Liquidated Damages Provided In The Agreement Cannot Be Awarded To A Party In Absence Of The Proof Of Actual Loss: Delhi High Court

The bench of Justice Manoj Kumar Ohri held that a sum ascertained as liquidated damages in the contract is not in the nature of penalty, but is a pre-estimate of loss estimated by the parties likely to be suffered by a party in the event of breach of contract by the other party. It held that Liquidated damages are not payable merely as a penalty for breach of contract, if no loss is suffered.

The Court held that it is the quantification of loss that would not require any substantiation if the loss is suffered by a party and a pre-estimated sum is agreed by the parties as liquidated damages for such loss.

Facts

The parties entered into a Lease Agreement dated 18.02.2019. In terms of the agreement, the petitioner had leased out his premises to the Respondent for a period of 5 years, with a lock-in period of 3 years within such period no party could terminate the contract. In terms of the agreement, the rent was to be paid from 01.06.2019.

Clause 14 of the agreement provided for resolution of disputes through arbitration and Delhi was designated as the seat of arbitration. A dispute arose between the parties when the lease deed was terminated by the respondent within the lock in period. Consequently, the respondent approached the Court for the appointment of the arbitrator.

The Court appointed an arbitrator upon the application preferred by the petitioner. Vide the impugned arbitral award dated 31.03.2023, the tribunal held that the termination of the agreement during the lock-in period was illegal, however, the Court did not allow the majority of the claims preferred by the petitioner as no proof of actual loss was furnished. Also, the tribunal partly allowed the counter-claims preferred by the Respondent.

Grounds of Challenge

The petitioner challenged the arbitral award on the following grounds:

• The arbitrator erred to disallow the claim no. 3 regarding the liquidated damages for the illegal termination of the agreement. The finding of the tribunal is inconsistent in as much as the tribunal held the termination to be illegal but disallowed the consequent damages.
• The tribunal should have awarded the minimum guaranteed amount for the remaining unexpired lock-in period of 30 months out of the 36 months.

The respondent made the following counter-arguments:

• The tribunal has rightly disallowed the claim of the petitioner for liquidated damages as it had not given any proof of actual loss. It is a settled law that in absence of proof of actual loss, the damages cannot be awarded.

Analysis by the Court

The Court observed that the tribunal disallowed the claim of the petitioner for liquidated damages for termination of the agreement during the lock-in period as no proof of actual loss was given by it.

The Court held that the sum agreed by the parties as liquidated damages would not dispense with the requirement of proof by the party claiming liquidated damages that it actually suffered a loss.

The Court held that a sum ascertained as liquidated damages in the contract is not in the nature of penalty, but is a pre-estimate of loss estimated by the parties likely to be suffered by a party in the event of breach of contract by the other party. It held that Liquidated damages are not payable merely as a penalty for breach of contract, if no loss is suffered.

The Court held that it is the quantification of loss that would not require any substantiation if the loss is suffered by a party and a pre-estimated sum is agreed by the parties as liquidated damages for such loss.

Accordingly, the Court dismissed the petition.

Case Title: Vivek Khanna v. OYO Apartments Investment LLP

Citation: 2023 LiveLaw (Del) 873

Date: 18.09.2023

Counsel for the Petitioner: Mr. Jitendra Kumar Jha

Counsel for the Respondent: Mr. Harsh Kaushik and Ms. Adrija Mishra

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