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Proof of loss incurred necessary to claim damages under contractual entitlement

In a recent set of cross appeals under Section 37 of the Arbitration and Conciliation Act, 1996, [the Act] came up for consideration before a division bench of the hon’ble Delhi High Court, wherein it emphasized on the necessity of evidence to substantiate loss when claiming damages and clarified that the mere presence of a penalty or liquidated damages clause did not exempt the party claiming damages from proving the loss suffered due to the breach. 

The disputing parties namely, Sudershan Kumar Bhayana and his wife (the owners) had entered into a Collaboration Agreement with Mr. Vinod Seth (the builder) as per which the builder was to construct a three-storied building on the property owned by the owners. It was agreed that the builder would bear the cost of construction and pay an additional amount of ₹ 64 lakhs and in return the builder would retain the second floor of the new building. A registered sale deed to that effect was executed by the owners in favour of the builder. However, before the building could be completed, disputes arose between the parties and the owners terminated the Collaboration Agreement.

The builder, vide a petition under Section 9 of the Arbitration and Conciliation Act, 1996, inter alia, sought interim reliefs to restrain the owners from alienating the rights on the second floor of the subject property. In pursuance of the said proceedings, the matter was referred to Arbitration and an Arbitrator was appointed with the consent of the parties.

Both, the owners and the builder filed their statement of claim and counterclaim, respectively. The owners claimed damages alleging breach of contractual obligations on the part of the builder which caused the owners to terminate the collaboration agreement. The builder on the other hand, claimed that the delay was caused due to the acts of the owners, making it difficult for the builder to complete the work within the stipulated time frame.  It was the builder’s case that he had paid an amount of ₹ 45 lakhs out of the agreed aforementioned amount of ₹ 64 lakhs and acknowledged a balance amount of ₹19 lakhs to be paid further to the owners. The builder also claimed to have incurred an amount of ₹ 36,92,400 towards the partial reconstruction of the subject property.

Although the Arbitral tribunal accepted the claims of the builder that he had paid an amount of ₹ 45 lakhs to the owners and had incurred expenses of ₹36,92,400 for reconstruction of the subject property, it ruled that the builder was guilty of breaching the agreement and that the owners were entitled to damages as per the terms of the same. However, the Arbitral Tribunal also accepted that the builder would be entitled to the refund of ₹ 45 lakhs, together with the cost of construction, from the owners.

The said arbitral award was challenged by the builder by way of an application under Section 34 of the Act before the High Court of Delhi.  While considering the said application to set aside the arbitral award, the learned single judge modified the arbitral award and reduced the quantum of damages on the ground that the tribunal erred in calculation of the damages to be awarded.  The hon’ble judge also held that the earnest money of ₹ 45 lakhs was liable to be forfeited on account of the builder’s breach.

Source: Barandbench

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