Arbitration Act | S.37 Court Cannot Recalculate Damages Awarded By S. 34 Court Without Finding Arbitrariness Or Perversity : Supreme Court

The Supreme Court recently held that a court exercising appellate jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 cannot re-calculate or substitute its own assessment of compensation once a Section 34 court has fixed a reasonable award within the terms of the contract.

A bench of Justice Pamidighantam Sri Narasimha and Justice Atul S Chandurkar restored a Delhi High Court single judge order awarding ₹27.06 crore as liquidated damages to NTPC Vidyut Vyapar Nigam Limited for delay in commissioning a 20 MW solar power project by Saisudhir Energy Limited under a power purchase agreement executed in 2012.

“In our view, the Division Bench exceeded its jurisdiction under Section 37 of the Act of 1996 when it proceeded to re-work and re-calculate the amount of reasonable compensation to which NVVNL was entitled. The learned Single Judge having determined the amount of reasonable compensation by relying upon Clause 4.6 of the PPA and thereafter awarding 50% of the amount so determined, in the absence of this determination being shown to be beyond the terms of Clause 4.6 of the PPA or arbitrary or perverse, no interference with such determination was called for in exercise of jurisdiction under Section 37 of the Act of 1996. In fact, the Division Bench has not recorded any finding that such determination of reasonable compensation by the learned Single Judge suffered from arbitrariness or that it travelled beyond what was provided by Clause 4.6 of the PPA”, the Court held.

The Court set aside a 2018 judgment of the Delhi High Court division bench which had reduced the damages to ₹20.70 crore, and held that the appellate court had exceeded its jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996, by reworking the quantum of compensation.

“The modification in the amount of reasonable compensation by the Division Bench is merely a substitution of its view in place of the plausible view taken by the learned Single Judge. Such course of taking a different view of the same matter from the one taken under Section 34 of the Act of 1996 would be beyond the scope of Section 37 of the Act of 1996. As held in AC Chokshi Share Broker Private Limited vs. Jatin Pratap Desai and another5 to which one of us (P.S. Narasimha J) was a party, the Court under Section 37 must only determine whether the Section 34 Court had exercised its jurisdiction properly and rightly, without exceeding its scope”, the Court further observed.

The dispute arose from a power purchase agreement dated January 24, 2012, executed under the Jawaharlal Nehru National Solar Mission, under which Saisudhir Energy agreed to commission and supply 20 MW of solar power to NTPC Vidyut Vyapar Nigam Limited by February 26, 2013 at a tariff of ₹8.22 per unit.

Saisudhir Energy failed to meet the deadline. It commissioned 10 MW from April 26, 2013, after a delay of two months, and the remaining 10 MW from July 24, 2013, after a delay of about five months. NTPC Vidyut Vyapar Nigam Limited invoked Clause 4.6 of the agreement, which provided for liquidated damages in case of delay.

A three-member arbitral tribunal, by a majority award dated July 21, 2015, awarded ₹1.2 crore to NTPC Vidyut Vyapar Nigam Limited, being 20 percent of the performance guarantee.

Both sides challenged the award under Section 34 of the 1996 Act. On September 8, 2016, a single judge of the Delhi High Court held that delay was admitted but granted only 50 percent of the damages payable under Clause 4.6, determining the total entitlement at ₹54.12 crore and awarding ₹27.06 crore as compensation.

In appeals under Section 37, the division bench of the High Court agreed that liquidated damages were payable but recalculated the compensation to ₹20.70 crore by reading Clause 4.6 of the PPA on the premise that a higher rate of damages was payable in the initial three months period of delay and that amount was reduced after three months. Both parties approached the Supreme Court.

Upholding the single judge's decision, the Supreme Court held that while a court under Section 34 has limited power to modify an arbitral award, as recognised in Gayatri Balasamy v. ISG Novasoft Technologies Limited, the division bench under Section 37 could not substitute its own assessment of reasonable compensation in the absence of arbitrariness or perversity in the Section 34 determination.

The Court also held that the project, executed under the national solar mission, involved public interest and environmental considerations, and that proof of actual loss was not required to award reasonable compensation under Section 74 of the Indian Contract Act, 1872.

“In such cases, the burden would be on the party committing the breach to show that no loss was caused by the delay or that the amount stipulated as liquidated damages was in the nature of penalty. In the facts of the present case, this burden has not been discharged by SEL. In fact, it has remained content by urging that NVVNL having failed to make any investment under the PPA, it neither suffered any loss of capital or loss of interest, notwithstanding the delay. Having agreed to incorporate Clause 4.6 in the PPA, it is clear that the rights of the parties ought to be determined bearing in mind the terms agreed and SEL would not be justified in contending that NVVNL had failed to indicate the exact loss suffered by it due to the delay in commissioning of the project”, the Court observed.

Allowing NTPC Vidyut Vyapar Nigam Limited's appeals and dismissing those filed by Saisudhir Energy, the Court restored the single judge's order granting ₹27.06 crore as liquidated damages.

Case No. – Civil Appeal Nos. 12892-12893 of 2024 with Civil Appeal Nos. 12894-12895 of 2024

Citation : 2026 LiveLaw (SC) 112

Case Title – M/s Saisudhir Energy Ltd. v. M/s NTPC Vidyut Vyapar Nigam Ltd. with M/s NTPC Vidyut Vyapar Nigam Ltd. v. M/s Saisudhir Energy Ltd.

Click here to read the judgment