Delhi District Court
Rathi Ispat Limited vs Asia Brown Boveri Ltd on 19 July, 2008
1
IN THE COURT OF DR.SUDHIR KUMAR JAIN, ADDITIONAL DISTRICT JUDGE, DELHI.
Suit No. 74/2004.
Date of Institution : 29.06.1998
Date of Decision : 19.07.2008
Rathi Ispat Limited,
havint office at:
Rathi Katra, Nai Sarak,
Delhi--110006.
.... Plaintiff
Versus
Asia Brown Boveri Ltd.,
having their office at :
15/16, Qutab Institutional Area,
Guru Nanak Foundation Building,
Saheed Jeet Singh Marg,
Hauz Khas,
New Delhi--110016.
... Defendant
Defendant changed to following nomenclature vide order dated
05.11.2004
ABB Ltd.,
having their office at :
IVth floor, NBCC Tower,
15, Bhikaji Cama Place,
New Delhi--110016.
And
2
ABB Ltd.,
2nd floor, Khanija Bhawan,
East Wing,
49, Race Course Road,
Bangalore--560001.
... Defendant
APPEARANCES:
FOR PLAINTIFF : Sh.Shiv Khurana, Advocate
FOR DEFENDANT : Sh.Rattan K. Singh, Advocate
SUIT FOR RECOVERY OF Rs.17,78,400/- (RUPEES SEVENTEEN LACS
SEVENTY EIGHT THOUSANDS AND FOUR HUNDRED)
JUDGMENT
This judgment shall decide a suit for recovery of Rs.17,78,400/- filed by the Rathi Ispal Limited (herein after referred to as "Plaintiff") against the Asia Brown Boveri Limited (herein after referred to as "Defendant"). The defendant was permitted to be changed to ABB Ltd.from Asia Brown Limited vide order dated 05.11.2004.
2. Briefly stated the relevant facts as pleaded by the plaintiff are 3 that the plaintiff, a limited company, engaged in the manufacture of different types of castings and billets had required the induction furnance for the purpose of expanding manufacturing activities; the defendant has made its offer/quotation dated 14.11.1988 which was revised on 22.11.1988 for the supply of furnance as per the terms and conditions agreed upon between the parties; no order could be cancelled after the issuance of the purchase order or the understanding to proceed with the work, unless such cancellation is mutually agreed upon between the parties and in the event of cancellation of order, the cancellation charges are leviable; the plaintiff along with acceptance letter had forwarded the cheque bearing no.54586 dated 25.11.1988 amounting to Rs.1,00,000/- which was accepted by the defendant resulted in the lawful agreement/contract between the parties; the plaintiff has also paid Rs.7,00,000/- from February, 1989 onwards to the defendant vide seven cheques bearing nos.80914 to 80920; the defendant despite the receipt of Rs.8,00,000/- did not make the delivery of equipments; the plaintiff has also paid Rs.2,46,400/- vide cheque bearing no.9595 dated 21.06.1989 for fabrication and delivery of Medium Frequency Induction Furnance; the procurement of furnance by the plaintiff was subject to the 4 grant of loan by ICICI for which the plaintiff has given the undertaking to the defendant to be forwarded to the ICICI but the defendant has failed to do so despite the fact that ICICI granted the period upto January, 1990 for the grant of loan; the plaintiff thereafter has made attempt to get financial assistance from IFCI; the defendant started demanding further advance without doing any work; the plaintiff has agreed to increase the price of finance vide letter dated 11.12.1990 by Rs.1,00,000/-; the plaintiff has demanded the furnance vide letter dated 17.12.19900 but the defendant did not take any step and only wanted 25% advance; the defendant vide letter dated 28.12.1990 insisted to change the terms which were not acceptable by the plaintiff; the defendant vide letter dated 07.05.1991 demanded further advances and vide letter dated 03.08.1991 has demanded additional charges; the plaintiff vide letter dated 24.08.1991 asked the defendant to refund the advance with reasonable rate of interest and treated contract as cancelled; the plaintiff vide letter dated 23.09.1991 again intimated the defendant that their demand is not justified and is illegal and uncalled; the plaintiff has written several letters to the defendant but the defendant did not take any step except to send the letter dated 18.11.1991; there were discussions 5 between the plaintiff and defendant in the year 1992-93 but the defendant only changed its stand everytime and did not execute the order; the plaintiff has written several letters dated 06.05.1993, 08.09.1993, 11.11.1993, 02.02.1994, 04.06.1994 and 03.02.1995 but the defendant has failed to complete the job; the plaintiff vide letter dated 15.06.1995 demanded delivery of equipments or the advance be refunded with 24% interest p.a. but the defendant did not refund the advance; the plaintiff has waited for the equipment and kept the contract alive; the plaintiff has also sent the letters dated 18.10.1995, 19.04.1996, 20.10.1997 and 19.11.1997; the defendant vide letter dated 11.12.1997 refused to refund the advance and stated that the contract has became barred by time; the plaintiff has served a legal notice dated 17.03.1998; the defendant despite the service of legal notice did not repay the advance; the defendant is liable to pay the principal amount of Rs.10,40,000/- and interest @ 24% p.a. w.e.f. 01.06.1995 till 30.04.1998 amounting to Rs.7,32,000/- alongwith pendente lite and future interest. The plaintiff has filed the suit and made the following prayer :--
a) Pass decree of Rs.17,48,400/- (Rupees Seventeen Lakhs Forty Eight Thousand and Four Thundered only) with 24% interest per annum from the date of 6 suit pendente lite and future interest till actual realization in favour of the plaintiff and against the defendant.
b) Pass the decree of the cost in favour of the plaintiff and against the defendant.
c) Pass any other decree or order or orders in favour of the plaintiff against the defendant as the Hon'ble Court may think fit and just and in the circumstances of the case.
3. The defendant has filed the written statement. The defendant has alleged that this court has no jurisdiction to entertain the suit as per clause 15 of the General Terms and Conditions of Tender and Sale and the suit can only be filed in the Bombay courts; there is an arbitration clause between the parties as per clause 17 of General Terms and Conditions of Tender and Sale; the suit is barred by limitation; the plaintiff had entered into an agreement dated 14.11.1988 which was modified by letter dated 22.11.1988 and accepted vide letter dated 26.11.1988; the plaintiff had placed order for supply of equipment, components and accessories for three mechanical and two electrical Medium Frequency Induction Melting Furnances type ITM-4/1500 for a total contract price of Rs.71,50,000/- inclusive of CED at the prevailing rates which was accepted by the defendant; the plaintiff has failed to abide by the payment terms both for advance payments and for 7 establishing a letter of credit for the balance payment including 100% taxes and duties; the plaintiff did not honour the financial commitments as mutually agreed upon and has suggested alternative payment terms and delayed the execution of the project; the defendant had informed the plaintiff about the non acceptability of the contract price and asked the plaintiff to agree on the revised contract price in view of escalation of raw material prices; the defendant has written several letters to the plaintiffs which are dated 17.01.1990, 17.02.1990, 09.03.1990, 12.04.1990, 18.04.1990, 20.04.1990, 21.08.1990, 27.12.1990, 07.05.1991 and 03.08.1991; the plaintiff had sent a reply dated 24.08.1991; the defendant had explained the reasons for the escalation of the price and requested the plaintiff for negotiation for revision of price vide letter dated 28.08.1991; the plaintiff did not agree for revised price as such contract stood terminated; the plaintiff after the lapse of 69 months vide letter dated 28.10.1997 requested the defendant to refund the advance alongwith interest which was barred by limitation; the contract dated 14.11.1988 has having a clause for cancellation of order which was amended in pursuance of letter dated 14.08.1989; the plaintiff has failed to make the payment of the amount in terms of contract as such the 8 advance payment made by plaintiff stood forfeited on 31.11.1992; the defendant vide letter dated 14.08.1999 has also confirmed the total contract value of Rs.69,76,000/- but the plaintiff has not complied with its obligation for the payments; the approval given by the ICICI was valid upto18.01.1990 but the plaintiff has not submitted the letter of undertaking pertaining to the ICICI Deferred Payment Scheme; the discussions were also held between the parties on 05.12.1990 and due to that discussion the contract price was revised to Rs.70,76,000/- with advance of 25% and balance contract price with taxes and duties to be covered under the Letter of Credit; the plaintiff has again failed to pay 25% of revised contract price; the defendant vide letter dated 27.12.1990 called upon the plaintiff to release balance advance and establish the Letter of Credit so that the work under the contract can be continued; the defendant has written various letters and also replied the legal notice dated 13.05.1998; the plaintiff is not entitled for the refund of advance which is forfeited. The defendant has controverted other pleas of the plaintiff.
