Assessing “Loss of Profits or Profitability” in Construction Contracts — Evolution through Judicial Narratives

Introduction

The construction industry is a dynamic and evolving one. In such an industry, claims such as loss of profits and profitability, prolongation and escalation costs, head office overheads, etc. are frequent. In such contracts, the issues that are most likely to arise include premature termination of the contract by the employer on account of alleged non-performance and breach of terms of the agreement by either of the parties. Such breach mainly occurs because of delays attributable to either of the parties on several accounts like (1) delay in execution of the work by either of the parties; (2) delay in handing over of clear sites/fronts; (3) delay in issuance/approval of drawings; and (4) delay in supply of stipulated materials, etc. Such delay in execution of contracts may lead to either of the parties incurring losses giving rise to claims seeking compensation for loss of idling of plant, labour and machinery and increase in onsite and offsite overhead expenses¹ also known as “loss of profit” and “loss of profitability”.

The Supreme Court and several other High Courts have engaged with the claims of “loss of profit” and “loss of profitability” wherein it has been established that for a party to succeed in such type of claims, the party is required to lead substantial credible evidence demonstrating actual or expected losses suffered by it as a result of the breach or prolongation of the contract.² Further, the other issue pertaining to such kinds of claims is the quantification of such losses that the party is entitled to because of such breach or prolongation of the contract.³ Concerns with regards to the quantification of such claims have now mostly been settled by the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd. (hereinafter “McDermott”) wherein certain formulas for quantifying both loss of profit and loss of overhead were recognised by the Court.⁴ The same shall be discussed in greater detail when the article analyses the concept of quantification of losses.

However, the jurisprudence surrounding the nature and type of requisite “sufficient credible evidence” to substantiate such claims has evolved over time with judicial precedents but still requires more standardisation and homogeneity from the courts.

This research paper is divided into four major parts, each of which deals in depth with a different aspect. The first part analyses the concept of claim of “loss of profit” with the aid of landmark judgments and distinguishes “loss of profit” claims from “loss of profitability” claims. The second part of the paper deals with various methods or formulas employed by the judicial machinery to assess the damages arising from such claims. The third part of the paper further analyses the evolution of the applicability of these formulae by courts and tribunals. Fourthly, the paper analyses the nature or quality of evidence required to substantiate such a claim and the criteria to sustain it. Lastly, the paper concludes with the present position on the nature and extent of proof necessary to substantiate such claims and also suggests a two-factor test for determining the same. This paper maps down this evolution and tries to assess the standard of proof necessary to prove such claims to claim damages thereunder.

Loss of profit and loss of profitability

This section of the article analyses the concept of loss of profit and also differentiates between the claims for loss of profit and loss of profitability or earning capacity. Further, this section also analyses the eligibility criteria for a claim to qualify as a loss of profit or profitability claim.

“Loss of profit” is the profit that the contractor is anticipated to make with the timely execution of the contract that he undertakes had it not been terminated by the employer thereby leading to a breach of contract and giving rise to the claim.⁵ Whereas, “loss of profitability” means losses suffered by the contractor due to his inability to deploy his manpower, plant and machinery, at another venture deployed at the site during the extended period.⁶

The Division Bench of the Delhi High Court in NHAI v. Hindustan Construction Co.⁷ distinguished the claim for “loss of profit” from “loss of earning ability or profitability”. Further, it was held that the party claiming “loss of profitability” is required to establish that the party had the opportunity to deploy resources in another venture and that venture would have yielded profits. Besides, in Bharat Coking Coal Ltd. v. L.K. Ahuja⁸ the Supreme Court has held that:

24. … It is not unusual for the contractors to claim loss of profit arising out of diminution in turnover on account of delay in a matter of completion of work. What he should establish in such a situation is that had he received the amount due under the contract, he could utilise the same for some other business in which he could have earned profit.

Though, the Court used the expression “loss of profit” however, the case in essence was that of “loss of profitability” and thus the requirement to prove actual loss was mandated only for losses arising out of delay⁹ and should not be misunderstood to be applicable to loss of profits for unexecuted works.

In view of the above judgments, it can be said that the following criteria are required to succeed in “loss of profitability” claims:

(i) the party had opportunities to deploy its resources at the material time;

(ii) that it could not do so as the resources were held up due to the prolongation of the work; and

(iii) the opportunities as available would yield certain profit.

