Introduction:

In the case of Jammu & Kashmir Economic Reconstruction Agency vs. M/s Simplex Projects Limited, the Delhi High Court, presided over by Justice Manoj Kumar Ohri, delivered a significant judgment on May 19, 2025, concerning the enforcement of liquidated damages (LD) clauses in contracts. The court upheld the Arbitral Tribunal’s (AT) decision, emphasising that the mere presence of an LD clause does not entitle a party to recover damages without substantiating actual loss.

Background:

The dispute arose from Contract Agreement No. JKUSDIP Srinagar/UT/02, dated April 2, 2013, about the construction of a multi-storied mechanised parking facility on MA Road, Srinagar. The project included a three-year Operation & Maintenance (O&M) period post the Defect Liability phase. While the petitioner contended that the project was to be completed between May 6, 2013, and November 5, 2014, the respondent asserted a stipulated completion date of February 24, 2015. The project concluded on April 30, 2017, after eight Extensions of Time (EoTs).

Petitioner’s Arguments:

The petitioner argued that the respondent was responsible for a delay of 677 days, out of a total delay of 1003 days. They claimed to have granted eight EoTs due to prevailing conditions in Kashmir and issued non-compliance notices under Clause 15.1 of the General Conditions of Contract (GCC). Based on the Technical Advisory Committee’s decision dated August 3, 2017, the petitioner imposed LD at 10% of the contract value under Clause 8.7, which allows 0.05% per day of delay, capped at 10%. The petitioner contended that the AT failed to adjudicate on the attribution of delay, which was essential for a fair assessment of the LD claim.

Respondent’s Arguments:

The respondent countered that the petitioner had not filed a counterclaim for the LD amount and attempted to unilaterally adjust it against the respondent’s undisputed claims without consent. They argued that Clause 8.7 of the GCC and Section 8 of the Particular Conditions of Contract (PCC) referred to delay damages at 0.05% of the final contract price per day, which should be seen as a penalty rather than genuine pre-estimated damages. The respondent emphasised that the use of the term “penalty” and the lack of mutual negotiation indicated that these clauses were penal.

Court’s Observations and Judgment:

The Delhi High Court observed that the AT had thoroughly evaluated the petitioner’s LD claim and rightly concluded that the petitioner should have raised it as a counterclaim. Once the respondent objected to the unilateral adjustment, the petitioner needed to seek a declaration validating that adjustment.

The court relied on Supreme Court judgments, including Kailash Nath Associates v. DDA, Fateh Chand v. Balkishan Dass, and Maula Bux v. Union of India, which held that the law requires proof of actual loss despite an LD clause and does not permit automatic recovery of the full LD amount upon breach.

The court further noted that Clause 8.7 of the GCC failed to qualify as a valid LD clause, as it was part of a standard contract without mutual negotiation and did not represent a genuine pre-estimate of damages. The court emphasised that Indian law does not recognise penalties as a measure of damages, and LD stipulated in contracts must not be like a penalty but must be a genuine pre-estimate of damages made by the parties.

Additionally, the court observed that there was no patent illegality committed by the AT in reaching the finding that the petitioner could not claim loss allegedly suffered by the government exchequer without proof. The court concluded that the AT rightly held that the petitioner could not claim both LD for delay and separate compensation for loss of parking revenue, as LD, being a pre-estimate of delay-related losses, would cover all such claims.

Accordingly, the petition was dismissed.