Loss Of Profit In Works Contracts Can Be Awarded Upon Illegal Termination, Even In Absence Of Direct Proof: Calcutta High Court

The court distinguished between claims for 'loss of profit' (resulting from unexecuted work due to illegal or premature termination) and 'loss of profitability' (arising from the reduced profit margin due to contract prolongation). The court held that while claims for 'loss of profitability' generally require evidence, 'loss of profit' from unexecuted works does not require proof of actual loss.

Brief Facts

The Appellant, Government of West Bengal, through the Superintending Engineer, Public Works Department, Paschim Medinipur invited tender for constructing a District Health Administrative Building at Bankura, estimated at Rs.1.69 crore. The respondent contractor's tender was accepted. The contractor was directed to complete the work within 18 months, i.e. by 5.06.2012.

Disputes arose between the parties. The executive engineer terminated the work order. The respondent contractor invoked arbitration to resolve the disputes. The Superintending Engineer was appointed as the sole arbitrator. He passed the award on 3.07.2017.

In its judgment dated 25.02.2021, the Commercial Court upheld the arbitrator's findings on Claim Nos. 1 to 7 and 9 but set aside Claim No. 8, which related to payments towards labour force and establishment costs during the stoppage of work. The claimant sought Rs. 15 lakh, in respect of which the arbitrator awarded Rs. 5 lakh. The Commercial Court held that in the absence of any proof either oral or documentary, the actual loss suffered could not be determined.

The Appellant filed the appeal challenging the impugned judgment passed by the Commercial Court under Section 34 of the Arbitration and Conciliation Act, 1996.

Issue

Whether the claim for loss of profit raised in the statement of claim could have been awarded by the sole arbitrator in the absence of any proof, either oral or documentary.

Submissions

Mr. Arindam Mondal, Counsel for the appellant submitted that the statement of claim did not contain the pleadings for establishing loss of profit. Unless loss was pleaded and established by proof, an award on loss of anticipated profit could not have been passed. Even in the case of anticipated loss, the same has to be established as the same is a sine qua non for claiming loss of profit.

Per contra, Mr. Soumik Ganguly, Counsel for the respondent contractor submitted that there was a delay on the part of the appellant in supplying the necessary drawings, issuing steel materials of required quantities, giving the specific instructions for progress of work which hampered the progress of work. Due to such substantial delay in progress of work, the price of the job work had escalated substantially for which the respondent had asked for termination of the work order or in the alternative to allow the claimant to complete the job work at the new price rate apropos the escalation of the work schedule.

Observations

The court observed that there lies a difference between claims raised by contractors against employers for loss of profit and loss of profitability. While loss of profit indicates claims for loss of expected profit due to unexecuted work resulting from an illegal or premature termination of the contract, loss of profitability of loss of business signifies claims for reduction in the estimated profit margin due to prolongation of the contract or claims for loss of opportunity to take up other projects during the extended period where the contractor could have earned a profit. The court relied upon the judgment of Delhi High Court in Shri Ajay Kalra v. DDA & Ors.

The court observed that claims for 'loss of profitability' are not generally allowed in the absence of evidence to prove such loss, as held in Unibros v. All India Radio, Bharat Coking Coal Ltd. v. L.K. Ahuja and Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited. The court, however, noted that the requirement to prove actual loss was mandated only for losses arising out of delay and should not be misunderstood to apply to loss of profits for unexecuted works.

The court observed:

“To support a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts that the appellant could have earned elsewhere by taking up any, it becomes imperative for the claimant to substantiate the presence of a viable opportunity through compelling evidence.”“However, if the contract is delayed due to breaches on the part of the employer the contractor would be entitled to recover his profit on the basis of reasonable expectation of profits which could be earned if not for the illegal termination of the contract”, the court stated.

The court referred its decision Deo Kumar Saraf v. Union of India (1988), which held that the Court's jurisdiction to award damages cannot be confined to the evidence on records only. The Court is entitled to allow damages on any other reasonable basis, even on the basis of mere guesswork.

In MSK Projects India Ltd. v. State of Rajasthan (2011), Apex Court stated that a claim of expected profits is legally admissible on proof of the breach of contract by the erring party, as a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages once the breach on part of the other party is established and no other proof of loss shall be required.

The court observed that once the contractor has established an illegal and unjustified termination of contract and a breach thereof on the part of the employer, the contractor cannot be further obligated to establish a loss suffered on account of such breach, because a reasonable expectation of profit is implicit in a works contract.

The court noted that in R.K. Aneja v. Delhi Development Authority (1998), the petitioner was entitled to 10% loss of profit on the balance amount of work left undone without proof of loss of profit which he expected to earn by executing the balance work.

The court observed that the arbitrator had given his reasons for not accepting the rate of 15% as claimed by the respondent contractor and instead awarded loss of profit at the rate of 10% based on precedents and material on record. The court found the approach of the arbitrator to be rational and plausible.

The court noted that in appeal, Section 37 of the Act grants narrower scope to the appellate court to review the findings in an award, if it has been upheld, or substantially upheld under Section 34.

The court held that once the parties have consented to an appointment of an arbitrator, it should be presumed that they have bestowed their faith and trust on the arbitrator and wanted a decision informally. In this regard, the court relied upon K. Suguman v. Hindustan Corporation Ltd. (2020), which held that "When parties have chosen to avail an alternate mechanism for dispute resolution, they must be left to reconcile themselves to the wisdom of the decision of the arbitrator and the role of the court should be restricted to the bare minimum."

The court held that once the interpretation given by the arbitrators is backed by logic and is reasonable, the same is required to be upheld. “It is not for the court to sit as an ordinary court of appeal over an arbitral award because the arbitrator has taken a view of law or of fact which a court of law may not have taken if such court were trying the dispute”, the court stated.

The court held that the respondent contractor was entitled to loss of profit at the rate of 10% as awarded by the sole arbitrator.

The court thus dismissed the appeal and upheld the impugned judgment.

Case Title: State of West Bengal & Ors. Vs. M/s. S.K. Maji

Case Number: FMA 573 of 2024

Date of Judgment: 05.03.2025

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