TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 1843
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.... hearing, of this appeal. 2. Punj Lloyd sued to recover Rs. 29,15,07,084.80/- from the appellant (hereafter "GAIL") The suit amount was deducted towards interim liquidated damages in terms of Clause 57.2 of the Special Conditions of Contract (SCC) to which the present disputants were parties. Punj Lloyd complained that GAIL had withheld amounts on account of the liquidated damages deducted for interim stages delays in the completion of works, in exercise of GAIL's rights under Clause 57.2 of the SCC from Punj Lloyd's bills. 3. GAIL was to lay down gas pipelines for transportation of re-gasified natural gas originating from Petronet LNG Terminal at Dahej in Gujarat and terminating at Vijaipur in Madhya Pradesh. This and other associated facilities was called the DAHEJ-VIJAIPUR Pipeline Project (DVPL Project). It consisted of four parts (called "spreads"). The invitation for bids described the spreads as follows:- SPREAD DETAILS TOTAL LENGTH (IN KMS) I. Dahej to Sherpura 169.9 II. Sherpura to Jhabua 100.8 III. Jhabua to Jagoti 152.3 IV. Jagoti to Vijaipur 193.3 4. Punj Lloyd submitted its bid for spreads I, II and III from DAHEJ to Jagoti for a pipeline leng....
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....xed for the spreads I, II and III of the pipelines laying project. The defendant has not deducted any damages on account of delay caused beyond the final date for commissioning of the work inasmuch as, and as given in detail below, the defendant has given extension to the plaintiff for completion of the project upto 10.4.2004 while simultaneously levying interim liquidated damages as per Clause 57.2 of the SCC for failure of the plaintiff to meet interim deadlines/dates. 8. Punj Lloyd sued GAIL for the amounts deducted, apart from other claims. GAIL, in its written statement, inter alia, argued that: "16. Para 16 of the Plaint is not only incorrect and frivolous, but the same is also an attempt on part of the Plaintiff to mislead this Hon'ble Court on fact. As a matter of fact, as per the records of contract performance maintained at site, there was a big Punch List towards pending works on part of the Plaintiff as on 05.02.2004 and the Plaintiff was attending Electrical/instrumentation/civil works at almost all SV stations during February/March, 2004. River protection works were pending at almost all crossing locations. Also pipe-line swabbing work (an activity required before ....
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.... The term "Force Majeure‟ as employed herein shall mean acts of God, earthquake, war (declared or undeclared), revolts, riots, fires, floods, rebellions, explosions, hurricane, sabotage civil commotions and acts and regulations of respective Government of the two parties, namely the OWNER and the CONTRACTOR. Upon the occurrence of such cause (s) and upon its termination, the party alleging that it has been rendered unable as aforesaid thereby, shall notify the other party in writing immediately but not later than 72 (Seventy-two) hours of the alleged beginning and ending thereof, giving full particulars and satisfactory evidence in support of its claim. xxxx xxxxx xxxxx 27.0 COMPENSATION FOR DELAY (LIQUIDATED DAMAGES): 27.1 Time is essence of the CONTRACT. In case the CONTRACT fails to complete the WORK within the stipulated period then, unless such failure is due to Force Majeure as defined in Clause 26 here above or due to OWNER's defaults, the CONTRACTOR shall pay to the OWNER, by way of compensation for delay and not as penalty, a sum @ 1/2% (Half Percent) of the VALUE OF CONTRACT for delay per week on pr....
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....corresponding cumulative length as per the above mentioned schedule. 2. For every 1% additional slippage beyond 5% as mentioned above in monthly cumulative scheduled progress, compensation for delay shall be levied @0.5% of contract value subject to maximum of cumulative 10% of contract value. With this provision, the compensation for delay shall get re-adjusted with recovery/improvement in progress by the Contractor in subsequent months, within the contractual completion period. For cumulative slippage resulting to compensation for delay exceeding 10% of contract value, other relevant provisions of contract document shall be applicable. 57.2.2 Intermediate 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 subclause 57.1.1 of SCC. 57.3 The total liability of the contractor to Owner under subclause 57.1.1 of SCC on Compensation for Delay/Liquidated Damages and sub-clause 57.2 of SCC on Intermediate Compensation for Delay/Liquidated Damages shall not exceed 20% (Twenty Percent) of contract value. The compensation on account of any liability (ies) other than above shall b....
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....ould be in addition to the liquidated damages payable as per Clause 57.1.1 of the SCC. Effectively, therefore a total of 10% interim liquidated damages and 10% of overall liquidated damages with respect to the last date fixed for commissioning of the DVPL Project was fixed as per the aforesaid terms of the contract, totaling to the total liquidated damages of 20%. We are in the present case only concerned with the issue as to whether the defendant was entitled to levy the interim liquidated damages of 5.425% of the value of the contract in terms of Clause 57.2 of the SCC." 13. After so holding, the learned single judge discussed the law applicable to damages, under Sections 73 and 74 of the Contract Act and held that only in the event of actual loss can damages be recovered, relying on Fateh Chand v Balkishan Dass AIR 1963 SC 1405. The difference between the grant of damages under Section 73 and 74 of the Indian Contract Act, besides Section 73 dealing with unliquidated damages and Section 74 dealing with the liquidated damages, is that Section 74 provides the upper limit of damages which can be granted subject to the condition that the liquidated damages specified are not in the....