The above criteria may not be necessary for claiming “loss of profit” claims because of the illegal termination of the contract. In A.T. Brij Paul Singh v. State of Gujarat¹⁰, the Court held that the essential for claiming “loss of profit” is that there must be a reasonable expectation of profit by the contractor and the other party to the contract must be guilty of the breach. This decision was also followed in Dwaraka Das v. State of M.P.¹¹

The courts have, however, used both the phrases interchangeably despite the differences, leading to confusion regarding the requirement of proof of actual loss in establishing a claim under these two heads of losses. It is the authors’ opinion that though the “loss of profitability” claims may require the party to prove actual losses suffered due to breach of contract but “loss of profit” claims should not have such criteria. A reasonable expectation of profit is implicit in construction contracts. Once the party has established the breach of contract on the part of the employer, the party should not be further burdened with proving actual losses as it clearly goes against the fundamental principle of contract law i.e. in case of breach of contracts, the injured must be put back in the same position that he would have been if he had not sustained the wrong.¹²

Computation/quantification of such losses

In light of the above discussion, it is clear that if a contractor has suffered any loss due to any delay that is attributed to the employer, then the contractor shall be entitled to loss of profitability. However, what remains to be determined is the quantum of such loss to which the contractor is entitled.

Following the landmark English judgment in Lavarack v. Woods of Colchester Ltd.¹³, the Court in M.N. Gangappa v. Atmakur Nagabhushanam Setty & Co.¹⁴, held that the method used for the computation of damages will depend upon the facts and circumstances of each case. Further, in the McDermott case¹⁵, the Supreme Court addressed the question and observed that Sections 55 and 73 of the Contract Act, 1872¹⁶ do not provide the method or procedure for computing damages or compensation. The Court acknowledged specific formulas that the Arbitral Tribunal can assign for the calculation of damages, which include the Hudson formula, the Emden formula and the Eichleay formula. These formulas are explained as follows:

A. Hudson Formula

The oldest formula for the calculation of lost overheads and profits is the Hudson formula which was first mentioned in Hudson’s Building and Engineering Contracts¹⁷ and provides a simplified manner to calculate overheads and profits as follows¹⁸:

The damage is calculated by determining the cost incurred due to delays, based on the contract’s head office overhead and profit percentage.¹⁹

The percentage of the contract value allocated for head office overhead and profit is converted into a decimal form by dividing it by 100. Then, this value is applied to the total contract sum to determine the overhead and profit amount for the entire project. This amount is spread evenly over the contract period to find the cost per unit of time (e.g., daily or monthly). Finally, this time-based cost is multiplied by the length of the delay to calculate the additional cost (or damage) due to the delay. The primary issue arises from the fact that the calculation is based on a number that already includes head office overheads and earnings, resulting in double counting that is unavoidable.²⁰

B. Emden Formula

Emden’s formula represents a “variant of Hudson” which, however, “resembles Eichleay”, as certain commentators state.²¹ The Emden formula is stated in the following terms:

The damage is calculated by assessing the additional cost due to the delay, focusing on the head office overhead and profit.²²

First, the portion of the contract value allocated to head office overhead and profit is identified by using the specified percentage. This portion is then distributed evenly over the entire contract period to determine the rate applicable for each time unit (daily, weekly, or monthly). Finally, this time-based rate is multiplied by the duration of the delay to calculate the total damage attributed to the delay. This method of calculation has the advantage of using the contractor’s actual head office and profit percentage rather than what is provided for in the contract.²³ There is also an inherent problem of double recovery in Emden’s formula as well.²⁴

C. Eichleay Formula

The Eichleay formula evolved in America and derives its name from the case of Eichleay Corpn.²⁵ It is applied in the following manner:

The damage is calculated by considering how much extra cost is incurred due to the delay in completing the contract. It is based on the portion of the contract value allocated to covering the head office overheads and profit, spread over the original contract duration.²⁶

First, the share of the contract value that accounts for overheads and profit is determined. This is typically a percentage specified in the contract. Then, this amount is calculated as a daily, weekly, or monthly rate by dividing it evenly across the original contract period. Finally, this rate is multiplied by the length of the delay to estimate the additional cost (or damage) caused by the delay.

In situations where the loss of opportunity cannot be proven and the claim is based on actual cost, this formula is applied.²⁷ The Eichleay formula assumes an average weekly turnover that is derived from the final billing for the works in question and the actual, instead of the anticipated period to perform these works.²⁸ This is its main advantage, as the head office overheads and profits recovery inherent in the contract are not duplicated in the formula result.

