Liquidated Damages Clause Does Not Permit Automatic Recovery Of Full Amount, Actual Loss Must Be Proven: Delhi High Court

The Delhi High Court bench of Justice Manoj Kumar Ohri has held that the law mandates proof of actual loss despite the presence of an Liquidated Damages (LD) clause and does not allow automatic recovery of the entire LD amount upon breach. Therefore, the Petitioner's unilateral adjustment without adjudication was unlawful. The AT rightly held that such unilateral recovery does not obviate the need for proper adjudication of the LD claim.Brief Facts:The impugned award arose from Contract Agreement No. JKUSDIP Srinagar/UT/02 dated 02.04.2013, executed following the respondent's bid on 04.12.2012 and the petitioner's Letter of Acceptance dated 06.03.2018. The contract concerned the “Construction of Multi-Storied Mechanized Parking Facility on MA Road, Srinagar,” including a three-year Operation & Maintenance (O&M) period post Defect Liability. While the petitioner claimed the project was to be completed between 06.05.2013 and 05.11.2014 (within 549 days), the respondent asserted the stipulated completion date was 24.02.2015. Ultimately, the project concluded on 30.04.2017 after eight Extensions of Time.The Arbitral Tribunal (AT) rejected the Petitioner's adjustment of Liquidated Damages (LD) from the Respondent's pending bills, holding that such unilateral adjustment was impermissible without adjudication. The AT found that the Petitioner had not filed a counterclaim for the LD amount and ruled that Clauses 8.7 and 14.15(b) of the GCC did not represent a genuine pre-estimate of damages, being part of a standard contract without mutual negotiation.The AT also dismissed the Petitioner's counterclaim for loss of car parking revenue, citing lack of evidence of actual loss. Since the LD claim failed on legal grounds, the AT did not assess whether the delay was attributable to the Respondent.Against the above award, the present petition has been filed under section 34 of the Arbitration Act.Contentions:The Petitioner submitted that the project was scheduled from 06.05.2013 to 05.11.2014, but actual work began on 24.08.2013 and concluded on 30.04.2017, resulting in a delay of 1003 days. Of this, 326 days were not attributable to the respondent, while the remaining 677 days were. It was further submitted that the petitioner granted 8 EoTs due to prevailing conditions in Kashmir and issued non-compliance notices under Clause 15.1 of the GCC, which went unacknowledged. Based on the TAC's decision dated 03.08.2017, the petitioner imposed LD at 10% of the contract value under Clause 8.7, which allows 0.05% per day of delay, capped at 10%.It was also submitted that the AT has failed to adjudicate as to which party the delay was attributable to and it is contended that without delving into the same, the AT could not have fairly dealt with the question of LD, thus, there was a non-application of mind on part of the AT in terms of Issue Nos. 1 and 2. Per contra, the Respondent submitted that it has been rightly held by the AT that no Counter claim related to liquidated damages was ever pleaded and that the petitioner attempted to merely unilaterally adjust it against the undisputed claims of the respondent, without taking the respondent‟s consent. It was further submitted that for argument's sake, if Issue Nos. 1 and 2 were to be reconsidered, the damages under Clause 8.7 should be seen as a penalty rather than liquidated damages. Clause 8.7 of the GCC and Section 8 of the PCC (Part A – Contract Data) refer to delay damages at 0.05% of the final contract price per day. Lastly, it was submitted that the use of the term “penalty” in this context—especially where ongoing penalties apply for unachieved milestones—supports the view that these are penal in nature, contrary to the petitioner's claim of pre-estimated genuine damages.Observations:The court noted that the Arbitral Tribunal (AT) thoroughly evaluated the Petitioner's liquidated damages (LD) claim and rightly concluded that the Petitioner should have raised it as a counter claim. Once the Respondent objected to the unilateral adjustment, it was necessary for the Petitioner to seek a declaration validating that adjustment. The Court relied on the Supreme Court judgments in Kailash Nath Associates v. DDA, Fateh Chand v. Balkishan Dass, and Maula Bux v. Union of India, where it was held that the law requires proof of actual loss despite an LD clause, and does not permit automatic recovery of the full LD amount upon breach. Thus, the Petitioner's unilateral recovery without adjudication was unlawful.It held that “AT has rightly held that unilateral recovery of LD by way of adjustment of accounts does not dispense with the requirement of seeking adjudication from the AT regarding the claim.”The court further observed that the Petitioner's contention that its LD claim was rejected solely for not being raised as a counter claim is incorrect. The Arbitral Tribunal (AT) primarily rejected it because Clause 8.7 of the GCC failed to qualify as a valid LD clause. The AT found no...

Liquidated Damages Clause Does Not Permit Automatic Recovery Of Full Amount, Actual Loss Must Be Proven: Delhi High Court

Mohd Malik Chauhan

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