Liquidated damages cannot be recovered automatically without proving actual loss despite a contractual stipulation.

The Petitioner (PVVNL), a government-owned power distribution company, awarded two turnkey contracts (Supply and Service) to the Respondent in March 2015 for rural electrification in Amroha, Uttar Pradesh

While the project was scheduled for completion by October 2016, it was eventually commissioned in February 2019

During execution, the Respondent requested several extensions citing site hindrances, which the Petitioner neither formally accepted nor rejected, allowing work to continue

After issuing a completion certificate in April 2022, the Petitioner unilaterally deducted ₹4,50,68,820 as liquidated damages (LD) from the Respondent’s bills in June 2022

The Respondent invoked arbitration, and the Arbitral Tribunal (AT) ordered the refund of the LD amount, finding the Petitioner partly responsible for the delay and noting a lack of evidence regarding "actual loss"

The Petitioner challenged this portion of the award under Section 34 of the Arbitration and Conciliation Act

1. Whether the Petitioner was justified in unilaterally deducting liquidated damages for the delay in performance without proving actual loss and where the delay was attributable to both parties

2. Whether the Arbitral Award, by directing the refund of the liquidated damages, was patently illegal or in conflict with the public policy of India

Section 34 of the Arbitration and Conciliation Act, 1996, which limits judicial interference to awards suffering from patent illegality or those in conflict with the public policy of India

Under Section 74 of the Indian Contract Act, 1872, proof of "actual loss" is a sine qua non for claiming liquidated damages unless such loss is impossible to prove

The Arbitral Tribunal is the sole judge of the quality and quantity of evidence and that courts cannot re-appreciate facts or evidence under Section 34

The court observed that the Arbitral Tribunal’s finding—that the delay was attributable to both parties—was supported by the Petitioner's failure to address numerous hindrance-related communications from the Respondent

The court noted that the Petitioner allowed the work to continue past the deadline without formal extensions and only deducted the LD amount three years after completion without prior notice

Applying the Kailash Nath principle, the court agreed with the AT that the Petitioner failed to establish any "actual loss" resulting from the delay, making the automatic 0.5% deduction untenable

The court emphasized that a unilateral adjustment of LD without adjudication or proof of loss, especially where the employer contributed to the delay, is impermissible in law

Consequently, the court found the AT’s reasoning to be a plausible view that did not shock the conscience of the court or meet the threshold of patent illegality

It held that the Petitioner could not recover liquidated damages because it failed to prove actual loss and was itself responsible for part of the delay

The court affirmed the AT's direction to the Petitioner to refund ₹4,50,68,820 to the Respondent along with interest at 8% per annum effective from July 1, 2022