In McDermott case²⁹, the Court prefaced its discussion with the remarks:

102-A. In the assessment of damages, the Court must consider only strict legal obligations, and not the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do.

The Court then explained each of the formulae commonly adopted.

The Court did not endorse any one particular formula since:

106. … it is an accepted position that different formulas can be applied in different circumstances and the question as to whether damages should be computed by taking recourse to one or the other formula, having regard to the facts and circumstances of a particular case, would eminently fall within the domain of the arbitrator.³⁰

In the authors’ opinion what is significant as far as the above discussion is concerned is that the Court is only concerned with the application of formulae and not whether the formulae would apply, notwithstanding that there is no proof of the contractor having suffered overhead charges or loss of profit. This aspect is analysed in greater detail in where the application of the formulae is discussed.

Another landmark case pertaining to the computation of losses is Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd.³¹ (hereinafter referred to as “Batliboi”). The Supreme Court reviewed a claim for loss of profit and profitability. They examined the arbitrator’s decision to provide 10% of the contract value for loss of overheads and an additional 10% for loss of profits/profitability.

The Court opined that the quantum of the damages must be within the scope of the arbitrator and the damages should be calculated as per the facts and circumstances concerning the dispute. The Court further elaborated on the decision of the Tribunal in deciding the method for computation of damages and further held that Batliboi case³²:

21. … The three formulae deal with theoretical mathematical equations, but are based on factual assumptions and therefore can produce three different and unrelated compensation/damages. Therefore, while applying a particular equation or method, the assumptions should be examined and the satisfaction of the assumption(s) ascertained in the facts and circumstances.

Additionally, the Court in respect of the computation of damages as per the Hudson formula also elaborated:

22. …The formula is couched on three assumptions. First, that the contractor is not habitually or otherwise underestimating the cost when pricing; secondly the profit element was realistic at that time; and lastly, there was no fluctuation in the market conditions and the work of the same general level of profitability would be available to her/him at the end of the contract period. Satisfaction of these assumptions should be ascertained when we apply Hudson’s formula for computing the damages.

It also clarified that the burden of proving that the requisite assumptions were met lies on the contractor. A further burden to prove the existence of various other opportunities that were missed due to the prolongation of the contract also lies on the contractor.³³

Furthermore, the Court opined that the loss of overheads or profitability has to be computed against the payments due for the unexecuted work. This implies that the already paid amount must be set off against the due payment. Therefore, damages towards expenditure on overheads and loss of profit are proportional and not compensable for the work performed and paid/payable. Delays in payment for work completion must be compensated for separately.³⁴ The present case advanced its opinion concerning the computation of the damages and emphasised the significance of proof to sustain such claims. The same has been discussed in detail further.

When can these formulas be applied by the Tribunal or Court?

The next question, which requires a detailed discussion, is whether the Court or the Arbitral Tribunal can allow claims based solely on any suitable formula without examining or relying upon any substantial evidence demonstrating that the contractor suffered an actual loss.³⁵ As mentioned in Part I of this paper that for awarding compensation for loss of profitability, the party has to prove the breach of the contract and it is also required to establish actual losses suffered by such breach. This position of law has also been incorporated under Sections 73 and 74 of the Contract Act, 1872, that in order to succeed in damages, the aggrieved party is required to prove real harm or actual loss. Though it is well known that for assessing the actual losses suffered by the party, some amount of guesswork is inevitable. However, the fact that damages are difficult to estimate, or could not be assessed with certainty or precision, cannot relieve the wrongdoer of the necessity of paying the damages for breach.³⁶

In Kailash Nath Associates v. DDA³⁷ has laid down the principles to be followed by the Court or by the arbitrator while considering the claim for compensation under Sections 73 and 74 of the Contract Act, 1872³⁸. It was held that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is held that compensation can only be given for damage or loss suffered. If damage or loss is not suffered, the law does not provide for a windfall.³⁹ The Bombay High Court in Edifice Developers and Project Engineers Ltd. v. Essar Projects (India) Ltd.⁴⁰ upheld the decision of the learned Single Judge in setting aside the Tribunal’s award granting loss of overheads on the misconceived notion of the universal applicability of the formulas for quantification of losses as per McDermott case.⁴¹ The Court clarified that the award was invalid since no evidence was placed on record to substantiate the same.

