No Compensation Can Be Awarded As Consequence Of Breach In Absence Of Any Legal Injury: Delhi HC Dismisses Plea U/S 34 Of Arbitration Act

Brief Facts

This petition under section 34 of the arbitration act was filed by Union of India, the petitoner in which the award passed by the tribunal was challenged. The impugned award was passed on December 17, 2021 in which amount of Rs. 1,05,56,800 along with interest was awarded in favour of Ms Krishna Constructions Company, the respondent.

The dispute stemmed from the contract executed between the parties in which the respondent had to construct a school building and staff quarters for Kendriya Vidyalaya in Chhindwara, Madhya Pradesh. The work under the contract had to be completed by January 1, 2017. The contract was terminated by the petitioner on April 4, 2019 due to inadequate progress made by the respondent towards completion of the project.

The respondent claimed that termination was unjustified and demanded the amount of Rs. 2,88,08,002 for the completed work based on performance guarantees. The petitioner on the other hand counter claimed the amount of Rs. 76,08,978 for pending bills and litigation costs.

The arbitrator observed that both parties were responsible for causing delay. The petitioner did not hand over the required drawings while the respondent did not complete the project in a time bound manner. It further observed that no loss due to incompletion of the project was shown by the petitioner therefore the petitioner could not withhold performance guarantee, security deposits and impose penalties on the respondent.

Contentions

The petitioner submitted that the arbitrator committed an error in concluding that it was not entitle to any compensation for delay in completing the project by the respondent. The judgment of the Supreme Court in was referred in ONGC Ltd. v. Saw Pipes Ltd (2003) which it was held that even if no loss is established, still the petitioner was entitled to restitution. It was further argued that rejection of counter claim of the petitioner was equally bad.

Per contra, the respondent submitted that since no documentary evidence was presented by the petitioner to demonstrate the losses, the arbitrator was right in rejecting their claims for compensation. It was further contended that the decision of the arbitrator can only be interfered when it is either perverse or illegal which is not the case in the present matter.

Court's Analysis

The court agreed with the observations of the arbitrator and held that loss due to breach of a contract has to be clearly demonstrated. However, it does not mean that exact or precise loss has to be calculated before claiming compensation for the breach of the contract.

The court further observed that this Court has held time and again that under Sections 73 and 74 of the Indian Contract Act, 1872, no compensation can be awarded as a consequence of breach, in the absence of any resulting legal injury.

The court observed that the arbitrator correctly applied the above principles and rejected the claims of the petitioner due to lack of evidence shown to prove the existence of loss.

The court further referred to the Delhi High Court judgment in Sudershan Kumar Bhayana v. Vinod Seth (2023) wherein it was held that we are unable to concur with the view of the learned Single Judge that an award of damages based on no material at all could be sustained on the basis of a penalty clause in the Collaboration Agreement.

It was further observed in the above judgment that on the other hand, damages, liquidated or unliquidated, when awarded, have a compensatory flavour to it. Liquidated damages are awarded by a court only if it construed as a genuine pre-estimate of the loss that is caused in the event of breach. It is no different from unliquidated damages i.e., it cannot be granted if there is no loss or injury.

Based on this, the concluded that since no evidence or documents were shown to prove the loss, the petitioner was unjustified in withholding the performance guarantee and security deposits.

Accordingly, the court held that for the aforesaid reasons, the impugned award does not suffer from any infirmity so as to attract the jurisdiction of this Court under Section 34 of the Act. The petition, alongwith pending applications, is therefore dismissed, but with no order as to costs.

Case Title: UNION OF INDIA v. MS KRISHNA CONSTRUCTIONS COMPANY

Case Reference: O.M.P. (COMM) 369/2022, I.A. 14345/2022 & I.A. 14347/202

Court: Delhi High Court

Judgment Date: 21/10/2024

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