Award of liquidated damages without evidence of legal injury or proof of loss constitutes patent illegality.

The Appellant was appointed as the sole selling agent for Manipur State Online Lotteries via a contract dated 05.04.2001, modified on 20.11.2002

The modified agreement (Clause 10.4) stipulated that the first draw must commence within six months (by 20.05.2003), failing which a compensation of ₹35 crores was payable

The first draw was delayed until 01.12.2003

Following disputes, an Arbitral Tribunal (AT) awarded the State (Respondent) ₹10 crores as liquidated damages for the delay (Counter-claim 1) and ₹19,48,111 for construction costs (Counter-claim 4)

The Appellant challenged this award under Section 34 of the A&C Act, which was dismissed by the District Judge, Imphal East, on 24.02.2021

The Appellant subsequently filed this appeal under Section 37

1. Whether the award of ₹10 crores as liquidated damages, without evidence of legal injury or loss, is in conflict with the public policy of India or vitiated by patent illegality

2. Whether the award of ₹19,48,111 for actual construction costs should be sustained or severed

The court applied Section 74 of the Indian Contract Act, 1872, noting that while it dispenses with proof of "actual loss," it requires the existence of "legal injury" to award compensation

The court relied on the Constitution Bench in Fateh Chand v. Balkishan Dass, which held that compensation must be reasonable and based on settled principles

Maula Bux v. Union of India and Kailash Nath Associates v. DDA established that if loss can be calculated, it must be proved; liquidated damages are only awarded without proof when loss is impossible or difficult to estimate

Regarding "public policy," the court applied the "fundamental policy of Indian law" test from ONGC v. Saw Pipes and CORE-II, asserting that disregarding binding Supreme Court precedents constitutes such a violation

The principle of "severability" from ISG Novasoft Technologies v. Gayatri Balasamy was used to separate distinct claims

The court found that although the AT treated Clause 10.4 as a liquidated damages provision, the State failed to lead any evidence regarding the loss suffered due to the delay

The AT arbitrarily arrived at the figure of ₹10 crores without any inferential process or mathematical basis

The High Court reasoned that since lottery business is res extra commercium, the State could not have suffered a standard commercial loss justifying such high damages

By awarding a sum without proof of injury and ignoring the mandates of Fateh Chand and Kailash Nath, the AT committed a patent illegality and violated the fundamental policy of Indian law

Conversely, Counter-claim 4 for ₹19,48,111 represented actual, unpaid construction costs for a facility built for the Appellant; this was a factual recovery of expenditure, not damages, and thus did not suffer from legal infirmity

The Court set aside the Section 34 Court’s order and the Arbitral Award insofar as they granted ₹10 crores in damages under Counter-claim 1, holding it was patently illegal and against public policy

The Court sustained the award of ₹19,48,111 under Counter-claim 4, as it was a distinct, proven debt for construction costs

No order as to costs was made