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

The Calcutta High Court division bench of Justice Soumen Sen and Justice Biswaroop Chowdhury has held that once a contractor establishes an illegal and unjustified termination of the contract by the employer, there is no need to prove the actual loss suffered. A reasonable expectation of profit is implicit in a works contract, and compensation must be awarded accordingly. 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...

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

Tazeen Ahmed

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