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.... defendant to the plaintiff, Ex. PW2/14." 15. The learned single judge then analyzed the letter dated 21.4.2004 (Ex. PW2/6) of the Engineers India Ltd. The said letter inter alia, said that: "5.0 EXTENSION OF TIME SCHEDULE The work of pipeline laying and commissioning was awarded to PLL under single contract. Though there are separate completion periods for laying of pipeline for spread I, II, III and for overall commissioning of pipeline system, the date of commissioning entire pipeline work, being last activity is considered as contractual date for completion of total work. Accordingly, extension of time schedule has been worked out w.r.t. last activity i.e commissioning of Pipeline System. Although pre-commissioning of Spreads in PLL scope (Spread I, II &III) was delayed by 65 days but it has not delayed the commissioning of pipeline system. From para 4.2, following has been observed: i) PLL has started Gas-in-activity on 29th February '04 immediately after gas for commissioning was made available. The commissioning of pipeline system and Performance Test Runs were completed on 10th April '04. ii) The last section taken up for commissioning was Spread IVA. The commis....
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....etion upto 15.04.04 without levying compensation for delay/LD, GAIL may consider to condone the intermediate compensation for delay/liquidated damages as stated in para 7.3 above. While on the subject, it may be appreciated that the purpose of intermediate LD is basically to pressurize the contractor for achieving intermediate milestones which in turn ensures the final completion of job in time. GAIL may further examine the recommendation and take final decision on the issue at the earliest, considering the above and the fact that "Gas-in" as well as commissioning of entire pipe line was not delayed. Thanking you and assuring you of our best services at all times, Very truly yours, Sd/- 16. GAIL's letter dated 5.7.2004 (Ex. PW2/10) to Engineers India Ltd observed as follows: "GAIL management has accepted your recommendations towards extension of contractual completion time period upto 10.04.2004 with an imposition of compensation for delay up to 5.425% of the executed contract value. Accordingly, the same may be communicated to M/s PLL." 17. The letter, dated 6.7.2004 (Ex. PW2/11) was relied on. Another letter dated 16.8.2004 (Ex. PW2/9) was noticed and quoted by the lea....
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....t/works and two liquidated damages were only imposed in terms of Clause 57.2 of the SCC towards intermediate compensation for delay, and being restricted to 5.425% of the contract value. He then rendered his findings as follows: "22. The facts of the present case are very peculiar with respect to the issue as to whether or not legally, the liquidated damages being the interim liquidated damages for interim delays, ought or ought not to be imposed i.e whether such damages are legally allowable or not legally allowable as per Section 74 of the Indian Contract Act. In order to answer this issue, it is required to be noted that failure to meet intermediate compliance schedules of spreads I to IV with their scheduled dates of completion would not have caused monetary losses to the defendant as actual transportation of gas through the pipelines laid was not envisaged on completion of interim stages of spreads I to III. What is being stated by this Court is that it is not as if there was a commencement point at the beginning of spread I with a point of delivery at the end of spread I or spread II or spread III, i.e commencement of delivery of gas to a customer by commencement of transpo....
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....rim liquidated damages in terms of the written statement and the documents Ex. PW2/6, Ex. PW2/10, Ex. PW2/11 and Ex. PW2/9. Therefore, the only claim of the defendant is towards interim liquidated damages but interim breaches of contract in the facts of the case have not caused any monetary loss to the defendant and therefore for the defendant to claim interim liquidated damages from the plaintiff. 23. In view of the above, issue nos. 3 to 5 are decided in favour of the plaintiff and against the defendant and it is held that since no monetary loss was caused to the defendant by any delay caused by the plaintiff for failure to meet interim timelines for the interim stages of performance during the spreads I to III of the contract, hence, plaintiff is not liable to pay any liquidated damages to the defendant under Clause 57.2 of the SCC. For the sake of completion of discussion, I would like to note that there is no evidence led on behalf of the defendant with respect to any monetary loss suffered for any failure to comply with the interim timeline by the plaintiff, and which in my opinion, in any case, would not have been possible in the facts of the present case as stated above ....
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....y of intermediate liquidated damages. Significantly, the levy of such intermediate liquidated damages was never disputed at the time it was granted in August, 2004. 20. GAIL urges that the impugned judgment is in error of law in holding that, "no loss had occurred due to intermediate delays when though the parties had expressly and unambiguously agreed that the intermediate delay in lowering of pipelines would result in losses and that 1/2% of the contract value per week or part thereof (subject to a maximum of 10%) was a genuine pre-estimate of such losses and that the said stipulation was not a penalty. The said finding of the learned Single Judge is contrary to the intention of the parties and amounts to rewriting the terms of the contract which is impermissible in law." 21. It is argued that the learned Single Judge erred in presupposing the loss caused by delayed transportation of gas to customers (given by the loss for GAIL as a result of delay of work by Punj Lloyd). It is next urged that the interpretation of the expression "in addition to" in clause 57.2 clarified that such intermediate liquidated damages was unconnected with the independent liquidated damages stipulated....
