2025 Supreme(Online)(AP) 16534

HIGH COURT OF ANDHRA PRADESH
R. Raghunandan Rao, T.C.D. Sekhar, JJ
M/s. Sunrise & Engineering Industries – Appellant
Versus
Hindustan Shipyard Limited – Respondent
C.M.A.Nos.234, 242, 243, 244, 245, 246, 247, 248, 249, 253, 257, 258 & 259 of 2025

An arbitrator can modify liquidated damages if the aggrieved party's loss is quantifiable or the delay is partly attributable to them, as the stipulated sum is only the outer limit for reasonable compensation under Section 74 of the Contract Act.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Sections 28(1)(a), 28(3), 34(2)(b)(i), and 34(2A) - Indian Contract Act, 1872 - Sections 55, 73, and 74 - Scope of Judicial Review under Section 34 - Arbitrator's power to modify Liquidated Damages.

(B) Arbitration - Section 34 - Patent Illegality - An arbitral award can be set aside only if it is vitiated by patent illegality on the face of the award. An award cannot be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

(C) Contract Act, 1872 - Section 74 - Liquidated Damages - The sum named in a liquidated damages clause is the outer limit within which reasonable compensation must be awarded. If the aggrieved party's loss can be evaluated in terms of money, only the actual loss must be compensated. The clause applies in toto only when the loss cannot be estimated.

(D) Arbitration - Section 31(3) - Reasoned Award - The mandate is for 'proper, intelligible, and adequate' reasoning. Courts should look at the substance of the findings, not the form, especially when the arbitrator is a non-lawyer. An award should not be set aside for inadequate reasons in a casual manner. (E) Contract Act, 1872 - Section 55 - Extension of Time - If extension of time is granted without a caveat preserving the right to claim compensation for delay, the party granting the extension is precluded from claiming damages under that clause. (F) Contract Act, 1872 - Section 74 - Apportionment of Delay - If the delay in contract performance is partly attributable to the party claiming liquidated damages, it is impermissible to apply the liquidated damages clause fully. The arbitrator must apportion the delay and modify compensation accordingly.

Facts of the case:
A Public Sector Undertaking (PSU) awarded sub-contracts to various entities for construction and repair work. The contracts contained a liquidated damages clause levying 2% per week of delay, up to a maximum of 20% of the contract value. The PSU levied 20% liquidated damages on the appellants for delays. The appellants sought arbitration, claiming the delay was due to the PSU's inaction, the clause was exorbitant, and the PSU had not proved any actual loss. The arbitrator held the clause was legal but modified the damages, finding the delay attributable to both parties and the rate exorbitant. The trial court set aside the award, holding the arbitrator could not modify the contract terms. The appeals challenged the trial court's order.

Findings of Court:
The High Court held that the arbitrator's reasons for modifying the damages were intelligible and adequate. The Court found that the PSU had admitted that its losses were quantified by the owners of the vessels, thus removing the basis for applying the liquidated damages clause without modification. The Court further held that the arbitrator's finding that delay was attributable to both parties was a valid ground to modify the damages. The High Court concluded that the trial judge's view that there was no material for this finding was incorrect, as the arbitrator had referred to correspondence between the parties.

Issues: (1) Whether an arbitrator can modify the quantum of liquidated damages stipulated in a contract. (2) Whether the liquidated damages clause must be applied in toto without proof of actual loss. (3) Whether the arbitrator's award lacked proper reasons. (4) Whether the award was in conflict with the public policy of India or suffered from patent illegality.

Ratio Decidendi: The court applied the principles in Fateh Chand and Maula Bux to hold that Section 74 of the Contract Act allows for reasonable compensation and that the stipulated sum is the outer limit. Where the actual loss can be quantified, only that actual loss should be compensated, not the pre-estimated sum. Further, where the claiming party is also responsible for the delay, the liquidated damages clause cannot be applied fully. The court also clarified that an arbitrator's reasoning must be 'proper, intelligible, and adequate', not elaborate. Result : Appeals allowed. The judgment of the trial court setting aside the arbitral awards was set aside, and the awards passed by the arbitrator were upheld. No order as to costs.