4. The plaintiff has filed the replication wherein reasserted and reaffirmed the previous stand. The plaintiff has pleaded that there was 9 no breach of contract by the plaintiff; the suit is filed within the limitation; the contract was novated vide letter dated 14.08.1989; the time was not the essence of the contract; the defendant has accepted the payment without any protest; the defendant is liable to pay the suit amount.
5. The admission/denial of the documents was conducted on 16.01.2003. The plaintiff has admitted the documents of the defendant which are ExD1 to ExD13. The defendant has admitted documents of the plaintiff which are ExP1 to ExP3.
6. The following issues were framed vide order dated 29.04.2004:--
1. Whether this court has no territorial jurisdiction to try the present case? OPD
2. Whether the suit is barred by limitation? OPD
3. Whether the plaintiff has committed any breach of the contract relating to terms of payment as alleged in the W.S. and if so, whether the defendant was justified in forfeiting the plaintiff's advance of Rs.10,46,000/- in terms of the contract between the parties? OPD
4. To what amount, the plaintiff is entitled to recover form the defendant? OPP
5. Whether the plaintiff is entitled to any interest and if so, on what amount, at what rate and for which period? OPP 10
6. Relief.
7. The plaintiff has examined Sh.Shailender Goel, Manager (Accounts) who tendered his affidavit which is ExP1 and referred the documents which are ExPW1/1 to ExPW1/9; Avinash Garg, Secretary as PW2 who tendered his affidavit which is ExP2 and referred the documents which are ExPW2/1 and ExPW2/2; Sh.Anil Kumar Sinha as PW3 who tendered his affidavit which is ExPW3/A and referred the documents which are ExPW1/1 to ExPW1/9; and Clerk from Punjab National Bank, Ambedkar Marg, Ghaziabad (U.P.) as PW4 who proved the copy of ledger as ExPW4/1 and copy of rate of interest as ExPW4/2.
The plaintiff evidence was closed vide order dated 18.05.2007.
The plaintiff has also furnished the affidavit of Rajeev Kumar, General Manager (Accounts) but the said witness was not produced for examination and is stated to have left the services of the plaintiff. The plaintiff has also produced Shailender Goel in evidence who was examined in chief and partly cross examined. The PW1 Shailender Goel was not produced for further cross examination. The counsel for the defendant has pleaded that the examination in chief and partly cross examination of PW1 Shailender Goel cannot be taken away from the 11 record as substantial cross examination of said witness has already been conducted. Vide order dated 27.02.2007 it was ordered that the issue whether the testimony of PW1 Shailender Goel can be read into evidence shall be decided at the final disposal of the suit. The witness PW1 was not produced by the plaintiff as such, his testimony cannot be washed away from the record. The examination in chief and partly cross examination of the plaintiff shall be read into the evidence. (Reliance placed upon judgment delivered in Sri Rabindra Kumar Dey V State of Orissa, (1976) 4 SCC 233.)
8. The defendant has examined Sh.Sunil Dhar , Assistant Vice President (Sales and Marketing) as DW1 who tendered his affidavit which is ExDW1/A and referred the documents which are ExDW1/1 to ExDW1/32 and ExD1 to ExD13. The defendant evidence was closed vide order dated 09.08.2007.
9. Sh.Shiv Kumar Khurana, Advocate, counsel for the plaintiff and Sh.Rattan K.Singh, Advocate, counsel for the defendant heard. Both the parties have also filed written submissions which are perused. Record perused. The issue wise findings are as under :-- 12
10. Issue no.1 Whether this court has no territorial jurisdiction to try the present case? OPD The defendant has stated that in view of clause 16 of the General Terms and Conditions of Tender and Sale, the jurisdiction to entertain and try the suit lies with the Mumbai Courts. However, during the course of arguments, the counsel for the defendant has conceded that the courts at Delhi has jurisdiction to entertain the suit. Even otherwise from the record, it is appearing that the parties have exchanged their correspondences and had meeting in the Delhi itself. It cannot be said that no part of cause of action has never arisen within the local jurisdiction of Delhi. The issue no.1 is decided in favour of the plaintiff and against the defendant.
11. Issue no.2 Whether the suit is barred by limitation? OPD Issue no.3 Whether the plaintiff has committed any breach of the contract relating to terms of payment as alleged in the W.S. and if so, whether the defendant was justified in forfeiting the plaintiff's advance of Rs.10,46,000/- in terms of the contract between the parties? OPD 13 The plaintiff, a limited company, has required the induction furnance for its manufacturing activities. The defendant vide letter dated 14.11.1988 ExPW3/DX1 has made offer for the supply/quotation of Medium Frequency Induction Melting Furnance. The quotation/offer dated 14.11.1988 ExPW3/DX1 was subject to the terms and conditions of the Tender and Sale and General Terms and Conditions annexed with quotation/offer. Relevant Commercial Terms and Conditions for equipment and components of electric furnance annexed with the quotation/offer ExPW3/DX1 are reproduced as under :--
Terms of Payment 30% of the contract price with the order as down payment and balance 70% of the contract price with 100% of price variation plus 100% taxes, duties, surcharges, incidentals etc. against an irrevocable and divisible Letter of Credit to be established by you in our favour at the time of placement of order. This Letter of Credit should be confirmed without any reserve by an Indian Scheduled Bank (of our approval) allowing partial dispatches and should be valid for a period of 2 months beyond the quoted delivery. The Letter of Credit should be available for utilisation as under -- 20% of the contract price as further down payment on the expiry of half of the delivery period, and balance 14 50% of the contract price with 100% price variation plus 100% taxes, duties, surcharges, incidentals, etc. against submission of usual despatch documents for every partial despatches made to you or on our declaration that the goods are stored to your account, in case the same could not be despatched for reasons beyond our control or at your request.
In case of your not honouring any of the commitments (viz. installment payments and opening of the Letter of Credit/honouring of documents sent through Bank) on the due dates, all payments received by us upto that date will be forfeited in full. We further reserve the right to treat your order as cancelled and demand from you cancellation charges in terms of the clause "Cancellation of Order" after adjusting the payments received and forfeited as above.
All bank charges will be to your account.
