Actual Loss Must be Proven for Automatic Recovery of Full Amount : Delhi HC [Read Order]

The Delhi High Court ruled that even if the statute contains a Liquidated Damages (LD) clause, it requires proof of actual loss and does not provide automatic recovery of the whole LD amount in the event of a breach.

The Petitioner's attempt to adjust Liquidated Damages (LD) from the Respondent's outstanding bills was denied by the Arbitral Tribunal (AT), which ruled that such a unilateral adjustment was not permitted in the absence of adjudication. The AT concluded that the GCC's Clauses 8.7 and 14.15(b) did not constitute a true pre-estimate of damages since they were a part of a standard contract that was not subject to mutual negotiation, and that the Petitioner had not submitted a counterclaim for the LD amount.

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Due to a lack of proof of actual damage, the AT also rejected the Petitioner's counterclaim for lost parking revenue. The AT did not determine whether the delay was due to the Respondent because the LD claim was dismissed for legal reasons.

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The petitioner claimed that although the project was supposed to be completed between May 6, 2013, and November 5, 2014, the actual construction started on August 24, 2013, and ended on April 30, 2017, causing a 1003-day delay. Of these, 677 days could be attributed to the respondent, while 326 days could not.

Additionally, it was argued that the petitioner issued non-compliance notices under GCC Clause 15.1 and granted eight EoTs because of the conditions in Kashmir, which were not acknowledged. The petitioner applied LD at 10% of the contract value in accordance with Clause 8.7, which permits 0.05% each day of delay up to 10%, based on the TAC's judgment dated 03.08.2017.

Additionally, it was argued that the AT had not applied its judgment to Issue Nos. 1 and 2 because it had not determined which party was responsible for the delay. It is argued that the AT could not have fairly addressed the issue of LD without investigating this.

In contrast, the respondent argued that the AT had correctly determined that no counterclaim pertaining to liquidated damages had ever been pleaded and that the petitioner had only tried to unilaterally adjust it against the respondent's uncontested claims without the respondent's consent.

The single bench of Justice Manoj Kumar Ohri noted that after carefully considering the Petitioner's liquidated damages (LD) claim, the Arbitral Tribunal (AT) correctly determined that the Petitioner ought to have brought it up as a counterclaim. The Petitioner had to request a declaration confirming the unilateral adjustment when the Respondent objected to it.

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.

The court also noted that the Petitioner's argument that their LD claim was denied because it wasn't brought up as a counterclaim is untrue. The main reason the Arbitral Tribunal (AT) dismissed it was because GCC Clause 8.7 was not a legitimate LD clause. The AT could find no proof that Clause 8.7 was a true pre-estimate of damages or the result of pre-contractual talks.

The AT correctly determined that the Petitioner could not seek both LD for delay and separate compensation for lost parking revenue, as LD is a pre-estimate of delay-related losses and would cover all such claims, the court ruled in rejecting the appeal.

To Read the full text of the Order CLICK HERE

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