The Delhi High Court has set aside an arbitral award to the extent it granted damages over and above liquidated damages (LD), holding that such damages cannot be awarded in the absence of proof of actual loss or a reasoned basis for quantification.
The petition under Section 34 of the Arbitration and Conciliation Act, 1996 was filed by UEM India Pvt. Ltd. challenging an award arising out of a contract with ONGC for installation and maintenance of effluent treatment plants in Assam. The dispute before the Court was confined to the award of damages equivalent to the Performance Bank Guarantee (PBG), granted over and above LD.
At the outset, the Court identified a two-fold issue whether damages were in fact awarded despite not being reflected in the operative portion of the award, and whether such damages were legally sustainable. Reading the award as a whole, the Court held that the arbitral tribunal had indeed awarded damages equivalent to 10% of the contract value, linked to the PBG, notwithstanding the absence of such quantification in the concluding paragraph.
On merits, the Court noted that the tribunal had found that only 5.86% of the contractual work was completed and upheld the invocation of the PBG, treating its value as “reasonable damages.” However, the respondent had failed to prove actual loss under various heads of claim, and the tribunal had itself rejected multiple counterclaims for damages on account of lack of evidence.
Despite this, the tribunal proceeded to award damages quantified at 10% of the contract value without identifying the heads of loss or providing any intelligible basis for such quantification. The Court held that this approach was legally unsustainable and violative of Section 73 of the Indian Contract Act, 1872, which requires proof of loss unless such loss is inherently incapable of proof.
The Court further held that the award failed to satisfy the requirement of a reasoned decision under Section 31(3) of the Arbitration Act, as the basis for awarding damages was neither explained nor supported by evidence. The award was also found to be self-contradictory, as specific claims for damages were rejected for want of proof, yet damages were granted without establishing any nexus to actual loss.
Accordingly, the Court set aside the award insofar as it granted damages equivalent to the PBG over and above LD, while leaving the remaining portions of the award intact, including claims relating to services rendered, refund of advance bank guarantee, and LD. The petition was allowed to this limited extent.
Appearances:
For the Petitioner: Mr. Gaurav Pachnanda, Sr. Adv. with Mr. Samir Malik, Ms. Snehal Kaila, Ms. Yachana Gupta, Mr. Udbhav Gady & Mr. Krishan Kumar, Advs.
For the Respondent: Mr. Abhishek Puri, Ms. Surbhi Gupta & Mr. Sahil Grewal, Advs.
