Calcutta HC Upholds Loss of Profit Claim Without Direct Proof

In the case of State of West Bengal & Ors. vs. M/s. S.K. Maji (FMA 573 of 2024), dated March 14, 2025, the Hon’ble Calcutta High Court reaffirmed the principle that a contractor is entitled to compensation for loss of profit upon the illegal or premature termination of a works contract by the employer, even in the absence of direct proof.

The dispute arose from a government contract awarded to M/s. S.K. Maji, the contractor, for constructing a district health building in Bankura, West Bengal. Due to delays in materials and instructions from the government, the project could not be completed on time, leading to its termination by the executive engineer in January 2014 under Clause 3(a) of the agreement. The contractor sought arbitration for compensation, including a loss of profit claim, which was reduced from 15% to 10% by the arbitrator. The Government of West Bengal challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the loss of profit claim lacked direct evidence. The Commercial Court at Asansol upheld the award, and the government appealed to the Calcutta High Court.

The court distinguished between claims for ‘loss of profit’ and ‘loss of profitability’. ‘Loss of profit’ refers to claims for loss of expected profit due to unexecuted work caused by illegal or premature contract termination, while ‘loss of profitability’ pertains to reduced profit margins from contract delays or missed opportunities to take on other projects during an extended period. The court noted that claims for ‘loss of profitability’ are in general not permitted without evidence proving the loss, as seen in the cases of Unibros v. All India Radio, (2023 SCC OnLine SC 1366), dated October 19, 2023; Bharat Coking Coal Ltd. v. L.K. Ahuja, [2004 (5) SCC 109], dated April 12, 2024; and Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited, [2024 (2) SCC 375], dated September 21, 2023. However, the court clarified that proof of actual loss is only required for claims arising from delays and should not be applied to claims for loss of profit due to unexecuted work.

The court held that to substantiate a claim for loss of profit resulting from a delayed contract or missed opportunities with other available contracts, the claimant must provide compelling evidence of a viable opportunity. However, if the delay arises from the employer’s breach, the contractor is entitled to recover profits based on reasonable expectations that could have been earned had the contract not been illegally terminated.

The court further observed that once a contractor proves that the contract was illegally and unjustifiably terminated due to the employer’s breach, the contractor is not required to prove the actual loss suffered, as the expectation of profit is an inherent part of the contract. In R.K. Aneja v. Delhi Development Authority, (1998 SCC OnLine Del 501), dated July 31, 1998, the court ruled that the petitioner was entitled to 10% loss of profit on the work left undone, without the need to prove the loss of profit that would have been earned had the work been completed.

The court further noted that under Section 37 of the Arbitration and Conciliation Act, 1996, the appellate court’s ability to review an arbitral award is limited, particularly when the award has already been upheld under Section 34 of the Act. It emphasized that when parties opt for arbitration as a dispute resolution mechanism, they demonstrate trust in the arbitrator’s decision, and the court’s role should be minimal.

The court stated that, in cases where the government is found to have breached the contract by improperly rescinding it, a broad approach should be taken in estimating damages, rather than focusing on minute details. In this context, the award of loss of profit at the 10% rate, as determined by the sole arbitrator, was deemed justified.

The decision highlighted the distinction between loss of profit and loss of profitability, reaffirming that loss of profit claims are entitled to compensation based on reasonable expectations rather than precise evidence.