In Associate Builders v. DDA⁴² unequivocally makes the position further clear that the learned arbitrator can grant the claims made on account of loss of profit and overhead costs only on the basis of credible evidence demonstrating actual loss or damages. In addition, in Essar Procurement Services Ltd. v. Paramount Constructions⁴³, the Bombay High Court ruled that Sections 73 and 74 of the Contract Act, 1872, require real harm or loss and therefore, proof cannot be waived. Further, this principle has also been enunciated by the Delhi High Court in Indo Nabin Projects Ltd. v. Powergrid Corpn. of India Ltd.⁴⁴, wherein it was held that:

12. Standard formulae adopted for computing loss of profits or overheads are essentially tools used for computing the extent of overheads in profits. Undoubtedly, in a given set of facts, the said formula may be effectively used for computing the amounts of overheads/profits. However, that cannot lead to the conclusion that in all cases, the Arbitral Tribunal would be bound to accept computation of overheads/loss of profits based on standard formulae and the claimant is absolved from producing any other material to establish its claims of loss on account of overheads/loss of profits. Whether it is apposite to use the standard formulae in a given case is also required to be established by the contractor. This would necessarily require the claimant to produce some material to justify norms as adopted in the standard formula relied upon by him. A claimant is also required to establish as a matter of fact that it had incurred expenditure on overheads attributable to the works executed during the extended period.

Further, in Essar Procurement case⁴⁵, the loss of profit and overheads was granted merely by applying formulas as enunciated in McDermott case⁴⁶ without relying on any documentary evidence. The order of the Tribunal allowing such claims was, therefore, set aside by the Court under an application filed under Section 34 of the Arbitration and Conciliation Act, 1996⁴⁷. Additionally, the Court specified that the parties cannot produce such evidence for admissibility at the stage of setting aside of the award. The same must be done before the Tribunal to assist it with the computation of losses.

With respect to a claim for loss of profitability, it is imperative for the party seeking damages to prove the existence of an opportunity that has been denied on account of the prolongation of the contract. To this effect, the Delhi High Court in NHAI v. IJM-Gayatri Joint Venture⁴⁸ had held that:

A party should prove, existing opportunity and that it could not avail the said opportunity due to prolongation which resulted in a loss to such party. The loss would have to be quantified and proved.

Additionally, in Unibros v. All India Radio⁴⁹, it was held that in situations where the Tribunal passes an award granting loss of profit or loss of overheads without substantial proof based merely on a formula, then such award is liable to be set aside. The Supreme Court held that:

20. … A claim for damages, whether general or special, cannot as a matter of course result in an award without proof of the claimant having suffered injury. The arbitral award in question, in our opinion, is patently illegal in that it is based on no evidence and is, thus, outrightly perverse; therefore, again, it conflicts with the “public policy of India” as contemplated by Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.

The abovementioned case therefore, is a landmark judgment as it alters the pre-existing practise in the domain of construction arbitration. Contractors have increasingly adopted a common practice of seeking compensation for loss of profits or overhead expenses in arbitration proceedings, even in the absence of meaningful evidence, merely depending on a formula.⁵⁰ In the authors’ opinion, the largest sufferers of such claims are public sector undertakings. The judgment aimed to halt the unethical practice of contractors exploiting the arbitration process for financial gain, especially in the absence of substantial evidence in corroboration with such assertions.

The same has been brought to light in Batliboi case⁵¹ in a special leave petition filed by the appellant whereunder, the Supreme Court upheld the decision of the Division Bench which set aside an order affirming the Tribunal’s award of grant of loss of profit and overheads each amounting to 10% of the contract value.⁵² The award was solely based on the formula and no substantial evidence was presented to support such claims. Therefore, in the petition filed thereafter, the award was struck down.

The Court, however, while assessing petitions under Section 34 of the Arbitration and Conciliation Act, 1996, must be judicious with the interference. The Court cannot set aside an award merely because they do not agree with the Tribunal’s interpretation, rather what must be analysed is whether the Tribunal’s findings were pursuant to a process of reasoning and discussion and analysis of evidence and documents presented before it.⁵³ The scope of judicial interference is minimal under Section 34 of the Arbitration and Conciliation Act, 1996⁵⁴.

In view of the above decisions, the authors contend that it is a well-established and accepted position that in order to claim “loss of profitability”, the party must prove both breach of contract and real loss or harm sustained. Once these two prerequisites are fulfilled, the party can use the abovementioned methods to determine the real losses suffered. The question that requires clarification or elucidation from the courts is whether the same yardstick may be applied when dealing with “loss of profit” claims. The authors have made it clear in Part I of the study that both types of claims are distinct in nature and courts or tribunals should not take the same strategy when dealing with them. While “loss of profitability” claims require the aggrieved party to demonstrate real loss or harm, “loss of profit” claims need not. Reasonable expectation of profit is already inherent in construction contracts, thus, the issue of actual loss or harm does not arise in case of “loss of profit” claims because the party has already experienced a loss as a result of the contract’s early termination.

