JUDGMENT

A.K. Goel, J.

1. Leave granted.

2. These appeals have been preferred against final judgment and order dated 10thFebruary, 2012 in RFA(OS) No. 35 of 2010 and dated 1st June, 2012 in R.P. No. 369 of 2012 in RFA (OS) No. 35 of 2010 passed by the High Court of Delhi at New Delhi.

3. The question raised for our consideration is when and to what extent can the stipulated liquidated damages for breach of a contract be held to be in the nature of penalty in absence of evidence of actual loss and to what extent the stipulation be taken to be the measure of compensation for the loss suffered even in absence of specific evidence. Further question is whether burden of proving that the amount stipulated as damages for breach of contract was penalty is on the person committing breach.

4. The Respondent-Delhi Development Authority awarded a contract vide agreement dated 4th October, 1995 to the Appellant for constructing a sewerage pumping station at CGHS area at Kondli Gharoli at Delhi. Clause 2 in the agreement provided as follows:

the contractor shall comply with the said time schedule. In the event of the contractor failing to comply with this condition, he shall be liable to pay as compensation an amount equal to one percent or such smaller amount as the Superintending Engineer Delhi Development Authority (whose decision shall be final) may decide on the said estimated cost of the whole work for everyday that the due quantity of work remains incomplete; provided always that the entire amount of compensation to be paid under the provisions of this clause shall not exceed ten percent of the estimated cost of work as shown in the tender.

Since the work proceeded at slow pace and the Appellant-Defendant failed to complete the same, the contract was terminated on 17th September, 1999. Under Clause 2 of the agreement, the Superintending Engineer of the Respondent levied compensation of Rs. 20,86,446/- for delay in execution of the project by an order of penalty dated 21st July, 1999 and called upon the Appellant to deposit the same. The said order reads thus:

The work was being executed by you at extremely slow pace. You had to complete the job by 7.1.97. You had failed to complete the work even after expiry of 2 years six months after stipulated date of completion. Despite the clear direction from Hon'ble Supreme Court to expedite the work and complete the job by June-99, you have failed to comply the direction of Court and have rather abandoned the work since 6.4.99 and you failed to complete the work till date.

In exercise of the power conferred on me Under Clause-2 of the agreement, I, R.C. Kinger, the SE/CC-10/DDA decide and determine that you are liable to pay Rs. 20,86,446/- (Rs. Twenty lacs eighty six thousand four hundred forty six only) as and by way of compensation as stipulated in clause-2 of the agreement.

5. On failure of the Appellant to respond to the above order, the Respondent filed suit No. 1311 of 2002 before the Delhi High Court for recovery of the said amount with interest. The Appellant-Defendant failed to contest the suit inspite of service but made an application raising objection to the maintainability of the suit on the ground that vide order dated 19th December, 2001, a former Judge of Delhi High Court had been appointed arbitrator to decide the disputes arising out of the contract. The said application was, however, dismissed on the ground that the matter in the suit was not within the purview of the arbitration. The Court proceeded to decide the suit on merits.

6. Learned single Judge dismissed the suit holding that the Plaintiff had not treated the time fixed for performance of the contract as of essence and the compensation stipulated in Clause 2 of the agreement was in the nature of penalty. The basis for levy of compensation had not been indicated so as to determine whether the compensation claimed was reasonable. Reliance was placed on the judgment of this Court in Arosan Enterprises Ltd. v. Union of India and