The Instinct to Deduct

A project runs late, and the employer unilaterally clips the contractor’s running bills for liquidated damages. The clause says 0.5% per week, capped at 5%, so the deduction seems lawful - no notice, no adjudication, no proof of loss. The Delhi High Court’s decision in PVVNL v. IL&FS Engineering and Construction Company Ltd. (6 April 2026) is a reminder that an LD clause is not a licence to deduct. The court upheld an award returning Rs 4.5 crore to the contractor with 8% interest while recognizing that the employer proved neither the contractor’s exclusive responsibility for the delay nor any actual loss.

What Happened

PVVNL, a UP-government power distribution company, engaged IL&FS Engineering and Construction Company under two contracts dated 3 March 2015 for rural electrification works in Amroha (combined value approx. Rs 94.5 crore, turnkey). The project was to be completed within 24 months (by 31 October 2016) but was commissioned on 20 February 2019 i.e., a delay of over two years.

During execution, the contractor wrote at least six letters between September 2016 and March 2019 seeking extensions of time, citing site hindrances, right-of-way problems, and delayed release of running bills. PVVNL did not respond to a single one. The applications were neither accepted nor rejected, and the contractor continued working without any formal extension. The completion certificate, issued in April 2022, recorded satisfactory completion. PVVNL had never raised any grievance about the delay. Yet in June 2022, without prior notice, PVVNL recovered Rs 4,50,68,820 as liquidated damages in one lump sum.

The Tribunal and the High Court

The arbitral tribunal found that the delay was not solely the contractor’s fault. PVVNL had failed to address the hindrances flagged by the contractor, delayed running-bill releases by over eighteen months, and never ruled on the time-extension requests. The tribunal also noted that in a comparable project in Bulandshahr, where the same contractor was responsible for a four-year delay, PVVNL imposed no liquidated damages, and offered no explanation for the different treatment.

On the law, the tribunal relied on the Supreme Court’s decision in Kailash Nath Associates: a liquidated damages clause sets a ceiling on recovery, not an automatic entitlement. Section 74 of the Contract Act requires proof of actual loss. PVVNL produced no evidence of actual loss; the deduction came three years after completion without notice or reasoned order, and was therefore untenable and arbitrary.

PVVNL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the tribunal had ignored Clause 21.2 of the General Conditions of Contract, under which the contractor was liable to pay an upper limit of 5% of the contract price to the employer for delay in completion of the project. The Hon’ble High Court dismissed the petition. The court held that the tribunal’s findings on shared delay, no proof of actual loss, and unilateral deduction without adjudication were not vulnerable for challenge.

What This Means In Practice

An LD clause is a ceiling, not a trigger. Section 74 of the Contract Act requires proof of actual loss; the clause sets the upper limit, not an automatic entitlement.
Unilateral deduction without adjudication is risky. Withholding LD without notice or a reasoned order invites scrutiny. The three-year gap between completion and deduction weighed heavily against PVVNL.
Concurrent delay defeats LD claims. Where the employer contributed to the delay through inaction, delayed payments, or failure to process extension requests, the contractor’s delay is not the sole cause.

Why Liquidated Damages Get Deducted in EPC Contracts and Why Courts Often Reverse Them