Bombay High Court: Liquidated Damages Clauses Cannot Be Regarded As Pre-Estimate Of Losses Without Actual Proof Of Losses

The Bombay High Court reiterated that the liquidated damages clauses would never be regarded as a pre-estimate of losses without actual proof of losses.

The Court reiterated thus in a Commercial Arbitration Petition preferred under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), challenging an Arbitral Award passed by an Arbitral Tribunal.

A Single Bench of Justice Somasekhar Sundaresan elucidated, “It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre estimate of damage or loss, can be awarded. Kailash Nath was pressed into service by both sides. A view was canvassed that Kailash Nath has rendered an absolute standard that liquidated damages clauses would never be regarded as a pre-estimate of losses without actual proof of losses. I have done my best to examine if the Impugned Award would be immune from interference bearing in mind Section 34 of the Act.”

The Bench referred to the Judgment of the Supreme Court in the case of Kailash Nath Associates v. DDA (2015), which was rendered in the context of a forfeiture of earnest money in an auction of land by the Delhi Development Authority (DDA) in relation to one party that was inconsistent with the treatment given to other parties.

Senior Advocate Zal Andhyarujina appeared for the Petitioner while Senior Advocate Haresh Jagtiani appeared for the Respondent.

Factual Background

Hindustan Petroleum Corporation Ltd. (HPCL) i.e., the Petitioner invited bids and awarded G.R. Engineering Private Limited (GRE) i.e., the Respondent a contract to construct twelve “mounded bullets” to store liquified petroleum gas at HPCL’s refinery at Mahul (Project). Specific elements of the mounded bullets were to conform to the usage of reinforced cement concrete (RCC) of “M30 grade”. The Project was to be completed by December 5, 2007 but was completed on February 2, 2010. Disputes and differences between the parties arose out of HPCL computing liquidated damages in the payments due on invoices raised by GRE.

HPCL also withheld various other amounts on the payments made to GRE, which led to the arbitration proceedings. The Arbitral Tribunal held that the amount withheld by HPCL on account of Civil Works (Rs. 1,99,07,227); under-insurance (Rs. 25,64,026); Customs Duty variation (Rs. 86,38,491.50); Service Tax (Rs. 3,08,85,583); normalising ‘Dished Ends’ (Rs. 5,00,000); and liquidated damages (Rs. 5,83,67,973) ought not to have been withheld. The Tribunal’s award directed the payment of such sums by HPCL to GRE. It also awarded interest at the rate of 7% per annum from the date of filing of the claim (September 6, 2012) until the date of actual payment.

Reasoning

The High Court after hearing the arguments from both sides, noted, “In Kailash Nath, the Supreme Court noted that the forfeiture of earnest money took place long after the agreement to sell that land to another party at a higher price was reached. In that context, it was also seen as a forfeiture without any loss being shown.”

The Court remarked that one would have expected the Arbitral Tribunal to deal with whether it is difficult or impossible to prove the loss in this case and one would have expected it to then deal with whether the amount of 0.5% per week of delay, which is capped at 5% of the contract value, is reasonable, if it is difficult to prove the loss.

“Indeed, there is no consideration whatsoever on the causation of delay and which party was responsible for the delay – the matter appears to have been argued simply on the basis of the contractual provision and implications of the law declared in, among others, Kailash Nath. The Learned Arbitral Tribunal has analysed none of the case law. The Learned Arbitral Tribunal has indeed held that some loss on investment is bound to occur due to the delay, but has not dealt with whether it was difficult or impossible to prove such loss”, it added.

The Court was of the view that the perceived absence of concreteness could be a pointer to the difficultly in proving the precise loss arising out of a delay of over two years.

“The primary dispute between the parties is HPCL’s stance that the additional duty has no financial implication for GRE since it would get credit for the corresponding amount under the Central Value Added Tax. The Learned Arbitral Tribunal has examined the matter and come to the view that the contract did not provide for examining any corresponding benefits that may be available from the imposition of additional taxes after the base date. This is an eminently plausible view”, it further noted.

The Court also emphasised that it is a reasonable and plausible view that when interpreting the contract one must look to the language of the contract and not extrapolate other hypothetical consequences outside of the contract.

“Therefore, I have no reason to interfere with the plausible view taken by the Learned Arbitral Tribunal. It would be impossible to hold that these findings are perverse or contrary to the fundamental policy of Indian law. … The Learned Arbitral Tribunal has left the actual precise computation of financial implications under Customs Duty for the parties to compute based on the declaration made in the Impugned Award”, it concluded.

Accordingly, the High Court disposed of the Petition, refused to interfere with the impugned award except insofar as it relates to the element of liquidated damages, which was quashed.

Cause Title- Hindustan Petroleum Corporation Limited v. G. R. Engineering Private Limited (Neutral Citation: 2025:BHC-OS:8905)

Appearance:

Petitioner: Senior Advocate Zal Andhyarujina, Advocates Vijay Purohit, Ishani Khanwilkar, Nitika Bangera, and Niyati Bogayta.

Respondent: Senior Advocate Haresh Jagtiani, Advocates Suprabh Jain, Pushpvijay Kanoji, and Pranay Kamdar.

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