Merely because clause in the PO entitles MTNL to seek LD cannot justify the amount it sought to recover
In Finolex Cables Limited Vs. Mahanagar Telephone Nigam Ltd., the two companies had entered into a contract and MTNL had invoked BG because of non-delivery.
The question before the Delhi High Court was whether the invocation of the BG by MTNL in terms of Clause 7.4 of the PO was justified. The High Court opined -
41. MTNL has no explanation whatsoever for suddenly springing on FCL the unilateral invocation of the BG which it made FCL renew from time to time. There was no loss suffered by MTNL on account of the failure of FCL to supply the cables. Merely because Clause 7.4 of the PO entitles MTNL to seek LD up to a maximum of 10% cannot justify the amount it sought to recover, namely, the entire sum of Rs.36,75,300, which according to the learned Arbitrator was approximately 10% of the contract value.
42. The law in relation to LD has been explained by the Supreme Court in its decision in Kailash Nath Associates v. Delhi Development Authority (supra). In para 43 of the said decision, the Supreme Court has explained the legal position as under:
“43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
43.2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
43.4. The Section applies whether a person is a plaintiff or a defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in future.
43.6. The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.”
43. It is, therefore, plain that it was incumbent on MTNL to prove that it had suffered some loss although as Mr. Sethi rightly pointed out it did not have to prove the actual loss. What, however, the learned Arbitrator has found and which finding has not been challenged by MTNL is that MTNL suffered no loss whatsoever. There was absolutely no material placed on record by MTNL that it suffered an iota of loss on account of non-supply of cables. Therefore, even assuming that Clause 7.4 signifies a genuine pre-estimate of damages, MTNL was not relieved of showing that it had suffered some loss. This again even if it proved that it suffered some loss, the adjudicatory body, which in this case was the learned Arbitrator was required to award „a reasonable sum‟. What is reasonable would depend on the facts and circumstances of every case. If the maximum amount of LD was to be awarded then it was incumbent on the Arbitrator to explain how the maximum LD anticipated by the clause as reasonable sum. In this regard, the Court finds no explanation whatsoever for the learned Arbitrator awarding the maximum 10% of the total value of the contract particular when no loss whatsoever has been suffered by MTNL.
44. The Court is, therefore, not able to sustain the impugned Award insofar as it holds that the invocation of the BG by MTNL was justified and awards MTNL a sum of Rs.36,75,300 as LD. This part of the Award is based on no evidence whatsoever. It is contrary to the settled legal position as explained by the Supreme Court in Kailash Nath Associates v. Delhi Development Authority (supra) and NHAI v. ITD Cementation (supra). An Award inconsistent with the law explained by the decision of the Supreme Court would opposed to the fundamental policy of Indian law. It would attract invalidation under Section 34 (2) (b) (ii) of the Act.
Note - The above decision is a little at variance with the judgement of the Delhi High Court in Mahanagar Telephone Nigam Limited v. Haryana Telecom Limited.
http://gmbalegal.blogspot.in/2017/05/if-clause-for-damages-present-party.html
The question before the Delhi High Court was whether the invocation of the BG by MTNL in terms of Clause 7.4 of the PO was justified. The High Court opined -
41. MTNL has no explanation whatsoever for suddenly springing on FCL the unilateral invocation of the BG which it made FCL renew from time to time. There was no loss suffered by MTNL on account of the failure of FCL to supply the cables. Merely because Clause 7.4 of the PO entitles MTNL to seek LD up to a maximum of 10% cannot justify the amount it sought to recover, namely, the entire sum of Rs.36,75,300, which according to the learned Arbitrator was approximately 10% of the contract value.
42. The law in relation to LD has been explained by the Supreme Court in its decision in Kailash Nath Associates v. Delhi Development Authority (supra). In para 43 of the said decision, the Supreme Court has explained the legal position as under:
“43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
43.2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
43.4. The Section applies whether a person is a plaintiff or a defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in future.
43.6. The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.”
43. It is, therefore, plain that it was incumbent on MTNL to prove that it had suffered some loss although as Mr. Sethi rightly pointed out it did not have to prove the actual loss. What, however, the learned Arbitrator has found and which finding has not been challenged by MTNL is that MTNL suffered no loss whatsoever. There was absolutely no material placed on record by MTNL that it suffered an iota of loss on account of non-supply of cables. Therefore, even assuming that Clause 7.4 signifies a genuine pre-estimate of damages, MTNL was not relieved of showing that it had suffered some loss. This again even if it proved that it suffered some loss, the adjudicatory body, which in this case was the learned Arbitrator was required to award „a reasonable sum‟. What is reasonable would depend on the facts and circumstances of every case. If the maximum amount of LD was to be awarded then it was incumbent on the Arbitrator to explain how the maximum LD anticipated by the clause as reasonable sum. In this regard, the Court finds no explanation whatsoever for the learned Arbitrator awarding the maximum 10% of the total value of the contract particular when no loss whatsoever has been suffered by MTNL.
44. The Court is, therefore, not able to sustain the impugned Award insofar as it holds that the invocation of the BG by MTNL was justified and awards MTNL a sum of Rs.36,75,300 as LD. This part of the Award is based on no evidence whatsoever. It is contrary to the settled legal position as explained by the Supreme Court in Kailash Nath Associates v. Delhi Development Authority (supra) and NHAI v. ITD Cementation (supra). An Award inconsistent with the law explained by the decision of the Supreme Court would opposed to the fundamental policy of Indian law. It would attract invalidation under Section 34 (2) (b) (ii) of the Act.
Note - The above decision is a little at variance with the judgement of the Delhi High Court in Mahanagar Telephone Nigam Limited v. Haryana Telecom Limited.
http://gmbalegal.blogspot.in/2017/05/if-clause-for-damages-present-party.html
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