Navigating the Fine Line: Liquidated Damages, Public Utility Contracts, and the Limits of Judicial Intervention in Arbitration

The Supreme Court of India’s recent judgment in a dispute between a solar power developer and a nodal agency under the National Solar Mission provides a masterclass on several complex legal intersections. It delves into the enforceability of liquidated damages clauses in contracts involving public interest, the scope of judicial power to modify arbitral awards, and the distinct roles of courts under the Arbitration and Conciliation Act, 1996. This ruling is pivotal for contractors, public sector undertakings, and legal practitioners navigating the terrain of infrastructure and energy projects.

 I. The Dispute: Solar Power, Delayed Commissioning, and a Hefty Claim

The case originated from the Jawaharlal Nehru National Solar Mission (JNNSM), a flagship government initiative to promote green energy. NTPC Vidyut Vyapar Nigam Ltd. (NVVNL) was appointed as the nodal agency to implement the mission. In this capacity, NVVNL entered into a Power Purchase Agreement (PPA) on 24.01.2012 with M/s Saisudhir Energy Ltd. (SEL). SEL agreed to set up and supply 20 MW of solar power at a concessional tariff, with a strict commissioning deadline of 26.02.2013.

SEL failed to meet this deadline. It commissioned 10 MW after a two-month delay (26.04.2013) and the remaining 10 MW after a five-month delay (24.07.2013). The PPA’s Clause 4.6 provided for liquidated damages (LD) for such delays. For delays beyond three months, the clause stipulated damages at ₹1,00,000 per MW per day. NVVNL invoked this clause, leading to arbitration.

 II. The Arbitral Tribunal’s Split Verdict

A three-member Arbitral Tribunal delivered a split award:

a. Majority Award: Held that while delay was admitted, NVVNL had not proven actual loss. It awarded a token amount of ₹1.2 crores (approx. 20% of the performance guarantee), rejecting NVVNL’s full claim.

b. Minority Award: Held that the LD clause represented a genuine pre-estimate of loss. It would have allowed NVVNL to encash bank guarantees worth ₹49.92 crores.

Dissatisfied, both parties challenged the award under Section 34 of the Arbitration Act before the Delhi High Court.

 III. The High Court’s Journey: Modification and Re-modification

A. Single Judge’s Order (Section 34 Proceeding):

The Single Judge held that the breach (delay) was admitted. Relying on Section 74 of the Indian Contract Act, 1872, and precedent, the judge held that in cases of breach, reasonable compensation is payable even without proof of actual loss, but it cannot exceed the stipulated amount. Considering the project’s 25-year lifespan, the judge deemed a 50% reduction of the calculated LD (as per Clause 4.6) to be “reasonable compensation.” Consequently, NVVNL was awarded ₹27.06 crores, to be recovered by deducting ₹25 lakhs per month from SEL’s dues.

B. Division Bench’s Judgment (Section 37 Appeal):

Both parties appealed. The Division Bench agreed with the Single Judge’s foundational principles but re-calculated the compensation. It applied a different interpretation of the LD clause’s sliding scale and reduced the payable amount to ₹20.70 crores.

These cross-appeals brought the matter before the Supreme Court, with both parties contesting the High Court’s interventions.

 IV. Core Legal Issues Before the Supreme Court

The Supreme Court framed and resolved the following pivotal issues:

1.In a contract for a public utility project, is the employer required to prove actual loss to claim liquidated damages under Section 74 of the Contract Act?

2.Was the Single Judge’s modification of the arbitral award (enhancing compensation from ₹1.2 cr to ₹27.06 cr) permissible under the limited scope of Section 34?

3.Did the Division Bench, in its order under Section 37, exceed its jurisdiction by further re-calculating and modifying the compensation determined by the Single Judge?

 V. The Supreme Court’s Analysis and Ruling

 

 1. On Liquidated Damages in Public Utility Contracts & Proof of Loss

SEL’s primary contention was that NVVNL, having invested no capital in the project, suffered no actual loss and was thus entitled to no compensation. The Court firmly rejected this argument.

a. Admitted Breach: The Court first established that SEL’s delay in commissioning was an admitted fact, triggering Clause 4.6 of the PPA.

b. Section 74 of the Contract Act: The Court invoked Section 74, which states that upon a breach of contract, the aggrieved party is entitled to “reasonable compensation” not exceeding the stipulated sum, “whether or not actual damage or loss is proved to have been caused thereby.” Proof of exact loss is not a sine qua non.

c. Public Interest Character of the Contract: The Court affirmed the High Court’s finding that the PPA was not an ordinary commercial contract. It was executed under the JNNSM, a national policy aimed at promoting green energy—a matter of public utility and environmental interest. Citing its precedent in M/s Construction and Design Services vs. DDA, the Court held that in public utility contracts, delay itself can be presumed to cause loss (e.g., to public welfare, environmental goals). The burden, therefore, shifts to the defaulting party to show that no loss occurred or that the clause is penal.

d. Conclusion on this Issue: The Court held that NVVNL was entitled to “reasonable compensation” under Clause 4.6 read with Section 74. SEL failed to discharge its burden of proving that the stipulated sum was a penalty or that no loss ensued from the delay. The Single Judge was correct in principle to award compensation.

