Authors: Mr. Samir Malik (Partner), Mr. Mahip Singh (Associate Partner) and Ms. Ayushi Pandey (Associate)
Loss of profit claims are among the most frequently pleaded heads of damages in Indian construction arbitration, and among the most consistently rejected. Despite prolonged delays, extensions of time, and employer-attributable breaches, contractors routinely fail to secure compensation under this head. The principal reason is a conceptual and evidentiary error: most claims labelled as “loss of profit” are, in law, claims for loss of profitability, and are pleaded and proved as neither.
What Courts Mean by “Loss of Profit” in Delay Cases?
In the context of delay or prolongation, loss of profit does not refer to a presumed margin embedded in the contract price. Unlike termination cases, where loss of profit may relate to the unexecuted portion of work, prolongation cases involve work that is ultimately executed, albeit over an extended period. In such cases, the contractor has already earned the contractual consideration for the work performed.
What is therefore claimed is not loss of profit per se, but loss of profitability, that is, the contractor’s alleged inability to deploy its resources elsewhere, undertake alternative work, or earn profits from other projects because its capacity remained tied up in the delayed performance of the contract. Contractors often blur this distinction and treat delay cases as if they were termination cases. They apply the lower, assumption-based standard used for loss of profit to what is, in reality, a claim for loss of profitability. Courts have consistently rejected this approach. They have made it clear that in cases of prolongation, loss of profitability cannot be presumed from delay, extensions of time, or notional profit percentages embedded in the contract. It must be strictly proved through clear and credible evidence showing actual economic loss.
The watershed moment came in the landmark case of Unibros v. All India Radio, 2023 SCC OnLine SC 1366. The Supreme Court categorically rejected the notion that loss of profit can be presumed merely because performance of a contract was delayed. While acknowledging that a contractor may, in principle, suffer economic loss due to prolongation, the Court held that such loss must be proved, not assumed. In that case, All India Radio engaged a contractor for construction of the Delhi Doordarshan Bhawan, but the project encountered a substantial delay of over forty-two months, leading to disputes. The contractor claimed loss of profits for having to render services and blocking its resources longer than the period stipulated in the contract. The Arbitrator awarded compensation using Hudson’s formula, but the Supreme Court set aside the award, holding that claims of loss of profits cannot result in awards being granted without proof of the claimant having suffered injury.
The Four Pillars That Most Claims Cannot Support
In Unibros, the Court clarified that to claim loss of profit due to delay in execution of the contract, the claimant must establish: (i) there was a delay in the execution and completion of the contract; (ii) such delay was not attributable to the claimant; (iii) the claimant was an established contractor with the capacity and credentials to undertake and execute substantial projects; and (iv) the alleged loss of profits is supported by credible evidence, and not merely by formulaic or speculative assertions.
It is the fourth pillar, credible evidence, that proves to be the Achilles heel of most claims.
There is a fundamental misunderstanding amongst contractors. Many believe that demonstrating delay caused by the employer automatically entitles them to apply a formula and calculate loss. However, Hudson’s formula, as well as other methods used to calculate claims for loss of off-site overheads and profits, only provide an estimate of losses that a contractor may have suffered but do not directly measure a contractor’s exact costs. These formulae are useful in assessing losses, but only if the contractor has led evidence to prove the loss of profits and opportunities it suffered owing to the delayed completion. Courts have consistently held that proof of actual loss is a condition precedent to applying any formula for computing loss of profit, and in the absence of such substantiating evidence, the claim cannot be sustained. Formulae cannot be applied in a vacuum without a factual basis.
Evidence Courts Require
Judicial guidance on this issue has been consistent. Courts expect material such as:
a. Evidence of other projects or tenders that the contractor could have undertaken but for the prolonged contract;
b. Proof of invitations to tender that were declined due to lack of capacity;
c. Financial statements demonstrating a drop in turnover or profitability attributable specifically to the delay; and
d. Contractual provisions governing extensions of time and compensation.
In Bharat Coking Coal Ltd. v. L.K. Ahuja, (2004) 5 SCC 109, the Supreme Court held that a claim for loss of profit due to the prolongation of a contract is not maintainable unless the contractor specifically pleads and proves that the delayed funds could have been utilized in another business to earn a profit. The Court emphasized that such claims require substantiating evidence on record and cannot be granted based on mere assertions of diminished turnover.
Similarly in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., (2024) 2 SCC 375, the Supreme Court reiterated that to claim loss of profit, the contractor must demonstrate that other work was available and would have been secured if not for the delay. It also held that the contractor must show a drop in turnover due to the delay, supported by books of accounts, to establish that the loss was directly attributable to the delay and not to other external factors.
More recently, the Delhi High Court Division Bench, in the case of Union of India v. Ahluwalia Contracts (India) Ltd., 2025 SCC OnLine Del 4066, upheld the rejection of the loss of profits claim by the arbitrator on the ground that it was founded entirely on assumed and extrapolated figures. The Court noted that the claimant had merely imputed an average monthly profit by applying a notional percentage to the contract value and projecting the same over the period of prolongation, without producing any evidence to demonstrate that such profits had in fact been earned historically or that comparable profits could have been earned elsewhere during the extended period. Emphasizing that loss of profit cannot be presumed from delay alone, the Court reiterated that the burden squarely lies on the claimant to prove, through cogent and contemporaneous material, that profits were actually lost due to the prolongation of the contract and that the claim is not hypothetical or unreal.
What Contractors Must Do
Contractors are not compensated for the business they wish they had done, they only get paid for the business they can prove they lost. To succeed, contractors must:
a. Maintain contemporaneous records: Document tender invitations received during the delay period and reasons for declining them.
b. Preserve financial evidence: Maintain detailed books of account showing turnover trends and the financial impact of resource immobilisation.
c. Demonstrate market conditions: Provide evidence of prevailing market opportunities and the contractor’s historical success rate in securing such work.
d. Engage experts early: Deploy quantum experts and delay analysts to construct credible causation narratives before the claim is crystallised.
e. Distinguish claim heads carefully: Ensure loss of profit claims do not overlap with claims for unabsorbed overheads or idle equipment to avoid allegations of double recovery.
Conclusion
Most loss of profit claims fail in Indian arbitration not because they lack legal merit, but because they lack evidentiary substance. The lesson for contractors is clear: anticipate the claim, document the loss, and prove the connection. Formulae are tools of calculation, not substitutes for proof. What ultimately determines success is not the length of the delay, but the quality of the evidence marshalled to show how that delay translated into a real commercial disadvantage. Without that bridge between breach and balance sheet, such claims are destined to fail.
Disclaimer: This article represents our understanding and interpretation of the relevant laws as on the date hereof and is provided without expressing any opinion, advice, or recommendation. The interpretations set out herein are subject to change, and there can be no assurance that any regulator, authority, or judicial body will concur with or adopt a position consistent with our views expressed in this article. This article is furnished solely for academic and informational purposes and should not be construed as legal advice or relied upon for any purpose whatsoever.
