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Liquidated Damages: Understanding Through Delhi High Court’s Lens

Understanding Liquidated Damages through Delhi High Court's Lens

The Delhi High Court recently rendered a pivotal decision that sheds light on the nuanced legal landscape of liquidated damages, a critical aspect of contractual disputes. The division bench of Justice Rajiv Shakdher and Justice Amit Bansal dissected the essence of damages in the context of a dispute between Bharat Heavy Electricals Limited and Kanohar Electricals Limited, elucidating the imperative for an aggrieved party to establish legal injury.

The Essence of the Dispute

The appeal against the arbitral award under scrutiny involved claims of liquidated damages by Bharat Heavy Electricals Limited due to delays in the supply of transformers by Kanohar Electricals Limited. Central to the adjudication was whether the imposition of damages was justified without the appellant proving actual loss or injury resulting from the delay.

The Arbitral and Judicial Examination

“The learned Arbitrator directed refund of liquidated damages retained by the appellant inter alia on the ground that the minutes of the meeting dated 21.03.2021 revealed that out of 46 transformers supplied by the respondent only 20 transformers had been installed and of which only 8 had been commissioned by 21.03.2021… Thus, the delay between the supply of transformers and their commissioning, at the very least, was 27 months when 8 out of 46 transformers supplied were commissioned.”

This excerpt highlights the arbitrator’s rationale, which was grounded in the substantial delay in the commissioning of the transformers, thereby questioning the direct impact of the delayed supply on the appellant’s operations.

Legal Reasoning and Court’s Stance on Liquidated Damages

In deliberating on the matter, the High Court emphasized the legal principles governing liquidated damages:

“Liquidated damages, in law, are no different from unliquidated damages that an aggrieved party may claim. In both instances, the aggrieved party is required to demonstrate legal injury… 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.”

This assertion underscores the need for demonstrating actual loss or injury, reaffirming the doctrine that mere delay does not automatically translate to legal injury warranting damages.

Concluding Observations on Liquidated Damages

The judgment profoundly delineates the contours of liquidated damages within the framework of the Indian Contract Act, 1872, particularly Section 74. It clarifies that the mere existence of a contractual damages clause does not absolve the claimant from the responsibility of proving actual loss or injury. 

Implications for Contractual Disputes

The Delhi High Court’s ruling serves as a cautionary note to parties engaged in contractual agreements, accentuating the importance of meticulously drafting liquidated damages clauses. It reinforces the judiciary’s commitment to ensuring that compensation for breach of contract is grounded in actual loss or injury, thereby preventing unjust enrichment or unwarranted penalization.

In essence, this decision not only provides clarity on the application of liquidated damages but also sets a precedent in how such claims are to be approached and substantiated in legal proceedings. It encapsulates the judiciary’s nuanced understanding of contractual disputes, emphasizing the balance between contractual freedom and the necessity for equitable justice in the adjudication of contractual damages claims.



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