Award On Damages Cannot Be Sustained Just On Penalty Clause In Agreement: Delhi High Court

The bench of Justices Vibhu Bakhru and Amit Mahajan held that mere presence of a clause providing for liquidated damages does not dispense with the requirement of proof of loss from a party claiming damages.

The Court held that a party claiming damages for breach of contract has to plead and prove that as a consequence of such breach, it has suffered the damages and that mere presence of a penalty or liquidated damages clause would not entitle it to such damages unless the damages suffered are incapable of being proved.

Facts

The parties entered into a Collaboration Agreement dated 09.04.2010. In terms of the agreement, the respondent (builder) agreed to build a three-storied building on the property owned by the appellants (owners).

In addition, the builder also agreed to pay a sum of ₹64,00,000/- and bear the cost of construction. In consideration for the same, the Owners had agreed that the builder would retain the second floor without roof rights, in the building as reconstructed, and they would execute a registered sale deed in respect of the said floor, in his favour. The entire construction work was to be completed within a period of 14 months, including the grace period of 2 months.

A dispute arose between the parties when the builder failed to complete the construction on time which led to the termination of the agreement by the owners. Thereafter, the builder filed an application under Section 9 of the A&C Act seeking an order restraining the owners from disposing of or creating any third-party rights in the second floor of the subject property.

With the consent of the parties, the Court appointed the arbitrator. The owners were the claimant before the tribunal and the builder also made a counter-claim. The arbitrator held the builder to be in breach of the contract for his failure to complete the construction work on time. Accordingly, the Court directed him to pay to the owners sum as agreed in the agreement. However, the Court also found that since the builder had paid a substantial amount to the owners and also incurred substantial costs for the partial completion of the work, therefore, he is entitled to the refund of the said amount.

The owners did not challenge the award and the findings to the extent of directing a refund to the builder became final, however, the builder choose to impugn the finding of the arbitrator, regarding the compensation to the owners for breach of contract, under Section 34 of the Act.

The ld. Single Judge partially allowed the petition and reduced the amount of compensation awarded by the tribunal in favour of the owner. Against this order, both the parties preferred appeal under Section 37 of the Act.

Analysis by the Court

The Court observed that the ld. Single Judge has modified the award by modifying the compensation awarded by the tribunal in favour of the owners. The Court held that the Court substituted its decision in place of that of the arbitral tribunal.

The Court held that the reduction by the Court in the amount of compensation is fundamentally flawed and beyond the scope of Section 34 and does not permit the Court to modify the award by substituting its view in place of the arbitral tribunal.

Next, the Court examined whether the tribunal was correct in awarding damages in favour of the owners in absence of any proof of loss. The Court observed that admittedly the owners did not lead any evidence to prove the loss suffered by them as a consequence of the breach of contract by the builder.

The Court held that an award of damages based on no evidence of loss cannot be sustained on the basis of a penalty clause in the agreement. It held that mere presence of a clause providing for liquidated damages does not dispense with the requirement of proof of loss from a party claiming damages.

The Court held that a party claiming damages for breach of contract has to plead and prove that as a consequence of such breach, it has suffered the damages and that mere presence of a penalty or liquidated damages clause would not entitle it to such damages unless the damages suffered are incapable of being proved.

Accordingly, the Court set aside the award to the extent that the arbitrator had allowed the claims of the owners in absence of any proof of actual loss.

Case Title: Sudershan Kumar Bhayana (Deceased) v. Vinod Seth (Deceased)

Citation: 2023 LiveLaw (Del) 924

Counsel for the Appellants: Mr. Gurmehar S. Sistani

Counsel for the Respondents: Mr. Kunal Seth

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