Court affirms that arbitrators can adjust liquidated damages when both parties share responsibility for project delays.
In a significant ruling, the Andhra Pradesh High Court on December 31, 2025, upheld an arbitrator's decision to modify the quantum of liquidated damages in a dispute involving M/s. Sunrise & Engineering Industries and Hindustan Shipyard Limited. The court addressed multiple appeals concerning arbitral awards passed by the same arbitrator, relating to a series of contracts awarded by Hindustan Shipyard Limited to various sub-contractors, including the appellant, M/s. Sunrise & Engineering Industries.
The dispute arose when Hindustan Shipyard Limited imposed liquidated damages of 20% on the contract value due to project delays. The appellants challenged these deductions, leading to arbitration. The arbitrator found the liquidated damages clause legal but modified the quantum, citing shared responsibility for delays and the exorbitant nature of the damages.
The arbitrator reasoned that the liquidated damages clause should not be applied mechanically, especially when actual loss can be quantified, and both parties contributed to the delay. This decision was challenged in court, with the respondents arguing that the arbitrator overstepped his jurisdiction by altering the contract terms.
The High Court, presided over by Justices R. Raghunandan Rao and T.C.D. Sekhar, supported the arbitrator's findings, emphasizing that liquidated damages clauses serve as an outer limit for compensation and adjustments are permissible when delays are attributable to both parties. The court also noted that the arbitrator had considered substantial correspondence between the parties, demonstrating shared accountability for the delays.
The ruling reaffirms the role of arbitrators in interpreting and adjusting contract terms to reflect the realities of project execution, providing a balanced approach to resolving commercial disputes.
Bottom Line:
Arbitration - Liquidated damages clause - Arbitrator allowed modification of quantum of liquidated damages based on factors such as shared responsibility for delay and exorbitant nature of the stipulated damages - Held, modification permissible when actual loss can be quantified and delay is attributable to both parties.
Statutory provision(s):
- Arbitration and Conciliation Act, 1996, Sections 28(1)(a), 28(3), 34
- Indian Contract Act, 1872, Sections 73, 74
