Isabella Mariam

The Supreme Court of India recently dismissed a civil appeal filed by a company, emphasizing that claims for damages are strictly limited to the terms outlined in the agreement, in accordance with Section 74 of the Indian Contract Act, 1872 (ICA). The case, which has a complex history, involved a dispute over compensation for breach of contract between two parties—a manufacturer and a buyer of machinery.

Background of the Case

The dispute arose from an agreement signed in 1992, wherein the Respondent agreed to design, procure, manufacture, and supply machinery for a continuous fermentation process to the Appellant. The fermentation process was based on a patented technique by the National Chemical Laboratory, Pune (NCL). The agreement, which included an arbitration clause, stipulated a total consideration of Rs. 93,20,000.

One key provision in the agreement guaranteed that the fermentation plant would yield a minimum of 280 liters of alcohol per metric tonne of molasses. The Appellant contended that the existing yield in their factory at the time of signing the agreement was only 245 liters per metric tonne. Additionally, the machinery was supposed to be delivered within 5.5 months, by May 15, 1993.

However, according to the Appellant, the machinery was delivered late—about 24 weeks behind schedule. When the machinery was tested in trial runs, the yield was found to be much lower than guaranteed. The maximum yield achieved was only 237.68 liters per metric tonne of molasses, falling short of the agreed-upon minimum of 280 liters.

On October 19, 1994, the Appellant issued a legal notice demanding Rs. 237.83 lakhs as damages from the Respondent, citing the underperformance and delays. Disputing the claim, the Respondent declined to pay, prompting the Appellant to invoke the arbitration clause. Both parties participated in arbitration, but their claims and counterclaims went through a series of legal challenges and remands, eventually reaching the Supreme Court.

The Dispute Process

The Arbitral Tribunal initially awarded the Appellant liquidated damages as per the agreement, which the Respondent accepted. However, the parties were not satisfied with the award and continued to challenge it. A Memorandum of Understanding (MOU) was signed, and one final trial run was conducted to test the machinery after necessary modifications. Despite the trial, the parties remained in dispute over the damages.

The Appellant filed a statement of claim seeking Rs. 233.75 lakhs in damages. The Civil Judge set aside the original award and remanded the case for a fresh adjudication. The High Court later ruled that the claim for Rs. 107.54 lakhs was beyond the jurisdiction of the Arbitral Tribunal. The Appellant appealed the decision, leading the case to the Supreme Court.

Supreme Court's Ruling

A bench of Justice Abhay S. Oka and Justice Ujjal Bhuyan dismissed the appeal, reinforcing the position that claims for damages should adhere to the terms of the agreement. They emphasized that the Appellant had already received liquidated damages as stipulated in the agreement for the breaches committed by the Respondent.

The Court noted that under Clause 21 of the agreement, the Appellant had the option to replace the plant and machinery and claim the cost of the machinery, along with installation expenses, from the Respondent. However, the Appellant chose not to exercise this option and retained the machinery. As a result, the Court reasoned that the Appellant was not entitled to the additional claims for damages, especially those exceeding the liquidated damages mentioned in the agreement.

The Court further clarified that the agreement contained a clause for liquidated damages, as outlined in Clause 15, which was intended to compensate for the non-performance of the machinery as guaranteed under Clause 8. The Appellant was entitled to liquidated damages, but any claims outside of this, including Rs. 68.15 lakhs for the refund of money spent on acquiring the machinery, were not supported by the terms of the agreement.

Thus, the Apex Court upheld the High Court’s judgment and rejected the Appellant’s plea for further compensation.

Case Title: Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd.

                  v. Thyssen Krupp Industries India Pvt. Ltd.

Case No : Civil Appeal No. 3194/2014

Coram: Justice Abhay S. Oka and Justice Ujjal Bhuyan

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