2017 (5) TMI 1843 - HC - Indian Laws

Appeal allowed: intermediate liquidated damages held genuine pre-estimate and enforceable without proving actual loss; suit dismissed

GAIL (INDIA) LIMITED Versus PUNJ LLOYD LIMITED

The HC allowed the appeal, holding that the contract's intermediate liquidated damages were a genuine pre-estimate of loss and enforceable without proof ... Levy of the liquidated damages by the defendant - whether the plaintiff is entitled to recover the suit amount or any other amount from the defendant? - deduction of intermediate liquidated damages - HELD THAT:- Kailash Nath Associates [2015 (1) TMI 1377 - SUPREME COURT] is an authority of recent vintage on the question of the power of the principal to invoke the performance guarantee condition, notwithstanding its inability to recover liquidated damages specified in a contract. The Supreme Court had considered the law in Fateh Chand's case [1963 (1) TMI 46 - SUPREME COURT] and several other decisions, and held that '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.' In ONGC [2003 (4) TMI 438 - SUPREME COURT], after noticing Maula Bax [1969 (8) TMI 78 - SUPREME COURT] the Supreme Court held that in certain eventualities parties may contemplate payment of damages or compensation to cater to specific situations because the quantification of such damages by evidence is impossible or impracticable. The stipulation in clause 57.2.1 and the amounts deducted were by way of liquidated damages and a genuine pre-estimate of the loss calculated in monetary terms. They were not merely precautionary conditions not meant to be enforced, but conditions that could be insisted upon, as is evident from clause 57.2.2, which clarifies that “compensation for Delay/Liquidated Damages stated in sub- clause 57.2.1 above shall be in addition to compensation for Delay/Liquidated Damages stated in sub-clause 57.1.1 of SCC.” Furthermore, the overall cap on damages at 20% (Clause 57.3) includes intermediate liquidated damages contemplated under clause 57.1.1. These intermediate delay liquidated damages were of the kind contemplated in Maula Bux and Bharat Sanchar Nigam, which the parties agreed, would be payable by one of them (Punj Lloyd) without proof of actual loss. This court is of the opinion that the appeal should succeed. The impugned judgment and decree is set aside; consequently, Punj Lloyd’s suit is dismissed. The appeal is accordingly allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the employer was entitled to deduct intermediate compensation for delay/liquidated damages under Clause 57.2 of the Special Conditions of Contract (SCC) for failure to meet interim milestones, notwithstanding grant of an extension of time for final commissioning. 1.2 Whether, under Sections 73 and 74 of the Indian Contract Act, proof of actual monetary loss was necessary for recovery of the intermediate liquidated damages stipulated in Clause 57.2 where the contract parties had agreed such liquidated damages. 1.3 Whether the contractual documents and subsequent correspondence (including recommendations of the Engineer-in-Charge and communications of the employer) constituted a qualified extension of time that precluded liability for intermediate liquidated damages. 1.4 Whether events pleaded by the contractor (monsoon, forest clearance delay, local obstructions) amounted to force majeure or otherwise excused liability for intermediate liquidated damages. 1.5 Whether the contractor's conduct and contemporaneous correspondence (including absence of timely protest) affected entitlement to recover intermediate liquidated damages. 1.6 (Cross-objection) Whether the decree should have applied the foreign-currency exchange rate at payment date and whether pre-suit interest (claimed at a higher rate) ought to have been awarded. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1. Entitlement to deduct intermediate liquidated damages under SCC Clause 57.2 Legal framework: The contract incorporated GCC Clauses (notably 27.0) and SCC Clauses 57.1-57.3. Clause 57.2 provided for 'Intermediate Compensation for Delay/Liquidated Damages' calculated by reference to cumulative slippage in monthly progress, with a specified formula and a cap; Clause 57.2.2 stated such intermediate LDs were 'in addition to' the LDs under Clause 57.1.1; Clause 57.3 capped total liability at 20% of contract value. Precedent treatment: Principles from Section 74 (and Section 73) jurisprudence as explained in binding authorities were considered - the rule that a liquidated sum named in contract is recoverable without proof of actual loss if it is a genuine pre-estimate, otherwise only reasonable compensation is awardable. Interpretation and reasoning: The Court examined the contract text, the amendment introducing Clause 57.2, and contemporaneous project correspondence. It found Clause 57.2 to be a voluntarily agreed, nuanced mechanism to ensure adherence to intermediate milestones (especially given likelihood of different contractors across spreads). The clause's purpose and structure demonstrated that intermediate LDs were substantive, enforceable obligations and not mere precautionary language. The surrounding circumstances at contract formation, the express 'in addition to' language and an overall cap supported treating Clause 57.2 as a liquidated damages clause recoverable per its terms. Ratio vs. Obiter: Ratio - Clause 57.2 created enforceable intermediate liquidated damages recoverable as a genuine pre-estimate of loss; obiter - policy comments on why such clause is prudent where multiple contractors might execute different spreads. Conclusion: The employer was contractually entitled to levy intermediate liquidated damages under Clause 57.2, subject to the test of genuineness of pre-estimate under Section 74. Issue 2. Need to prove actual loss when a liquidated amount is stipulated Legal framework: Sections 73 and 74 of the Indian Contract Act provide that reasonable compensation is to be awarded for breach; Section 74 allows recovery of a contractual liquidated sum 'whether or not actual damage or loss is proved' if the sum is a genuine pre-estimate. Precedent treatment: The Court reviewed authorities explaining that where damages are difficult or impracticable to quantify, a pre-agreed liquidated amount may be recovered without proof of actual loss, but where loss is readily provable the claimant may need to show loss unless clause is a genuine pre-estimate. Interpretation and reasoning: Applying those principles to Clause 57.2, the Court found (i) the clause was a deliberate, detailed pre-estimate mechanism for intermediate slippage, (ii) contemporaneous monitoring and repeated communication by the consultant/employer demonstrated awareness and application of the clause, and (iii) the clause's formulaic computation