2026 (2) TMI 225 - SC - Indian Laws

Liquidated damages and public utility exception in contracts: limited modification of arbitral award permitted; appellate reworking reversed.

Liquidated damages claims involving public interest projects attract a public utility exception requiring the breaching party to prove absence of loss; ... Liquidated damages for delay - public utility exception to Section 74 of the Indian Contract Act, 1872 - burden on breaching party to prove absence of loss where public interest project is involved - limited power of modification under Section 34 of the Arbitration and Conciliation Act, 1996 - scope of appellate interference under Section 37 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- The modification of the award so as to enhance the amount of reasonable compensation by the Section 34 Court was a permissible exercise when viewed in the context of the law laid down in Gayatri Balasamy [2025 (5) TMI 566 - SUPREME COURT (LB)] The modification is in exercise of jurisdiction under Section 34 of the Act of 1996 without undertaking any examination of the merits of the dispute. To put it plainly, the modification is only with a view to apply Clause 4.6.2 of the PPA to the facts of the case which exercise has also been approved by the Section 37 Court. We, therefore, do not find that on this count, the judgment of the Section 34 Court suffers from any jurisdictional error. Having agreed to incorporate Clause 4.6 in the PPA, it is clear that the rights of the parties ought to be determined bearing in mind the terms agreed and SEL would not be justified in contending that NVVNL had failed to indicate the exact loss suffered by it due to the delay in commissioning of the project. The learned Single Judge as well as the Division Bench have in our view rightly approached this aspect of the matter and have held that NVVNL in terms of Clause 4.6 of the PPA is entitled to reasonable compensation. We, therefore, do not find any reason whatsoever to take a different view of the matter in this regard. Determination of the amount of reasonable compensation - In our view, the Division Bench exceeded its jurisdiction under Section 37 of the Act of 1996 when it proceeded to re-work and re-calculate the amount of reasonable compensation to which NVVNL was entitled. The learned Single Judge having determined the amount of reasonable compensation by relying upon Clause 4.6 of the PPA and thereafter awarding 50% of the amount so determined, in the absence of this determination being shown to be beyond the terms of Clause 4.6 of the PPA or arbitrary or perverse, no interference with such determination was called for in exercise of jurisdiction under Section 37 of the Act of 1996. In fact, the Division Bench has not recorded any finding that such determination of reasonable compensation by the learned Single Judge suffered from arbitrariness or that it travelled beyond what was provided by Clause 4.6 of the PPA. Having held in paragraph 28 of the impugned judgment that it was in agreement with the view of the learned Single Judge of the need to balance equities and compute a fair and reasonable amount of compensation coupled with the fact that the majority award granting a paltry amount of ₹1.2 crores was held to be contrary to the fundamental policy of Indian law thus requiring interference, the further exercise undertaken by it in modifying the amount of reasonable compensation was not justified in the facts of the case. The modification in the amount of reasonable compensation by the Division Bench is merely a substitution of its view in place of the plausible view taken by the learned Single Judge. Such course of taking a different view of the same matter from the one taken under Section 34 of the Act of 1996 would be beyond the scope of Section 37 of the Act of 1996. As held in AC Chokshi Share Broker Private Limited vs. Jatin Pratap Desai and another [2025 (2) TMI 414 - SUPREME COURT] to which one of us (P.S. Narasimha J) was a party, the Court under Section 37 must only determine whether the Section 34 Court had exercised its jurisdiction properly and rightly, without exceeding its scope. To that extent, we find that the Division Bench of the High Court erred in interfering with the judgment of the learned Single Judge. Thus, we are of the view that the determination of the amount of reasonable compensation by the learned Single Judge having been undertaken in terms of Clause 4.6 of the PPA and further discretion having been exercised by awarding 50% of such amount as liquidated damages, the Division Bench was not justified in modifying the said decision. Accordingly, the judgment of the Division Bench to that extent stands set aside. The judgment of the learned Single Judge in OMP stands restored. Civil Appeal preferred by NVVNL, thus, stands allowed and Civil Appeal preferred by SEL stands dismissed. Issues: (i) Whether Clause 4.6 of the PPA and Section 74 of the Indian Contract Act, 1872 permit recovery of reasonable liquidated damages without proof of actual loss where the contract concerns a project of public utility; (ii) Whether the Division Bench in exercise of jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 was justified in re-working and reducing the amount of reasonable compensation determined by the Section 34 court.Issue (i): Whether reasonable compensation under Clause 4.6 of the PPA is recoverable without proof of actual loss in view of Section 74 of the Indian Contract Act, 1872 and the public-utility character of the project.Analysis: Clause 4.6 provides a contractual scheme for liquidated damages and Section 74 permits recovery of reasonable compensation up to the contractual stipulation without proof of actual damage, subject to the exception for bonds relating to public duties. The contractual purpose of the PPA is to implement the JNNSM and promote grid-connected solar generation, engaging public interest and environmental objectives. Where a contract concerns public utility or public interest, the pre-estimate of loss in the contract may be treated as sufficient and the burden shifts to the breaching party to demonstrate absence of loss or that the stipulation is a penalty.Conclusion: Clause 4.6 and Section 74 apply to permit recovery of reasonable liquidated damages without separate proof of actual loss given the public-utility character of the PPA; conclusion in favour of Appellant.Issue (ii): Whether the Division Bench exceeded the permissible scope of appellate review under Section 37 by re-calculating the amount of reasonable compensation fixed by the Section 34 court.Analysis: Section 34 courts possess a limited power to modify awards (including under the doctrine of severability) where such modification remains within the statutory contours and does not amount to an appellate re-appraisal of merits. Section 37 review is confined to assessing whether the Section 34 court exercised its jurisdiction correctly and within limits, and is not a license to substitute the appellate court's own merits-based view where the Section 34 determination is plausible and not shown to be arbitrary, perverse, or beyond the contract terms. The Section 34 court had applied Clause 4.6 and awarded 50% of the computed amount as reasonable compensation; the Division Bench re-worked the calculation without recording that the Section 34 determination was arbitrary or beyond Clause 4.6.Conclusion: The Division Bench exceeded its jurisdiction under Section 37 by re-calculating and substituting its own view for the plausible Section 34 determination; conclusion in favour of Appellant.Final Conclusion: The Section 37 judgment that modified the Section 34 determination of reasonable compensation is set aside and the Section 34 judgment is restored, resulting in allowance of the appeal filed by the Appellant and dismissal of the cross-appeal.Ratio Decidendi: Where a contractual liquidated-damages clause relates to a project involving public interest, Section 74 permits recovery of reasonable compensation without proof of actual loss, and a Section 34 court may make a limited modification of an award within statutory bounds; an appellate court under Section 37 must not re-calculate or substitute its own merits-based assessment unless the Section 34 determination is shown to be arbitrary, perverse, or beyond the contract terms.