Arbitration Act | To Claim Liquidated Damages, Party Should Establish It Had Suffered Legal Injury As Result Of Breach Committed By Other Party: Delhi High Court

“Liquidated damages, as agreed to between the disputants, represents the maximum amount that can be paid to an aggrieved party. Since damages for breach of contract is paid as compensation, the law requires the defaulting party to pay, even under Section 74 of the Contract Act, reasonable compensation. It is only where, for instance, the contract obtaining between the party is inveigled in complexity, that the law dispenses proof of actual loss or damage. This, however, does not relieve the aggrieved party from establishing that it had suffered legal injury as a result of the breach committed by the defaulting party.”

Brief Facts:

The Appellant approached the Delhi High Court (“High Court”) and filed an appeal challenging the judgment, issued by the learned Single Judge, which dismissed the Appellant's petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Single Judge upheld the award, which favoured the Respondent.

The Arbitrator awarded Rs. 1,28,52,203/- to the Respondent. The award stipulated that failure by the Appellant to pay the specified amount within 60 days would attract simple interest at 8% per annum from the date of the award. Notably, the Arbitrator ruled in favour of the respondent regarding claim 1(i) for liquidated damages, reasoning that the Appellant did not incur any losses due to the delayed supply of goods. Additionally, the Arbitrator granted Rs. 1,62,138/- for claim 2(i), pertaining to unpaid prices for spares, and partially allowed demurrage charges under claim 4(i) to the extent of Rs. 1,30,000/-.

The Appellant, contended that regarding claim 1(i) for liquidated damages, the Respondent, being a contractor involved in a significant Engineering Procurement Construction (EPC) project of the appellant, would have inevitably caused losses or injuries. Both the learned Arbitrator and the Single Judge reached a contrary conclusion on this matter. Feeling aggrieved, the Appellant approached the Delhi High Court.

Observations by the High Court:

The High Court noted that the matter pertained to a purchase order for transformers, initially set at 44 units but later increased to 46 units. It was undisputed that 42 transformers were delivered within the agreed timeframe of August 26, 2018. However, four transformers were delivered with a delay, arriving on December 31, 2018. The Appellant, in response to this delay, imposed liquidated damages at a rate of 9.5% of the total contract price, as per clause 16.2 of the GCC Rev 06.

The High Court noted that despite 42 of the 46 transformers being delivered on time, the Appellant levied liquidated damages on the entire contract value without adjusting for the timely delivery of these transformers. Moreover, the Appellant failed to lodge a counter-claim despite retaining funds and justifying their retention. The High Court held that the attempt to demonstrate loss and injury by citing the transformers' intended use in an EPC project was unconvincing. The High Court emphasized that the Arbitrator is the authority to assess evidence and concluded that the Appellant failed to prove legal injury, a prerequisite for levying liquidated damages.

The High Court held that imposition of liquidated damages must be based on legal injury. The High Court rejected the Appellant's request to submit additional evidence concerning liquidated damages imposed by NTPC. Consequently, the High Court upheld the judgment of the Single Judge, dismissing the appeal and awarding costs of Rs. 20,000/- to the Respondent.

Case Title: Bharat Heavy Electricals Limited Vs Kanohar Electricals Limited

Citation: 2024 LiveLaw (Del) 358

Case Number: FAO(OS) (COMM) 245/2023 and CM APPL. 57335/2023.

Advocate for the Appellant: Mr Neeraj Malhotra, Sr Adv. with Mr Sarojanand Jha, Ms Rajreeta Ghosh, Mr Rahul Kumar and Mr Nimish Gupta, Advs.

Advocate for the Respondent: Mr Raman Kapur, Sr. Advocate with Mr Varun Kapur, Advocates.

Click Here To Read/Download Order