UNIBROS was awarded a works contract by ALL INDIA RADIO (AIR) to construct an office building.
Supreme Court of India1 revisits the measure of damages for delay in completion of works contract and the Hudson formula in Building and Engineering Contracts.
Brief facts
UNIBROS was awarded a works contract by ALL INDIA RADIO (AIR) to construct an office building. The construction was scheduled to be completed in 1 year but suffered a delay of 3-1/2 years. Disputes arose between the parties regarding the compensation for delay in completion of construction. UNIBROS invoked arbitration. Amongst the various claims before the arbitral tribunal, UNIBROS claimed INR 2,00,00,000/- for loss of profit endured due to UNIBROS retention on the contract without any corresponding increase in monetary benefits.
Decision of the arbitrator
For the claim of loss of profits, the arbitrator awarded INR 1,44,83,830 towards loss of profit by applying the Hudson formula on the following grounds:
i. Delay in completing the work beyond the stipulated contract period was caused by AIR as against the stipulated contract period of 12 months.
ii. UNIBROS was retained by AIR for the execution of the work for an additional period of 3½ years leading to loss of UNIBROS profit earning capacity during the extended period leading to loss of profit earning capacity during the extended periods.
iii. Loss of profit was based on the profit allowance of 7-1/2 % per year.
iv. UNIBROS was not required to establish the exact amount of gain or loss with absolute certainty; instead, presenting fairly persuasive and the best available evidence under the particular circumstances of the case would suffice.
Challenge of AIR against the award
AIR challenged the award before the High Court on the following grounds:
i. The present case being that of delay simpliciter, Hudson’s formula will have no application to award any amount for loss of profit without the aggrieved party leading any evidence as a condition precedent to the application of the Hudson formula
ii. The application of the Hudson’s formula hinges upon three essential conditions:
Firstly, the profit awarded to the contractor must have been realistically attainable elsewhere had it been free to leave the contract at the appropriate time;
Secondly, the contractor should not have consistently underestimated his costs during pricing, ensuring that the profit percentage was genuinely viable at that point;
Thirdly, there should have been no subsequent changes in the market, such that work of a comparable level of profitability would have been available to the contractor at the time of the conclusion of the contract.
iii. In the absence of cogent evidence substantiating a genuine loss of profit or opportunity, it would be unjustifiable to permit the contractor to capitalize solely on the application of the Hudson formula.
The High Court set aside the award. UNIBROS further appealed before the division bench of the High Court which conformed the decision of the single judge of the High Court. UNIBROS preferred a further appeal before the Supreme Court of India.
Decision of the Supreme Court of India
i. To support a claim for loss of profit arising from a delayed contract or missed opportunities from other available contracts that UNIBROS could have earned elsewhere by taking up any, it becomes imperative for the claimant to substantiate the presence of a viable opportunity through compelling evidence. This evidence should convincingly demonstrate that had the contract been executed promptly, the contractor could have secured supplementary profits utilizing its existing resources elsewhere.
ii. Hudson’s formula, while attained acceptability and is well understood in trade, does not, however, apply in a vacuum. Hudson’s formula, as well as other methods used to calculate claims for loss of off-site overheads and profit, do not directly measure the contractor’s exact costs. Instead, they provide an estimate of the losses the contractor may have suffered. While these formulae are helpful when needed, they alone cannot prove the contractor’s loss of profit. They are useful in assessing losses, but only if the contractor has shown with evidence the loss of profits and opportunities it suffered owing to the prolongation.
iii. The law, as it should stand thus, is that for claims related to loss of profit, profitability or opportunities to succeed, one would be required to establish the following conditions: 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. On perusal of the records, we are satisfied that the fourth condition, namely, the evidence to substantiate the claim of loss of profitability remains unfulfilled in the present case.
Conclusion
While the Supreme Court of India accepted the principles of Hudson formula in measuring damages in works contract, the court has held that the contractor will have to provide adequate evidence to demonstrate that the contractor was deprived from deploying the resources/assets in another project which prevented the contractor from earning a profit. Mere mathematical calculation based on the duration of delay and contract value will not suffice.
Footnote
1. M/S UNIBROS V. ALL INDIA RADIO – 2023 INSC 931
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