Although often used interchangeably, the terms ‘loss of profit’ and ‘loss of profitability’ represent distinct legal concepts. The Calcutta High Court (“Calcutta HC”) in a recent judgment emphasized this difference. In this case, an arbitrator granted damages for loss of profit to a contractor, despite the absence of concrete evidence, and this award was upheld by the commercial court. However, the employer challenged this decision, arguing that compensation for anticipated profits could not be awarded without a clear plea and proof of actual loss.
The concepts of loss of profit and loss of profitability have been widely discussed in several judgments of Indian courts. The Delhi High Court has clarified that ‘loss of profit’ arises when a contract is not completed due to a breach by one party, resulting in the claimant losing anticipated gains from that specific project. On the other hand, ‘loss of profitability’ typically relates to delays caused by the respondent party, which prevent the claimant from undertaking other profitable projects beyond the original contract term.
Loss of profit claims are generally governed under Section 73 and Section 74 of the Contract Act, 1872. Section 73 allows a party suffered by another party’s breach to seek compensation, regardless of whether its specified in the contract. In contrast, Section 74 addresses predetermined compensation amounts already outlined in the contract, which the breaching party must pay. This specified amount, termed as compensation, may include liquidated damages or penalties.
The evidence required to prove loss of profit and loss of profitability have been discussed by various Indian courts including the Supreme Court. The Supreme Court has held that while proving actual losses is essential in cases involving delay, this does not extend to loss of profits arising from unexecuted work. The Supreme Court has observed that in order to claim loss of profitability, a contractor should establish that had he received the amount due under the contract, it could have been utilized for some other business and profit could have been earned. Claim for loss of profitability
could not be granted, unless such a plea is raised and established . Furthermore, to support a claim for loss of profitability due to a delayed contract or missed opportunities from other available contracts that the contractor could have pursued elsewhere, the contractor must provide solid evidence of a feasible opportunity. This evidence should clearly demonstrate that, had the contract been completed on time, the contractor could have generated additional profits by utilizing its existing resources on other projects.
The Supreme Court has also noted that the nature and quality of such evidence will depend on the facts and circumstances of each case. It may typically include independent contemporaneous evidence such as potential projects the contractor could have undertaken had there been no delays, the total number of tenders the contractor received and chose not to pursue due to the extension of the contract, financial statements, or clauses in the contract related to delays, extensions of time, and compensation for loss of profitability. However, the court will not make a guess in the dark without credible evidence being presented.
The Supreme Court has also outlined key criteria for successfully claiming loss of profitability:
In Batiboi Environmental Engineers Limited v Hindustan Petroleum Corporation Limited and Another , the Supreme Court reiterated the need to prove that other business opportunities were lost due to the delay, which could be demonstrated by showing declined tender offers. The same can also be proven from the books of accounts to demonstrate a drop in turnover and establish that this result is from the particular delay rather than from extraneous causes.
If a contract is wrongfully terminated or delayed due to the respondent’s fault, the contractor can seek damages based on the expected profit they would have earned. Once a breach is established, courts recognize this expected profit as a valid claim without needing further evidence of loss.
The Supreme Court has 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 will be required.
The Supreme Court has, in the case of McDermott International Inc. v. Burn Standard Co. Ltd. and Ors. noted that courts often rely on methods such as Hudson Formula, Emden Formula, and Eichleay Formula, to calculate the quantum of damages. However, quantification of damages through honest guesswork or a rough and ready method, in case it is difficult to quantify the precise amount of loss suffered by a party, has been upheld by the Delhi High Court . In an earlier judgment of the Delhi High Court, it has been held that the court can allow damages on any reasonable basis, even on the basis of mere guesswork.
While both ‘loss of profit’ and ‘loss of profitability’ relate to the financial impact of contractual breaches or delays, they differ significantly in legal context and evidentiary requirements. Courts demand well-substantiated claims, particularly when the loss relates to missed opportunities due to delay. A clear understanding of the nature of loss and the supporting evidence required is essential when deciding which type of claim to pursue. Recognizing this distinction ensures that claims are better structured and more likely to succeed under applicable legal provisions.
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