Cancellation of Order The contract cannot be cancelled without our written consent and in the case of cancellation, the cancellation charges will be applicable at the rate of 10% of the contract price if cancelled within 2 months from the date of order, @ 20% if cancelled within 2 to 4 months, @ 30% if cancelled within 4 to 5 months and @ 50% if cancelled after 5 months from the date of order.
12. The clause 'Terms of Payment' provides that in case of non honouring of any commitment pertaining to installment payment, opening of Letter of Credit etc. on due dates, all payments received upto that 15 date will be forfeited. As per the clause "Cancellation of Order", the contract cannot be cancelled without the written consent of the defendant and in case of cancellation the other party has to pay the cancellation charges.
13. The defendant after submission of quotation/offer dated 14.11.1988 ExPW3/DX1, in pursuance of discussion held on 15.11.1988, 18.11.1988 and 19.11.1988 has modified the quotation/offer vide letter dated 22.11.1988 ExDW1/2 (ExP1 and ExPW1/1). The clause (4) pertaining to 'Terms of Payment' is reproduced hereinunder:--
4. Terms of Payment:
Alongwith the order you will release to us an advance payment of Rs.16 lakhs (Rs.8 lakhs per furnance). This will be released on 22nd November, 1988.
For the first furnance an additional advance of Rs.5 lakhs will be released in the first week of December, 1988.
For balance contract price for both orders plus 100% taxes and duties you will open a confirmed, divisible and irrevocable Letter of Credit in our favour in the first week of December, 1988. A draft of the L/C is enclosed at Annexure-II.16
All other terms and conditions remain
unchanged.
14. The perusal of 'Termsof Payment' reflects that the plaintiff was to release the advance payment of Rs.16,00,000/- i.e Rs.8,00,000/-
per furnance on 22.11.1988 and thereafter the plaintiff has to release additional advance of Rs.5,00,000/- for first furnance in the first week of December, 1988. It was further agreed upon between the parties that for balance contract price plus 100% taxes and duties, the plaintiff was to open a confirmed, divisible and irrevocable Letter of Credit in favour of defendant in the first week of December, 1988. The defendant has also enclosed a draft of Letter of Credit. The other terms and conditions of the quotation/offer dated 14.11.1988 ExPW3/DX1 remain unchanged. The plaintiff has accepted the offer vide letter dated 26.11.1988 ExD3. It was stated in letter dated 26.11.1988 Ex.D3 that the total price of two ITM-4/1500 KW furnances plus 1 additional cucible will be Rs.71,50,000/- and any increase/ decrease in the excise duty due to statutory changes shall go to the account of the plaintiff. It was also agreed upon between the parties in respect of price variation that except 17 for the statutory changes, the price shall remain firm. All the other conditions including the technical specification cited as per ExPW3/DX1 dated 14.11.1988 remain unchanged. The contract was concluded between the parties for supply of Medium Frequency Induction Furnance in terms of quotation/offer dated 14.11.1988 ExPW3/DX1 after delivery of letter dated 26.11.1988 Ex.D3.
15. The plaintiff has paid Rs.1,00,000/-vide cheque no.54586 dated 25.1.1988 alongwith letter dated 26.11.1988 ExD3. The plaintiff subsequently has also paid Rs.7,00,000/- from February, 1989 onwards through different cheques. The said payments are not disputed by the defendant.
16. The defendant has requested to plaintiff vide letter dated 25.03.1989 ExPW1/2 (ExP2) to release the advance payment and also stated therein that due to the non payment of advance, there might be delay in the execution of the order. The defendant has also proposed to increase the price. The defendant vide letter dated 15.06.1989 ExDW1/3 written in reference to letter dated 25.03.1989 ExPW1/2 (ExP2) has agreed to limit the increase in prices to 9% increasing the revised contract price to Rs.77,93,500/- from Rs.71,50,000/-. The plaintiff has to 18 pay 15% of the contract price as advance and balance 85% would be arranged under Deferred Payment Scheme of ICICI. The plaintiff has amended the order vide letter dated 23.06.1989 ExPW1/D2 for supply of 2 crucibles with 2 power packs instead of 3 crucibles and 2 power packs as earlier agreed upon. The contract price was resettled at Rs.69.76 lacs which also included 9% variation as per terms of order dated 15.06.1989 ExDW1/3. The plaintiff has paid Rs.2,46,000/- vide cheque no.95950 to make advance up to 15% of the revised contract price as per terms of letter dated 15.06.1989 ExDW1/ 3. The PW1 during the cross examination has also admitted that the plaintiff vide letter dated 23.06.1989 ExPW1/D2 has sought to amend certain terms of credit transaction and has also agreed to increase the price by 9%.
17. It is apparent that in pursuance of quotation/offer dated 14.11.1988 ExPW3/DX1, the plaintiff has to make the payment of 25% advance payment and remaining balance payment of the contract price along with taxes and duties was to be made by opening the Letter of Credit. The Letter of Credit has never been opened by the plaintiff in favour of the defendant. The PW1 in the cross examination has admitted that till August, 1989 the plaintiff has not opened the Letter of Credit in 19 favour of the defendant. The plaintiff has to arrange 85% balance payment under the Deferred Payment Scheme of ICICI bank in pursuance of letters dated 15.06.1989 ExDW1/3 and dated 23.06.1989 ExPW1/D2. The PW1 in cross examination has admitted that till August 1989, the plaintiff has not availed the deferred payment loan from ICICI bank to pay the agreed sale consideration. The plaintiff has pleaded that the defendant has to arrange finance from the financial institutions while the defendant has alleged that it was not a contractual obligation for the defendant to arrange finance for the payment of sale consideration. The ICICI has sanctioned a loan under Deferred Payment Scheme vide intimation dated 18.07.1989 ExDW1/4. The defendant vide letter dated 26.07.1989 ExDW1/5 has forwarded the sanction of ICICI dated 18.07.1989 ExDW1/4 to the plaintiff. The plaintiff has admitted the letter dated 26.07.1989 ExDW1/5 while admitting the letter dated 05.08.1989 ExD5 during admission/denial of documents. The defendant has requested the plaintiff vide letter dated 05.08.1989 ExD5 for sending the letter of undertaking from its banker for the completion of balance formalities with ICICI bank. The plaintiff has not availed the Deferred Payment Scheme of ICICI bank despite the other letters written by the 20 defendant to the plaintiff for furnishing the relevant documents including the Letter of Undertaking.
18. The plaintiff vide letter dated 23.06.1989 ExPW1/D2 has revised the contract price to Rs.69.76 lacs including 9% variation and also released the further payment of Rs.2,46,400/- to make the advance upto 15% of the revised contract price. The plaintiff vide letter dated 23.06.1989 ExPW1/D2 had novated the agreement dated 26.11.1988 ExD3. The agreement dated 26.11.1988 ExD3 was again novated vide letter dated 14.08.1989 ExDW1/15. The plaintiff has also admitted that the agreement dated 26.11.1988 was novated vide letter dated 14.08.1989 ExDW1/15. The stipulations as to the payment and cancellation of order contained in agreement dated 14.08.1989 ExDW1/15 are reproduced hereinunder:--
Terms of Payment (A) 15% of the contract price as advance Rs.10,46,400/- as advance alongwith the order. (We confirm having received this amount vide your various cheques.) (B) Balance 85% of the contract price plus taxes, price variation, levies, surcharges, etc. to be covered under ICICI deferred payment scheme subject to your eligibility and approval from ICICI.21
A Letter of Undertaking from your Bankers (a scheduled Indian Bank) shall be furnished by you.
