Arbitration In IndiaConstruction Arbitration – Part VI

December 9, 20210



Damages are an attempt to quantify the harm suffered by one party due to the act or omission of the other party. For construction disputes, the harm suffered may result in additional costs incurred on the project or on the contractor, due to acts or omission of either parties. Damages are a means to restore the affected party to the position it would have been, had the breach of contract not taken place.

Section 73 of the Indian Contract Act, 1872 (the Contract Act) stipulates that upon breach of contract, the party who is liable for the breach of the contract shall compensate the other party for any loss or damage. Herein it should be noted that such damage has occurred naturally during the usual course of things and should not be remote or indirect loss or damage sustained as a result of the breach.

In such cases, the Court decides upon the quantum of damages and awards to the suffering party depending upon the actual loss or damage suffered. Therefore, it provides for unliquidated damages, wherein the terms of the contract do not stipulate the compensation to be paid in the event of breach of contract.

Liquidated Damages

Construction contracts generally contain terms for payment of liquidated damages or penalty in case of delay. Such contracts provide for recovery of liquidated damages in the event contractor is unable to perform the contract and that results in delay.

A usual method for calculating the damages is at the rate of affixed percent of the total contract price per day or week of delay, with a maximum limit. However, a Limitation of Liability clause is included in the contract to limit the substantial damages incurred.

Section 74 of the Contract Act deals with liquidated damages or damages which are predetermined within the terms of the contract. The said section states that in case of a breach of contract, wherein the damages are predetermined in the contract itself, the party suffering from the breach is entitled to receive such compensation or penalty, irrespective of actual damage or loss suffered by the claiming party. Such compensation or penalty is awarded to the party suffering the breach on showing proof that the party has suffered loss.

However, it is pertinent to note that such compensation or penalty shall be reasonable and not exceed the amount specified in the terms of contract. The rationale behind the said provision is that the award of any compensation cannot exceed the actual loss suffered by the party due to breach of contract which arose in the usual course or that was so contemplated by the parties at the time of making the contract.

In Haryana Telecom Ltd. v. Union of India, 2006 SCC Online Del 575, the Arbitral award that awarded damages incurred by Government for loss suffered due to the delay on behalf of the contractor in supplying cables, was set aside by the Delhi High Court. The Government was required to purchase the same from other seller, which was obtained at cheaper rates and hence no loss was suffered by the Government. Therefore, the Arbitral award for damages to the Government was set aside.

Section 74 of the Contract Act, provides that liquidated damages may be awarded to the suffering party even when actual damage or loss caused is not proved by the party. However, this does not dispense of the requirement of proof of damage, but merely applies to cases where the actual loss or damage suffered is impossible to be proved.

Hence, the aforementioned provides for an exception to the requirement of proof of damage to indicate the existence of some loss or damage, but not the actual quantum of the same. Therefore, a claim for liquidated damages can arise only when a relevant loss or injury is suffered by the party.

In the case of Raheja Universal Pvt. Ltd. v. B.E. Bilimoria & Co. Ltd., 2016 (5) Mah L.J. 229, the Bombay High Court set aside the Arbitral award for grant of liquidated damages, on the ground that the party had failed to prove actual loss or damage suffered and had no evidence to indicate the same.

Therefore, a stipulated compensation or penalty in the terms of contract does not guarantee liquidated damages to the suffering party, unless the party can prove the existence of substantial loss or damage; the same is subject to the exception stated herein above.

Penalty stipulated in the Contract

Penalties refer to sum pre-determined in the terms of Contract to be paid to the suffering party on breach of contract. While liquidated damages are proportionate to the actual loss or damage suffered, penalties are usually higher and disproportionate to the actual loss suffered. Such penalties are inculcated in the contract to ensure performance of the contractual obligations.

The existence of a penalty clause does not disqualify the suffering party to initiate a claim for unliquidated damages. This is not possible when the contract contains a Liquidated Damages clause, thus limiting the remedies available to the party.


The Specific Relief Act, 1963 provides for specific performance of contract in case of breach of contract. Further, the Specific Relief (Amendment) Act, 2018 has introduced certain changes which are relevant to construction disputes.

Firstly, the Amendment has placed the discretion to enforce specific performance of the contract on the party affected by the breach of contract. This has amended the earlier common law rule of Courts granting specific performance on their discretion after determining that damages alone would not be sufficient.

The Amendment further provides for substituted performance, wherein the party suffering loss due to breach has the right to enforce substituted performance from a third party of his choice or his own agency. However, the costs and expenses incurred through such substitution shall be recovered from the defaulting party.

The provision of substituted performance is beneficial for construction disputes as it would reduce subsequent delays and costs incurred due to non-completion of project by defaulting contractor. The employer could then recover the excess costs for substituting the performance from the defaulting contractor.

Additionally, the Amendment prohibits injunction orders for any contract relating to infrastructure project where such an injunction would cause substantial delay or impede the development of the project. Therefore, it empowers the employers to continue with construction projects and avoid injunction orders causing significant delay and losses.

The Amendment is of great impact to construction disputes where time is of essence. It eliminates the need to undergo Court procedure to be awarded damages and an order for specific performance, based on the discretion of the Court. The suffering party can claim for specific relief on its own and can also claim compensation for the loss suffered.


In the event of breach of the terms of a construction contract, the party claiming the damages must prove that time is the essence of the contract and that the other party breached the same by not completing it, within the stipulated term of the contract.

As held by various Courts, the primary aspect to be considered for the enforcement of Arbitral award in construction contracts is the occurrence of actual loss or damage suffered by either party to the contract. Therefore, the party claiming damages must substantially establish that it has incurred actual loss or damage.

There can be a breach in a construction contract due to critical delays caused by the either of the parties or any other sort of disruption. In the backdrop of the same, either or both the parties may seek extension of time due to such delays or for recovery of losses. Hence, as a remedy, damages or specific relief are awarded in the event of construction disputes, based on the terms of the contract and factual matrix of the dispute.

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