Arbitral Award Permitting Forfeiture of Performance Security Without Proving Breach and Actual Loss Is Patentlly Illegal.

The Petitioner was the successful bidder for a hotel plot in Hari Nagar, allotted by the Delhi Development Authority (DDA) for the 2010 Commonwealth Games

Under Clause 3.14 of the tender, the Petitioner furnished a Performance Bank Guarantee (PBG) of Rs. 63,05,000, which was liable for encashment if the hotel was not completed within 24 months

Due to delays, the DDA encashed the PBG under an interim order by the Arbitrator

The Petitioner sought damages and a refund of the PBG, while the Respondent filed counter-claims seeking to retain the PBG amount and interest

The Arbitrator rejected the Petitioner’s claims but allowed the Respondent’s counter-claim for the PBG amount solely because the Petitioner failed to prove its own claim for damages

The Petitioner challenged this part of the award under Section 34 of the Arbitration and Conciliation Act, 1996

1. Whether the counter-claim of the Respondent could be allowed solely on the basis of the rejection of the Petitioner’s claims without an independent determination of breach and loss.

2. Whether an unreasoned arbitral award regarding a counter-claim is sustainable under Section 31(3) and Section 34 of the Act.

3. Whether a specific, severable part of an arbitral award can be set aside while leaving the remainder intact.

Section 31(3) of the Arbitration and Conciliation Act, 1996, which mandates that an arbitral award must state the reasons upon which it is based

Sections 73 and 74 of the Indian Contract Act, 1872, noting that compensation for breach requires proof of actual loss or a genuine pre-estimate of damages

Kailash Nath Associates v. DDA (2015), which establishes that reasonable compensation is only payable upon proof of damage resulting from a breach

Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025), which affirms that courts have the power to sever and set aside only the invalid parts of an award under Section 34

The Court found that the Arbitrator failed to record any specific finding regarding whether the Petitioner had committed a breach of contract that warranted the forfeiture of the PBG

The Arbitrator’s logic—allowing the counter-claim simply because the Petitioner’s claim for business loss was rejected—was deemed legally flawed

Under the Indian Contract Act, the Respondent was required to prove either actual loss or the impossibility of proving such loss to claim liquidated damages; however, the award was silent on these prerequisites

Consequently, the Court determined that the award was "non-speaking" and "bereft of reasons," thereby violating the public policy of India and the statutory mandate for a reasoned award under Section 31(3) of the Act

The petition was allowed in part: the arbitral award dated 17.07.2023 was set aside specifically regarding Counter-Claim No. 1 (the PBG amount), while the rest of the award remained unaffected