The letter of undertaking to be furnished within one month of receipt of clearance from ICICI for covering this order under deferred payment scheme.
In case of your not honouring any of the commitments, all payments made by you shall be forfeited in full. We further reserve the right to treat your order as cancelled and demand from you Cancellation Charges in terms of the clause "Cancellation of Order" after adjudicating the payment received and forfeited as above.
All stamp duties and bank charges will be to your account.
19. The perusal of letter dated 14.08.1989 ExDW1/15 reflects that the plaintiff was to pay 15% of the contract price as advance which was infact paid by the plaintiff and the said payment was also confirmed by the defendant. The plaintiff was to pay balance 85% of the contract price plus taxes and further charges under the ICICI Deferred Payment Scheme. The plaintiff has never availed the ICICI deferred payment scheme rather the plaintiff has made efforts to arrange the finance from IFCI. The defendant vide letters dated 12.10.1989, 13.12.1989 and telex message dated 8.01.1990 ExDW1/16 (colly) has requested the 22 plaintiff to submit the letter of undertaking from its banker's. The said letters are not disputed by the plaintiff in the cross examination. It was agreed between the parties as per agreement dated 14.08.1989 ExDW1/15 that in case of non honouring of any commitment, all payments shall be stand forfeited in full and the plaintiff was also liable to pay the cancellation charges. The plaintiff has never alleged any fraud, concealment of facts or that the agreement ExDW1/15 was against the public policy. The plaintiff has never raised any objection regarding the validity and illegality of agreement dated 14.08.1989 ExDW1/15.
20. The defendant again vide letter dated 21.08.1990 has requested and informed the plaintiff regarding the delay in full filing the terms of payments of the contract. It was also intimated to the plaintiff that there is a big rise in the price of raw material. The defendant has made the request for increase in the price of contract. The defendant further requested the plaintiff vide letter dated 27.12.1990 ExDW1/22 to release the full advance and to establish the required Letter of Credit without any further delay. The plaintiff has made the advance payment of 15% of the contract price in pursuance of letter/agreement dated 14.08.1989 ExDW1/15 but the plaintiff has never opened the Letter of 23 Credit in pursuance of letter dated 26.11.1988 ExD3 to arrange the balance sale consideration under the Deferred Payment Scheme of ICICI in pursuance of novated agreements dated 15.06.1989 ExDW1/3 and dated 14.08.1989 ExDW1/15. The defendant again requested the plaintiff to do the needful vide letter dated 05.01.1991 ExDW1/24. The defendant again vide letter dated 09.05.1991 ExD9 requested the plaintiff to clear the order for manufacturing.
21. The plaintiff has pleaded that the defendant vide letter dated 03.08.1991 ExDW1/27 has asked for the enhancement of the contract price which was not agreed upon between the parties. The perusal of letter dated 03.08.1991 ExDW1/27 sent by the defendant to the plaintiff reflects about intimation given to the plaintiff that the plaintiff has not honoured contractual commercial obligation as per the previous agreed terms. The defendant has requested the plaintiff to re-fix the contract price at Rs.83,00,000/- inclusive of Central Excise Duty. The plaintiff has replied letter dated 03.08.1991 ExDW1/27 vide reply dated 24.08.1991 ExPW1/4 (ExD10). The plaintiff vide letter dated 24.08.1991 ExPW1/4(ExD10) has intimated to the defendant that the revision of the price subsequent the agreement dated 14.08.1989 ExDW1/15 is not 24 justified. It was also stated therein that if it is difficult for defendant to honour the commitment at the firm price, then the defendant was asked to return the amount alongwith interest. The plaintiff mentioned therein to treat the contract as cancelled. The relevant portion of the letter dated 24.08.1991 ExPW1/4 (ExD10) is reproduced as under :--
As the prices agreed with you were firm, therefore, the question of revising the same upward is not justified. However, if you feel that you are finding it difficult to honour your commitments at the firm prices, you may return our advance alongwith reasonable interest and may treat our order as cancelled.
22. The defendant has replied the letter dated 24.08.1991 ExPW1/4 (ExD10) vide reply dated 28.08.1991 ExDW1/28. The defendant has requested the plaintiff not to pursue cancellation of order.
The plaintiff has again vide letter dated 03.10.1991 ExD11 expressed its inability to the defendant to revise the upward rates of two induction furnances. The defendant was requested either to honour commitment to supply the furnances at the old rates or to return the advance given to the defendant with interest at a reasonable rate. The defendant earlier has also written a letter dated 18.11.1991 ExDW1/29, which was replied by the plaintiff vide letter dated 04.01.1992 ExD12, to explain the 25 circumstances under which the defendant had approached the plaintiff for revision for the contract price.
23. In light of above discussion, the following facts have emerged:-
-
i) The defendant has made offer/quotation vide letter dated 14.11.1988 ExPW3/DX1 to the plaintiff for the supply of Medium Frequency Induction Furnance;
ii) The offer/quotation ExPW3/DX1 was revised vide letter dated 22.11.1988 ExDW1/2 (ExPW1/1 and ExP1);
iii)The plaintiff vide letter dated 26.11.1988 ExD3 had accepted the revised offer/quotation dated 22.11.1988 ExDW1/2;
iv)The total contract price was agreed upon between the parties was at Rs.71,50,000/-;
v) As per the agreement between the parties, the plaintiff has to make advance payment ofRs.16,00,000/- by 02.11.1988 with additional payment of Rs.5,00,000/-
till first week of December, 1988. The plaintiff was also to open a confirmed, divisible and irrevocable Letter of Credit in favour of defendant in respect of balance contract price plus 100% taxes and duties;
vi)The plaintiff has paid Rs.8,00,000/-to the defendant vide receipts ExDW1/5 to ExDW1/14;
vii)The defendant vide letter dated 25.03.1989 ExPW1/2 proposed to increase the contract price;
26
viii)The defendant vide letter dated 15.06.1989 ExDW1/3 has increased the price by 9% i.e. to Rs.77,93,000/- from Rs.71,50,000/-;
ix)The plaintiff vide letter dated 23.06.1989 ExPW1/D2 has revised the order to 2 Crucibles with 2 power packs from 3 crucibles and 2 power packs and the price was resettled at Rs.69.76 lacs including 9% price variation;
x) The agreement was renovated between the parties vide agreement dated 14.08.1989 ExDW1/15 and out of new agreement dated 14.08.1989 ExDW1/15, the plaintiff was to pay 15% of contract price as advance which infact was paid and the balance 85% of the contract price plus taxes and other charges was to be covered under ICICI Deferred Payment Scheme;
xi)The ICICI vide letter dated 18.07.1989 ExDW1/4 has sanctioned the balance contract price under Deferred Payment Scheme which was intimated to the plaintiff vide letter dated 26.07.1989 ExDW1/5;
xii)The plaintiff was also requested vide letter dated 05.08.1989 ExD5 to arrange the Letter of Undertaking from its banker's for onward transmission to ICICI bank;
xiii)Thereafter various communications were entered upon between the parties for revision of the price and furnishing of letter of undertaking;
xiv)The defendant vide letters dated 27.12.1990 ExDW1/12, 05.01.1991 ExDW1/24, 07.05.1991 ExDW1/ 25, 03.08.1991 ExDW1/27, 09.05.1991 ExD9 has proposed to revise/increase the contract price;
27
xv)The plaintiff vide letters dated 24.08.1991 ExPW1/ 4 (ExD10) and 03.10.1991 ExD11 has refused to revise the price and also asked the defendant to return the advance with reasonable interests.
