The Meghalaya High Court has recently in a dispute arising out of a coal supply agreement held that "It is quite common, particularly in the international grain trade or in case of high sea sales of commodities that a party agrees to purchase a certain quantity of goods but reneges on the same. In such a scenario, as per the law in force in this country, notwithstanding any agreement between such parties, the party in breach would be liable to compensate the other party only to the extent of the loss suffered by such other party, unless there is a genuine pre-estimate indicated by way of liquidated damages."

The Division Bench of Chief Justice Sanjib Banerjee and Justice H. S. Thangkhiew were dealing with a grievance carried by the private respondents to the writ court that in terms of a coal supply agreement, the private respondents were required to lift a certain guaranteed amount of coal periodically, but they failed to do so following which the appellant herein raised the claim for such minimum guaranteed amount.

The issue for consideration before the Court was whether Star Cement Limited would be liable to compensate Coal India Limited for the value of the quantum of coal that was not lifted, particularly since such coal was sold to a subsequent purchaser. It was submitted by Star Cement Limited that a party could not make a profit by claiming compensation as compensation, in effect, is intended only to make good the loss suffered by a party.

Senior Advocates M.Z. Ahmed and B. Dutta along with Advocate A.M. Dutta appeared for the Appellant Coal India Limited while Senior Advocate Dr A. Saraf along with Advocate Z.A. Chowdhury appeared for the Respondent Star Cement Limited.

The Court observed that "In principle, the private respondents may be right. Since the relevant clause cannot be read as a penalty, as that may be prohibited by the Contract Act, 1872, the minimum guaranteed amount or the value thereof can be seen to be a form of liquidated damages indicating the highest amount that the appellant herein could have received for the private respondents not lifting the quantum of coal that was specified in the agreement".

It was also further observed that "It often happens that the price of a commodity goes up and the party who had contracted to purchase the same originally no longer finds such price to be commercially viable. In such a scenario, the seller may sell the same commodity at the risk and cost of the original buyer to a third party; but it is only if there is a shortfall in the price that such shortfall can be realised from the original buyer. Of course, the additional costs incurred would be to the account of the original buyer."

Accordingly, the Court allowed the Petition to the extent above.

Cause Title: The Chairman, Coal India Limited & Ors v. Star Cement Limited [WA No. 8 of 2023 with MC (WA) No. 9 of 2023]

Click here to read/download the Order