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M/S Construction & Design Services v. Delhi Development Authority

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 1440-1441 of 2015, arising out of SLP (C) Nos.35365-35366 of 2012)Decided 4 Feb 2015
Civil Appeal Nos. 1440-1441 of 2015, arising out of SLP (C) Nos.35365-35366 of 2012
Justice T.S. Thakur · Justice Adarsh Kumar Goel

Background

DDA had awarded the appellant-contractor a contract in 1995 to construct a sewerage pumping station, with a clause stipulating liquidated damages of up to 1% per day of delay (capped at 10% of the estimated cost) if the work was not completed on schedule. The contractor worked at a slow pace and the contract was terminated in 1999, after which DDA levied over Rs.20 lakh in compensation for the delay. The dispute over whether this stipulated sum was an enforceable pre-estimate of damages or an unenforceable "penalty" reached the Supreme Court.

Decision Breakdown

The Court examined the law under Sections 73 and 74 of the Indian Contract Act on compensation for breach, noting that where exact loss is difficult to prove (as is common in construction contracts), a genuine pre-agreed estimate of damages in the contract should ordinarily be honoured unless shown to be unreasonable or a disguised penalty. Since the contractor (who committed the breach) led no evidence that DDA suffered no loss or that the clause was unreasonable, the Court held DDA was entitled to reasonable compensation for the delay. However, because DDA also did not produce specific evidence of the exact extent of loss, the Court adopted a middle path, holding it fair to award half of the claimed amount as reasonable compensation. The appeal was thus partly allowed, modifying the High Court's decree.

Lesson Learnt

A party that breaches a contract containing a genuine pre-agreed damages clause cannot escape liability simply by arguing there is no proof of exact loss: courts will enforce such clauses as a fair estimate of damages, though courts retain discretion to moderate the amount when neither side produces precise evidence of the loss actually suffered.

Official source (sci.gov.in)View Judgment (PDF)

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