24. It is admitted by both the parties that on 05.12.1990, the discussions were held between them and out of the discussion total contract price was revised to Rs.70,76,000/- with advance of 25% and balance contract price with taxes and duties to be covered under a Letter of Credit. The DW1 in affidavit Ex.DW1/A deposed that to make up 25% of the revised contract price, the plaintiff was to pay Rs.7,22,600/- within a week. The said facts are not disputes by the plaintiff. The plaintiff himself admitted that the plaintiff has agreed to increase the contract price vide letter dated 11.12.1990 by Rs.1,00,000/- . It means that terms of contract was again resettled between the parties in pursuance of discussion held on 05.12.1990.
25. The defendant vide letter dated 27.01.1992 which is admitted by the plaintiff in the replication, has requested the plaintiff for further negotiations. Thereafter there was no much correspondences between the parties regarding further execution of the contract/work order. The 28 plaintiff has stated that the various letters dated 06.05.1993 ExPW1/7, 08.09.1993, 11.11.1993, 02.02.1994 ExPW1/8, 04.06.1994 and 03.02.1995 were sent to the defendant. The plaintiff further pleaded that the defendant has promised to complete the work and also offered the furnance for inspection. The plaintiff vide letter dated 15.06.1995 ExPW1/9 has demanded the refund of advance. The plaintiff has pleaded that till such time the contract was kept alive. The defendant has denied receipt of letters ExPW1/7 to ExPW1/9. The PW1 in cross examination has admitted that no record is available to show actual despatch of letters ExPW1/7 to ExPW1/9 to the defendant. The plaintiff has further stated that the plaintiff has sent the letters dated 18.10.1996 and 19.04.1996 and 20.10.1997 ExDW1/30 and 29.11.1997 ExDW1/31. The defendant has denied the receipt of letters dated 18.10.1995 and 19.12.1995 but admitted the letter dated 20.10.1997 ExDW1/30 and 29.11.1997 ExDW1/31. The plaintiff has not proved the despatch of letters dated 18.10.1995 and 19.04.1996.
26. The plaintiff in letter dated 20.10.1997 ExDW1/30 not mentioned that the contract is still alive but only mentioned that books of accounts of the plaintiff showing the debit balance of Rs.10,73565.62 ps. 29 in the name of the defendant and asked the defendant to refund the said money. The plaintiff again vide letter dated 29.11.1997 Ex.DW1/31 asked the defendant to make the payment in pursuance of letter dated 20.10.1997 Ex.DW1/30. The defendant vide letter dated 11.12.1997 ExD13, the receipt of which is also not disputed by the plaintiff, intimated the plaintiff that the advance has became time barred and also requested for the payment of cancellation charges.
27. In the backdrop of above facts, the following legal and factual propositions have emerged for consideration:--
i) When the plaintiff treated the contract as cancelled and from which date the limitation has reckoned for filing the suit?
ii) Whether the defendant is entitled for the forfeiture of advance paid by the plaintiff as per cancellation clauses contained in offer/quotation dated 14.11.1988 Ex.PW3/DX1, letter dated 15.06.1989 ExDW1/3 and 14.08.1989 Ex.DW1/15?
28. LIMITATION The Part II of the Limitation Act, 1963 deals with the limitation of suits, appeals and applications. Section 3 deals with the bar of limitation. It provides that every suit instituted after the prescribed period shall be dismissed although the limitation has not been set up as a 30 defence. It is the duty of the court to examine whether the suit has been instituted within the period of limitation and if the suit is filed after the expiry of period of limitation, the court is bound to dismiss the suit although the defence of limitation has not been set up by the defendant. The court is under the bounden duty to consider whether the suit is barred by limitation or not.
The counsel for the plaintiff has argued that there has been correspondences between the parties relating to the execution of the order and the payment of additional charges demanded by the defendant from time to time vide various letters as referred herein above; the contract price could not be finalized despite negotiations, as such the plaintiff has demanded back the advance vide letter dated 20.10.1997 ExDW1/30 and the defendant vide letter dated 11.12.1997 Ex.D13 has refused to return the advance; the period of limitation has started from 11.12.1997 as such the suit is filed within the limitation; the defendant has never intimated forfeiture of the amount before 11.12.1997 vide letter ExD13. The counsel for the plaintiff has referred Hind Construction V State of Maharashtra, AIR 1979 SC 720 wherein it 31 was observed that the contract remains alive till cancelled by the defendant; and Bank of Baroda V S.K.Aggarwal, 1996 AD (Delhi) 203.
The counsel for the defendant has argued that the suit is barred by limitation in terms of novated agreement dated 14.08.1989 Ex.DW1/15 which is also admitted by the plaintiff in paragraph no.3 of the replication; the plaintiff vide letter dated 24.08.1991 Ex.PW1/4 (ExD10) and 03.10.1991 Ex.D11 had cancelled the contract and asked for the refund of the amount; thereafter no new contract came into existence between the parties, as such, the suit is barred by limitation; and the suit is covered under Article 47 of the Limitation Act, 1963.
29. Article 47 of the Limitation Act, 1963 prescribed the period of 3 years for filing a suit for money paid upon an existing consideration which afterward failed, from the date of failure of contract. For the application of Article 47, the suit must be for money which has not been paid by the plaintiff to the defendant. The money must have been paid or a consideration which was in existence at the time of payment and thereafter the consideration should have been failed. If these ingredients are established then the Article 47 is applicable. 32
30. The defendant has made offer/quotations for supply of Medium Frequency Induction Furnance vide letter dated 14.11.1988 Ex.PW3/DX1 and the contract was finalized vide letter dated 26.11.1988 ExD3 after modification vide letter dated 22.11.1988 Ex.DW1/2. The plaintiff has paid Rs.10,46,400/-vide receipts ExDW1/6 to Ex.DW1/14. The discussions were held between the parties for revision of price as the defendant has demanded the revision of price vide letter dated 25.03.1989 Ex.PW1/2. The plaintiff vide letter dated 23.06.1989 Ex.PW1/D2 has agreed to increase the price by 9% variation and the total consideration value was resettled at Rs.69.76 lacs. The novated agreement dated 14.08.1989 Ex.DW1/15 was also executed between the parties. The plaintiff has paid 15% of the contract price as advance, but did not pay the balance 85% of the contract price plus taxes and duties under ICICI Deferred Payment Scheme. Thereafter the defendant has written various letters dated 27.12.1990 Ex.DW1/22, 28.12.1990 Ex.DW1/23, 05.01.1991 Ex.DW1/24, 07.05.1991 Ex.DW1/25, 09.05.1991 Ex.D9 and 03.08.1991 Ex.DW1/27 etc. for revision of price. The plaintiff has refused to revise the price upward vide letter dated 24.08.1991ExPW1/4 (Ex.D10) and 03.10.1991 Ex.D11 and asked for the 33 return of advance with reasonable interest. The plaintiff has proposed to cancel the contract vide letters dated 24.08.1991 ExPW1/4 (Ex.D10). The defendant has not accepted the cancellation of the contract and vide letter dated 27.01.1992 requested the plaintiff for negotiations. As per the cancellation clause contained in Ex.PW3/DX1, the contract cannot be cancelled without the written consent of the defendant and further in case of cancellation, the plaintiff was liable to pay the cancellation charges which were modified vide letter dated 14.08.1989 Ex.DW1/15. It is not the case of the defendant that the defendant has ever cancelled the contract either in terms of offer/quotations dated 14.11.1988 Ex.PW3/DX1 or vide novated agreement dated 14.08.1989 Ex.DW1/15. It is the case of the defendant that it was not within the discretion of the plaintiff to cancel the contract and the contract can only be cancelled with the written consent of the defendant. The defendant for the first time vide letter dated 11.12.1997 ExD13 invoked cancellation clause and meaning thereby that the contract was cancelled only on 11.12.1997 vide letter ExD13. The suit was instituted on 29.01.1998. The suit is within the limitation. The Issue no.2 is decided in favour of the plaintiff and against the defendant.
