Bhupesh Bhayana and Another v. Kunal Seth and Another
Background
In 2010, the owners of an old building (the Bhayana family) and a builder (the Seth family) agreed that the builder would reconstruct the building in exchange for retaining a floor and paying compensation, with penalty clauses for delay (Clause 7) and for outright breach (Clause 13). The builder abandoned construction in 2011 after completing only part of the structure, prompting arbitration. The arbitrator awarded the owners a delay penalty under Clause 7 but denied them the separate breach-based forfeiture under Clause 13, and also awarded the builder refund of his deposit plus construction costs. A Delhi High Court judge modified the penalty period, and a Division Bench, on further appeal, denied the owners any penalty at all for want of proof of actual damage, leading to this appeal before the Supreme Court.
Decision Breakdown
The Supreme Court held that the Division Bench erred in denying the owners compensation for the builder's delay merely because they had not separately proved actual damage: the agreement's day-to-day penalty clause itself built in the presumption of loss. It also found the arbitrator's award "patently illegal" for treating Clauses 7 and 13 as mutually exclusive instead of applying both, and for miscalculating the penalty period, but noted the owners never challenged this illegality within the Section 34 limitation period, so it had attained finality on that specific point. Rather than setting aside the award and forcing the parties into a fresh decade-plus round of litigation, the Court invoked its power under Article 142 of the Constitution to do complete justice, recalculating the amounts due and fixing a final net balance payable by the owners to the builder's family, with no interest payable to either side.
Lesson Learnt
Courts can use their extraordinary constitutional power (Article 142) to finally settle long-running arbitration disputes with a fair recalculation rather than sending parties back to square one, but a party who does not timely challenge an error in an arbitral award within the statutory limitation period risks losing the right to correct even a genuinely illegal part of that award.