Supreme Court Modifies Arbitral Award Under Article 142, Awards Owners Penalty for 63 Days of Builder's Delay

A bench of Justices Sanjay Kumar and K. Vinod Chandran modifies a 2013 arbitral award under Article 142, holding that contractual penalty clauses do not require separate proof of damage.

A Supreme Court bench of Justices Sanjay Kumar and K. Vinod Chandran has brought to a close a construction dispute that has wound through arbitration and two rounds of court proceedings since 2012. The Court found that the arbitrator, the Section 34 court, and the Division Bench of the Delhi High Court each arrived at the wrong answer on the same question: for how long, and on what basis, were the owners of a Delhi property entitled to a contractual penalty of Rs 10,000 per day from a builder who abandoned the project. Exercising power under Article 142 of the Constitution, the Court awarded the owners Rs 6,30,000 as penalty for 63 days of delay and directed a final net payment of Rs 25,62,400 to the builder's legal representatives after set-off.

A Reconstruction Agreement That Unravelled

The dispute traces to an agreement dated 9 April 2010 between late Sudershan Kumar Bhayana and his wife Kiran Bhayana (the owners) and late Vinod Seth (the builder). Under the agreement, the builder was to demolish and reconstruct the owners' old building. In return, he was entitled to retain the second floor without roof rights and was required to pay Rs 64,00,000 to the owners in instalments as earnest money and compensation.

Clause 7 of the agreement fixed a 12-month period for completion from the date the vacant land was handed over, with a further grace period of two months. After that, the builder was liable to pay Rs 10,000 per day as penalty for the delayed period. Clause 13 provided that if the builder breached the agreement, the earnest money and compensation amount would stand forfeited.

The builder paid Rs 45,00,000 out of the total Rs 64,00,000. The remaining Rs 19,00,000 was payable within fifteen days of laying the fourth slab, which never happened. Construction was abandoned in August 2011 after only the basement, stilt, and ground floors and a chajja had been built. The owners terminated the agreement on 11 November 2011.

The builder invoked the arbitration clause by notice dated 26 December 2011 and approached the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996. By order dated 21 September 2012, the High Court appointed a sole arbitrator.

Three Layers of Error: Arbitrator, Section 34 Court, Division Bench

The arbitrator passed an award on 21 October 2013. He found a clear breach by the builder and awarded penalty under Clause 7 at Rs 10,000 per day from 9 April 2011 to 8 April 2013, a period of two years, totalling Rs 72,00,000. On the builder's counter claim, the arbitrator accepted construction costs of Rs 36,92,400 and directed refund of the Rs 45,00,000 earnest money, reasoning that since damages were being awarded to the owners, forfeiture under Clause 13 would amount to penalising the builder twice. The net result was that the owners had to pay Rs 9,92,400 to the builder.

Only the builder challenged the award under Section 34. By order dated 15 April 2019, the Section 34 court upheld the award with modifications. It found that the commencement date for penalty should be 9 August 2011, when construction stopped, not 9 April 2011, and that the period should run only until October 2012, when the claim statement was filed, not for two years. This reduced the compensation payable to the owners.

Both sets of legal representatives then filed cross appeals under Section 37. The Division Bench of the Delhi High Court, by its judgment dated 27 September 2023, went further. It held that the Section 34 court had impermissibly substituted its own decision for the arbitrator's, which was beyond the scope of Section 34. On the merits, the Division Bench found that the owners had not adduced any evidence of actual damage suffered and had only relied on Clause 7. It also held that since the owners had terminated the agreement on 11 November 2011, before the stipulated period expired, they could not claim damages beyond that date. The Division Bench set aside the award of damages to the owners entirely, leaving only the builder's counter claim intact.

The owners appealed to the Supreme Court. By order dated 10 July 2024, the Court directed the owners to deposit Rs 50,00,000 before the High Court without prejudice to their rights. On 5 December 2025, the Court stayed execution proceedings initiated by the builder's legal representatives.