34Forfeiture of advance paid by the plaintiff in terms of cancellation clause as per offer/quotation dated 14.11.1988 Ex.PW3/DX1 and 14.08.1989 Ex.DW1/15?
The defendant had submitted offer/quotation vide letter dated 14.11.1988 Ex.PW3/DX1 to the plaintiff for supply of Medium Frequency Induction Furnance. The said offer/quotation was accepted by the plaintiff vide letter dated 26.11.1988 Ex.D3 with modification vide letter dated 22.11.1988 Ex.DW1/2. As per the terms of payment settled between the parties contained in letter dated 22.11.1988 Ex.DW1/2, the plaintiff was to make advance payment of Rs.16,00,000/- upto 22.11.1988 and additional payment of Rs.5,00,000/- till the first week of December, 1988. It has been further agreed that the balance contract price and the 100% taxes and duties shall be paid by opening a confirmed, divisible and irrevocable Letter of Credit in favour of the defendant in the first week of December, 1988. The offer/quotation dated 14.11.1988 Ex.PW3/DX1 has contained the forfeiture and cancellation clauses. The forfeiture clause provides that in case of default in any commitment on the due date in respect of installment payments, opening of Letter of Credit etc., all the payments received by the defendant up to 35 that date shall be forfeited in future. The plaintiff was also liable to pay the cancellation charges as per clause "Cancellation of Order". The "Cancellation of Order" clause provides that the contract cannot be cancelled without the written consent of the defendant and in case of cancellation the cancellation charges are to be payable by the plaintiff. The term of payments was modified vide letter dated 22.11.1988 Ex.DW1/2 which was accepted by the plaintiff vide letter dated 26.11.1988 Ex.D3. The plaintiff has made the payment of Rs.8,00,000/- on different dates vide receipts Ex.DW1/6 to Ex.DW1/14. The defendant vide letter dated 25.03.1989 Ex.PW1/2 has requested the plaintiff for increase of the contract price. The defendant again vide letter dated 15.06.1989 Ex.DW1/3 proposed to revised the price from Rs.71,50,000/- to Rs.77,93,500/- with 9% variation with agreement of the plaintiff. The terms of the payment were settled between the parties and the plaintiff has to pay advance payment of 15% of the contract price and the balance 85% contract price was to be paid under the Deferred Payment Scheme of ICICI Bank. The plaintiff vide letter dated 23.06.1989 Ex.PW1/D2 settled the contract price at Rs.69.76 lacs including 9% variation after modification of supply order. The plaintiff has infact paid 36 the 15% of the contract price as advance. The defendant has intimated the plaintiff vide letter dated 26.07.1989 Ex.DW1/5 about sanction of balance 85% contract price under Deferred Payment Scheme as per intimation dated 18.07.1989 Ex.DW1/4. The plaintiff never availed said facility. The agreement was novated vide letter dated 14.08.1989 Ex.DW1/15. As per letter/ agreement dated 14.08.1989 Ex.DW1/15, 15% of the contract price was to be paid as advance which infact was paid by the plaintiff and the balance 85% of the contract price plus taxes and other duties was to be covered under ICICI deferred payment scheme. The agreement dated 14.08.1989 Ex.DW1/15 also contained forfeiture clause which provides that in case of default in the commitments, all the payments made by the plaintiff shall be forfeited in full. The defendant has also reserved the right to cancel the order and also to demand the cancellation charges from the plaintiff. Thereafter several correspondences were exchanged between the parties regarding the honour of the agreement dated 14.08.1989 Ex.DW1/15. The defendant has written various letters to the plaintiff such as 27.12.1990 Ex.DW1/22, 05.01.1991 Ex.DW1/24, 07.05.1991 Ex.DW1/25, 09.05.1991 Ex.D9 for making the payment as per the 37 agreement dated 14.08.1989 Ex.DW1/15. The plaintiff has also written letters to the defendant such as dated 28.12.1990 Ex.DW1/23, dated 27.04.1991 Ex.D8. The discussions were also held between the parties on 05.12.1990 and out of that discussion the plaintiff has enhanced the contract price by Rs.1,00,000/- and the contract price was revised to Rs.70,76,000/- with stipulation of advance of 25% and the balance contract price with taxes and duties was to be covered under Letter of Credit. The plaintiff has only made the payment of Rs.10,46,000/- and was required to make further payment of Rs.7,22,600/- to make up to 25% of the total contract price. The plaintiff has not paid Rs.7,22,600/- to make up 25% of the revised contract price and also not opened the irrevocable Letter of Credit for the payment of balance contract price with 100% taxes and duties. The plaintiff in pursuance of letter dated 03.08.1991 Ex.DW1/27, issued a letter dated 24.08.1991 ExD10 (Ex.PW1/4) wherein the plaintiff had expressed his inability to revise the price and further asked the defendant to refund the advance alongwith reasonable interests. The plaintiff again vide letter dated 03.11.1991 Ex.D11 further reiterated its demand for the return of advance from the defendant. The plaintiff again vide letter dated 20.10.1997 Ex.DW1/31 38 had intimated the defendant that the books of account are showing a debit balance of Rs.10,73,565.62 ps. in the name of defendant as the defendant has not supplied the furnances. The defendant was requested to refund the amount of Rs.10,73,565.62 ps. The defendant vide letter dated 11.12.1997 ExD13 refused to refund the advance and also requested to pay the cancellation charges.
32. In the backdrop of these facts, the issue arises for consideration is whether the defendant was entitled to forfeit Rs.10,46,000/- paid by the plaintiff as advance in pursuance of forfeiture clause contained in offer/quotation dated 14.11.1988 Ex.PW3/DX1, letter/agreement dated 14.08.1989 Ex.DW1/15 and in pursuance of discussion held on 05.12.1990.
33. The counsel for the plaintiff has argued that the defendant has never invoked forfeiture clause in terms of offer/quotation dated 14.11.1988 Ex.PW3/DX1 and 14.08.1989 Ex.DW1/15 till the issuance of letter dated 11.12.1997 Ex.D13; the defendant never treated the non- payment of balance contract price as a ground for initiating any action; the dispute was regarding revision of the contract price. The counsel for the plaintiff has referred letters issued by the defendant such as dated 39 17.11.1990 Ex.DW1/19, 30.11.1990 Ex.DW1/20, 18.12.1990 Ex.DW1/21 and 27.12.1990 Ex.DW1/22. The counsel for the plaintiff has further argued that the plaintiff vide letter dated 28.12.1990 Ex.DW1/23 has demanded the layout plan of the machinery; the defendant vide letter dated 05.01.1991 Ex.DW1/24 has informed the plaintiff about furnishing of layout drawings; vide letter dated 05.01.1991 Ex.DW1/24, the plaintiff was informed by the defendant that the defendant is awaiting the commercial clearance for the order which is long due and the defendant has expressed his desire to complete the order; the defendant has requested for the increase of price but the advance was never forfeited till 11.12.1997 vide letter Ex.D13; the defendant has not suffered any loss and there is no evidence of suffering any loss by the defendant as such the plaintiff is not entitle to forfeit the advance paid by the plaintiff; the defendant has intended to transfer the furnance of the other parties to the plaintiff vide letter dated 12.04.1990 Ex.DW1/ 17 (colly); the plaintiff has never paid the earnest money as argued by the defendant but only the advance payment was made to the defendant which can never be forfeited. The counsel for the plaintiff has relied upon Fateh Chand V Bal kishan Dass, AIR 1963 SC 1405; Maula Bux V UOI, AIR 40 1970 SC 1955; Greenhills Exports (Pvt.) Ltd. Mangalore and others V Coffee Board, Bangalore, (2001) (3) Arbitration Law Reporter 307 (Karnataka )(DB); Essban Paints (P) Ltd.V UOI, 2002(1) Arbitration Law Reporter 51; Haryana Telecom Ltd. V Union of India and Anr. 2006 (2) Arb.293 (Delhi) and ONGC V Saw Pipes , (2003) 5 SCC 705.
