When Silence Is Not Golden: Bombay HC Flags Arbitrary Denial of Liquidated Damages

⚖️ Bombay High Court: Arbitral Tribunals Must Give Clear Reasons When Rejecting Liquidated Damages Claims

In a significant judgment reaffirming principles of transparency and accountability in arbitral proceedings, the Bombay High Court has ruled that arbitral tribunals must provide adequate reasoning when rejecting claims for liquidated damages under Section 74 of the Indian Contract Act, especially in cases where proving actual loss is difficult or impossible.

The judgment was delivered by Justice Somasekhar Sundaresan on June 18, 2025, in the case of HPCL v. GR Engineering Pvt Ltd.

🛠️ The Dispute: Project Delays and Damages

The case arose from a 2006 contract between Hindustan Petroleum Corporation Limited (HPCL) and GR Engineering (GRE) for the construction of 12 LPG mounded bullets at HPCL’s Mumbai refinery.

Despite clear timelines, the project was delayed by over two years. HPCL withheld payments and sought ₹5.83 crore in liquidated damages, citing clauses in the contract that allowed a deduction of 0.5% per week of delay, capped at 5% of the total contract value.

GRE disputed the deductions and initiated arbitration. In 2018, the arbitral tribunal directed HPCL to pay several withheld sums and rejected its claim for liquidated damages.

🧑‍⚖️ High Court Intervention: Tribunal Acted Arbitrarily

HPCL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Bombay High Court partially set aside the award, finding that the tribunal had failed to examine critical issues and had not provided adequate reasons for rejecting HPCL’s damages claim.

"The absence of reasons is what manifest arbitrariness is about," the Court remarked, criticizing the tribunal’s approach.

Justice Sundaresan drew on the Supreme Court's ruling in Kailash Nath Associates v. DDA to emphasize that:

· Liquidated damages can be awarded without proof of actual loss, if the loss is inherently difficult to quantify.

· The claimed amount must, however, reflect a genuine pre-estimate of loss.

“One would have expected the Tribunal to ask whether proving the loss was difficult or impossible,” the Court said, “and whether the contractual cap was a reasonable estimate.”

🧾 Severing the Award: Relief for HPCL

The Court invoked the principle of partial severability—recently affirmed in the Supreme Court’s 2024 five-judge Bench ruling in Gayatri Balasamy v. ISG Novasoft Technologies Ltd—to sever and set aside only the portion of the award that rejected HPCL’s claim for liquidated damages.

It held that this element could now be referred back to arbitration for fresh adjudication, while the rest of the award remained valid.

“The arbitration agreement subsists as far as liquidated damages are concerned,” Justice Sundaresan noted, granting both parties liberty to re-arbitrate this issue.

📌 Other Key Findings

Despite HPCL’s success on the liquidated damages issue, the Court upheld several other components of the award:

· ✅ GRE’s entitlement to ₹25.64 lakhs for under-insurance deductions.

· ✅ Reimbursement of ₹3.08 crore in service tax and ₹86.38 lakhs in customs duty.

· ✅ Validity of an expert report by Prof RS Jangid (IIT Bombay) relied upon by GRE, even though HPCL had refused to introduce it as evidence.

The Court also dismissed HPCL’s argument that its vigilance department’s recommendations were beyond dispute, clarifying that such internal departments do not constitute government agencies.

💡 Legal Significance

This ruling reinforces several important principles in Indian arbitration law:

· 🔍 Tribunals must record reasons for accepting or rejecting claims, especially on issues like liquidated damages where judicial standards are well-settled.

· ⚖️ Courts have limited but precise powers to set aside severable parts of arbitral awards under Section 34.

· 🧾 Parties cannot escape scrutiny simply by citing internal reviews or institutional reports.

📝 Conclusion

The Bombay High Court’s judgment serves as a timely reminder that arbitral discretion must be backed by reasoning—particularly in commercial disputes involving public sector undertakings and large infrastructure contracts.

In this case, HPCL may have to return to arbitration, but with a strong judicial message in its favor: silence and arbitrariness in awards will not be tolerated, even in technical forums like arbitration.

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