Reasonable Liquidated Damages Allowed in Case of Delayed Supply

In a decision delivered on September 21, 2023, in the case of Jupiter Rubber Pvt. Ltd. V. Union of India [MANU/DE/6416/2023], the High Court of Delhi upheld the imposition of penalty for delayed supplies to the extent of 3% of the contract value and refused to award interest on untimely payments.

In the instant case, the respondent had floated a tender for the supply of Light Weight Ground Sheets pursuant to which an offer was made by the appellant to supply the material. As per the provisions of the tender, for the approval of the goods, advance samples representing the entire bulk supply was to be submitted. The delivery period of the goods as per the tender condition was four months or earlier from the date of approval of advance samples for the entire quantity. In view of delay on the part of the respondent in processing the approval of the samples, the delivery period was re-fixed twice. Further, the delivery of the goods, rather than being done in bulk was done in five lots. The appellant received 90% payment in respect of the goods supplied under each of the first four lots but while making the 90% payment towards the fifth lot, a sum was deducted towards Liquidated Damages and the appellant was also denied interest on delayed payments. Aggrieved by this, the appellant took the matter for arbitration.

The arbitral tribunal held that since the appellant had failed to make the supply of goods within time, which was of essence in the contract, it was not entitled to claim any interest. As far as the imposition of Liquidated Damages were concerned, it was held that the goods were not supplied in bulk as per the conditions in the contract, rather they were supplied according to the convenience of the appellant which further delayed the pre-inspections and payments.

Thus, the Tribunal held that the Liquidated Damages were legally sustainable. However, it reduced the amount from 10% to 3% of the contract value since the damages had to be in the nature of reasonable compensation and not penalty. This award given by the Arbitral Tribunal was challenged by both the parties, however, a single judge bench upheld the arbitral tribunal’s judgement except for the denial of interest and asked the appellant to initiate appropriate legal proceedings for redressal of its claim.

The grounds for preferring the present appeal put forth by the appellant was that the imposition of Liquidated Damages was done despite the lack of an agreement for the same and no proof of actual damage being accounted for by the respondent.

The court while dismissing the appeal and upholding the findings of the single judge bench observed that although actual loss was not proven by the respondent, timely supply of the material was extremely crucial and delay in the same inflicted legal injury on the respondent under Section 74 of the Contract Act, 1872. The Court also noted that the contract between the parties envisaged the delivery of the goods in bulk supply and not in five different lots as done by the appellant. Further, the refusal to grant interest for non-existence of an agreement between the parties, was determined to be flawed since nothing precluded the arbitral tribunal from awarding interest in view of its suo moto power under Section 31 of the Act.