2025 (4) TMI 1575 - SC - Indian Laws

Deduction of liquidated damages by the respondent from the appellant s contractual dues in view of the extensions of time granted for completion of the contract work - seeking to set aside the arbitral award upholding such deduction - HELD THAT - Respondent had established that the loss suffered by it indeed occurred due to delay in handing over the new premises. Clause 26 of the contract agreement permitted the respondent to levy liquidated damages. It also provided as to how the quantum of liquidated damages should be arrived at. According to the arbitral tribunal the quantum was at the rate of 0.5% per week of delay. Delay in this case was more than ten months. Bulk of the delay was for reasons within the control of the appellant. The figure of Rs. 82, 43, 499.00 was correctly quantified and deducted as liquidated damages by the respondent. Therefore the arbitral tribunal held that the liquidated damages were legally and contractually valid. A conjoint reading of Sections 55 73 and 74 would indicate that in a contract whether time is of the essence or not if the contractor fails to execute the contract within the specified time the contract becomes voidable at the option of the promisee and the promisee would be entitled to compensation from the promisor for any loss occasioned to him by such failure. However in case of a contract where time is of the essence the contract becomes voidable on account of the contractor s failure to execute the contract within the agreed time. The promisee cannot claim compensation for any loss occasioned by such breach of the contract unless he gives notice to the promisor of his intention to claim compensation. This is made more specific in Section 73. Section 74 contemplates a situation where penalty is provided for and quantified as compensation for breach of contract. In such a case the party complaining of the breach is entitled to compensation whether or not actual damage or loss is proved to have been caused thereby but such compensation shall not exceed the quantum of penalty stipulated. Scope of Section 34 of the 1996 Act is now well crystallized by a plethora of judgments of this Court. Section 34 is not in the nature of an appellate provision. It provides for setting aside an arbitral award that too only on very limited grounds i.e. as those contained in sub-sections (2) and (2A) of Section 34. It is the only remedy for setting aside an arbitral award. An arbitral award is not liable to be interfered with only on the ground that the award is illegal or is erroneous in law which would require re-appraisal of the evidence adduced before the arbitral tribunal - The award as such cannot be touched unless it is contrary to the substantive provisions of law or Section 34 of the 1996 Act or the terms of the agreement. The learned Single Judge had clearly gone beyond the grounds provided in Section 34 of the 1996 Act to set aside the arbitral award. Learned Single Judge exceeded the jurisdiction under Section 34 of the 1996 Act. There was no justification for setting aside the arbitral award by taking a different view. View taken by the arbitral tribunal is certainly a possible and plausible view. A different interpretation of clause 26 other than the one taken by the arbitral tribunal is possible but that will not bring the challenge to the arbitral award within the four corners of Section 34. In any view of the matter mere setting aside of the arbitral award did not confer any benefit to the appellant. In the circumstances the Division Bench was justified in reversing the order of the learned Single Judge under Section 37 of the 1996 Act. Conclusion - The arbitral award upholding the deduction of liquidated damages restored and the Single Judge s order setting aside the award set aside as beyond jurisdiction. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the deduction of liquidated damages by the respondent from the appellant's contractual dues was justified, particularly in view of the extensions of time granted for completion of the contract work;

(b) Whether the arbitral award upholding such deduction was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 ('the 1996 Act');

(c) The scope and extent of judicial interference under Sections 34 and 37 of the 1996 Act, specifically whether the High Court Division Bench was justified in setting aside the Single Judge's order under Section 34 and restoring the arbitral award under Section 37;

(d) The interpretation and interplay of contractual clauses relating to liquidated damages (Clause 26), extension of time (Clause 27), and consequences of failure to comply with instructions (Clause 28) in the contract;

(e) The applicability of provisions of the Indian Contract Act, 1872, particularly Sections 55, 73, and 74, to the contract and the issue of liquidated damages;

(f) Whether the delay in completion of the contract work was attributable to the appellant or excusable due to reasons beyond its control;

(g) Whether the respondent had suffered loss or damage on account of the delay, justifying the levy of liquidated damages;

(h) Whether the extension of time granted after the completion of work (ex post facto extension) affects the validity of the liquidated damages deduction.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Justification for Deduction of Liquidated Damages and Effect of Extension of Time

The contract contained Clause 26, which permitted the employer (respondent) to deduct liquidated damages if the contractor (appellant) failed to complete the work by the stipulated date or any extended time granted under Clause 28. Clause 27 provided for extension of time on specified grounds, requiring the contractor to apply in writing and the employer to grant a fair and reasonable extension if justified. Clause 28 dealt with consequences of failure to comply with instructions.

The arbitral tribunal found that the appellant had delayed completion beyond the original and extended timelines, causing the respondent to incur financial loss by continuing to pay rent for the old premises and losing rental income from the new premises. The tribunal held that the deduction of Rs. 82,43,499 as liquidated damages was valid, reasonable, and legally justified under Clause 26 and the contract terms. The delay was primarily attributable to the appellant's default, and extensions granted were with reservation of rights to levy liquidated damages.

The appellant contended that the respondent had extended the time for completion, and since the work was completed within the extended time granted by the respondent (letter dated 26.09.2008), no delay existed to justify liquidated damages. The appellant also argued that time was not of the essence in the contract, and liquidated damages could only be levied if actual loss was caused.

The learned Single Judge accepted the appellant's contentions, holding that extension of time and levy of liquidated damages could not co-exist, and therefore set aside the arbitral award. However, the Division Bench reversed this, observing that the Single Judge's decision was based on assumptions beyond the limited grounds under Section 34 of the 1996 Act and that the arbitral tribunal's view was a plausible one deserving deference.