The Correct Penalty Period: 63 Days

The Supreme Court identified a factual aspect that all three forums had overlooked. Clause 7 tied the start of the 12-month period to the date the vacant land was provided to the builder, not to the date of the agreement. In his written statement and counter claim before the arbitrator, the builder had stated that the owners vacated the building one month after the agreement and that demolition took a further two months, placing the handover of vacant land at 9 July 2010. The owners did not rebut this. Even in his affidavit-in-evidence, late Sudershan Kumar Bhayana did not deny these time frames; he merely asserted, contrary to the clause, that the 12 months ran from the date of the agreement itself.

Taking the uncontroverted date of 9 July 2010 as the start of the 12-month period, and adding the two-month grace period, the stipulated 14 months expired on 9 September 2011. The builder's entitlement to penalty under Clause 7 therefore commenced only on 9 September 2011.

The owners terminated the agreement on 11 November 2011. The Court held that after termination, the owners could not continue to claim penalty under a clause that provided for payment during the “delayed period” of construction. The owners had also not adduced independent evidence of damage — such as increased construction costs or loss of revenue — that would have supported a claim beyond the contractual clause. The penalty period was therefore 9 September 2011 to 11 November 2011: 63 days at Rs 10,000 per day, totalling Rs 6,30,000.

No Separate Proof of Damage Required for a Contractual Penalty Clause

The Division Bench had non-suited the owners entirely on the ground that they had produced no evidence of actual damage. The Supreme Court rejected this reasoning. Where an agreement itself stipulates a day-to-day penalty for delay, the damage suffered by the party entitled to that penalty is implicit in the clause. The Court held that it was not necessary for the owners to adduce separate evidence of actual damage when the contract itself envisioned payment of penalty on a day-to-day basis for the delayed period.

The Division Bench's conclusion to the contrary was, the Court said, “opposed to the explicit covenant in the agreement and cannot be accepted.”

Modification Under Article 142 After Fourteen Years of Litigation

The Court acknowledged that the award dated 21 October 2013 was patently illegal in more than one respect. The arbitrator ought not to have denied the owners their entitlement under both Clause 7 and Clause 13. When the contract separately provided for penalty for delay and forfeiture for breach, it was not open to the arbitrator to grant relief only under Clause 7 and deny forfeiture under Clause 13 on the ground that it would penalise the builder twice. This constituted a patent illegality under Section 34(2A) of the Arbitration Act. However, since the owners had not challenged the award and it had attained finality on that point, the Court did not reopen it.

The Court drew on the Constitution Bench decision in Gayatri Balasamy v. ISG Novasoft Technologies Limited, (2025) 7 SCC 1, which held that modification of an arbitral award is a limited power distinct from setting it aside, that the appellate jurisdiction under Section 37 is coterminous with the jurisdiction under Section 34, and that this Court's power under Article 142 can be used to effect substantial justice rather than relegating parties to fresh proceedings.

Setting aside the award at this stage, after litigation running since 2012, would require the parties to start afresh. The Court declined to do so and instead exercised power under Article 142 to give a final quietus to the dispute.

On the interest question, the arbitrator had denied the builder interest on the counter claim amount. The builder did not raise this in his Section 34 application. Only before the Division Bench did the builder's legal representatives make a feeble prayer for interest, without any foundational pleading. The Division Bench denied it, and no further appeal was filed. The Court held that the interest issue was therefore closed.

Outcome

The Court held the owners entitled to penalty of Rs 6,30,000 under Clause 7 of the agreement. The builder's legal representatives remained entitled to Rs 81,92,400 (Rs 36,92,400 as construction costs and Rs 45,00,000 as refund of earnest money). Deducting the owners' entitlement, the net amount payable to the builder's legal representatives was Rs 75,62,400. Since Rs 50,00,000 had already been disbursed pursuant to the Court's earlier order, the balance payable by the owners to the builder's legal representatives was Rs 25,62,400. Neither party was entitled to interest on the amounts payable to them. The appeals were disposed of accordingly, with parties directed to bear their own costs.