Sudershan Kumar Bhayana (Deceased) v/s Vinod Seth (Deceased); FAO(OS) 132/2019
In a recent judgment, the High Court of Delhi addressed a case involving cross-appeals filed under the Arbitration & Conciliation Act, 1996. This case was centered around an arbitral award that was challenged by the parties on various grounds, including the award of damages without any evidence or material to establish that the owners had suffered any damages.
One of the pivotal issues in the case was whether an award of damages could be justified solely based on a penalty clause in the collaboration agreement. The court ruled that an award of damages without any substantiating evidence could not stand merely on the grounds of a penalty clause in the agreement. The Hon’ble Court emphasized that unless loss is both pleaded and proven, where it is capable of being proven, it cannot be recovered. The court further observed that no windfall could be granted in favour of the respondent to recover liquidated damages if no loss is incurred or proven.
The Hon’ble Court also made a distinction between penalties and damages, noting that a penalty is generally construed as a sum stipulated to act in terrorem, while damages, whether liquidated or unliquidated, when awarded, have a compensatory nature. Liquidated damages are granted by the court only if they are seen as a genuine pre-estimate of the loss caused in the event of a breach. The court held that liquidated damages eliminate the need for proof when loss or damage cannot be proven, but they cannot be granted if there is no actual loss or injury.
In summary, the High Court of Delhi determined that an award of damages cannot be sustained solely based on a penalty clause in the agreement. The court stressed the importance of pleading and proving loss, where it is possible to do so, before damages can be awarded. This decision of the Hon’ble Court highlighted the significance of parties to an agreement carefully considering the terms of any penalty clause and ensuring that it genuinely pre-estimates the potential loss that might occur in the event of a breach.

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

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