Delay and breach claims in construction arbitrations: When the evidence falls short

Delay is often an inevitable feature of construction contracts. The claims arising out of such delay are many and varied, including price variation on account of delay, site overheads, loss of profitability and head office overheads.

Frequently, these claims are not adequately corroborated with evidence before the Arbitral Tribunal, which leads to the Tribunal rejecting otherwise meritorious claims or Courts setting aside awards. This article seeks to provide a snapshot of where certain claims arising out of breach and / or delay of contract are lost, and how such claims can be strengthened with evidence.

For the purpose of this article, we have emphasised on the following elements:

a) Loss of Profit,

b) Loss of Profitability, and

c) Head Office Overheads.

A summary table setting out each claim alongside the evidence required to establish it is provided at the end of this article.

Prior to delving into these claims and analysing where they are lost, it is important to identify the distinction between ‘loss of profit’ and ‘loss of profitability’.

While there is a clear line of jurisprudence on the distinction between ‘loss of profit’ and ‘loss of profitability’, the two concepts are often used interchangeably. In fact, the Calcutta High Court, recently, in State of WB v. SK Maji, 2025 SCC OnLine Cal 3945 noted that several decisions of the Supreme Court “conflate the concepts of loss of profit and loss of business.”

The distinction between ‘loss of profit’ and ‘loss of profitability’ has been succinctly explained by the Delhi High Court in Ajay Kalra v. Delhi Development Authority, 2023 SCC OnLine Del 8781, as follows:

“'Loss of Profits' and 'Loss of Profitability' has often been interchangeably used in recovery cases. The former stands for the loss incurred due to the non-completion/prevention from completing of the contract on account of breach committed by the respondent. The latter refers to the loss incurred due to the delay in the project attributable to the respondent, due to which the claimant has lost the opportunity to earn profits through other projects after the contractual period.”

To sustain a claim for ‘loss of profit’, establishing wrongful termination is essential. This claim is relatively easier to prove than a claim for ‘loss of profitability’, as the expectation of profit is inherent in work contracts [See, A.T. Brij Paul Singh and Ors. v. State of Gujarat, (1984) 4 SCC 59; MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573], and a proven breach generally entitles the contractor to compensation for lost profits on unexecuted work.

Once a breach is proven, Courts have consistently held that a claim for ‘loss of profit’ requires “a broad evaluation instead of going into minute details” [See, AT Brij Paul (supra); SK Maji (supra)]. The Calcutta High Court, in SK Maji (supra), explained that once breach is established on the part of the employer “the contractor cannot be further obligated to establish a loss suffered on account of such breach, because a reasonable expectation of profit is implicit in a works contract.”

Courts have generally adopted a lenient approach to such claims, often awarding in the range of 5 to 15% of the value of unexecuted work as ‘loss of profit’, without a detailed inquiry into actual margins [See, JG Engineers Private Limited v. Union of India and Anr., (2011) 5 SCC 758; NHAI v. BEL-ACC (JV), 2016 SCC OnLine Del 4025; R.K. Aneja v. Delhi Development Authority, 1998 SCC OnLine Del 501]. These percentages, however, are not fixed norms, and the quantum of damages naturally depends on the facts and circumstances of each case. Accordingly, a prudent approach would be to lead cogent evidence substantiating the profit margin envisaged under the contract. This may include business plans, internal financial projections or presentations, as well as any correspondence or agreements reflecting the anticipated profit component.

To establish ‘loss of profitability’ arising out of prolongation of a contract, the decision of the Supreme Court in Unibros v. All India Radio, (2024) 1 SCC 221 is instructive, identifying the following four conditions to be satisfied:

“...first, there was a delay in the completion of the contract;

second, such delay is not attributable to the claimant;

third, the claimant's status as an established contractor, handling substantial projects; and

fourth, credible evidence to substantiate the claim of loss of profitability.”

Interestingly, it is the fourth condition where the majority of claims for ‘loss of profitability’ fail, as contractors often cannot provide credible evidence of lost alternative business due to employer-caused delays.

The Supreme Court in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corporation Ltd., (2024) 2 SCC 375 has set out the kinds of evidence required to be led by a contractor to prove the fourth condition, and referred expressly to:

i. Records evidencing that the contractor declined invitations to tender during the period of delay owing to their resources being tied up in the delayed contract; and

ii. Year-on-year turnover comparisons to demonstrate “a drop in turnover and establish that this result is from the particular delay rather than from extraneous causes”.

Claims for ‘Head Office Overheads’, often made alongside claims for ‘loss of profit’ and ‘loss of profitability’, may be made in two situations.

First, where the contract is prematurely terminated and the contractor is unable to recover head office expenses that were built into its bid. In such cases, the contractor may claim ‘dedicated overheads’, i.e., direct head office expenses specifically incurred for the project. These must be substantiated with specific records, such as staff time sheets, travel expenses, and other supporting documentation. The contractor may also claim “unabsorbed overheads”, which are costs incurred regardless of the contractor’s specific projects, and include rental payments for the head office, executive and administrative salaries, insurance, stationery, and legal and accounting costs.

Second, where there is prolongation of the contract, the contractor may claim unabsorbed head office overheads by demonstrating, on principles similar to those applicable to loss of profitability, that missed opportunities resulted in a loss of turnover. This, in turn, prevented recovery of the overheads that the contractor could reasonably have expected to recover during the prolongation period, as its resources remained tied up on the project. Critically, formulae such as Hudson’s, Eichleay’s or Emden’s, while useful as a framework, are insufficient on their own. The contractor must adduce credible evidence such as financial statements, evidence of declined tenders, or a demonstrable drop in turnover to substantiate such a claim.

Given the complexity of computing unabsorbed head office overheads during prolongation, contractors frequently resort to established formulae. However, reliance on a formula alone carries significant risk. 

While the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181 recognised the use of formulae for computing claims, it is important to note that such formulae are “dependent on various assumptions which are not always present and which, if not present, will not justify the use of a formula” [See, Property and Land Contractors Ltd. v. Alfred McAlpine Homes North Ltd., (1995) 76 BLR 59, approved in Batliboi (supra)].

Take the Hudson formula, for example, as noticed by the Supreme Court in Batliboi (supra). The Hudson formula rests on three assumptions: (i) that the contractor has not underestimated costs when pricing; (ii) that the profit element in the bid was realistic; and (iii) that there was no fluctuation in market conditions and work of the same general level of profitability would have been available at the end of the contract period.

Consequently, it becomes necessary for parties and their counsel to assist the Arbitral Tribunal in identifying and justifying the correct formulae for computation in a given case.

Construction arbitrations are won or lost on the strength of the evidence produced. Even if a claim for damages, unsupported by clear evidence, succeeds before an Arbitral Tribunal, an award granting damages without clear, credible evidence is “outrightly perverse... in conflict with the ‘public policy of India’ as contemplated by Section 34(2)(b) of the Act” [See, Unibros (supra)]. Contractors who document carefully, and counsels who build that documentation into the record from the outset, give Tribunals the tools to award what is deserved. Those who do not, rarely end up recovering what they are owed.

About the authors: Angad Varma and Toyesh Tewari are Partners, Agastya Sen is a Senior Associate at Dua Associates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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