The Andhra Pradesh High Court has overturned a trial court order that had set aside multiple arbitral awards in a long-running contract dispute between Hindustan Shipyard Limited and several fabrication contractors. In a detailed judgment delivered on December 31, the Division Bench restored the arbitrator’s decision that had partially refunded liquidated damages deducted for delays in execution of works.
The court held that an arbitrator is empowered to assess “reasonable compensation” under contract law and may reduce liquidated damages when delays are attributable to both sides.
Background of the Case
Hindustan Shipyard Limited (HSL), a public sector undertaking engaged in ship construction and repair, had awarded several sub-contracts to different fabrication and engineering firms between 2012 and 2013. Each work order contained a clause allowing HSL to levy liquidated damages at the rate of 2% per week of delay, subject to a maximum of 20% of the contract value.
When the projects were not completed within the stipulated timelines, HSL deducted the maximum permissible liquidated damages from the contractors’ final bills. The contractors disputed the deductions, claiming that delays were caused by factors such as lack of work space, delayed supply of materials, absence of crane facilities, and late payments by HSL.
The disputes were referred to arbitration, where a sole arbitrator passed awards in 2016 directing partial refund of the deducted amounts, while retaining a portion of the liquidated damages.
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The arbitrator held that the liquidated damages clause itself was legally valid. However, he found that the quantum imposed was excessive in the facts of the case.
After examining correspondence between the parties and operational constraints at the shipyard, the arbitrator concluded that delays were not solely attributable to the contractors. Instead, responsibility was shared between both sides.
Taking this into account, the arbitrator reduced the damages and ordered refund of the excess amounts, along with interest at 9 percent per annum.
HSL challenged the arbitral awards before the XI Additional District Judge, Visakhapatnam. In January 2025, the trial court allowed the challenge and set aside all the awards.
The trial court held that once an arbitrator accepted the validity of a liquidated damages clause, he could not modify its quantum. It further held that the arbitrator had exceeded his jurisdiction and that the awards violated public policy.
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High Court’s Observations
The Division Bench of Justice R. Raghunandan Rao and Justice T.C.D. Sekhar disagreed with the trial court’s approach.
The court observed that Section 74 of the Indian Contract Act does not mandate automatic enforcement of the full amount mentioned in a liquidated damages clause. Instead, it limits compensation to what is “reasonable.”
“The liquidated damages clause fixes only the outer limit,” the Bench noted, adding that courts and arbitrators must assess whether actual loss can be quantified.
The judges also noted that HSL itself had admitted before the arbitrator that it had suffered quantified losses due to penalties imposed by vessel owners. Once losses are measurable, the court said, damages cannot be imposed mechanically.
On the issue of shared delay, the Bench observed, “Once delay is found to be attributable to both parties, it would be impermissible to apply the liquidated damages clause in full.”
The court rejected the trial judge’s finding that there was no material to support the arbitrator’s conclusions, pointing out that letters and documents were duly marked and relied upon.
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Final Decision
Allowing all the Civil Miscellaneous Appeals, the High Court set aside the trial court’s January 3, 2025 orders and restored the arbitral awards in full.
“No ground is made out for interference with the arbitral awards,” the Bench held, concluding that the arbitrator acted within his jurisdiction and applied settled principles of contract law.
No order as to costs was passed.
Case Title: Sunrise & Engineering Industries v. Hindustan Shipyard Limited
Case No.: C.M.A. No. 234 of 2025 (Batch matters)
Case Type: Civil Miscellaneous Appeals (Arbitration)
Decision Date: 31 December 2025
