Recovery of LD Was Valid Contractually and Legally: Supreme Court Reaffirms Limits of Judicial Review Under Section 34 of Arbitration Act

Case Summary

• Case Name: Consolidated Construction Consortium Limited v. Software Technology Parks of India

• Date of Judgment: 28 April 2025

• Court: Supreme Court of India (Civil Appellate Jurisdiction)

• Judges: Hon'ble Mr. Justice Abhay S. Oka and Hon'ble Mr. Justice Ujjal Bhuyan

• Advocates: Appeared on behalf of both parties (names not specified in the judgment)

• Applicable Acts and Sections:

  • Arbitration and Conciliation Act, 1996 – Sections 34 and 37

  • Indian Contract Act, 1872 – Sections 55, 73 and 74

Introduction

In a notable reaffirmation of judicial non-intervention in arbitral matters, the Supreme Court dismissed the appeal filed by Consolidated Construction Consortium Ltd. (hereinafter ‘CCCL’) against the restoration of an arbitral award that upheld the levy of liquidated damages by Software Technology Parks of India (hereinafter ‘STPI’). The judgment reiterates the narrow ambit of Section 34 of the Arbitration and Conciliation Act, 1996 and the sanctity of arbitral autonomy—especially in contract disputes where extensions and damages interplay.

Background

The dispute arose from a construction contract awarded to CCCL by STPI for the development of an office building and incubation centre. Although the original deadline was 15 January 2007, the contractor completed the project only by 30 November 2007—almost ten months late.

STPI, invoking Clause 26 of the contract, deducted ₹82,43,499 as liquidated damages (LD). CCCL contested this deduction through arbitration. The arbitrator upheld STPI’s action, concluding that the deduction was both “legally and contractually valid.” However, a Single Judge of the Madras High Court set aside the award under Section 34. That decision was overturned by a Division Bench under Section 37, restoring the award. The Supreme Court’s present judgment affirms the Division Bench’s ruling.

 Issues Before the Court

1. Whether the arbitral award suffered from any illegality justifying its setting aside under Section 34 of the 1996 Act.

2. Whether deduction of liquidated damages by STPI was valid, despite multiple extensions of time granted to the contractor.

3. Whether the arbitral tribunal’s reasoning could be interfered with by a court acting under Section 34 or Section 37 of the Act.

Key Observations

1. Scope of Judicial Review Under Section 34 is Exceptionally Limited

The Court reiterated a settled principle:

“Section 34 is not in the nature of an appellate provision. It provides for setting aside an arbitral award that too only on very limited grounds...”

This limited scope has been consistently upheld in past Supreme Court judgments. The bench categorically held that the Single Judge exceeded jurisdiction by substituting his own view for that of the arbitrator:

“Learned Single Judge had clearly gone beyond the grounds provided in Section 34... View taken by the arbitral tribunal is certainly a possible and plausible view.”

The takeaway: courts cannot re-evaluate evidence or substitute interpretations, even where two views are possible.

2. Time Extensions Do Not Automatically Waive LD Rights

CCCL argued that since the time for completion had been extended, STPI could not levy LD. But the Court pointed to contemporaneous evidence: every extension letter expressly preserved STPI’s right to levy damages.

The arbitral tribunal found this consistent with Clause 26 of the contract. It noted:

“Recovery of LD was valid contractually and legally. It was levied by a competent authority and the levied amount was fair and reasonable.”

The Court upheld this logic and refused to re-examine the factual record.

3. No Inherent Conflict Between Clauses 26 and 27

Clause 26 allowed LD if work was not completed within the agreed or extended time. Clause 27 provided the contractor with grounds to request extension. The Supreme Court harmonised the clauses by stating that extension does not nullify the employer’s right to LD, especially when loss is proven.

Notably, STPI had:

• Granted multiple extensions under Clause 27;

• Issued repeated notices reserving rights under Clause 26;

• Proven financial loss in the form of rent and loss of rental income.

4. Established Loss Justified LD Application

The arbitrator recorded STPI’s monetary loss from continued rent on the old premises and delayed rentals from the new facility. These findings were grounded in evidence, thus insulating them from judicial interference.

This position aligns with Section 74 of the Indian Contract Act, which allows for recovery of stipulated damages even without strict proof of loss—provided the compensation is reasonable.

A Brief Note on the Contractual Framework

The Court conducted a holistic review of the contract:

• Clause 26: Authorised LD deduction at 0.5% per week, subject to a 5% cap.

• Clause 27: Allowed for time extension upon unavoidable hindrances.

• Clause 28: Enabled the employer to get work done at the contractor’s cost for non-compliance.

The Court held:

“Clause 26 is not controlled by Clause 27... A plausible view may be taken that both provisions can co-exist.”

This reading neutralises CCCL’s argument that extension implied waiver or condonation of delay.

Substantive Law Anchors: Sections 55, 73 and 74 of the Indian Contract Act

The judgment adeptly weaves in the Contract Act:

• Section 55: If time is not of the essence, performance delay does not make the contract voidable but entitles the promisee to compensation.

• Section 73: Allows for compensation for actual loss due to breach.

• Section 74: Permits recovery of stipulated damages (like LD), irrespective of proof, subject to being reasonable.

The Court endorsed the arbitrator’s finding that STPI had both (a) reserved the right, and (b) proven losses—thus satisfying both Sections 73 and 74.

When Deference to Arbitral Wisdom Prevails

This judgment continues the Supreme Court’s pro-arbitration stance. Courts must respect arbitral decisions unless they are fundamentally flawed on grounds such as procedural unfairness, lack of jurisdiction, or conflict with public policy.

Hon'ble Justice Ujjal Bhuyan’s bench rightly concluded:

“An arbitral award cannot be set aside on a ground which is beyond the grounds mentioned in sub-sections (2) and (2A) of Section 34.”

This sends a strong signal to commercial litigants and practitioners: parties must accept arbitral determinations unless they can demonstrate patent illegality or procedural irregularity.

Conclusion

The Supreme Court’s dismissal of CCCL’s appeal preserves the integrity of arbitral outcomes and reinforces the sanctity of contract enforcement. It cautions against overbroad interpretations of judicial review under Section 34, and upholds the principle that parties must live with the consequences of their agreements—especially when those agreements explicitly balance flexibility (via extensions) with accountability (via LDs).

For legal professionals, this decision provides clarity on how courts view contractual LDs, the coexistence of time extensions and damages, and the careful limits of arbitral intervention. As the arbitration ecosystem in India continues to mature, such judgments offer a blueprint for disciplined and commercial adjudication.

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