AP High Court Restores Arbitral Awards In Hindustan Shipyard Case; Says Arbitrators Can Modulate 'Exorbitant' Liquidated Damages

The High Court of Andhra Pradesh recently set aside a Trial Court's order that had earlier quashed thirteen arbitral awards against Hindustan Shipyard Limited (HSL) and its subcontractors.

On 31st December 2025, the Division Bench comprising of Justices R. Raghunandan Rao and T.C.D. Sekhar, upholding the arbitral awards, stated that an arbitrator has the jurisdiction to modulate liquidated damages if they are found to be exorbitant or if the delay is attributable to both parties, and noted that “the question of application of the clause for liquidated damages, without modification, would not arise”.

The dispute arose out of sub-contracts granted by Hindustan Shipyard Limited (HSL), a Public Sector Undertaking, for vessel fabrication and repairs. The contracts contained a clause allowing liquidated damages, up to a maximum of 20% of the contract value, at a rate of 2% per week of completion delay.

Consequently, HSL withheld the maximum 20% liquidated damages from the contractors' bills alleging delays. Disagreeing with the deductions, the contractors invoked the arbitration clause and in the year 2016, a sole arbitrator holding that the delay was attributable to both the parties, ordered a partial reimbursement of liquidated losses while retaining a portion of the levy.

Deciding a challenge to the awards under Section 34 of the Arbitration and Conciliation Act, the XI Additional District Judge of Visakhapatnam set aside the arbitral awards in 2025, ruling that the arbitrator had exceeded his jurisdiction by modifying the contractual liquidated damages clause.

The contractors argued that delays were a result of unrealistic schedules, delayed payments, and HSL's failure to provide ground-level amenities. They argued that the 20% penalty was "exorbitant and unconscionable" and that HSL was only entitled to "reasonable compensation" under Section 74 of the Contract Act.

Hindustan Shipyard Limited countered that the contractors could not contest the Liquidated Damages clause as they were bound it by it by signing the contract. They argued that the arbitral tribunal exceeded its jurisdiction by "meddling with the terms of the contract" and that the entire 20% was warranted because of the losses incurred during the delivery of the vessel.

The Division Bench, noted that the learned Arbitrator had found that "neither appellants nor the respondent were solely responsible for the delays" and therefore a "middle ground would have to be arrived at for a fair solution". The High Court criticizing the trial court's interference, held that the arbitrator's reasons were "intelligible and adequate". Relying on the decision of the Constitution Bench in Fateh Chand vs. Balakishan Das, the Court observed that Section 74 of the Contract Act prescribes the Liquidated Damages amount as an "outer limit".

The Court emphasized: "The question that arises is whether the compensation fixed under the liquidated damages clause... is sacrosanct and compensation has to be awarded without any modification. Section 74... had held that only reasonable compensation... could be permitted by the Court".

The Andhra Pradesh High Court noted that liquidated damages cannot be imposed mechanically or in full once loss is quantifiable and delay is not solely attributable to the contractor. The Bench observed that where the employer admits that losses are already quantified, or where delay is shared between both parties, the arbitrator is empowered to reduce or modify the damages to ensure reasonable compensation. Conclusively, the Court held that “the learned Arbitrator cannot be termed to have exceeded his jurisdiction as such modification is permissible”.

Allowing the appeals, the High Court set aside the decision of the trial court and thereby restored the initial arbitral awards. 

Case Title: M/s. Sunrise & Engineering Industries vs. Hindustan Shipyard Limited & Anr. (and connected matters)

Case No: C.M.A. No. 234 of 2025 & batch

Coram: Justice R. Raghunandan Rao and Justice T.C.D. Sekhar

Date of Decision: December 31, 2025

Appearances: Sri K. Srinivasa Rao (for Appellants); Sri G. Ramesh Babu (for Respondents)

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