Liquidated damages require proof of loss, and an arbitral refund finding was left undisturbed.

Section 74 of the Indian Contract Act, 1872 does not permit compensation for liquidated damages unless legal injury or loss is shown. In a dispute over delayed delivery of transformers, the arbitral tribunal found that only a small portion of supplies was delayed, the employer had not proved any loss, and timely delivery had ceased to be of essence. The Delhi High Court declined interference with the arbitral award and the Section 34 order, holding that liquidated damages operate only as an upper limit on reasonable compensation and that a new factual basis raised without pleadings could not be entertained. The refund claim was therefore sustained.

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Issues: Whether the arbitral award and the order under Section 34, insofar as they directed refund of liquidated damages, called for interference on the ground that loss or legal injury had not been established.

Analysis: The dispute turned on the levy of liquidated damages for delayed delivery of four transformers out of forty-six, in a contract where most supplies had been made within time and the remaining transformers were delivered later. The arbitral tribunal found, on the basis of the pleadings and evidence, that the employer had not shown any legal injury or loss arising from the delay, particularly because only a small portion of the transformers had been commissioned even after a substantial lapse of time, indicating that timely delivery had ceased to be of essence. The Court held that Section 74 of the Indian Contract Act, 1872 does not dispense with the requirement of proving legal injury: liquidated damages operate as an upper limit on reasonable compensation, but compensation cannot be awarded where no loss or damage is shown. The Court also noted that the appellant's attempt to introduce a new factual basis regarding damages allegedly levied by a third party could not be entertained in the absence of pleadings.

Conclusion: No interference was warranted with the arbitral finding or with the order under Section 34; the challenge to the refund of liquidated damages failed.

Final Conclusion: The award sustaining the respondent's claim for refund of liquidated damages was upheld, and the appeal was rejected.

Ratio Decidendi: Liquidated damages under Section 74 of the Indian Contract Act, 1872 can be awarded only if the complaining party establishes legal injury or loss; where no such injury is shown, reasonable compensation cannot be granted, and an arbitral finding to that effect should not be disturbed absent patent error.

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