India: Delhi High Court Reaffirms The Scope Of Law On Liquidated Damages

Introduction:

The Delhi High Court ("Court") in the recent judgment of Vivek Khanna v. Oyo Apartments Investments LLP¹, rejected the challenge to the arbitral award filed under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act") on the ground that a claim under liquidated damages with a pre-estimated sum can be dispensed with, if the party with a claim has actually not suffered a loss. The Court held that liquidated damages with a pre-estimated sum in a contract only prevents courts/tribunals from determining the quantification of the loss, if it can be proven that loss has been suffered.

Factual Matrix and Arguments:

A Lease Agreement was signed between the Petitioner and the Respondent, wherein the Petitioner had leased out his premises to the Respondent for a term of 60 months, with a lock-in period of 36 months.

A dispute arose between the parties when the Respondent terminated the Lease Agreement before the expiration of the 36 month lock-in period. Pursuant to the same, the Petitioner invoked arbitration, the Arbitral Tribunal ("Tribunal") was constituted, claims and counterclaims were raised and the arbitral award ("award") was delivered. The Tribunal in its award, held that the premature termination of the lease by the Respondent was illegal, however, it disallowed the claim made by the Petitioner with respect to granting rent for the remaining period of the lock-in. Aggrieved by the decision of the Tribunal, the Petitioner filed an appeal before the Court challenging the award under Section 34 of the Act.

Largely, it was the Petitioner's case that its claim of sum towards rent payable for the remaining lock-in period was wrongly rejected, especially when the Tribunal had held that premature termination of the lease by the Defendant was illegal.

It was the Respondent's main contention that the Petitioner was not entitled to the rent for the remaining lock-in period, in absence of any evidence proving loss suffered by Petitioner due to termination of the Lease Agreement before the expiry of the lock-in period. On the contrary, the Respondent put forth information in its Statement of Defense which indicated that the Petitioner had leased out its premises to new tenants from the very next day the Respondent had vacated. The Respondent equated the restriction in terminating lease during lock in period as a liquidated damages clause in the Lease Agreement and put forth its submission that a party seeking liquidated damages must prove that loss has been suffered.

Summary of the Judgment:

Before delving into the merits of the case, the Court remarked that the Petitioner had taken the defence of patent illegality, one of most invoked grounds under Section 34 of the Act. Examining the narrow limit of a challenge under the scope of patent illegality under Section 34 of the Act, the Court relied on the judgment of Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India (NHAI)² to observe that the instances of patent illegality were well established and include a non-judicial approach adopted by the arbitrator and manifest legal perversity in reaching conclusions.

With respect to the Petitioner's claim of sum towards rent payable for the remaining lock-in period not being granted, the Court held that rejection of said claim was correct and was not patently illegal. The Court relied on its interpretation of admissibility of liquidated damages in the matter of Deepak Chopra v. FLAKT (India) Pvt. Ltd.³ and other judgments⁴.

The Court, while observing the crystallized legal position stated that the sum as per liquidated damages is not in the nature of a penalty but a pre-estimate of loss estimated by the parties likely to be suffered by a party in the event of breach of contract. Therefore, a mere breach of contract would not make the liquidated damages payable and loss suffered must be proved by the party claiming such liquidated damages.

Views:

The stipulation for liquidated damages has been provided under Section 74 of the Indian Contract Act, 1972 ("Contract Act"), however, its scope has been a topic of contention, across the years. As per Section 74 of the Contract Act, there is no necessity to prove actual damage or loss. The same was held to be the case by the Supreme Court in Fateh Chand v. Balkishan Das⁵ and other judgments⁶, wherein a wide interpretation was given to Section 74 of the Contract Act.

However, in the subsequent years, multiple High Court judgments interpreted the phrase 'actual damage or loss' under Section 74 to be the court's assessment of quantification of loss, stating that existence of loss or injury is indispensable for such claim of liquidated damages.⁷ The same principle was adopted by the Supreme Court in 2015 in the case of Kailash Nath Associates v. Delhi Development Authority⁸ ("Kailash Nath") and subsequently by other High Courts.⁹ The present decision under analysis follows the ratio laid down by Kailash Nath.

While it has been criticized that such an interpretation curtails the scope of Section 74 and goes against its legislative intent of not having to prove any legal injury, the Kailash Nath judgment is sound in law, and operates on the principles of equity. Therefore, the same being followed by High Courts across India, is definitely a step in the right direction.

Footnotes

1 Vivek Khanna v. Oyo Apartments Investments LLP, (O.M.P. (COMM) 266/2023, CAV 377/2023, I.A. 13723/2023, I.A. 13724/2023, I.A. 13725/2023, I.A. 13726/2023).

2 Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India (NHAI), (2019) 15 SCC 131.

3 Deepak Chopra v. FLAKT (India) Pvt. Ltd, 2020 SCC OnLine Del 103.

4 Manju Bagai v. Magpai Retail Pvt., 2010 SCC OnLine Del 3842 and Egon Zhender International Pvt. Ltd. v. Namgayal Institute for Research on Ladakhi Art & Culture (Nirlac) & Ors, 2013 SCC OnLine Del 4288.

5 Fateh Chand v. Balkishan Das, 1963 AIR 1405.

6 Maula Bux v. Union Of India, 1970 AIR 1955 and ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705.

7 Indian Oil Corporation v. Lloyds Steel Industries Limited (2007) 144 DLT 659; M/s. Herbicides (India) Ltd. v. M/s. Shashank Pesticides P. Ltd., 180 (2011) DLT 243 and Raheja Universal Pvt. Ltd. v. B.E. Bilimoria & Co. Ltd., (2016) 3 AIR Bom R 637.

8 Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136.

9 Supra note 3; Union of India v. Motor & General Sales Ltd, 2016 SCC OnLine Bom 6787.

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