A Clause That Restricts The Right Of The Contractor To Seek Damages For Delay Attributable To The Employer Is Against Public Policy: Delhi High Court

Chambers of Ishaan Garg

Ch. No. 217, Western Wing, District & Sessions Court, Tis Hazari, New Delhi, Delhi 110054

+91 8851742417, +91 8800386163

The High Court of Delhi has held that a clause that restricts the right of the contractor to seek damages for delay attributable to the employer is against public policy in terms of Section 23 of the Indian Contract Act.

The bench of Justice Chandra Dhari Singh held a clause that restricts the right of the aggrieved party to claim damages is prohibitionary in nature and against the fundamental policy of Indian Law. It held that such a clause is no fetter on the power of the arbitral tribunal to compensate, by way of unliquidated damages, a party that has suffered loss due to the delay attributable to the other party.

The Court held that once the tribunal has ascertained that the employer is responsible for the delays in the execution of the project work, the tribunal must award damages to the contractor and it cannot deny the damages merely because the agreement prohibits or does not contain any provision for damages.


M/s MBL Infrastructure Ltd. (the Petitioner), a Public Limited Company specializing in Civil Engineering projects across India, entered into a contract with the Delhi Metro Railway Corporation (the Respondent), a joint venture of the Government of NCT of Delhi and the Government of India. The contract pertained to the construction of Sarai Station, including various components like architectural finishing, water supply, sanitary installations, and external development works, as well as structural works on the Badarpur - Faridabad Corridor of Delhi MRTS Phase III.

The Respondent invited tenders for the project on March 9, 2012, and the Petitioner submitted its tender on the same day, which was accepted by the Respondent on May 9, 2012. The project had stipulated commencement and completion dates of May 21, 2012, and November 20, 2013, respectively, spanning over 18 months with a contract value of Rs. 41.57 crores.

The Petitioner provided performance bank guarantees and bank guarantees for mobilization advance. Despite delays in site handover, the Petitioner received the first installment of mobilization advance on September 6, 2012. However, possession of the remaining plot for Sarai Metro Station was denied by the Respondent.

Subsequently, the Respondent issued a notice for alleged failure to adhere to work programs and other obligations. Despite the Petitioner's denial of any delay, the Respondent, on November 1, 2013, terminated the contract and encashed the provided bank guarantees.

The matter went to arbitration, and the Arbitral Tribunal, in its award on March 6, 2020, found the Respondent in breach of contract, holding them responsible for the project delay. The Tribunal allowed some of the Petitioner's claims but dismissed others, including all Counter claims of the Respondent. Importantly, the Tribunal deemed the termination of the contract and encashment of the Performance Bank Guarantee as illegal and unjustified, considering the Respondent's breach of the agreement.

Aggrieved by the rejection of several of its claim, the petitioner challenged the award to the extent to which the tribunal rejected the claims.

Grounds of Challenge

The petitioner made the following submissions challenging the award:

That the tribunal, while acknowledging the petitioner's expenditures and harm caused by the respondent's actions, failed to grant claims for damages, costs, and interest.

That once the tribunal attributed a fundamental breach and delay to the respondent, the denial of damages contradicts Section 55 and 73 of the Indian Contract Act.

That the tribunal, by rejecting payment of damages, overlooked the fact that parties cannot contract out of provisions of the Indian Contract Act, 1872, and the rights created by Section 73 and 55 of the said Act cannot be contractually waived.

That the initiation of Corporate Insolvency Resolution Process was a consequence of the respondent's illegal actions, entitling the petitioner to damages on account of loss of reputation.

That the tribunal wrongly placed reliance upon Clause 17.10 of GCC to reject Claim No. 7 for costs, as the Arbitration and Conciliation Act vests absolute discretion in the tribunal to determine costs.

agreement prohibits or does not contain any provision for damages.

The Court held that in situations where the contract illegally restricts or does not provide sufficient remedies to the contractor to claim damages, the arbitral tribunal can transgress beyond the boundaries of the Contract to grant the relief that a party is lawfully entitled to.

The Court also held that the tribunal cannot deny claim for loss of profit by placing reliance on Clause 8.3 which only pertains to the case of delay and not the eventuality of wrongful termination which is the basis of the aforesaid claim. It held that loss of profit on account of wrongful termination of the contract cannot be denied by relying on a contractual provision which is related to the delay and consequent extension of the contract. Accordingly, the Court held that the tribunal wrongly rejected the claim for idling & loss of overheads and loss of profit.

However, the Court upheld the award on rejection of claims related to damage to reputation and costs of arbitration and interest component. It held that the petitioner did not prove that it suffered any reputational loss due to the termination of the agreement, also, the initiation of the insolvency proceedings against cannot be entirely attributed to the termination.

The Court observed that the agreement restricted the tribunal to award costs to any party, additionally, the agreement prohibited anti-lite and pendente lite interest. It held that the tribunal being the creature of the contract is bound by the reasonable restrictions put on its power by the agreement.

Next, the Court dealt with the issue of partial setting aside of the award. It held that the finding of the tribunal on claims 3&4 can be severed from the rest of the award. It held that such severing is not modification of the award. It explained that modification would be when the court modifies/changes the damages awarded, modifies the interest rate, etc. But mere setting aside of unconnected/independent findings of the tribunal does not amount to modification of the award.

Accordingly, the Court set aside the award on claims 3&4. The Court remitted back these claims for fresh consideration by the tribunal.

Case Title: MBL Infrastructure Ltd v. DMRC, OMP(COMM) 311 of 2021. (2024 Delhi HC)