In any typical commercial arbitration, the claimant categorizes his claims under various heads. The most common head of claim being the costs that have accrued to it over the period of the contract from the date a breach/expropriation by the other party occurred. Damages suffered by the claimant as a result of such breach are also a usual form of claim. Apart from these, the claimant generally requests to be compensated for speculative loss of profits. It is tricky to quantify such future loss as not only would the claimant have to prove something that never happened but also demonstrate that the profits would have been obtained, "but for...the breach, interference, etc." It is also incumbent upon the claimant to rule out other causes of loss. In matters relating to infrastructure, such a claim arises when the project does not reach fruition or was delayed owing to reasons attributable to the employer, depriving the contractor of potential profit margins that could have been gained from the project.
DETERMINING PROBABLE LOSS OF PROFITS
It is settled law that where a party is liable for breach of contract, either express or implied, the other party is in general, entitled to nominal damages, although, no actual damages are proved. In this specific context, it has been held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract1. However, discerning the remoteness of damage and proving the damage with reasonable certainty are crucial for basing a claim on speculative loss of profit.
A party injured by a breach of contract can recover only those damages that either should "reasonably be considered...as arising naturally, i.e., according to the usual course of things" from the breach, or might "reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." This principle was first propagated in the landmark case of Hadley v. Baxendale2 which was one of the earliest to grant a claim arising from loss of profit under the head of 'Special Damages'. However, damages - nominal or actual, have to be proven to a degree of reasonable certainty in order for them to be granted. This basically means that damages are not recoverable for loss beyond an amount the evidence permits to be established with reasonable certainty3
While ascertaining the claim arising from loss of profit, the Arbitral Tribunal would evaluate several criteria, not limited to:
i. Business records, historical financial statements, business financial forecasts, etc
ii. Duration of such forecasts/projections
iii. Ability to continue operations over the duration of projection
iv. Stability and predictability of future costs and revenue
These criteria are often not weighed equally, and tribunals are prone to emphasize more on future profitability than past performance. Arbitral Tribunals have refused to recover speculative losses when there is insufficient evidence to prove that the project could generate positive cash flows4. Projecting of fair market value of the project using Discounted Cash Flow (DCF), in order to draw up potential losses, was objected to for being highly speculative by the respondent and was also upheld by the Tribunal5 as the given asset did not have a history of operations or profitability.
However, in five solar power cases against Spain, tribunals awarded compensation for lost future profits even if the power plants did not have a long history of operations6. The earlier DCF model was upheld as according to the tribunal, power stations have a relatively simple business model, producing electricity whose demand and long-run value can be analysed and modelled in detail based on readily available data.
CONCLUSION: POSITION OF INDIAN COURTS
The Delhi High Court held that the contractor being retained for longer on the project, without any corresponding increase in monetary benefit or freedom to undertake other projects, is a valid ground for being compensated for loss of future profit, even if the contract debarred such a contingency7. The Supreme Court, in 20048, pronounced that it cannot award a claim for loss of profits in the absence of evidence to support such a presumed loss; Indian courts have ever since usually granted claim for loss of profit to the extent of 10% of the contract value as a reasonable amount9 where it has clearly been proven that if not for the breach/delay in contract fulfilment by the respondent, the claimant would have earned profits over the duration succeeding timely execution of the contract10.
While loss of profit has become a common head of claim in project-based arbitration matters, the tribunals are not prone to rely solely on the claimant's calculations, projections or documentary evidence provided to support the same. The question of ascertaining loss and quantum of damages is often a very technical undertaking and if the claimant fails to pass certain thresholds to prove the quantum of claim that it demands, the tribunal may resort to approaching industry-based experts or arrive at what they consider to be the most reasonable estimate of such loss.
Footnotes
1 Associate Builders v. Delhi Development Authority [Civil Appeal No. 1-531 of 2014 (arising out of SLP (Civil) No. 14767 of 2012)]
2 (1854) 9 EX 341
3 TAS Distribution Co. v. Cummins Engine Co. [491 F. 3d 625, 632 (7th Cir. 2007)]
4 Bear Creek Mining Corporation v. Republic of Peru (ICSID ARB/14/21)
5 Id.
6 Eiser Infrastructure Limited and Energia Solar Luxembourg S.à.r.l vs. The Kingdom of Spain (ICSID ARB/13/36)
7 National highways Authority of India v. HCC Ltd. [OMP (Comm) No. 633/2012, decided on 08.07.2014 (High Court of Delhi)].
8 Bharat Coking Coal Ltd. v. LK Ahuja, [(2004) 5 SCC 109].
9 Himachal Joint Venture v. Panilpina World Transport, [AIR 209 Delhi 88].
10 National Highways Authority of India v. AFCONS-APIL Joint Venture, [OMP (Comm) No. 10/2018, decided on 31.01.2018 (High Court of Delhi)] 1 2
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
