1996, after completing 80% of the work.
On 04.07.1996, BEEL made a formal claim to HPCL for breach of contract on account of delay in execution, causing extra expenses and losses. Subsequently, BEEL invoked arbitration. An arbitral award dated 23.03.1999 was passed which inter alia substantially allowed BEEL's claims including claim for 'Compensation for loss of Overhead and profit and also profitability. HPCL preferred an arbitration petition challenging the Award before the High Court of Judicature at Bombay, which was dismissed by the Ld. Single Judge. Thereafter, HPCL filed an appeal and in departure from the findings of Ld. Single Judge, the Arbitral Award was set aside by the Division Bench of the Hon'ble High Court exercising power under Section 37 read with Section 34 of the Arbitration and Conciliation Act. The SC judgement in 'Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Another' upholds the decision in of the Division Bench and dismisses the civil appeal filed by BEEL.
Findings & Analysis:
The Hon'ble Supreme Court has extensively analysed the findings in the Award and inter alia discussed the principles and formulae for computing a claim for increased overheads and loss of profit in a works contract. The Supreme Court has emphasized on the need for giving reasoning and justification for the amount of damages awarded by the Arbitral Tribunal and upheld setting aside of the Award for the lack thereof.
The SC has observed that the Award is deficient as it is particularly silent as to the method and manner in which the arbitrator had computed damages and there is lack of justification as regards the method adopted by the arbitral tribunal. BEEL had based for loss on account of overheads and profits/profitability upon 48 months delay as on 27.08.1997. BEEL for computation had considered 10% of the contract value towards overheads and other 10% towards profits/profitability for arriving at the figure of Rs. 3,38,38,460/-, after taking into "account the same percentages from the payments already received by them".
The Supreme Court has noted that the loss towards overheads and profits/profitability is to be computed on the payments due for the un-executed work, and should exclude the payments received/receivable for the work that has already been executed. In other words, damages towards expenditure on overheads and loss of profit are proportionate, and not payable for the work done and paid/payable. Delay in payment on execution of the work has to be compensated separately.
The Hon'ble Apex Court has further opined that the computation of damages should not be whimsical and absurd resulting in a windfall and bounty for one party at the expense of the other. The computation of damages should not be disingenuous. The damages should commensurate with the loss sustained.
The Hon'ble Apex Court has held that even to ascertain the loss of overheads and profits if formulae such as the Hudson's, Emden's, or Eichleay's formulae are applied, the factual assumptions should be examined while applying a particular equation or method. In its verdict, the Supreme Court has cautioned that these formulae when applied should be with full care and caution not to over-award the damages.
The Hon'ble Apex Court has therefore laid down a more stringent criteria for determination of the quantum of damages by the arbitral tribunal for such claims of loss of profit. Hon'ble Supreme Court has analysed the Hudson's formula which is widely used for computation of such claims and observed that Hudson's formula, is couched on three assumptions. First, that the contractor is not habitually or otherwise underestimating the cost when pricing; secondly the profit element was realistic at that time; and thirdly, there was no fluctuation in the market conditions and the work of the same general level of profitability would be available to her/him at the end of the contract period.
The Court also noted that the Eichleay's Formula is more precise and accurate in calculating loss of profits since it requires the contractor to itemise and quantify the total fixed overheads during the contract period. It takes into consideration all the contracts during the delay period to determine the proportionate fraction of the total fixed overheads.
Conclusion:
Therefore, for a party claiming damages for loss of profit, satisfaction of these assumptions is necessary. In view of the findings in the Batliboi Judgment, now, Material should be furnished by the party claiming such damages, such as producing invitations to tender which were declined due to insufficient capacity to undertake other work, or from the books of account of the contractor which show a decreased turnover etc., in order to justify and assure that the assumptions for applying the formulae are met.
This observation of the Hon'ble Supreme Court is commensurate with the principle of Section 73 of the Indian Contract Act, 1872, that a party may be awarded damages only for those losses that it has been able to prove that it has suffered.
The Hon'ble Supreme Court's extensive analysis of the computation methods for a Loss of Profit claim and setting out the materials requisite for establishing said claim has heralded a shift in the jurisprudence on the 'Loss of Profit' claim, and will act as a caution for Arbitral Tribunals before which the claim is raised in First Instance - insofar as calculation, factual assumptions and material furnished to establish Loss of Profit, is concerned. Therefore, it can be said that the Hon'ble Supreme Court has further clarified and fortified the standards for proving the assumptions in a Loss of Profit claim.
Footnotes
1. Batliboi Environmental Engineers Limited
2. Hindustan Petroleum Corporation Limited
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
HINDUSTAN PETROLEUM CORPORATION LIMITED 
