In a significant legal development clarifying the boundaries of judicial modification of arbitral awards and the proof required for contractual penalty clauses, the Supreme Court of India has modified a “patently illegal” arbitral award to do substantial justice.
A Division Bench comprising Justice Sanjay Kumar and Justice K. Vinod Chandran invoked the Court’s extraordinary powers under Article 142 of the Constitution of India to resolve a 14-year-old builder-owner dispute. The Court ruled that when a contract explicitly provides a daily penalty for construction delays, owners do not need to lead separate evidence to prove actual loss, as the damage is implicit in the contract.
Legal Issue:
- Whether separate evidence of actual damage is required to claim a contractually agreed daily penalty for construction delays.
- The scope of appellate powers under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, to modify an arbitral award.
- Outcome: The Supreme Court modified the arbitral award by reducing the owners’ delay penalty to ₹6,30,000 (representing a 63-day period prior to contract termination) and upholding the builder’s counter-claim of ₹81,92,400. After offsetting the figures, the Court directed the owners to pay a remaining balance of ₹25,62,400 to the builder’s legal heirs, without interest, bringing a final quietus to the litigation.
The dispute originated from a collaboration agreement dated April 9, 2010, executed between late Sudershan Kumar Bhayana and Kiran Bhayana (the owners/appellants) and late Vinod Seth (the builder/husband of respondent No. 2, father of respondent No. 1).
Key Contractual Terms:
- Reconstruction: The builder was to reconstruct the old building belonging to the owners. Upon completion, the builder was entitled to retain the second floor without roof rights.
- Monetary Consideration: The builder was required to pay a total sum of ₹64,00,000 to the owners in instalments as earnest money and compensation.
- Clause 7 (Delay Penalty): The project was to be completed within 12 months from the date the vacant land was provided, with a grace period of 2 additional months. If delayed beyond this period, the builder was liable to pay a penalty of ₹10,000 per day to the owners “apart from what so ever the reason may be for the delayed period.”
- Clause 13 (Breach Penalty): If the owners breached the agreement, they were liable to pay double the earnest money. If the builder breached, the earnest money and compensation amount paid would stand forfeited.
The Breakdown:
The builder paid ₹45,00,000 out of the agreed ₹64,00,000. The remaining ₹19,00,000 was payable within 15 days of laying the fourth slab (lanter), an event which never occurred.
In August 2011, construction was abandoned by the builder after constructing only the basement, stilt, ground floor, and chajja. Consequently, the owners terminated the agreement on November 11, 2011.
Litigation History & Arbitrator’s Award
The builder invoked the arbitration clause (Clause 6) on December 26, 2011. Following an application under Section 9 of the Arbitration and Conciliation Act, 1996 (the ‘Arbitration Act’), the Delhi High Court appointed a sole arbitrator on September 21, 2012, to adjudicate the disputes.
On October 21, 2013, the Arbitrator delivered his award, holding that:
- The builder had committed a clear breach of the agreement.
- The owners were entitled to a penalty under Clause 7 @ ₹10,000 per day from April 9, 2011, to April 8, 2013 (2 years), totalling ₹72,00,000.
- The builder was entitled to construction costs of ₹36,92,400 (as the owners did not contest the claim amount) and the refund of ₹45,00,000 lying with the owners. The Arbitrator ruled that since damages were awarded under Clause 7, the owners could not simultaneously seek forfeiture of earnest money under Clause 13, as it would amount to penalizing the builder twice.
- No interest was awarded to the builder. Thus, the owners were directed to pay a net amount of ₹9,92,400 to the builder (calculated as ₹81,92,400 – ₹72,00,000).
Section 34 & Section 37 Proceedings:
Only the builder challenged the award under Section 34 of the Arbitration Act. On April 15, 2019, a Single Judge of the Delhi High Court modified the award. The judge held that the penalty period should run from August 9, 2011 (when construction stopped) to October 2012 (when the claim statement was filed), reducing the owners’ compensation from ₹72,00,000 to ₹42,00,000.