 2. On Permissibility of Modification under Section 34

SEL argued that the Single Judge’s act of modifying the award and enhancing compensation constituted impermissible merits review, exceeding the limited grounds under Section 34.

The Court referred to the Constitution Bench decision in Gayatri Balasamy vs. ISG Novasoft Technologies Ltd., which explicitly recognized a limited power of modification vested in the Section 34 court. This power can be exercised:

a. Where the award is severable.

b. To correct clerical or computational errors.

c. Where modification flows inevitably from the court’s determination on a point of law without a fresh merits inquiry.

 

The Supreme Court held that the Single Judge’s modification fell within this permissible zone. The Judge did not re-appreciate evidence but applied the law (Section 74) to the admitted facts (breach and Clause 4.6) to determine what constituted “reasonable compensation.” This was a correction of a legal error (the Tribunal’s failure to properly apply Section 74), not an appellate review of facts. Hence, the modification under Section 34 was upheld.

 3. On Division Bench’s Intervention under Section 37

This was the crux of the Supreme Court’s ruling and where it found error. The Court drew a sharp distinction between the roles of courts under Section 34 and Section 37.

1. Nature of Section 37 Appeal: An appeal under Section 37 is not a second appeal on facts or law. It is an appeal against the order of the Section 34 court. The scope is even narrower. The court must only examine whether the Section 34 court exercised its jurisdiction correctly, without perversity, arbitrariness, or exceeding its limits.

2. Error of the Division Bench: The Supreme Court found that the Division Bench, after rightly agreeing with the Single Judge’s legal approach (need to balance equities and award reasonable compensation), proceeded to recalculate the compensation amount. It substituted its own “reasonable” figure (₹20.70 cr) for the Single Judge’s “reasonable” figure (₹27.06 cr). The Division Bench identified no legal flaw, perversity, or jurisdictional error in the Single Judge’s calculation; it merely preferred a different interpretation of the LD clause’s gradation.

The Supreme Court held this was unwarranted. Citing AC Chokshi Share Broker Pvt. Ltd. vs. Jatin Pratap Desai, it reiterated that a Section 37 court cannot substitute its view for a plausible view taken by the Section 34 court. The Division Bench’s recalculation was a merits-based intervention that trespassed into an area where the Single Judge’s discretion, exercised lawfully, was final.

 VI. The Final Outcome

a. The Supreme Court set aside the Division Bench’s modification of the compensation amount.

b. The Single Judge’s order awarding ₹27.06 crores to NVVNL was restored.

c. Civil Appeals filed by NVVNL were ALLOWED.

d. Civil Appeals filed by SEL were DISMISSED.

 VII. Key Takeaways and Implications

 

1.Public Utility Contracts are Different: For projects involving public interest, environmental goals, or utility services, courts are more likely to enforce liquidated damages clauses without strict proof of actual loss. Delay itself may be construed as a public loss.

2.The Shield of Section 74: The judgment reaffirms the settled law under Section 74 of the Contract Act. A stipulation for liquidated damages is not a penalty to be ignored; it is the upper limit for “reasonable compensation.” The aggrieved party need not prove actual loss, but the court can reduce the amount if it finds the stipulated sum unreasonable.

3.Limited, But Existent, Modification Power: The ruling confirms and relies on Gayatri Balasamy to settle that Section 34 courts have a limited power to modify awards. This power is not appellate but is tied to correcting awards based on legal defects discernible within the narrow confines of Section 34.

4.The Section 37 Boundary is Sacred: This is perhaps the most significant procedural clarification. The Supreme Court has strictly delineated the boundary of Section 37. Appellate courts must show extreme restraint. They cannot re-adjudicate the reasonableness of a compensation quantum lawfully determined by the Section 34 court. Their role is only to check for jurisdictional errors in the Section 34 order.

5.Clarity for Contracting Parties: Parties, especially in infrastructure and energy sectors, must draft liquidated damages clauses with care. In public interest contracts, these clauses will be given strong effect. A party in breach must be prepared to pay substantial compensation, even in the absence of direct financial loss to the other side.

 Conclusion

The Supreme Court’s judgment serves as a vital navigational chart in the often-turbulent waters of arbitration law and contract enforcement. It balances the need to uphold contractual sanctity and public interest in timely project completion with the imperative to keep judicial intervention in arbitration within strictly defined statutory limits. By curbing the appellate court’s reach under Section 37, the ruling reinforces the finality of arbitral awards and the limited corrective role of courts, a cornerstone of India’s arbitration ecosystem.

Judgment Name: M/s Saisudhir Energy Ltd. vs. M/s NTPC Vidyut Vyapar Nigam Ltd. & Connected Appeals (Civil Appeal Nos. 12892-12893 of 2024 with 12894-12895 of 2024), Supreme Court of India, decided on January 30, 2026.