Safia Malik

The High Court of Andhra Pradesh Division Bench of Justice R. Raghunandan Rao and Justice T.C.D. Sekhar, on 31 December 2025, allowed appeals, set aside a Trial Court order quashing thirteen arbitral awards, and restored the awards. The dispute concerned deductions of liquidated damages at 2% per week, capped at 20% of contract value, from subcontractors’ bills for alleged delay in completing contracted works for a public sector shipyard. The subcontractors said the delay was also attributable to the shipyard and that any loss could be quantified. Upholding the awards, the Bench said an arbitrator may modulate liquidated damages if they are exorbitant or delay is shared, observing that “the question of application of the clause for liquidated damages, without modification, would not arise”.

The dispute arose out of multiple sub-contracts awarded by a public sector undertaking engaged in ship construction and fabrication works to various contractors. Each work order prescribed timelines for completion and contained a clause providing for levy of liquidated damages at the rate of 2% per week of delay, subject to a maximum of 20% of the contract value. Alleging delay in execution, the employer deducted liquidated damages at the maximum contractual rate from the contractors’ bills.

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The contractors invoked arbitration, contending that delays were attributable to factors beyond their control, including non-availability of work fronts, delayed supply of materials, lack of crane facilities, delayed payments, and inter-dependency issues. It was also contended that similarly placed contractors were granted revised schedules with reduced liquidated damages and that no actual loss had been established by the employer.

A sole arbitrator was appointed in all matters. After considering documentary evidence, including correspondence between the parties, the arbitrator upheld the validity of the liquidated damages clause but reduced the quantum, holding that delay was attributable to both sides and that reasonable compensation alone could be awarded. Interest was also granted. The trial court set aside the arbitral awards, holding that the arbitrator lacked jurisdiction to modify the contractual liquidated damages. Aggrieved thereby, the contractors preferred the present appeals.

The Division Bench examined the scope of judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996, and the permissibility of modification of liquidated damages by an arbitral tribunal. The Court noted that “it is an admitted fact that the contract in question contained a provision of levy of liquidated damages @ 2% for a delay of every week subject to a maximum of 20% of the value of the contract.”

While the arbitrator had held the clause to be legal and valid, the Court recorded that the modification was based on two grounds: “the liquidated damages stipulated under the said clause were on the higher side” and “the delay was attributable to both sides.”

The Bench observed that Section 74 of the Indian Contract Act governs levy of liquidated damages and permits only reasonable compensation. Referring to constitutional and larger Bench decisions, the Court stated that “the compensation fixed under the liquidated damages clause is the outer limit within which reasonable compensation, for actual loss, should be awarded.”

Dealing with the employer’s reliance on the contractual clause, the Court recorded that “where such evaluation [of loss] is possible, it would only be the actual loss that would have to be compensated.” It was specifically noted that the employer had admitted before the arbitrator that vessel owners had levied quantified damages for delayed delivery, and therefore “the question of application of the clause for liquidated damages, without modification, would not arise.”

On the finding of shared delay, the Court observed that “once the delay is partly attributable to the respondent, it would not be permissible to apply the clause for liquidated damages” mechanically. The Court rejected the trial court’s conclusion that there was no material to attribute delay to the employer, observing that the arbitrator had relied upon letters and documents marked as exhibits.

On adequacy of reasons, the Court held that “the reasons set out by the learned Arbitrator are intelligible and adequate” and that re-appreciation of evidence was impermissible under Section 34.

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The Court “does not find any reason to set aside the Award” passed by the sole arbitrator. It accordingly “allowed” all the civil miscellaneous appeals and “set aside the judgment of the trial Court, in the arbitration petitions.” The arbitral awards granting partial refund of liquidated damages with interest were “upheld.” “There shall be no order as to costs. Pending miscellaneous petitions, if any, shall stand closed.”

Advocates Representing the Parties

For the Petitioners: Sri K. Srinivasa Rao, Advocate
For the Respondents: Sri G. Ramesh Babu, Advocate

Case Title: M/s. Sunrise & Engineering Industries v. Hindustan Shipyard Limited
Neutral Citation: APHC010206362025
Case Number: C.M.A. Nos. 234, 242, 243, 244, 245, 246, 247, 248, 249, 253, 257, 258 & 259 of 2025
Bench: Justice R. Raghunandan Rao, Justice T.C.D. Sekhar