Following the demise of both original parties, their legal representatives filed cross-appeals under Section 37. On September 27, 2023, a Division Bench of the Delhi High Court set aside the award of damages to the owners in its entirety. The Division Bench reasoned that the owners had failed to adduce any independent evidence of actual damage suffered due to the delay. It upheld only the builder’s counter-claim. The owners appealed this decision to the Supreme Court.
Arguments and Legal Framework
The core arguments centered on the power of the courts to modify arbitral awards under Sections 34 and 37 of the Arbitration Act, and whether a party must prove actual loss to claim contractually stipulated liquidated damages.
The Supreme Court examined the legal precedent established in the Constitution Bench judgment of Gayatri Balasamy vs. ISG Novasoft Technologies Limited (2025) 7 SCC 1, noting that:
“modification and setting aside of an arbitral award have different consequences as the former alters the award while the latter annuls it.”
The Court highlighted that denying the judiciary the authority to modify an award under Section 34, especially when annulment causes disproportionate hardship and delay, “would defeat the raison d’être of arbitration.” Furthermore, the appellate jurisdiction under Section 37 was confirmed to be “coterminous with and as broad as the jurisdiction of the Court under Section 34 thereof.”
The Supreme Court’s Analysis
The Supreme Court found errors in the reasoning of the Arbitrator, the Single Judge, and the Division Bench on multiple fronts:
1. Proof of Damage and Contractual Intent
The Supreme Court directly rejected the Division Bench’s conclusion that the owners were disentitled to compensation because they did not lead separate evidence of loss. The Court observed:
“when the agreement categorically stipulated timelines for the commencement and completion of the construction and the consequences that were to follow thereupon, it was not necessary for the owners to adduce evidence separately in proof of the actual damage suffered by them owing to the breach of the agreement on the part of the builder. 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.”
2. Calculation of the Penalty Period
The Court noted that all lower forums had overlooked the contractual trigger for the 12-month timeline. Under Clause 7, the clock started only when “vacant land is provided.”
Uncontroverted evidence showed that the owners vacated the building one month after the April 9, 2010 agreement, and demolition took another two months. Therefore, the vacant land was provided on July 9, 2010.
- The 14-month construction period (including the 2-month grace period) expired on September 9, 2011.
- The delay penalty could only begin on September 9, 2011.
- Since the owners terminated the contract on November 11, 2011, they could not claim delay penalties beyond the termination date.
- Thus, the contractually valid penalty period spanned 63 days (from September 9, 2011, to November 11, 2011). At ₹10,000 per day, this amounted to ₹6,30,000.
3. Patent Illegality of the Original Award
The Court observed that the Arbitrator’s award was “patently illegal in more ways than one.” Under Section 34(2A), the Arbitrator committed an illegality by denying the owners their separate remedies under both Clause 7 (for delay) and Clause 13 (for breach/forfeiture), as the contract clearly intended them to be separate, non-overlapping remedies. However, since the owners had not filed a Section 34 application challenging this denial, that portion of the award had attained finality.
The Decision
To prevent the parties—who had been litigating since 2012—from being relegated to a fresh round of arbitration, the Supreme Court exercised its powers under Article 142 of the Constitution of India to modify the award and resolve the matter completely.
The final financial reconciliation ordered by the Court is as follows:
- Refund due to the Builder (Respondents): ₹81,92,400
- Penalty due to the Owners (Appellants): ₹6,30,000
- Net Amount payable to Respondents: ₹81,92,400 – ₹6,30,000 = ₹75,62,400
Since the appellants had already deposited and disbursed ₹50,00,000 to the respondents under the Supreme Court’s interim orders, the outstanding balance was calculated as:
- Balance Outstanding: ₹75,62,400 – ₹50,00,000 = ₹25,62,400
The Supreme Court directed the appellants to pay the balance of ₹25,62,400 to the respondents. The Court ruled that no interest can be claimed by either party on the respective amounts and directed both parties to bear their own costs.
Case Details
- Case Title: Bhupesh Bhayana and another v. Kunal Seth and another
- Case No.: Civil Appeal Nos. of 2026 (@Special Leave Petition (Civil) Nos. & & @Diary No. 20732 of 2024) / 2026 INSC 546
- Bench: Justice Sanjay Kumar and Justice K. Vinod Chandran
- Date of Judgment: May 26, 2026
