Damages without proof of loss: The Supreme Court’s overbroad 'public utility’ presumption

The “most basic principle of the award of damages” as elucidated by Justice RF Nariman (Retd.) in Kailash Nath v. Delhi Development Authority is “that compensation can only be given for damage or loss suffered. If damage or loss is not suffered, the law does not provide for a windfall."

The logical corollary to the above principle has also been well settled in Indian jurisprudence. When such loss is determinable in terms of money, then it must be proved.

Proof of loss is thus a sine qua non for the grant of compensation. However, Section 74 of the Indian Contract Act of 1872 (“Contract Act”) carves out an exception: when the loss suffered by the claimant is impossible or difficult to prove, then the liquidated amount named in the contract, if it is held to be a genuine pre-estimate of damage or loss, can be awarded.

However, the Supreme Court in Construction & Design Services v. DDA appears to have taken a contrary view from the general principles governing the award of liquidated damages.

In Construction, the Supreme Court was tasked with deciding a claim for damages by the DDA against a contractor who had been engaged by the DDA for constructing a sewerage pumping station. Clause 2 of the contract between the parties provided for payment of compensation by the contractor to DDA equivalent to one percent or such smaller amount as the Superintending Engineer, DDA may decide, if the contractor failed to comply with the time schedule for completion. The contractor had admittedly breached the contract.

The DDA filed a civil suit against the contractor for recovery of the amounts under Clause 2, and a single judge of the Delhi High Court dismissed the suit as the DDA failed to prove that it suffered monetary loss of any kind. On appeal, a Division Bench of the High Court reversed the view taken by the single judge and held that there was no need to prove loss when there is a delay in the performance of a contract for the construction of a public utility service. Relying upon the illustration in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., the Division Bench held:

“... the observations of the Supreme Court in para 68 of the decision reported as AIR 203 SC 2629 ONGC v. Saw Pipes Ltd. are squarely applicable in the instant case as per which delayed constructions such as completing construction of road or bridges within stipulated time would be difficult to be linked with actual losses suffered by the State.”

The Supreme Court in Construction, confirmed the Division Bench’s view and introduced a presumption of loss in ‘public utility’ contracts even without proof. 

Instead of the DDA being required to: (i) prove the quantum of loss, or in the alternative, the impossibility to quantify loss; and (ii) prove that the amount mentioned in the contract was a genuine pre-estimate of damages, the Supreme Court in Construction reversed the statutory burden engrafted into Section 74. The Supreme Court held that the “burden was on the appellant who committed breach to show that no loss was caused by delay or that the amount stipulated as damages for breach contract was in the nature of penalty.”

The decision in Construction foregoes the “difficult to prove” test and presumes loss

As mentioned above, the (often confusing) phrase “whether or not actual damage or loss is proved to have been caused thereby” occurring in Section 74, is a narrow exception to the general rule that a claimant must prove the losses suffered by it. The exception covers only those classes of cases where the “damage or loss is difficult or impossible to prove”. Explaining this exception, a three-Judge Bench of the Supreme Court in Maula Bux held that:

“But the expression 'whether or not actual damage or loss is proved to have been caused thereby' is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the court to assess compensation arising from breach... Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation.

However, the Supreme Court in Maula Bux made it clear: “Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him." Thus, to rely upon the exception engrafted in Section 74, the claimant must first demonstrate that, in their case, damage or loss is unquantifiable.

What may have been first required to be determined by the Supreme Court in Construction was: are the damages or losses suffered by DDA impossible or difficult to prove? For this, DDA ought to have been asked to establish that: (a) the loss arising out of the contractor’s breach was impossible to quantify; and (b) the amount mentioned in the contract as liquidated damages was a genuine pre-estimate. Only once these two requirements were adequately established by way of evidence could the burden have been shifted onto the party in breach to establish that no loss was suffered, and that the amount mentioned in the contract as liquidated damages was in the nature of a penalty. 

However, without requiring the DDA to establish the above two requirements, the Court observed that, in contracts involving ‘public utility’, “loss could be assumed."

Had the Court undertaken the inquiry as to whether the losses were impossible or difficult to determine, it is possible that at least some elements of loss could have been established by the DDA. This appears particularly plausible in light of the Court’s observation that the contractor’s delay had resulted in “loss of interest on blocked capital”. Such a loss would ordinarily be capable of quantification.

Further, in Construction, the Supreme Court appears to have placed reliance on an illustration contained in Saw Pipes, without engaging with the broader reasoning adopted in that judgment. In Saw Pipes, the Supreme Court had first examined the evidence on record and determined that:

(a) the exact loss resulting from the breach was inherently difficult to prove, owing to multiple contributing factors resulting in loss to ONGC which were not solely attributable to the party in breach; and

(b) the stipulated amount was expressly described in the contract as a genuine pre-estimate and not a penalty, leading the Court to hold that, in contracts where the agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used.

Shifting the burden undermines the legislative intent behind Section 74

As per the decision in Construction, once a party proves breach of a ‘public utility’ contract, it is not required to prove losses suffered by it, and the breaching party must lead evidence to prove that no loss was caused by such breach. With the burden reversed and loss being assumed, the legislative intent behind Section 74 of the Contract Act may be impacted. Statutorily, the burden of proof “lies on that person who would fail if no evidence at all were given on either side.” [Section 105, Bharatiya Sakshya Adhiniyam, 2023]

Thus, as per Construction, even absent proof of loss, the breaching party must prove the negative, failing which it may be made liable for compensatory damages despite no actual loss, an outcome difficult to reconcile with Section 74 as explained in Fateh Chand, which permits compensation only for actual loss or damage.

The fundamental principle underlying the award of damages is that where monetary loss can be determined, the claimant must prove the loss suffered. This principle finds authoritative recognition in Fateh Chand, Maula Bux, Saw Pipes and Kailash Nath.

The only exception to this rule arises where the loss is impossible to prove. In such cases, a court may consider the sum stipulated in the contract if it represents a genuine pre-estimate of damages

In Construction, even where loss is assumed, the Court must first determine whether it is quantifiable or inherently incapable of proof. In the absence of such a finding, the burden should not shift to the party in breach merely because the contract involves ‘public utility.'

The fallout of the ratio of Construction is visible as recently as January 2026, where the Supreme Court in Saisudhir Energy Ltd. v. NTPC Vidyut Vyapar Nigam, applies it as a general rule for public utility projects, despite the materially different contractual context.

While Construction may have aimed to relieve the State of proving actual loss in public utility contracts, it risks shifting the burden onto the party in breach across all such contracts, potentially altering settled principles of proof of damages.

About the authors: Angad Varma and Toyesh Tewari are Partners, Agastya Sen is a Senior Associate at Dua Associates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.