Compensation of Loss of Profit For Termination of Contract or Omission of The Scope of Work

Compensation of Loss of Profit for
Termination of Contract or Omission of the

Scope of Work
 Published on November 13, 2019
S. Thilak LLM,MBA,BSc(Hons),PMP,MCIArb,MAIQS
Contracts Manager/ Senior Quantity Surveyor

8 articles
The contracting firms bid for new projects with the anticipation of gaining profits. Before
responding to a tender, the contracting firms carefully analyze the particular project requirements
along with their resource availability, current workload, financial requirements, and any other
constraints. Based on the analysis, they tender for a number of projects by sacrificing the/ at the
cost of other tenders, which are not decided to move forward. Therefore, if the Employer
terminates a contract or omits a portion of the scope of work, the Contractor loses the
opportunity to gain the intended profit, which is built into the value of the omitted scope or
terminated contract. In other words, the Contractor would have gained the intended profit if he
had completed a particular project or had he undertaken another project.
The Court in Ellis-Don v. The Parking Authority of Toronto (1978) case held that “if a
contractor is entitled to damages for loss of income to cover head office overheads, why should
he not also be entitled to damages for loss of income that would result in normal profit.”
The FIDIC 2017 Red and Yellow Books (RB and YB) clearly permit a claim for loss of profit in
case of
I. The omission of works which is to be carried out by other third parties
The clause 13.3.1 c articulates “if the Parties have agreed to the omission of any work which is to
be carried out by others, the Contractor’s proposal may also include the amount of any loss of
profit and other losses and damages suffered (or to be suffered) by the Contractor as a result of
the omission”.
II. Termination of contract by the Contractor (Cl. 16.2) (The Contractor’s decision to terminate
the contract because of the causes attributable to the Employer)
The clause 16.4 [Payment on Termination] articulates that “after termination under Sub-Clause
16.2 [Termination by Contractor], the Employer shall promptly pay the Contractor the amount of
any loss of profit or other losses and damages suffered by the Contractor as a result of this
termination” (subject to satisfy the condition precedents under clause 20.2).
III. Termination for Employer’s convenience (Cl. 15.5)
The clause 15.6 [Valuation after Termination for Employer’s Convenience] says that “after
termination under Sub-Clause 15.5 [Termination for Employer’s Convenience] the Contractor
shall, as soon as practicable, submit detailed supporting particulars of the amount of any loss of
profit or other losses and damages suffered by the Contractor as a result of this termination.”
Position under FIDIC 99
I. FIDIC 99 versions of these books do not allow room for loss of profit claim for omission under
the variation clause. The reason might be, the omission of the scope of work with the intention to
execute the works by others is not permitted under the 99 versions.
II. However, claiming the loss of profit in case of termination of the contract by the Contractor
(Cl. 16.2) is permitted. Clause 16.4 [Payment on Termination] of FIDIC 99 RB and YB
expresses the same position as clause 16.4 of the 2017 edition.
III. The payment after termination for Employer’s convenience under FIDIC 99 edition is
articulated under Clause 19.6 [Optional Termination, Payment and Release], in which the loss of
profit is not touched and therefore clamming of loss of profit for termination of contract for
Employer’s convenience (Cl 15.5) under FIDIC 99 RB and YB is not possible.
The major difference between 99 and 2017 editions related to this subject is, 99 editions do not
permit the Employer to omit part of scope or terminate the contract for convenience with the
intention to execute works by others, but 2017 editions do. So, it can be summarized that if the
Employer omits the work or terminates the contract with the intention to award to another third
party, the Employer owes liability to pay loss of profit to the original Contractor. This principle
can be reinforced with the support of case laws. In the UK case of Amec Building Ltd v. Cadmus
Investment Co Ltd (1996), the appeal Court confirmed the arbitral award of loss of profit for the
omitted scope of work, which was carried out by a third party. The Court held that Amec were
entitled to be compensated for the loss of profit and dismissed the appeal.
Conversely, if a contract is worded in a like manner to FIDIC 99 RB or YB, recovering the loss
of profit is not straightforward in case of termination of the contract, which will NOT be
completed using any other third party contractors. In such circumstances, the Contractor may
seek public Court intervention to succeed in a loss of profit claim. In the case of Victoria
Laundry (Windsor) Ltd v. Newman Industries Ltd (1949), the court stated that the Contractor
must prove the loss of profit, and such profit must not be far higher than the normally expected
level. The court also held that an exceptionally high profit, which might have been earned on
another project (the project that was dropped to undertake the current project), could be claimed
if the Employer was aware of such opportunity cost at the time contract formed. However,
common law position is not clear in case of the omission of the scope, which is NOT to be
executed using any other third party contractors. Since FIDIC 99 versions include provision for
variation, including omission, the contractor has no scope for claiming damages for breach. I
repeat again for the sake of clarity that the Contractor is entitled to loss of profit in case of
omission of work which is to be executed using any other third party contractors as clearly
specified in the FIDIC 2017 versions of RB and YB and the Court decision of the Amec
Building Ltd case.
The JCT contract forms do not use the wording of ‘loss of profit’, instead use the wording of
‘direct loss.’ The clauses related to the valuation of termination allow claiming the direct losses.
The clause 8.12 of the SBD/Q 2016 allows direct loss in case of termination of the contract by
the Contractor because of the Employer’s default, insolvency of Employer, the
Architect/Contract Administrator’s instruction to suspend the work, force majeure events and the
actions of the government which affect the project execution. The court held in the Wraight Ltd
V. PH & T Holdings (1968) case that the wording of direct losses shall be interpreted as the
inclusion of gross profit. Therefore, based on the Wraight case, the contracts formed based on the
terms alike JCT shall be entitled to claim of loss of profit.

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What are the differences between FIDIC 99 and FIDIC 2017 editions regarding loss of profit claims?

Under what conditions does common law allow loss of profit claims when a contract is terminated?

Compensation of Loss of Profit for

Termination of Contract or Omission of the

Contracts Manager/ Senior Quantity Surveyor

I. The omission of works which is to be carried out by other third parties

III. Termination for Employer’s convenience (Cl. 15.5)

Position under FIDIC 99

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