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....ontractors. Learned ASG also relied upon the ruling in Construction and Design Services v. Delhi Development Authority 2015 (14) SCC 263). The Court observed as follows: "14. There is no dispute that the appellant failed to execute the work of construction of sewerage pumping station within the stipulated or extended time. The said pumping station certainly was of public utility to maintain and preserve clean environment, absence of which could result in environmental degradation by stagnation of water in low lying areas. Delay also resulted in loss of interest on blocked capital as rightly observed in para 7 of the impugned judgment of the High Court. In these circumstances, loss could be assumed, even without proof and burden was on the appellant who committed breach to show that no loss was caused by delay or that the amount stipulated as damages for breach of contract was in the nature of penalty. Even if technically the time was not of essence, it could not be presumed that delay was of no consequence. Thus, even if there is no specific evidence of loss suffered by the respondent-plaintiff, the observations in the order of the Division Bench that the project being a public u....
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....ndone the intermediate compensation for delay/liquidated damages as stated in para 7.3 above. While on the subject, it may be appreciated that the purpose of intermediate LD is basically to pressurize the contractor for achieving intermediate milestones which in turn ensures the final completion of job in time." 25. Learned counsel contrasted the language of clause 27.1 of the General Conditions of Contract which specifically talked about time being of essence of the contract and also stipulated compensation "not as a penalty a sum @ ½ % (half percent) of the value of contract for delay per week on pro-rata for part thereof subject to a maximum of 10% (ten percent) of the value of the contract. The parties agree that this is a genuine pre-estimate of the loss/damage which will be suffered on account of delay/breach on the part of the contractor and the said amount will be payable on demand without there being any proof of the loss of such loss or damages caused by such delay/breach." It was submitted that the original clause 57.2, especially the payment of intermediate compensation for delay/liquidated damages did not exist and parties introduced it after the agreement. ....
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....004, i.e. from the date of cause of action when the amounts were deducted on the assumption of liability. In the absence of any reasons, learned Single Judge could not have refused the grant of any interest for the pre-suit period. That the decree granted pendente lite and future interest only highlighted the learned Single Judge's awareness that withholding of sums due could result in severe economic consequences. The omission to adduce any reasons for refusing to grant interest on a substantial amount for three years, i.e. the pre-suit period was, therefore, a clear error of law. Learned counsel highlighted that having regard to the totality of circumstances, the rate claimed, i.e. 18% was justified and legal. Analysis and Conclusions 28. Kailash Nath Associates (supra) 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 (supra) and several other decisions, and held as follows: "The law laid down by a Bench of 5 Judges in Fateh Chand's case is ....
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....g Maula Bax (supra) 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 Court observed as follows: "Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that 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, the party complaining of breach is entitled, whether or not actual 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. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is pr....
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....as to deter a party from breaking the contract or to compensate the innocent party for breach. The question to be always asked is whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss". (See para 26-126 of Chitty on Contracts, 30th edition) The fact that damage is difficult to assess with precision strengthens the presumption that a sum agreed between the parties represents a genuine attempt to estimate it and to overcome the difficulties of proof at the trial. According to the Law of Contract by G.H. Treitel (10th edition), a clause is penal if it provides for "a payment stipulated as in terrorem of the offending party to force him to perform the contract. If, on the other hand, the clause is an attempt to estimate in advance the loss which will result from the breach, it is a liquidated damages clause. The question whether a clause is penal or pre-estimate of damages depends on its construction and on the surrounding circumstances at the time of entering into the contract". Lastly, the fact that a sum of money is payable on breach of contract is described by the contract as "penalty" or "liquidated damages" is relevant but not decisive as to categor....
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....ture of a condition does not depend on its nomenclature, but on its effect having regard to the overall circumstances of the case. 33. Punj Lloyd's position that certain events (excessive rainfall, delayed forest clearance and hold up on account of villagers' ire) being the reason for delays, in the opinion of the court, are not sufficient to absolve its liability. When it accepted the contract, it was aware of the possibility of rainfall in the areas where it had to operate; this included inclement conditions such as excessive rainfall, etc. Its inability to provide and plan in certain matters (welding, etc) despite these conditions, actually indicates its failure. It is not unknown for such activities to be performed in extreme weather conditions. The challenge is to perform the job in the agreed time, ensuring that all resources are deployed. Likewise, this court was not shown anything to suggest that forest clearance or permissions were outside Punj Lloyd's domain. They certainly were not force majeure situations. Therefore it could not have legitimately sought shelter because of those facts, to claim immunity from payment of compensation. 34. These considerations apart, ther....