Contractor Must Prove Loss Of Profit On Unexecuted Work; No Automatic Damages: Karnataka High Court

The Karnataka High Court has held that a contractor claiming damages for loss of profit on unexecuted works is not barred from raising such a claim merely because the work remained unexecuted.

However, the contractor must prove that it actually suffered the loss. "If a contractor is prevented from executing the contract on account of reasons attributable to the employer, the contractor is not precluded from raising a claim for loss of profits for the unexecuted works," the court observed.

It added, "However, the contention that the contractor is not required to establish that it had suffered such loss is unmeritorious."

A division bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha dismissed an appeal filed by N.N. Constructions. The appeal challenged an order refusing to set aside an arbitral award arising from a railway widening contract with South Western Railway.

The dispute arose from a contract worth about ₹12.77 crore awarded in March 2017. The contract was extended several times before it was foreclosed. N.N. Constructions later sought about ₹4.38 crore in arbitration, including about ₹1.91 crore towards loss of profits on the unexecuted work.

The arbitral tribunal rejected the claims. It found that the Railways were not solely responsible for the delay and that the contractor had failed to substantiate its claims with evidence. The Commercial Court declined to interfere with the award.

Before the High Court, the contractor argued that its claim was for profits it would have earned on the unexecuted portion of the work. It contended that this was distinct from a claim arising from prolongation of the contract. It also argued that such damages could be awarded on a presumptive basis.

Accepting the distinction, the bench observed, "There is some merit in the contention that the appellant's claim for loss of profit was not based on prolongation of the contract; it was based on the value of work that was not executed. If a contractor is prevented from executing the contract on account of reasons attributable to the employer, the contractor is not precluded from raising a claim for loss of profits for the unexecuted works."

The court, however, clarified, "This cannot be conflated with the claim for loss of profits on account of loss of opportunity or on account of prolongation of contract. However, the contention that the contractor is not required to establish that it had suffered such loss is unmeritorious."

The bench also rejected the contractor's reliance on the Supreme Court's decision in A.T. Brij Paul Singh. It held that the judgment does not lay down that tribunals can award a fixed percentage of the value of unexecuted work as damages without evidence. Whether damages are payable, and their measure, must depend on the facts and the evidence in each case.

On the challenge to the tribunal's factual findings, the court held, "As noted above, the said conclusions are based on materials on record. The said findings hence will not to be held to be perverse or unreasonable in the sense of the Wednesbury principle of unreasonableness. Thus, these findings cannot be held to vitiate the impugned award on the ground of patent illegality."

Finding no patent illegality in the arbitral award, the High Court dismissed the appeal.

For Appellant: Advocate Bapat Samath Vinayak Rao

For Respondents: Shivakumar, CGC