Indian Kanoon - Search engine for Indian Law

"85. ....... In view of BSNL vs. Reliance Communication Ltd. the dominant test is "pre-estimate of reasonable compensation". If there is pre-estimate of reasonable compensation, Section 74 of the Indian Contract Act is not violated but if there is no pre-estimate of reasonable compensation, Section 74 of the Indian Contract Act is violated and as such the clause cannot be treated for liquidated damages and such clause is bound to be treated as penalty for ensuring performance. Such penal clause cannot be enforced and hence such clause would be in conflict with the provisions of Section 23 having opposed to the public policy which term has been put to a definite meaning in ONGC Ltd. vs. Saw Pipes Ltd. It can be stated that concept of public policy concerns public good and public interest. If any provision is patently illegal, that is opposed to the public policy meaning that any clause in an agreement or the agreement as a whole could be declared unenforceable or void, if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. That apart, in Fateh Chand vs. Bal Kisen Das it has been unambiguously held that the aggrieved party is entitled to receive compensation from the party who commits the breach of the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of actual loss of damage. It does not justify the award of compensation when in consequences of the breach, no legal injury at all has been 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 party knew when they made the contract, to be likely to result from the breach. This proposition is the reflection of the doctrine of proportionality. There cannot be any doubt or dispute keeping in view the decision in Regina (Daly) v. Secretary of State for the Home Department reported in [2001] 2 WLR 1622 that in regard to the cases involving common law constitutional rights, the doctrine of proportionality must be applied. The other limb of the argument on the challenge to the validity of clause 10.2(ii) and the financial penalty scheme is that those are opposed to the provisions of Section 20A of the Indian Telegraph Act which provides for breach of conditions of licence. Section 20A, as provided statutorily, cannot be challenged on the touchstone of Section 73 and 74 of the Indian Contract Act. The penal consequences as provided by clause 10(2)(ii) and the financial penalty clause are in conflict with Sections 73 and 74 of the Indian Contract Act and provisions of Section 20A of the Indian Telegraph Act and hence the said clause and provisions are un-enforceable and void in view of Section 23 of the Indian Contract Act. But the respondents may reframe the said clause by way of addition or modification or alteration in the mode of amendment or issue instruction in conformity with the provisions of Section 4 of the Indian Telegraph Act, 1885 by "pre-estimate of reasonable compensation" for breach of the licence agreement or at their option they may deal with the breach in terms of Section 20A of Indian Telegraph Act. This Court categorically holds that Clause 10(2)(ii) of the licence agreement and the financial penalty scheme as introduced by the impugned communication dated 14.12.2008, Annexure-3 to the writ petition and the clarification dated 03.02.2011 (Annexure-9 to the writ petition) are not within the meaning and import of liquidated damages and those are clearly penalty which fail to pass through the test of pre-estimate of reasonable compensation. That apart, this scheme or the clause 10.2(ii) of the licence agreement stands opposed to Section 20A of the Indian Telegraph Act and the public policy in the manner as aforesaid. Above all, while incorporating the Clause 10(2)(ii), the requisite compliance as stated for invoking the authority as provided under clause 5.1 is conspicuous by absence. Such requisite exercise in incorporating the financial penalty clause would render the very clause or provision by letters/communication unenforceable. The cumulative result of such observations is that those communications dated 24.12.2008, Annexure-3 to the writ petition and 03.02.2011, Annexure-9 to the writ petition, cannot be enforced and hence those are treated void and inoperative. To recapitulate, the Government of India as the licensing authority under Section 4 of the Indian Telegraph Act would be within its competence notwithstanding this judgment to incorporate additional clause liquidating the damages that may occur for breach of instructions dated 10.05.2005, 04.06.2007, 30.04.2008, Annexure-1A to the writ petition. It is to be further clarified that the instruction dated 22.11.2006 is a composite instruction containing instruction in respect of verification of the subscribers and penal clause which provides that after 31.03.2007 if any subscriber's number is found working without proper verification a minimum penalty of `1000/- per violation of subscriber verification number shall be levied on the licensee. That instruction dated 22.11.2006 is not entirely interfered with but the financial penalty as prescribed is declared unenforceable and void, subject to the leave as granted to the licensor. However, the latter part containing immediate disconnection of the subscriber number by the licensee is not interfered with, keeping an eye on the internal security of the country. For the same reason, the impugned circulars/instructions for re-verification of the subscribers' identity on the basis of prescribed papers/documents are not interfered with. Since the financial penalty clause which emanated from Clause 10(2)(ii) has been interfered with, the procedure as laid down to be observed by the Term Cell has become inoperative till such time the Central Government takes appropriate measures having due regard to the observations made in this judgment. The Central Government may take appropriate measure, if they are so inclined to, within a period of six months from today. The Central Government shall remain within its competence to recover the damages if those are liquidated in the new measure for breach of instruction as to verification of identify of subscribers, treating the same as breach of term or condition of the licence agreement subject to compliance of the requisite of communication and acceptance. Since this Court has interfered with the financial penalty clause and instruction, the cause for realising liquidated damage shall be treated to have arisen from the date when the new measure would be notified, if at all, by the Central Government. It is further clarified that all consequential instructions emanating from the financial penalty clause i.e. Clause 10.2(ii) of the licence agreement shall stand inoperative but with severability, meaning without any effect on the content in respect of verification of the subscribers' identity in the manner as prescribed by the Central Government."