The counsel for the defendant has argued that the plaintiff has paid Rs.10,46,000/- which was having attribute of "earnest money" as per the judgment given in Maula Bux V UOI, AIR 1970 SC 1955; the plaintiff was reminded various times by the defendant for the revision of contract price due to the escalation of raw material vide letters dated 15.09.1989 Ex.DW1/3, 25.03.1989 Ex.P2 etc.; the defendant is entitled to forfeit Rs.10,46,000/- paid by the plaintiff in terms of offer/quotation dated 14.11.1988 Ex.PW3/DX1 and dated 14.08.1989 Ex.DW1/15; the price was revised in the month of December 1990 and even thereafter the plaintiff has neither paid 25% of the revised contract price as down payment nor established any Letter of Credit despite letter dated 27.12.1990 Ex.DW1/22; the defendant vide letter dated 07.05.1991 Ex.DW1/25 informed the plaintiff about the forfeiture of amount already 41 paid by the plaintiff and as such the concluded contract of December, 1990 came to an end by operation of forfeiture clause; forfeiture of the earnest money was justified and was within contemplation of charges as pre-estimated damages. The counsel for the defendant mainly relied upon the judgment Oil and Natural Gas Corporation Ltd. V Saw Pipes Ltd., (2003) 5 SCC 705. The counsel for the defendant has relief upon Tribal Co-operative Marketing Development Federation of India Ltd.V Auro Industries Limited and Anr. OMP 178/2000, New Venus Cooperative Group Housing Society Ltd. V R.K.K.Printers and Ors. CS(OS) 491/1995, Saurabh Prakash V DLF Universal Ltd. (2007), 1 Supreme Court Cases 228, Ashwini Kapoor & Anr. V Union of India & Anr. CWP No.3944 of 1994 to justified the forfeiture of the advance order by the plaintiff to the defendant and also to highlight distinction between security and earnest money.
34. In case of Saurabh Prakash V DLF Universal Ltd. (2007), 1 Supreme Court Cases 228, the Supreme Court has discussed the distinction between security and the earnest money. It observed as 42 under :--
42.The distinction between a security and an earnest money has also been pointed out by this Court in Maula Bux V Union of India in the following terms :(SCC pp. 557-58, para 4) "4. Under the terms of the agreement the amounts deposited by the plaintiff as security for performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in the Dictionary of English Law at p.689: 'Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds.' As observed by the Judicial Committee in Kunwar Chiranjit Singh V Har Swarup:
'Earnest money is part of the purchase price when the transaction goes forward; it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee.' In the present case the deposit was made not of a sum by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits 43 cannot be regarded as earnest money."
35. In case of Ashwini Kapoor & Anr. V Union of India & Anr. CWP No.3944 of 1994, the High Court has justified the forfeiture of 25% of auction price deposited by the petitioner as earnest money in view of the failure of the petitioner to pay balance 75% price. It was observed as under :--
From the above extract it will be seen that the judgment proceeded on the basis as to whether 25% by way of earnest way a genuine pre- estimate of the loss flowing from breach of contract. It was also felt that customary deposit by way of earnest was 10% which would be a reasonable amount to forfeit. While discussing the question of reasonableness, we have noted that deposit of 25% of the auction price is customary in this country and has been upheld by Courts. Further in the facts of the present case the 25% deposit is as per the norms led down in statutory rules to which there is no challenge. Therefore, this case cannot be of any assistance to the petitioner in the present case.
36. To appreciate the controversy between the parties, it is necessary to reproduce Section 73 and 74 of the Contract Act, 1872 which reads as under :-
73.Compensation for loss or damage caused by breach of contract.-- When a contract has been broken, the party who suffers by such 44 breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.--When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
74.Compensation for breach of contract where penalty stipulated for -(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 be, the penalty stipulated for.
45
37. One cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 exempts him from such responsibility and enables him to claim compensation in spite of his failure to prove the actual extend of the loss or damage, provided of course he establishes the basic requirement for award of 'compensation' viz. the fact that he has suffered some loss or damage. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of 'legal injury' having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Section 73 and 74. Section 74 is only supplementary to Section 73 and it does not make any departure from the principle behind Section 73 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of Section 73. The words in Section 74 'whether or not actual damage or loss is proved to have been caused thereby' have been employed to underscore the departure deliberately 46 made by the Indian Legislature from the complicated principles of English Common Law and also to emphasis that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. That is why Section 74 deliberately states that what is to be awarded is reasonable compensation. In a case when the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for; there is nothing to recompense, satisfy or make amends. Therefore, he will not be entitled to compensation.
38. The words 'whether or not actual damage or loss is proved to have been caused thereby' mean that the person aggrieved by the breach is not required to prove actual loss or damage suffered before claiming a decree, and the court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract; and irrespective of any actual damage, even if it may be smaller then the sum stipulated. When the section says that an aggrieved party is entitled to compensation whether actual damage is proved to have been 47 caused by the breach or not it merely dispenses with the proof of 'actual loss or damage'. It does not justify the award of compensation whether a legal injury has resulted in consequence of the breach or not, because compensation is awarded to make good the loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
39. In case of Maula Bux V UOI, AIR 1970 SC 1953 it was held as under:--
Forfeiture of reasonable amount paid as earnest money does not amount to imposing a penalty but if forfeiture is in the nature of penalty, Section 74 applies. Thus in every case of breach of contract the aggrieved person is not required to prove actual loss of damage suffered by him and the court is competent to award reasonable compensation, if no actual damages are proven to have been suffered in consequence of the breach of contract.
40. Thus where the court is unable to assess the compensation, the sum named by the parties if it is recorded as a genuine estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum names is in the nature of a penalty. Where loss is terms of money can be determined, the party claiming compensation must prove the loss suffered by him.