(b) Scope of Judicial Interference under Sections 34 and 37 of the 1996 Act

Section 34 of the 1996 Act enumerates limited grounds on which an arbitral award can be set aside, including incapacity, invalid arbitration agreement, lack of proper notice, award beyond scope of submission, improper composition or procedure, subject matter not arbitrable, or conflict with public policy. Section 34(2A) allows setting aside for patent illegality appearing on the face of the award but excludes mere erroneous application of law or reappraisal of evidence.

The Court emphasized that Section 34 is not an appellate provision and judicial interference is to be minimal, respecting arbitral autonomy. The Court reiterated that if two views are possible, the view taken by the arbitral tribunal must be accepted. The learned Single Judge's order was found to have exceeded the limited scope of Section 34 by reappraising evidence and substituting its own view on the contract interpretation and facts.

Section 37 provides for appeal against orders under Section 34 but the scope of interference remains limited. The Division Bench was justified in setting aside the Single Judge's order and restoring the arbitral award, as the Single Judge had acted beyond the permissible scope of Section 34.

(c) Interpretation of Contractual Clauses

The Court analyzed Clauses 26, 27, and 28 of the contract. Clause 26 allows deduction of liquidated damages for delay beyond stipulated or extended time. Clause 27 permits extension of time on certain grounds but explicitly states that the contractor's claim is only for extension of time and not for any other claim. Clause 28 deals with consequences of failure to comply with instructions.

The Court noted that Clause 26 is not controlled or overridden by Clause 27. Extensions of time granted under Clause 27 do not preclude the employer from levying liquidated damages if the contractor fails to complete work within such extended time. The contract expressly provided that extensions were granted without prejudice to the right to recover liquidated damages.

The appellant's completion of work beyond the last extended period (30.06.2007), continuing until 30.11.2007, was without prior approval. The extension granted by letter dated 26.09.2008 was ex post facto, and therefore did not negate the right of the respondent to levy liquidated damages for the delay beyond the extended period.

(d) Applicability of Indian Contract Act Provisions

The Court examined Sections 55, 73, and 74 of the Indian Contract Act, 1872. Section 55 provides that if time is of the essence, failure to perform within time renders the contract voidable at the option of the promisee. If time is not of the essence, the promisee is entitled to compensation for loss caused by delay. Section 73 mandates compensation for loss or damage caused by breach, while Section 74 provides for compensation by way of penalty or liquidated damages, even if no actual loss is proved, subject to reasonableness and not exceeding the stipulated amount.

The Court concluded that whether or not time was of the essence, the respondent was entitled to compensation for loss caused by delay. The contract stipulated liquidated damages as compensation, which were reasonably quantified. The respondent had suffered loss due to continued rent payments and loss of rental income, as established on record and accepted by the arbitral tribunal.

(e) Attribution of Delay and Loss

The arbitral tribunal found that the bulk of the delay was attributable to the appellant's default. The respondent had granted multiple extensions due to appellant's inability to complete work within the stipulated time. The respondent had forewarned the appellant at review meetings and in correspondence that extensions were without prejudice to the right to levy liquidated damages. The respondent's loss was established through evidence of continued rent payments and loss of rental income during the delay period.

The appellant's contention that delay was due to force majeure events such as landslides and rains was considered by the Single Judge but rejected by the Division Bench and the Supreme Court, which found that the arbitral tribunal's findings on attribution of delay and loss were plausible and deserved deference.

(f) Effect of Ex Post Facto Extension of Time

The appellant sought and was granted extension of time after completion of the work (letter dated 26.09.2008), which was ex post facto approval. The Court held that such ex post facto extension does not negate the respondent's right to levy liquidated damages for the delay beyond the last extended period. The contract required application for extension within 15 days of hindrance, which was not complied with in this case. The respondent's right to liquidated damages under Clause 26 remained valid.

3. SIGNIFICANT HOLDINGS

"If two views are possible, there is no scope for the court to re-appraise the evidence and to take the view other than the one taken by the arbitrator. The view taken by the arbitral tribunal is ordinarily to be accepted and allowed to prevail."

"Section 34 is not in the nature of an appellate provision. It provides for setting aside an arbitral award that too only on very limited grounds i.e. as those contained in sub-sections (2) and (2A) of Section 34. It is the only remedy for setting aside an arbitral award."

"Clause 26 is not controlled by clause 27. If the contractor fails to complete the work within the stipulated period or within the extended time as may be provided, he would be liable to pay liquidated damages which may be deducted by the employer from any money due or that may become due to the contractor."

"Extension of time and levy of liquidated damages cannot go hand in hand only if the work remains incomplete after the extended period. Once the work is completed during the extended period, claim of liquidated damages cannot be accepted. However, if the work is completed beyond the extended period, liquidated damages are recoverable."

"The appellant had continued execution of the work beyond 30.06.2007 and completed the same only on 30.11.2007 though the last extended period had expired on 30.06.2007. The extension granted on 26.09.2008 was ex post facto. Therefore, the respondent was entitled to levy liquidated damages for the delay."

"The respondent had established that the loss suffered by it indeed occurred due to delay in handing over the new premises. Clause 26 of the contract agreement permitted the respondent to levy liquidated damages. The quantum was at the rate of 0.5% per week of delay. The figure of Rs. 82,43,499.00 was correctly quantified and deducted as liquidated damages by the respondent."

"The Single Judge exceeded the jurisdiction under Section 34 of the 1996 Act by setting aside the arbitral award on grounds beyond the scope of Section 34. The Division Bench was justified in reversing the order under Section 37 of the 1996 Act."

Final determination: The appeal was dismissed, the arbitral award upholding the deduction of liquidated damages was restored, and the Single Judge's order setting aside the award was set aside as beyond jurisdiction.