Contractual claims for profit: Liability, causation and quantification

Introduction

Commercial ventures are centered on a simple premise: the potential for profit. Historically, ‘profit’ was an intuitive exercise - any exchange ought to improve the position of parties. This intuition came to be meticulously measured in the clay tablets associated with the Ubaid Period[1], the numerical tablets and bullae from the Uruk Period[2] under the Mesopotamian system for accounting and administration. With data recording deliveries of grain, livestock, oil, metals, etc., mercantile systems began tracking the seasons of production and demand, leading to a stratification of expectations and accountability in trade. Etymologically also, ‘profit’[3] means growth, advance, increase or success – conveying a sense of advancement.  It is therefore unsurprising that profit is a central organising principle of commercial enterprise and contractual relations. 

Parties bargain for profit, structure pricing with profit as a metric, and litigate over ‘loss of profits’ when the expected commercial return is impaired. The breadth of the expression ‘loss of profit’ is expansive- it may refer to the direct profits foregone due to non-completion of obligations, or it may refer to the diminished profitability of that venture due to delay or disruption. It may also mean consequential or opportunity-based profit- i.e., profit that could have been earned from successive contracts, had resources not been tied to remedying delayed performance of the preliminary contract. 

Understandably, a claim for lost profits is tethered to cold, hard facts - whether a loss occurred, the cause for such loss, and if the loss is accurately quantifiable and adequately compensable. Each such fact has significant legal consequences, assessed through different legal and evidentiary thresholds. Thus, risk allocation in contracts becomes important[4].

In this article, the Authors examine how contracts can identify and appropriately provision for losses.

The Framework: Gains prevented qualify as losses sustained

Contracts often provision for the unsavoury and the unforeseen– events where conduct of parties have caused losses unto the other, or events where extraneous events (such as regulatory requirements) cause delays in completion.  Such undesirable events are addressed either through clauses on ‘limitation of liability’, ‘Indemnity’, or through clauses for excluding of consequential losses.

As a starting point, party intent must be manifest from the Contract - would ‘loss of profits’ be excluded from the purview of damages, or would it be permissible as a claim, but capped at a reasonable amount? Would direct losses be permitted but indirect or consequential loss of profit be excluded? Would loss of profit be recoverable in specific circumstances or would it be a general remedy unto parties?

Once there is a contractual stipulation as to ‘loss of profits’, any claim would have to meet the parameters of Section 73 of the Indian Contract Act, 1872 (‘Contract Act’). As per Section 73, a party aggrieved by the breach of a contract would be entitled to compensation for any loss or damage that naturally arose from such breach. Such compensation would be payable if the Party who breached the contract knew at the time of making the contract, that such losses were likely to be incurred in the event of breach. Significantly, compensation is payable only in respect of loss or damage arising ‘from’ such breach.  No compensation is liable for any remote and indirect loss. Therefore, much depends on establishing a nexus between the breach, a loss arising ‘from’ such breach, and whether the party said to be in breach could have ‘known’ when they made the contract, that such losses could result from the breach. In disputes concerning delay in performance, Section 55 comes into play in addition to the requirement under Section 73 and Courts will test if claims for losses based on delay in performance stem from a requirement that the Contract be completed in a specified time.

Types of claims for loss of profit

Illustration: X is a contractor. X enters into a contract with Y in 2026, where X would construct a Café for INR 10 crore within 12 months. X prices the contract after factoring costs (towards labor, material, equipment and overhead costs) and a profit of INR 2 crore. While the Contract is underway, a few different situations may arise. 

However, X and Y can only claim losses to the extent that such delays are attributable to the other party and that the Contract protects X and Y in such event. Therefore, the Contract will be the first point of scrutiny to satisfactorily establish that X and Y suffered a ‘loss of profit’.

In common parlance, all such claims would fall within the category of ‘loss of profits’. Jurisprudentially, these situations warrant different treatment, typically bucketed as ‘loss of profit’ as against ‘loss of profitability’[5]. Loss of profit stands for the loss incurred due to non-completion of/prevention from completing the contract whereas the loss of profitability refers to the loss incurred due to the delay in the project attributable to the other side, on account of which, the claimant lost opportunity to earn profits through other projects after the contractual period[6].

Loss of profits: Profits expected, but lost due to unfair interruption in performance 

• Typically, loss of profit concerns the expected gain from the contract that was prevented from being earned (Situation 1).

The Hon’ble Supreme Court has recognised that where breach deprives a party of the opportunity to complete the contract, compensation may be legally recoverable as a loss of expected profit, provided the rescindment is proven to be in breach of the contract[7]. The remainder of the contract could be a reasonable means for assessing expected profit where breach has prevented completion and the estimate rests on a rational basis[8].