48
41. In Fateh Chand V Bal kishan Dass, AIR 1963 SC 1405 it was observed that Section 74 merely dispenses with the proof of "actual loss or damage", but it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, as compensation for breach of contract can be awarded to make good the loss or damage which naturally arose in the usual course of things or which the party new when they made the contract to be likely to result from the breach. It was held as under:--
Section 74 of the Indian Contract Act is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
( Para 8 ) 49 The measure of damage in the case of breach of a stipulation by way of penalty is by S.74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with poof of "actual loss or damage"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
( Para 10 )
42. The legal proposition emerges from the decision given by the Apex Court in Maula Bux and Fateh Chand is that the Section 74 of the Contract Act, 1872 merely dispenses with the proof of actual loss or damage but it does not justify the award of compensation when in consequence of the breach no legal injury at all is resulted. 50
43. In case of Oil and Natural Gas Corporation Ltd. V Saw Pipes Ltd., (2003) 5 SCC 705 relied upon by the counsel for the defendant, an order was placed for supply of steel plates but the material was not delivered within time and extension was granted with the specific stipulation that amount equivalent to liquidated damages for delay in supply of pipes would be recovered from the supplier which was so done. The dispute was referred for arbitration. The tribunal held that it was for the suffering party to establish that the loss has been caused because of breach committed by the supplier within the prescribed time limit and the amount so held with wrongly withheld. The case before the Supreme Court . The question which the Supreme Court has examined was whether the party claiming compensation must prove the loss suffered by him. It was held as under :--
64.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 proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such 51 breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach.
66.In Maula Bux case19 the Court has specifically held that it is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree and the court is competent to award reasonable compensation in a case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. The Court has also specifically held that in case of breach of some contracts it may be impossible for the court to assess compensation arising from breach.
68. From the aforesaid discussions, it can be held that:
1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.
2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is proved in Section 73 of the Contract Act.52
3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree.
The court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract.
4) In some contract/s, it would be impossible for the court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation.
44. The High Court of Delhi in case of Haryana Telecom Ltd. V Union of India and Anr. 2006 (2) Arbitration Law Reporter 293 (Delhi) has discussed all the cases referred herein above. In this case, the department of Telecommunication, Union of India/respondent floated tender for supply of certain material which was infact supplied by the petitioner. The disputes have been arisen between the parties on account of failure of the petitioner to make the additional supply. The respondent has invoked the bank guarantee. The Arbitrator was appointed who made and published award dated 17.12.1999. The petition u/s 34 of the Arbitration and Conciliation Act, 1996 was filed. The 53 issue before the court was that whether the damages could have been awarded only if the loss has been suffered. The Arbitrator although recorded the finding that no damages were suffered by the respondent but despite this fact had allowed the damages. The court has observed that the amount was in the nature of the penalty and the arbitrator has failed to appreciate the distinction between the amount stipulated by way of penalty. It was observed that in case the amount stipulated is by way of penalty, proof of damages is required. It was held as under:--
24.The judgment in Oil and Natural Gas Corporation Ltd. vs. Saw Pipes' case (supra), also makes clear this question of law by referring to the earlier judgments and to that extent there is force in the contention of learned counsel for the petitioner that in case the amount stipulated is by way of penalty, proof of damages is required. The only question, thus, to be considered is whether in the present case the amount stipulated is by way of penalty or a genuine pre-estimate of damages.
25. In my considered view, the stand of the respondent itself shows that the amount is really in the nature of penalty. This is how the respondent has treated the same and so as to the arbitrator, but despite this fact the arbitrator has failed to appreciate the distinction between an amount stipulated by way of penalty.
45. The plaintiff has paid Rs.10,46,000/- as advance towards the 54 sale consideration. It was not paid as earnest money. It is not the case of the defendant that they have actually suffered losses. Even no counter claim is made by the defendant. The defendant even after the receipt of Rs.10,46,000/- as 15% of contract price in pursuance of agreement dated 14.08.1989 Ex.DW1/ 15 has not commenced the work. In the various letters written by the defendant to the plaintiff, there is not a single whisper about the commencement of work placed by the plaintiff. The defendant has never cancelled the contract or forfeited the amount on the ground of non payment of advance money or failure of the plaintiff to open the Letter of Credit to cover the balance contract price and 100% taxes and duties. Even the plaintiff vide letter dated 24.08.1991 Ex.PW1/4 (ExD10) had asked the defendant to pay the advance but even then the defendant has not forfeited the amount and vide letter dated 28.08.1991 Ex.DW1/28 requested the plaintiff not to pursue with the cancellation oder. The only dispute raised by the defendant was regarding the revision of contract price. Infact the contract price was already revised in pursuance of discussion held on 05.12.1990. The plaintiff has agreed to increase the contract price by 1,00,000/- vide letter dated 11.12.1990. However the plaintiff has not 55 paid the 25% of the contract price and has also not opened the Letter of Credit. But the defendant has not alleged that the defendant has treated Rs.10,46,000/- as pre-estimated damages in case of breach of contract. There is no evidence to prove that the defendant has actually suffered any loss for which the defendant is entitled for the reasonable compensation in terms of Section 74 of the Contract Act, 1872. Advance paid by the plaintiff was not accepted by way of penalty despite forfeiture and cancellation clauses in agreements i.e Ex.PW3/X1 and Ex.DW1/15. The defendant is not entitled to forfeit the advance paid by the plaintiff. The defendant in letter dated 12.1.1997 Ex.D13 has mentioned that they had to dispose of the material as scrap but there is no evidence to substantiate this fact. Even vide letter dated 11.12.1997 ExD13 advance paid by the plaintiff was not forfeited but proposed to be adjusted towards the cancellation charges. The defendant has never intended to forfeit advance of Rs.10,46,000/- paid by the plaintiff. The defendant is not entitled to forfeit advance of Rs.10,46,000/-. The issue no.3 is decided in favour of the plaintiff and against the defendant.
46. Issue no.4 To what amount, the plaintiff is entitled to recover form 56 the defendant? OPP In view of discussion on issues no.2 and 3, the plaintiff is entitled for the recovery of Rs.10,46,000/- paid by the plaintiff as advance to the defendant. The issue no.4 is decided in favour of the plaintiff and against the defendant.
47. Issue no.5 Whether the plaintiff is entitled to any interest and if so, on what amount, at what rate and for which period? OPP The plaintiff to prove the rate of interest to be levied upon the defendant has examined PW4 who proved that the bank has charged interest @ 16.23% from the plaintiff. The PW4 has proved the copy of register as Ex.PW4/1 and rate of interest as Ex.PW4/2. The plaintiff is claiming the interest for the period w.e.f. 01.06.1995 @ 24% p.a. However considering the rate of interest prevailing in the market and even the fact that the plaintiff itself has failed to fulfill its obligation under the agreement, the interest of the justice would be achieved if the defendant is directed to pay simple interest @ 9% p.a from 11.12.1997 when the defendant informed the plaintiff to forfeit the advance of 57 Rs.10,46,000/- paid by the plaintiff. The plaintiff is entitled for simple interest @ 9% p.a w.e.f. 11.12.1997. Issue no.5 is decided accordingly.
48. Relief In view of findings on issues no.1 to 5, the suit of the plaintiff is decreed and a decree of Rs.10,46,000/- is passed in favour of the plaintiff and against the defendant alongwith simple interest @ 9% p.a.w.e.f. 11.12.1997 till date of decree and from date of decree till realization and proportionate cost. The decree sheet be prepared accordingly. File be consigned to the record room. Announced in the open court (Dr.Sudhir Kumar Jain) Dated : 19.07.2008 Additional District Judge, Delhi 58 19.07.2008.
Present : None for parties.
Vide separate judgment, the suit of the plaintiff is decreed and a decree of Rs.10,46,000/- is passed in favour of the plaintiff and against the defendant alongwith simple interest @ 9% p.a.w.e.f. 11.12.1997 till date of decree and from date of decree till realization and proportionate cost. The decree sheet be prepared accordingly. File be consigned to the record room.
(Dr.Sudhir Kumar Jain) Additional District Judge, Delhi