Why a Rs 2 crore profit claim collapsed for lack of proof

The project was delayed by 42 months. Unibros wanted Rs 2 crore for lost profit. The court asked: where's the proof?

A construction company stood before the Supreme Court holding a formula. The formula said they had lost Rs 1.44 crore in profit because All India Radio had delayed their project by 42.5 months. The court looked at the formula. Then it looked at the evidence. There was none.

The question was simple: can a contractor claim loss of profit by pointing to a mathematical formula alone, without showing actual financial injury? The Supreme Court said no.

When the site wasn't ready

In April 1990, M/s Unibros signed a contract with All India Radio to build Phase-II of the Delhi Doordarshan Bhawan. The work was supposed to take 12 months. But All India Radio failed to hand over the complete site and the required drawings on time. The project dragged on. It finished only in October 1994 — 42.5 months late.

Unibros argued that being stuck on this delayed project prevented it from taking up other profitable work. It claimed Rs 2 crore as loss of profit. The dispute went to arbitration.

The arbitrator's first award

The sole arbitrator applied a well-known calculation method called Hudson's formula (a standard formula used in construction contracts to estimate loss of profit by applying a fixed percentage to the contract value for the period of delay). Using this formula, the arbitrator awarded Unibros Rs 1.44 crore for loss of profit, along with 18% interest.

The arbitrator's desk, it seemed, held only a single formula sheet — no financial statements, no lost bids, no correspondence with clients. That sheet alone became the basis for the award.

All India Radio challenged this award before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that allows a court to set aside an arbitral award if it conflicts with the public policy of India). The Single Judge of the High Court looked at the award and found a problem: there was no evidence to support the loss of profit claim. The judge set aside the award on that specific claim and sent it back to the arbitrator for reconsideration.

When the arbitrator ignored the court

The arbitrator got a second chance. But instead of calling for fresh evidence, the arbitrator simply passed a second award that was identical to the first — same amount, same reasoning, same lack of proof. The High Court judge, when presented with this second award, flipped through what was essentially an empty evidence folder — no new documents, no fresh analysis, nothing that addressed the remand order.

The Delhi High Court was not impressed. The Single Judge set aside the second award, this time dismissing the loss of profit claim entirely and imposing costs of Rs 50,000 on Unibros. The Division Bench of the High Court upheld this decision. Unibros appealed to the Supreme Court.

What the law actually requires

Before the Supreme Court, Unibros argued that the arbitrator had correctly applied Hudson's formula and that the High Court had overstepped by re-examining the merits of the award. The company pointed to earlier Supreme Court judgments that allowed loss of profit claims in delayed construction contracts.

All India Radio countered that the earlier judgments required proof — not just a formula. The company said Unibros had not produced a single document showing that it had actually lost other contracts because of the delay. No rejected bids. No lost tenders. No financial statements showing a dip in revenue during the delay period. Nothing.

The courtroom, during arguments, was filled with the rustle of papers as counsel for AIR gestured to the empty space where evidence should have been. The bench listened in silence.

Why the formula wasn't enough

The Supreme Court bench — Justice S. Ravindra Bhat and Justice Dipankar Datta — dismissed the appeal on October 19, 2023. The court held, in no uncertain terms, that "an award based on no evidence is patently illegal" and conflicts with the public policy of India under Section 34(2)(b)(ii) of the Arbitration Act. The words hung in the air as the judgment was read out: the formula alone could not substitute for proof.

The court laid down four things a claimant must prove for loss of profit: (1) that the contract was delayed; (2) that the delay was not the claimant's fault; (3) that the claimant is an established contractor handling substantial projects; and (4) credible evidence to substantiate the claim of lost profitability.

Hudson's formula, the court said, does not directly measure a contractor's exact costs. It provides estimates. It is useful only after the contractor has first shown — with evidence — that loss of profits and opportunities were actually suffered. The formula cannot by itself prove the loss.

The court also made clear that an arbitrator cannot ignore a judicial direction. When the High Court sent the matter back for reconsideration, the arbitrator was bound to comply. Passing an identical award without fresh evidence was an attempt to overreach a binding judicial decision — which itself conflicts with fundamental public policy.

The smell of old legal files and the weight of the Supreme Court's judgment settled over the matter. The appeal was dismissed, though the costs of Rs 50,000 imposed by the Single Judge were made easy — meaning Unibros did not have to pay that amount.

The procedural journey in full

The case had travelled a long road. It began with the sole arbitrator's first award on February 11, 1999, allowing Claim No. 12 for loss of profit at Rs 1,44,83,830 with 18% interest. The Single Judge of the Delhi High Court set aside that award on May 20, 2002, under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, for lack of credible evidence, and remitted the matter for reconsideration.

The arbitrator then passed a second award on July 15, 2002 — identical to the first. The Single Judge set this aside on February 25, 2010, dismissing the claim entirely with costs of Rs 50,000. The Division Bench of the Delhi High Court upheld this decision on December 9, 2019. Finally, the Supreme Court dismissed the appeal on October 19, 2023.

The precedents that guided the court

The Supreme Court relied on several key precedents. In ONGC Ltd. v. Saw Pipes Ltd. (2003), the court had held that an award conflicting with the public policy of India could be set aside. In Associated Builders v. Delhi Development Authority (2015), the court elaborated on what constitutes a patent illegality. In Bharat Cooking Coal Ltd. v. L.K. Ahuja (2004), the court addressed the need for evidence in claims for damages. In The Project Director, NHAI v. M. Hakeem (2021), the court reaffirmed the requirement of proof. In M/s AT Brij Paul Singh & Ors. v. State of Gujarat (1984), the court had allowed loss of profit claims but only where evidence existed. In McDermott International Inc. v. Burn Standard Co. Ltd. (2006), the court discussed the limits of arbitral discretion.

What this means for every contractor

For businesses that sign construction contracts — or any contract with a delay clause — this judgment is a warning. A formula is not proof. A spreadsheet is not evidence. If you claim loss of profit, you must bring documents that show actual financial injury: lost bids, rejected tenders, financial statements, correspondence with prospective clients.

THE PLAY: Before you claim loss of profit in arbitration, gather the documents that prove you actually lost the work — not just the formula that calculates what you might have earned.

The Supreme Court ended where it began: with a formula and an empty folder. The folder remained empty. The formula remained unproven. And the claim for Rs 2 crore collapsed for lack of proof.