The Supreme Court has ruled that where a contract itself specifically provides for payment of a penalty for delay, parties may not be required to independently prove actual damage suffered for claiming such compensation.
The bench of Justice Sanjay Kumar and Justice K. Vinod Chandran also exercised its powers under Article 142 of the Constitution to modify an arbitral award and bring a long-running dispute to a final conclusion instead of sending parties into another round of litigation.
The dispute arose from an agreement executed on April 9, 2010, under which the builder undertook reconstruction of an old building belonging to the owners. The builder was entitled to retain the second floor without roof rights and was required to pay ₹64 lakh as earnest money and compensation in installments. The agreement also contained specific clauses regarding timelines and consequences of breach. Clause 7 stipulated completion of the project within 12 months, with an additional grace period of two months. In case of delay thereafter, the builder would pay a penalty of ₹10,000 per day. Clause 13 separately dealt with breach consequences, providing for forfeiture of earnest money if the builder defaulted.
The builder allegedly paid only ₹45 lakh out of the total agreed ₹64 lakh and later abandoned construction in August 2011 after partially constructing the basement, stilt and ground floor. Following this, the owners terminated the agreement in November 2011.
Arbitration proceedings commenced in 2012 and the arbitrator found that the builder had breached the agreement. The arbitrator awarded compensation to the owners at ₹10,000 per day under Clause 7, calculating compensation for two years and awarding ₹72 lakh. However, the arbitrator also held that the builder was entitled to recover construction expenses and refund of the ₹45 lakh already paid, eventually directing the owners to pay approximately ₹9.92 lakh to the builder after adjustment.
The matter subsequently moved through proceedings under Sections 34 and 37 of the Arbitration and Conciliation Act. A Single Judge of the Delhi High Court reduced the compensation period, while a Division Bench later completely denied compensation to the owners on the ground that they had failed to establish actual damage suffered due to delay.
The Supreme Court disagreed with the Division Bench’s approach and held that the contractual framework itself recognized that delay would inherently cause damage. The Court observed that where parties consciously agree to a day-to-day penalty mechanism for delay, the existence of damage is implicit within the contractual arrangement itself.
The Court observed: “The very fact that the contractual clause itself envisioned payment of penalty on a day-to-day basis for the delayed period indicated that the damage suffered by the owners was implicit therein.”
The Court held that the High Court erred in entirely rejecting the compensation claim merely because the owners had not separately proved actual financial loss. However, the Court also found errors in the arbitral award’s computation of the compensation period.
According to the Supreme Court, the starting point for calculating the contractual period was not the agreement date itself but the date on which vacant land was actually handed over after demolition of the old structure. Considering the undisputed facts, the Court concluded that the builder’s liability for delay commenced only on September 9, 2011. Since the owners terminated the agreement on November 11, 2011, compensation could only be calculated for the 63-day period between these dates. Accordingly, the owners became entitled to ₹6.30 lakh.
The Court further observed that the arbitral award suffered from patent illegality on several aspects but noted that the owners had not challenged certain findings, including the denial of forfeiture under Clause 13. Therefore, those portions had attained finality.
To avoid further prolonged litigation, which had already continued since 2012, the Supreme Court invoked Article 142 and modified the award instead of setting it aside entirely. The Court relied on its earlier Constitution Bench ruling in Gayatri Balasamy v. ISG Novasoft Technologies Limited and observed that modification of awards may be preferable where annulment would create hardship and unnecessary delay.
After adjustment, the Court held that the builder’s side was entitled to ₹81.92 lakh, while the owners were entitled to ₹6.30 lakh as penalty. After deductions and accounting for ₹50 lakh already disbursed, the owners were directed to pay a balance amount of ₹25.62 lakh. The Court clarified that neither side would be entitled to any interest on the amount payable.
Case Details
Case Title: Bhupesh Bhayana and another Versus Kunal Seth and another
Citation: JURISHOUR-1403-SC-2026
Case No.: Diary No. 20732 of 2024
Date: 26/05/2026