and cap supported the conclusion that it represented a genuine pre-estimate. The Court rejected the Single Judge's conclusion that absence of proof of monetary loss (and grant of extension for final commissioning) automatically negated liability for intermediate LDs; the existence of an agreed pre-estimate obviated requirement of proving actual loss in appropriate circumstances. Ratio vs. Obiter: Ratio - where parties have agreed a liquidated damages mechanism that is a genuine pre-estimate, proof of actual loss is not a precondition to recovery; Obiter - comparative analysis of clause language in SCC vs GCC. Conclusion: Proof of actual monetary loss was not required to recover intermediate liquidated damages under Clause 57.2, provided the clause is a genuine pre-estimate - which the Court held it was. Issue 3. Effect of extension of time for final commissioning on liability for intermediate LDs Legal framework: Contractual provisions gave the employer power to extend time for final completion; separate clauses governed intermediate LDs and final LDs. The question was whether an agreed extension for final completion precluded enforcement of pre-existing intermediate LDs. Precedent treatment: Authorities distinguish between extensions that discharge antecedent breaches and qualified extensions that are conditional; courts analyze contract language and contemporaneous conduct to determine whether liability was waived or preserved. Interpretation and reasoning: The Court analysed the consultant's recommendation letter and employer's communications which granted final extension up to the actual commissioning date but simultaneously recorded application of intermediate LDs (5.425%). The communications expressly limited waiver of final LDs while preserving intermediate LDs; indeed some communications recommended condonation but left final determination to employer. The Court found no unconditional waiver of intermediate LDs; the extension was either qualified or accompanied by express reservation of the intermediate LDs. Therefore extension did not extinguish the employer's contractual right to recover intermediate LDs under Clause 57.2. Ratio vs. Obiter: Ratio - a grant of extension for final completion does not ipso facto negate contractual entitlement to intermediate LDs where contemporaneous communications preserve or impose such LDs; Obiter - commentary on practical project management reasons for maintaining intermediate milestones. Conclusion: The qualified extension for final commissioning did not preclude enforcement of Clause 57.2 intermediate LDs; the employer validly imposed the 5.425% intermediate deduction. Issue 4. Force majeure/excusing events (monsoon, forest delays, local obstructions) Legal framework: Clause 26.1 defined Force Majeure and required prompt notification and evidence; standard contract principles require that claimed excusing events fall within contractual definition and be proved as preventing performance. Precedent treatment: Courts require strict compliance with contractual notice/evidence provisions and examine whether the event was unforeseeable or beyond the contractor's responsibility. Interpretation and reasoning: The Court observed that while monsoon and other difficulties occurred, the contractor had bid knowing geographic and climatic conditions; some delays claimed were not established as being outside contractor's control or as satisfying the Force Majeure clause. The contractor failed to demonstrate that the incidents were non-foreseeable or that it took all reasonable steps to mitigate. Moreover, contemporaneous documents showed repeated monitoring and warnings about slippages. The Court held that the pleaded events did not absolve liability for intermediate LDs. Ratio vs. Obiter: Ratio - events relied upon did not satisfy contractual Force Majeure provisions so as to absolve intermediate LD liability; Obiter - note on contractor's responsibility to plan for foreseeable climatic/clearance risks. Conclusion: Claimed monsoon, clearance and local disturbances did not constitute excusing Force Majeure events sufficient to negate liability under Clause 57.2. Issue 5. Contractor's conduct and contemporaneous protest or acquiescence Legal framework: Contract law recognises that waiver, estoppel or forfeiture may arise from conduct and contemporaneous acceptance/omission to protest. Precedent treatment: Courts consider whether the contractor registered timely protests or sought relief when intermediate LDs were notified; silence or acquiescence may displace later challenge. Interpretation and reasoning: The Court found the contractor did not meaningfully dispute the levy of intermediate LDs at the relevant time and failed to contemporaneously challenge the employer's communications. Numerous letters from the consultant and employer recorded concerns and the contractor's inadequate mobilization; absence of prompt objection weighed against the contractor's later contention. This conduct supported enforceability of the deductions. Ratio vs. Obiter: Ratio - contractor's failure to contemporaneously protest or to take steps to rebut consultant/employer findings undermined later challenge to intermediate LDs; Obiter - procedural observation on evidential value of contemporaneous records. Conclusion: Contractor's conduct and lack of timely protest supported the employer's entitlement to recover intermediate LDs. Issue 6. Cross-objection on currency conversion and pre-suit interest Legal framework: Relief in foreign currency or its conversion and award of pre-suit interest are matters of equitable and legal discretion governed by pleadings and established principles. Interpretation and reasoning: The Court, having allowed the appeal and set aside the Decree in favour of contractor, dismissed cross-objections. Consequently, questions of exchange rate application and pre-suit interest were rendered moot by dismissal of the suit and did not alter outcome. Ratio vs. Obiter: Ratio - cross-objections fail where principal claim is dismissed; Obiter - no substantive determination on appropriate exchange-rate or pre-suit interest rates was necessary. Conclusion: Cross-objections were dismissed as the suit was dismissed; no adjustment to currency conversion or award of pre-suit interest was warranted in the appellate outcome. Final Conclusion The Court held that the intermediate liquidated damages under Clause 57.2 were enforceable as a genuine pre-estimate of loss, did not require proof of actual monetary loss, were not displaced by the grant of a qualified extension for final commissioning, and were not negated by the contractor's pleaded events. Accordingly the employer's levy of intermediate damages was upheld and the prior decree in favour of the contractor was set aside; the contractor's cross-objections failed.