It is a normal practice in our country to retain and later recover the damage claim amounts as claimed by the employer from the amounts payable to the contractor, without going to a court or arbitration for adjudication of the damage claim. Only the aggrieved contractors approach the court or arbitrator challenging the damages and consequential illegal recovery. In many cases, the contract also provides for retention and recovery of such damage claim amounts, either directly by one party or after a determination by a competent authority, provided in the contract. In a recent path-breaking judgment delivered on December 13, 2018 in the case of Shapoorji & Co Vs Union of India (2018) SCC Online Del 12911 Justice Mr Vibhu Bakru of Delhi High court has pronounced a well-reasoned Judgment holding that the claim of damages by the employer cannot be termed as “Debt Due” till it is determined by the and hence recovery of the claim made by the employer from amounts due to the contractor is unsustainable. It also has held that the damage clause gives only a right to the employer to approach an arbitrator or a court for determination and not to recover unilaterally.

In the present case, the bid of the Petitioner contractor was selected and accepted by the Respondent CPWD Union of India to construct new fixed tensile membrane roofing over the seating area of the Jawaharlal Nehru stadium, New Delhi, for Commonwealth Games. The project was to be completed within a period of twenty months commencing from 04.01.2008. Thus, the works were to be completed by 03.09.2009. The project was finally completed after various extensions of time granted by the Respondent. The petitioner alleged that the major part of the delay was due to the delay of the respondent in fulfilling its obligations. Since the respondent was not ready to compensate the loss suffered by the petitioner, the petitioner initiated arbitration proceedings and made a claim of Rs.1,23,19,78,944.80. The Respondent did make certain counterclaims before the arbitral tribunal but those did not include the delay damages, which is the subject matter of the present article. In fact, the extensions of time were granted to the petitioner by the respondent without reserving rights to claim damages for the delay.

In the meantime, the office of Comptroller and Audit General of India (CAG) inspected the works and created a report blaming the CPWD officials etc., Then the said CAG report was placed before the Public Accounts Committee (PAC). The said PAC called upon the Respondent CPWD and sought an explanation as to why compensation for delay in execution of the works was not levied. The Respondent explained to the PAC that most of the delays could not be attributable to the petitioner but PAC pressurized the Respondent CPWD to make

A demand for damages to the tune of Rs. 30.80 crores. As per the direction of PAC, the respondent CPWD issued impugned letters to the Petitioner demanding Rs.30.80 crores, under Clause 29 (GCC) of the contract. The said clause 29 (i) provides for marking of a Lien on the sums claimed by the Respondent and retain it till the issue is finally decided by an Arbitrator or a Court having jurisdiction to decide the matter. The said clause 29(ii) provides that the respondent has the right to audit and technical examination, in case of an overpayment to the Respondent to the contractor which was found either by an Audit or otherwise, the Respondent has the right to recover the same from the Contractor. The Court found that Clause 29 of the General Conditions of Contract is to enable the Government to withhold sums due to a contractor pending adjudication of such claims, which shows that the Government has to take steps for adjudication of such claims.

The main point which came to be decided by the Court was whether the claim amount of delay damages claimed by the Respondent can be treated as “amount became due” and be recovered? The High Court followed the decision of Union of India Vs Raman Iron Foundry1 to hold that a sum which was neither due nor payable cannot be recovered by the Union of India/ Respondent. In the said case, Supreme Court referred to the decision of Bombay High Court in Iron and Hardware India (Co) case2. The following observation of the Supreme Court is very important for the analysis:

26. The Supreme Court had held that a sum which was neither due nor payable could not be made the subject matter of the aforesaid clause. In that case, the Supreme Court had referred to the decision of the Bombay High Court in Iron and Hardware India (Co.) v. Shyam Lal and Bros, AIR 1954 Bom 423. The relevant observations made by the Supreme Court are set out below-

‘… In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.

As already stated, the only right which he has is the right to go to a court of law and recover damages. Now, damages are the compensation which a court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation because of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But until that determination, there is no liability at all upon the defendant.’

Based on the various Judgments of High Courts and the above-said judgment of the Supreme Court of India, Delhi High Court allowed the above-said appeal. Hence, the settled law is clear that no employer can recover any amount on the ground of damages till a Court of law/ Arbitrator determines the same.