Standard of proof required for claiming loss of profit

Once the party proves real harm or actual loss suffered, the main challenge that lies for the party is to provide “sufficient evidence” to support claims such as loss of profitability or overhead charges, among other things. It is necessary to examine the standard and mode of proof required to support such claims. This section of the article examines the specifics and documents typically produced by the party to substantiate such claims, as well as the mode of proof adopted by the parties to prove such documents, with the assistance of numerous judicial decisions that have influenced its trajectory.

In Bharat Coking case⁵⁵, the Supreme Court supported the decision of the arbitrator to deny the claim for loss of profit due to a dip in turnover caused by a delay in the completion of the work. The Court reaffirmed the principle that the claimant in such circumstances must prove that if they had received the sum owed under the contract, they could have used it for a different business whereby they could have made a profit. Without the presentation and validation of such a plea, the acceptance of a claim for loss of profits would not have been possible. However, as described in Part I of the paper, the Court in this case, while using the phrase “loss of profit”, was essentially dealing with “loss of profitability” arguments made by the party due to the extended period of the contract. As a result, the concept established in this case should only apply to claims involving loss of profitability.

The general practice is that a party seeking compensation for a loss must provide evidence or proof to corroborate the claim, such as contemporaneous records and other verifying evidence.⁵⁶ On a thorough examination, the authors deduced that though the evidence required would depend on the facts and circumstances of each case⁵⁷:

17. … it may generally include independent contemporaneous evidence, such as other potential projects that the contractor had in the pipeline that could have been undertaken if not for the delays, the total number of tendering opportunities that the contractor received and declined owing to the prolongation of the contract, financial statements, or any clauses in the contract related to delays, extensions of time and compensation for loss of profit.

Furthermore, in order to establish a claim for loss of profitability, site overhead expenses or head office overheads, numerous documents are required to be annexed that substantiate such claims.⁵⁸ The authors also identified some other documents that constitute the proof of loss which may include the compilation of all records of the party for relevant financial years which contains particulars like staff expenses, accommodation, security charges, travel expenses, insurance, telephone expenses, etc. each of which must be proved by further annexing receipts, bills, etc. Statement of loss and profits of the company for the relevant financial years may also be attached to show the impact of breach or prolongation of contract on the company’s loss or profit.

However, the opposite party may always raise an objection with regard to the sanctity of such document, therefore, in order to establish the credibility of the documentation annexed, a certificate by the authorised Chartered Accountant certifying the documentation, loss and profit accounts and other annexed details to be true and in compliance with the relevant statutory provisions. Annexing such Chartered Accountant (CA) certificates may increase the probative value of such documents. However, if a party only files a CA certificate and does not produce a CA as a witness to prove expenditure certified by him, the sanctity of such certificates may be called into question. The Delhi High Court in Ircon International Ltd. v. GPT-Rahee JV⁵⁹ has dealt with this issue and observed as follows:

35. In the present case, the respondent had supported its claim by furnishing a Certificate of an Independent Chartered Accountant [Annexure C(F)-A-35]. A plain reading of the said certificate indicates that it was accompanied by Statement of Administrative and other Overhead Expenses. Further, the Chartered Accountant concerned had also certified that he had examined the same from various books and accounts maintained by the respondent including vouchers, bank statements, bills, invoices, as well as other relevant supporting records and documents maintained by the respondent. The Arbitral Tribunal had accepted the said Certificate. Although, the author of the said Certificate was not examined, the officer concerned of the respondent had produced the said Certificate and duly affirmed the quantification. As noted above, strict rules of evidence do not apply to arbitral proceedings and there is considerable discretion available to the Arbitral Tribunal to take a view on the quality and the sufficiency of evidence. The contention that the impugned award is required to be set aside on the ground that quantification of certain claims awarded in favour of the respondent is without any material, is unmerited.

