Section 74 Contract Act| Claim For Damages Will Remain Confined To As Per Agreement: SC Rejects Plea Of Company
The Supreme Court dismissed a Civil Appeal of a company, saying that the claim for damages will remain confined to as per the agreement in view of Section 74 of the Indian Contract Act, 1872 (ICA).
The issues in the Appeal were limited but the litigation had a chequered history.
The two-Judge Bench of Justice Abhay S. Oka and Justice Ujjal Bhuyan said, “The appellant got liquidated damages as provided in the agreement on account of breaches committed by the respondent. The claim for damages of the appellant will remain confined to what is expressly provided under the Agreement in view of Section 74 of the Contract Act.”
Section 74 of ICA is about the compensation for breach of Contract where penalty stipulated for. It thus reads: “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”
Senior Advocate Vijay Hansaria appeared for the Appellant while Senior Advocate Chander Uday Singh appeared for the Respondent.
Factual Background
An agreement was executed in 1992 by and between the Appellant and Respondent under which the Respondent agreed to design procure, manufacture, and supply to the Appellant machinery and equipment for a continuous fermentation process based on the Encillium process, patented by the National Chemical Laboratory, Pune (NCL). The said agreement contained an arbitration clause and the total consideration was Rs. 93,20,000/-. One of the clauses in the agreement was that the fermentation plant that was to be supplied by the Respondent must have a guaranteed minimum yield of 280 litres of alcohol per metric tonne of Molasses. According to the Appellant's case, when the agreement was entered into, the existing yield in their factory was 245 litres per metric tonne of Molasses.
Under the agreement, the plant and machinery were to be supplied within a period of five and half months from the effective date of the agreement, i.e., by May 15, 1993, for a total consideration of Rs. 93.20 lakhs. As per the Appellant, there was a delay of about 24 weeks in the machinery’s delivery and four trial runs were conducted on the machinery supplied by the Respondent. The yield was much less than the guaranteed yield of 280 litres per metric tonne of Molasses and the maximum yield in trial runs was 237.68 litres per metric tonne of Molasses. Therefore, on October 19, 1994, the Appellant issued a legal notice to the Respondent claiming a sum of Rs. 237.83 lakhs as damages. The Respondent disputed the said claim and the Appellant invoked the arbitration clause by appointing its nominee Arbitrator.
A Memorandum of Understanding (MOU) was executed between the parties which provided for conducting one more trial run for 15 days after necessary modifications in the machine. The Appellant filed a statement of claim before the Arbitral Tribunal, claiming damages of Rs. 233.75 lakhs. Both parties challenged the Arbitral Tribunal’s award and the Civil Judge set aside the same by remanding it for fresh adjudication. This was challenged before the High Court, which held that the claim of Rs.107.54 lakhs was beyond the jurisdiction of the Arbitral Tribunal. The Appellant appealed to the Supreme Court, which restored the Order of the Civil Judge. Thereafter, the Arbitral Tribunal made a second award, which was challenged by both parties. The High Court allowed the Respondent's Appeal and dismissed the Appellant's cross-objections. Hence, the case was before the Apex Court.
Reasoning
The Supreme Court after hearing the arguments from both sides, observed, “As stated earlier, there is a clause for liquidated damages under which a claim was allowed by the Arbitral Tribunal, which the respondent accepted. Under clause 21 of the agreement, the appellant had the choice of replacing the plant and machinery and seeking the cost of the plant and machinery and the installation cost from the respondent. However, the said option was not availed by the appellant.”
The Court noted that the agreement provided for liquidated damages in clause 15 on account of non-performance of the guarantees set out in clause 8 and assuming that the entire plant and machinery was a failure or scrap, the Appellant had the right to replace the same and claim the cost from the Respondent; however, that was not done by the Appellant.
“The appellant retained the plant and machinery and did not take the benefit of clause 21. Therefore, as rightly held by the High Court, the appellant was not entitled to the claim of Rs.68.15 lakhs as it was claimed in the statement of claim as the refund of the amount spent by the appellant on the acquisition of plant and machinery”, it concluded.
Accordingly, the Apex Court dismissed the Appeal.
Cause Title- Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd. v. Thyssen Krupp Industries India Pvt. Ltd. (Neutral Citation: 2025 INSC 219)
Appearance:
Appellant: Senior Advocate Vijay Hansaria, AOR M. Y. Deshmukh, Advocates Pradip Rajendra Malpani, Manjeet Kirpal, Adviteeya Sharma, and Kavya Jhawar.
Respondent: Senior Advocate Chander Uday Singh, Advocates Surekha Raman, Amarjit Singh Bedi, Abhishek Anand, Varun Chandiok, Riya Seth, Unnimaya S, and Shreyash Kumar.
