No Damages For Loss Of Profit In Absence Of Proof Of Missed Profitable Ventures Due To Delay In Contractual Payment: Delhi High Court

The Delhi High Court bench of Justices Vibhu Bakhru and Tejas Karia has held that unless it is demonstrated that the delay in payment for the completion of the work contract prevented the contractor from undertaking other profitable ventures, damages for loss of profits cannot be awarded. Brief Facts: The impugned arbitral award arose from disputes under a contract dated 29.08.2011 for Package-III Electrical Services at AIIMS, Patna, under the PMSSY scheme. The Arbitral Tribunal found time to be the essence of the contract and held that delays due to site unavailability were not attributable to the respondent. Consequently, it allowed certain claims but rejected others, including those for site office expenses and loss of profits during the extended period, reasoning these were covered in item rates under Clauses 12.2 of the GCC and 2(x) of Schedule 'F'. The learned Single Judge held that reliance on these clauses was misplaced and found the rejection of Claims 3, 4, 5, 7, and 12 to be perverse, setting aside the award to that extent while upholding the rejection of Claim 14 as premature. The core issue is whether the award's rejection of the respondent's claims suffers from patent illegality on the face of the record. Contentions: The Appellant submitted that the delay at the initial stage itself was attributable to the respondent on several counts such as approval of milestones, submission of technical data sheet, and technical representatives not being positioned in full strength or in time. The Respondent submitted that provisional Extensions of Time [EOTs] were granted by the appellant to the respondent in order to keep the Contract alive on account of prolongation of the work, which was for reasons attributable to the appellant. Moreover, substantial payments, which were due to the respondent, were arbitrarily withheld by the appellant. Reimbursement of expenditure on extra items beyond the scope of the work was also pending. Observations: The court noted that the 15% mark-up under the contract applies only to deviations involving extra items, quantities, or substitutions, to cover overheads and costs. However, the respondent's claim did not arise from such deviations but sought compensation for costs incurred due to prolongation of the contract, which was allegedly caused by the appellant. Based on the above, it held that the Arbitral Tribunal's rejection of the respondent's claim, citing the 15% mark-up under Schedule 'F', is unsustainable. Clause 2(x) of Schedule 'F' does not apply to claims for additional costs due to prolongation of work. Therefore, the award is vitiated by patent illegality to that extent. The court noted that the Arbitral Tribunal rejected the respondent's claim for loss of profit on three grounds: (a) it lacked contractual support; (b) the claimed loss of profit was deemed hypothetical and unreal; and (c) compensation was limited to additional expenses due to prolongation, with a 15% mark-up where applicable. The court held that the Arbitral Tribunal rightly found the respondent's claim for loss of profits to be hypothetical and unsupported by evidence. The respondent failed to prove actual loss and merely assumed monthly profits based on projected earnings, which the Tribunal found speculative. Therefore, the learned Single Judge's finding of patent illegality on this ground is unsustainable. The court further held that when compensation for wage escalation, material costs, and delays (with interest) is already awarded, it is difficult to justify an additional 15% as “loss of profit.” It further said that while contractors may claim loss of profit due to delayed completion, they must prove that the contract amount, if received timely, could have been used for other profitable ventures. In this case, no such evidence was presented. Therefore, as settled in Sunley (B) & Co. Ltd. v. Cunard White Star Ltd. (1940) , the arbitrator's award of Rs. 6,00,000 for loss of profit was rightly deleted. The Supreme Court in Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Anr held that when a contract is delayed and a contractor claims loss due to reduced income or idle workforce, the contractor must prove that other work was available and could not be taken up due to the delay. It further held that this can be demonstrated through evidence such as declined tender invitations or a drop in turnover reflected in the books of accounts, directly attributable to the delay. If such loss of turnover is not established, the claim is treated as a mere delay in payment, and the contractor is only entitled to interest on the capital employed, not to any profit. Similarly, the Supreme Court in M/s Unibros v. All India Radio held that to claim loss of profit due to delay or missed opportunities, the claimant must present compelling evidence of a...

No Damages For Loss Of Profit In Absence Of Proof Of Missed Profitable Ventures Due To Delay In Contractual Payment: Delhi High Court

Mohd Malik Chauhan

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