The authors have adequately established that only after a thorough examination of all annexed documents and certificates should a tribunal decide whether the substance is sufficient to establish the party’s claims. Once sufficient evidence in support of the claims is placed on record, the Tribunal may judiciously examine and analyse the evidence and, if found credible and sufficient, may admit the party’s claim raised on such account. However, the issue is how much evidence is “sufficient evidence” to allow such claims. The most important judgment pertaining to the issue is Unibros v. All India Radio⁶⁰, whereby the count emphasised the need for substantial evidence to corroborate the claim for loss of profit. The Court clarified that a claim for profit cannot be granted without corroborating it with credible evidence to prove an actual loss of profit.⁶¹

The Supreme Court stipulated that in cases involving claims for loss of profit or missed prospects for success, the following conditions must be met:

(a) that there was a delay in completing the contract;

(b) the same was non-attributable to the claimant;

(c) the claimant is an established contractor who has been handling substantial projects; and

(d) sufficient evidence/material substantiating the claim of loss of profitability.⁶²

Upon examination of the record, it was determined that the final requirement, namely, the presence of adequate evidence or substance evidence to corroborate the claims of loss of profitability, was not met in the current case. As a result, the appeal was dismissed. It is pertinent to mention that although the Supreme Court used the term “loss of profits”, the actual claim was for “loss of profitability”. Therefore, the need to demonstrate actual loss was only required for losses resulting from delays and should not be mistakenly applied to loss of profits for unfinished work.

For loss of profits claims, the party upon proving the breach of contract should not be burdened with the need for any additional evidence to demonstrate the actual loss. Recently, in State of W.B. v. S.K. Maji, the Calcutta High Court, has 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.⁶³ Furthermore, when determining the extent of the losses, the Court should conduct a general assessment rather than delving into intricate details. The rationale behind the same is that in a works contract, a reasonable expectation of profit is implicit.⁶⁴ Therefore, the Court just needs to ascertain the proportion of profit that is implied in the contract in order to calculate the loss of profit on unfinished tasks.

However, when it comes to a claim for loss of profitability, the contractor must not only demonstrate the cause of the loss but also provide evidence of the exact amount of loss experienced using contemporaneous documents.⁶⁵ For example, this can be a compilation of projects or works in which the claimant had the necessary qualifications but was unable to undertake due to the prolonged duration of the contract.

Therefore, the authors submit that to ensure clarity between the two, it is crucial for the courts to definitively resolve this question by differentiating between these two categories of claims regarding the need for evidence of actual loss.

Conclusion

The examination of ”loss of profits and profitability” claims within the construction industry through the lens of judicial narratives reveals a dynamic and evolving landscape in the evaluation and quantification of profitability claims. In light of the preceding discussion, it is clear that in order to support loss of profits and profitability claims, the party asserting such claims must establish or demonstrate that it has suffered actual loss or harm using substantial credible evidence. Once the actual harm or loss has been established, the Arbitral Tribunal may use the abovementioned formulas to quantify such claims. However, it is argued that these claims should not be allowed in the absence of such evidence. Therefore, the importance of evidence supporting profit or profitability claims should not be underestimated. While it may not be possible to prove each item of cost incurred, this does not relieve the affected party of the burden of proving that some loss has occurred.⁶⁶

Furthermore, the nature of the evidence produced by the party to support its claims is also critical in allowing such claims. Given the dynamic or unique nature of each construction contract, it may not be prudent to apply a straitjacket rule that only certain types of evidence are admissible. However, as correctly held in Unibros case⁶⁷, broad points regarding the admissibility of such claims may be identified by the courts and uniformly adopted to objectively decide the issue of admissibility of such evidence.

Lastly, a detailed analysis of the abovereferred judicial decisions further reveals that the Indian courts have not yet adopted a standard or uniform approach while dealing with challenges to such awards allowing loss of profits and profitability claims under Section 34 of the Arbitration and Conciliation Act, 1996.⁶⁸ For instance, the courts in A.T. Brij Paul case⁶⁹ and State of Kerala v. K. Bhaskaran Pillai⁷⁰ have upheld the awards even though there was a lack of evidence on record to support such claims whereas in cases like Edifice Developers case⁷¹ and Essar Procurement Services case⁷², the courts have set aside awards categorically stating that substantial evidence proving actual loss or harm is a precondition to apply the above discussed formulas. Thus, a uniform or standard approach is required to be adopted while dealing with challenges to such awards. The best way to deal with ”loss of profitability” claims is to apply the following two-factor test:

1. Whether the party suffered any actual loss or harm due to the breach or prolongation of contracts?

2. Whether the party claiming such damages have produced sufficient credible evidence that is admissible, to establish such loss?

If yes, then widely accepted formulas be used for quantifying such claims.