The Hon’ble Madras High Court’s decisions prove particularly instructive in understanding loss of profits.[9] The Hon’ble Court explained that a claim for ‘loss of profit’ must be distinguished from claims on account of disruption, price variation, or delays in execution which are generally capable of being proven through evidence of actual expenditure or actual loss. While the claims for damages must often be proved through evidence, a claim for ‘loss of profit’ is by definition an estimate, for which the assessment must be anchored in bid assumptions, comparable contracts or other reasonable indicators. it is that profit that could have been earned had the contract run its course, but which was lost due to the premature termination. The Hon’ble Court therefore recognised that a claim for ‘loss of profit’ cannot be proven with exactitude in the same way as a claim for actual outlay 

Loss of profitability: Diminished commercial returns due to ‘opportunity loss’

• Loss of profitability, by contrast, concerns the diminished commercial returns even if performance is completed- typically caused by delay, disruption, or the inability to deploy resources elsewhere (Situations 2 and 3).

The scope of enquiry is more exacting where the claim is for ‘loss of profitability’, i.e., where the grouse is not that X was prevented in completing performance of the contract, but that X lost potential opportunities in the course of attending to Y’s demands under Situation 3 or on account of delays as in Situation 3.  Starting from evidentiary requirements, a claim for loss of profitability must be supported by evidence showing the missed opportunity or reduced commercial return[10].  The contractor must establish that they could have utilised the same time and resources for other businesses in which they could have earned profit[11]. Where a claim is based on ‘missed opportunities’, the claiming party must establish through concrete evidence[12]:

• the existence of a real opportunity that could have been pursued;
• the fact that resources would have been freed up for utilisation in the other opportunity, if this contract had been duly executed.

Such proof may take the form of contemporaneous tender opportunities that had to be declined, or accounting material showing a reduction in turnover linked to the relevant period. In the absence of such evidence, the complaint is of delayed receipt of money rather than lost profitability, which would be more properly staked under a claim for interest[13]. In a nutshell, a party must first show that they were entitled in fact and at law to claim amounts towards loss (of profit or of profitability) and then measure the loss so suffered.

Quantification: not in vacuum

Having established that a loss was occasioned, and that such loss was attributable to the other party, the quantification of such takes centre-stage. Different formulae come to the aid of estimating the losses suffered, such as Hudson, Emden, and Eichleay[14]. These formulae are to be applied mindfully, with viable context to the operative facts. 

Conclusion

The importance of drafting clauses that foresee how to deal with claims over ‘loss of profits’ cannot be overstated. Contracts should consciously record party intent and maintain consistency in treatment across other protective clauses, such as clauses for indemnity and limitation of liability. Such practices tend to be best commercial practices, in addition to serving as safe harbor if the contract becomes subject to litigation. 

[The authors are Executive Partner, Associate Partner and Associate, respectively, in Commercial Dispute Resolution practice at Lakshmikumaran & Sridharan Attorneys, Chennai]

[1] Denise Schmandt-Besserat (From accounting to writing, 25 April 2014), available here, accessed 6 July 2026 

[2] Ibid

[3] ‘Search ‘Profit’ on Etymonline’ (etymonline), available here, accessed 6 July 2026

[4] Raghavan Ramabadran, Krithika Jaganathan, Nirupama Shankar,  ‘Risk allocation in commercial contracts', available here.

[5] State Industries Promotion Corpn. of T.N. Ltd. v. RPP Infra Projects Ltd. [2025 SCC OnLine Mad 8166].

[6] Corpn. of Chennai v. National Building Construction Corpn. Ltd. [2026 SCC OnLine Mad 246].

[7] A.T. Brij Paul Singh v. State of Gujarat. [1984 (4) SCC 59].

[8] J.G. Engineers (P) Ltd. v. Union of India. [2011 (5) SCC 758].

[9] Union of India v. Amulya Constructions [Order dated 2 December 2022 in O.P.No.501 of 2017 passed by High Court of Madras].

[10] State Industries Promotion Corpn. of T.N. Ltd. v. RPP Infra Projects Ltd. [2025 SCC OnLine Mad 8166].

[11] Bharat Coking Coal Ltd. v. L.K. Ahuja. [(2014) 5 SCC 109]

[12] Unibros v. All India Radio. [2023 INSC 931].

[13] Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd. [(2024) 2 SCC 375].

[14] McDermott International Inc. v. Burn Standard Co. Ltd. [2006 (11) SCC 181].