CLAIM OF LOSS OF PROFITS IN ARBITRATION DISPUTES

INTRODUCTION

The apex court recently ruled that a claim for loss of profit, cannot be allowed in an arbitral award without substantial proof that the aggrieved party has suffered injury. The decision in the case of M/s Unibros Vs. All India Radio, illustrated the same. Firstly, the pre-condition of breach of contract needs to be fulfilled, i.e., there can be no claim for damages if there is no breach of contract between the parties. Second, the party making such a claim must establish the loss of profit. Existence of loss or injury is an indispensable prerequisite for a loss of profit claim.

The Division Bench of the Supreme Court enumerated the following conditions required to establish  a claim of loss of profit.

           (i)delay in the completion of the contract;
           (ii)such delay is not attributable to the claimant;
           (iii)claimant's status as an established contractor; and
           (iv)credible evidence to substantiate the claim of loss of profit.

The Supreme Court held in an appeal preferred against an impugned arbitral award under section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter “Act”), that upon perusal of the records, in the present case, the fourth condition, the evidence to substantiate the claim of loss of profitability remains unfulfilled, and therefore such claim was denied.

Loss of Profit Claim

Section 73 of the Indian Contract Act, 1872 ( “Contract Act”) enshrines the principle of loss of profit, which is a type of damages that can be claimed under the Contract Act, resulting from breach of contract. It is a claim made in instances where the breach of contract leads to reduction in profit earning of the aggrieved party. It is the profit which the party could have made, if the contract has not been breached. A loss of profit claim cannot be a pre-estimated injury and should result from the direct consequence of breach of contract, however such consequence cannot be too remote and unforeseeable.

Whereas Section 74 of the Contract Act deals with liquidated damages which is a pre-determined amount mutually agreed between the parties to the contract. Liquidated damages are stipulated in the contract and as such will require no specific proof to be adduced to be awarded such a claim, except that there was a breach of contract that caused loss to the aggrieved party.

The principles governing damages under civil law may be extended to arbitrations as well. The aggrieved party seeking a claim for loss of profit has to lead evidence and prove the claim as per the principles laid down in the Contract Act. In a decision of the Division Bench of the Bombay High Court, the finding of a Single Judge setting aside an arbitral award on the ground that the award for liquidated damages was allowed even though no evidence had been led to prove the loss of profits was upheld.

In another instance, the Kerela High Court while deciding an appeal filed under Section 37 of the Act, held that damages payable under Sections 73, 74  and 75 of the Contract Act, is only for loss or damage caused by the breach and not on account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, such party cannot claim such damages or compensation. Thus, mere breach of contract does not guarantee success in the claim of loss of profits unless actual loss or injury is proven.

Analysis

The principle for establishing a claim for loss of profit, either for civil disputes or arbitral disputes is the same. The claim must be specifically proved by adducing substantive evidence. The courts have provided a comprehensive list of potential facts that may be adduced as evidence to substantiate these claims. For example, if the claim is that loss is incurred due to loss of opportunity in future or simultaneous projects then proof that such opportunities surfaced or some potential projects were deferred due to delays caused by the breach of the contract, the number of opportunities that were lost because of such delay caused, relevant financial records, etc., may be adduced.

The evidence should demonstrate that had the contract been executed promptly and had there been no breach and disputes that arose as a result of the said breach, the party claiming loss of profits could have made supplementary profits from elsewhere.

It is pertinent to note that the substantive evidence that needs to be furnished to prove loss of profits will be contingent upon the facts and circumstances of each case. However, the overarching principle is evident, credible evidence is paramount in substantiating the claim for loss of profit.

References:

1. M/s Unibros Vs. All India Radio, 2023 SCC OnLine SC 1366.

2. M/s Unibros Vs. All India Radio, 2023 SCC OnLine SC 1366, para 19.

3. Raheja Universal Private Limited. v. B.E. Bilimoria & Co. Ltd. (2016) 3 AIR Bom R 637.

4. Devchand Construction v. Union of India, 2022 SCC OnLine Ker 826