Proof Of Actual Damage Not Required To Claim Liquidated Damages If Contract Stipulates Daily Penalty: Supreme Court

"The very fact that the contractual clause itself envisioned payment of penalty on a day-to-day basis for the delayed period indicated that the damage suffered by the owners was implicit therein." Supreme Court, in a significant ruling dated May 26, 2026, held that when an agreement stipulates a specific timeline and a daily penalty for delay, the damage suffered is considered implicit within the contract.

A bench of Justice Sanjay Kumar and Justice K. Vinod Chandran observed that requiring a party to prove actual loss in such circumstances is "manifestly erroneous" and contrary to explicit contractual covenants. The Court emphasized that while an award might be patently illegal, the interest of justice may require modification under Article 142 to avoid fresh rounds of prolonged litigation.

The dispute arose from a 2010 reconstruction agreement between property owners and a builder. The builder abandoned the project in 2011 after partial construction, leading the owners to terminate the agreement. Arbitration followed, resulting in an award that granted the owners a daily penalty for delay but denied them the right to forfeit earnest money.

The primary questions before the Court were whether property owners are required to prove actual damage to claim contractually stipulated daily penalties for construction delays. The Court also examined the extent to which a court can modify an arbitral award under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, to ensure substantial justice.

Division Bench Erred In Requiring Independent Evidence Of Damage

The Supreme Court found that the Delhi High Court's Division Bench erred in setting aside the award of damages simply because the owners had not produced independent evidence of loss. The Bench noted that Clause 7 of the agreement specifically provided for a penalty of ₹10,000 per day for the delayed period.

"When the agreement categorically stipulated timelines for the commencement and completion of the construction and the consequences that were to follow thereupon, it was not necessary for the owners to adduce evidence separately in proof of the actual damage suffered by them," the Court observed.

Damages Implicit In Daily Penalty Clauses

The Court clarified that the existence of a day-to-day penalty clause is a clear indicator that both parties understood the consequences of delay. The Bench held that the conclusion of the High Court was "opposed to the explicit covenant in the agreement" and could not be sustained.

"The very fact that the contractual clause itself envisioned payment of penalty on a day-to-day basis for the delayed period indicated that the damage suffered by the owners was implicit therein," the judgment stated.

Scope Of Modification Under Section 34 And Section 37

The Bench referred to the Constitution Bench decision in Gayatri Balasamy vs. ISG Novasoft Technologies Limited, highlighting the distinction between modifying and setting aside an award. It noted that the power to set aside an award is circumscribed by Section 34, particularly the ground of "patent illegality" under Section 34(2A).

The Court observed that while the Arbitrator’s interpretation of the "double penalty" (denying forfeiture while awarding daily compensation) constituted a patent illegality, the owners had not challenged that specific finding. Therefore, that portion of the award had attained finality.

Arbitrator And Single Judge Blundered In Calculating Penalty Period

The Supreme Court pointed out that both the Arbitrator and the Single Judge of the High Court had used erroneous dates for calculating the penalty. The initial 12-month period was supposed to begin only after the vacant land was provided to the builder, a fact "completely lost sight of by both the Courts."

Based on the builder's uncontroverted assertions, the Court determined the correct commencement date for the 12-month period was July 9, 2010. Including the two-month grace period, the builder was liable for penalty only from September 9, 2011, until the date the agreement was terminated on November 11, 2011.

Exercise Of Powers Under Article 142 To Prevent Fresh Litigation

Though the award was found to be patently illegal regarding the calculation and interpretation of clauses, the Court declined to set it aside in its entirety. The Bench noted that the parties had been litigating since 2012 and starting afresh would impose "significant hardship."

"We, therefore, exercise our power under Article 142 of the Constitution so as to give a quietus to the dispute between the parties... to effect substantial justice between the parties instead of relegating them to a fresh round of litigation," the Bench held.

In its final directions, the Court held the appellants (owners) entitled to a penalty of ₹6,30,000 for a 63-day delay. After adjusting the builder's confirmed claims for construction costs and earnest money refund (totaling ₹81,92,400), the Court ordered the owners to pay a balance of ₹25,62,400 to the respondents.

Date of Decision: May 26, 2026