2025 (2) TMI 586 - SC - Indian Laws

Liquidated damages under Section 74 limited to agreement terms, no refund for retained plant machinery costs

SAHAKARMAHARSHI BHAUSAHEB THORAT SAHAKARI SAKHAR KARKHANA LTD Versus THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD.

The SC upheld the HC's decision rejecting the appellant's claim for Rs.68.15 lakhs as refund of plant and machinery costs. The court held that liquidated ... Liquidated damages for delay in delivery of the plant and machinery - Section 74 of the Indian Contract Act, 1872 - HELD THAT:- The High Court rightly rejected the appellant's contention that the claim for damages of Rs.107.54 has been concluded against the respondent. The High Court rightly observed that if that were so, this Court would not have confirmed the order of remand to the Arbitral Tribunal even on the said issue. Penalties/liquidated damages were stipulated for the delay in delivering machinery and plant, failure to give the guaranteed performance of continuous fermentation plant, failure to provide a guaranteed performance with respect to steam, and failure to give a guaranteed performance with respect to power. Even the rates of liquidated damages have been laid down - Careful perusal of the claim made before the Arbitral Tribunal by the appellant shows that the claim for the sum of Rs.107.54 lakhs was not based on clause 21 of the agreement. It is not the appellant's case that the respondent was called upon to replace the plant and machinery, and as the respondent failed to do so within a reasonable time, the appellant replaced the plant and machinery by themselves. The claim was on account of a refund of the amount spent by the appellant on the plant, as is evident from paragraph 16 of the statement of claim. The claim was not made in terms of Clause 21 of the Agreement. The claim was not on account of the breach of warranty. What is claimed is virtually the refund of the amount spent - 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. Conclusion - 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. 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. There are absolutely no error in the view taken by the High Court, and accordingly, the appeal is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:Whether the appellant was entitled to claim Rs.68.15 lakhs as damages for loss suffered due to non-performance of machinery and equipment.The applicability of liquidated damages under Section 74 of the Indian Contract Act, 1872, in the context of the agreement between the parties.The interpretation and application of clauses 15 and 21 of the agreement regarding penalties, liquidated damages, and the seller's obligation to rectify or replace defective machinery.The jurisdiction and authority of the Arbitral Tribunal in awarding certain claims, particularly the claim of Rs.107.54 lakhs.ISSUE-WISE DETAILED ANALYSIS1. Entitlement to Rs.68.15 lakhs as Damages for Non-PerformanceRelevant Legal Framework and Precedents: The case primarily hinges on the interpretation of Section 74 of the Indian Contract Act, 1872, which deals with compensation for breach of contract where a penalty is stipulated. The section allows for reasonable compensation not exceeding the stipulated amount, regardless of whether actual damage is proven.Court's Interpretation and Reasoning: The Court emphasized that the claim for Rs.68.15 lakhs was not based on the provisions of clause 21 of the agreement, which allowed the appellant to replace the defective machinery and claim costs. Instead, the claim was effectively a refund of the amount spent on the plant, which was not permissible under the terms of the agreement or Section 74.Key Evidence and Findings: The appellant failed to utilize the option under clause 21 to replace the machinery at the respondent's cost. The claim was presented as a refund rather than a rectification or replacement cost, which was not supported by the contract terms.Application of Law to Facts: The Court applied Section 74, concluding that the appellant's claim for damages was confined to what was expressly provided under the agreement. The appellant had already received liquidated damages for breaches, and further claims were not justified.Treatment of Competing Arguments: The appellant argued for the entitlement to additional damages based on non-performance, while the respondent contended that the claim was speculative and not supported by the contract. The Court sided with the respondent, emphasizing the appellant's failure to follow the contractual remedy of replacement.Conclusions: The appeal for Rs.68.15 lakhs was dismissed as the claim did not align with the contractual provisions or the legal framework of Section 74.2. Applicability of Liquidated Damages under Section 74Relevant Legal Framework and Precedents: Section 74 of the Indian Contract Act, 1872, outlines the entitlement to liquidated damages in case of breach, limiting recovery to the stipulated amount unless actual damages are proven.Court's Interpretation and Reasoning: The Court highlighted that the appellant had already received liquidated damages under the agreement's terms for specific breaches. The claim for additional damages was beyond what Section 74 permits, as it was not based on actual damages or rectification costs.Key Evidence and Findings: The agreement contained specific clauses for liquidated damages, which the appellant had utilized. The additional claim was not substantiated by the agreement or the law.Application of Law to Facts: The Court applied Section 74 to confine the appellant's recovery to the liquidated damages already provided under the agreement, rejecting the additional claim as speculative.Treatment of Competing Arguments: The appellant's argument for further damages was dismissed due to the lack of contractual or legal basis, while the respondent's reliance on Section 74 and the agreement's terms was upheld.Conclusions: The Court concluded that the appellant's claim for additional damages was not tenable under Section 74, affirming the High Court's decision.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: '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.'Core Principles Established: The judgment reinforces the principle that claims for damages must align with contractual provisions and statutory limits, particularly under Section 74 of the Indian Contract Act. Liquidated damages stipulated in a contract are binding unless actual damages are proven.Final Determinations on Each Issue: The Court dismissed the appeal for Rs.68.15 lakhs, affirming that the appellant's claims were limited to the liquidated damages expressly provided in the agreement. The appellant's failure to utilize the contractual remedy of replacement under clause 21 further weakened their position.