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Wednesday, February 4, 2015

delay in executing the work resulted in loss for which the respondent was entitled to reasonable compensation. Evidence of precise amount of loss may not be possible but in absence of any evidence by the party committing breach that no loss was suffered by the party complaining of breach, the Court has to proceed on guess work as to the quantum of compensation to be allowed in the given circumstances. Since the respondent also could have led evidence to show the extent of higher amount paid for the work got done or produce any other specific material but it did not do so, we are of the view that it will be fair to award half of the amount claimed as reasonable compensation. 19. Accordingly, this appeal is partly allowed and the decree granted by the High Court is modified to the effect that the respondent-plaintiff is entitled to half of the amount claimed with rate of interest as awarded by the High Court. Out of the amount deposited in this Court, the respondent will be entitled to withdraw the said decretal amount and the appellant will be entitled to take back the remaining . 20. The appeals are disposed of accordingly.


                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                    CIVIL APPEAL NOS...1440-1441 OF 2015
              (ARISING OUT OF SLP (C) NOS.35365-35366 OF 2012)




                               J U D G M E N T

1.    Leave granted.
2.    These appeals have been preferred against final judgment
and order dated 10th February, 2012 in RFA(OS) No.35 of 2010 and  dated  1st
June, 2012 in R.P. No.369 of 2012  in RFA (OS) No.35 of 2010 passed  by  the
High Court of Delhi at New Delhi.
3.    The question raised for our consideration is when and to  what  extent
can the stipulated liquidated damages for breach of a contract  be  held  to
be in the nature of penalty in absence of evidence of  actual  loss  and  to
what extent the stipulation be taken to be the measure of  compensation  for
the loss suffered even in absence of specific  evidence.   Further  question
is whether burden of proving that  the  amount  stipulated  as  damages  for
breach of contract was penalty is on the person committing breach.
4.    The respondent - Delhi Development Authority awarded a  contract  vide
agreement dated 4th October,  1995  to  the  appellant  for  constructing  a
sewerage pumping station at CGHS area at Kondli Gharoli at Delhi.  Clause  2
in the agreement provided as follows:
"the contractor shall comply with the said time schedule.  In the  event  of
the contractor failing to comply with this condition, he shall be liable  to
pay as compensation an amount equal to one percent or  such  smaller  amount
as the Superintending Engineer Delhi Development Authority  (whose  decision
shall be final) may decide on the said estimated cost of the whole work  for
everyday that the due quantity of work remains incomplete;  provided  always
that the entire amount of compensation to be paid under  the  provisions  of
this clause shall not exceed ten percent of the estimated cost  of  work  as
shown in the tender."

Since the work proceeded at slow pace and the appellant-defendant failed  to
complete the same, the contract was  terminated  on  17th  September,  1999.
Under Clause  2  of  the  agreement,  the  Superintending  Engineer  of  the
respondent levied compensation of Rs.20,86,446/- for delay in  execution  of
the project by an order of penalty dated 21st July,  1999  and  called  upon
the appellant to deposit the same.   The said order reads thus :
"The work was being executed by you at extremely  slow  pace.   You  had  to
complete the job by 7.1.97.  You had failed to complete the work even  after
expiry of 2 years six months after stipulated date of  completion.   Despite
the clear direction from Hon'ble Supreme Court  to  expedite  the  work  and
complete the job by June-99, you have failed  to  comply  the  direction  of
Court and have rather abandoned the work since  6.4.99  and  you  failed  to
complete the work till date.

In exercise of the power conferred on me under clause-2  of  the  agreement,
I, R.C. Kinger, the SE/CC-10/DDA decide and determine that  you  are  liable
to pay Rs.20,86,446/- (Rs. Twenty lacs  eighty  six  thousand  four  hundred
forty six only) as and by way of compensation as stipulated in  clause-2  of
the agreement."

5.    On failure of the  appellant  to  respond  to  the  above  order,  the
respondent filed suit No.1311 of  2002  before  the  Delhi  High  Court  for
recovery of the said amount with interest.  The  appellant-defendant  failed
to contest the suit inspite of  service  but  made  an  application  raising
objection to the maintainability of the suit on the ground that  vide  order
dated 19th December, 2001, a former Judge  of  Delhi  High  Court  had  been
appointed arbitrator to decide the disputes arising  out  of  the  contract.
The said application was, however, dismissed on the ground that  the  matter
in the suit was not within  the  purview  of  the  arbitration.   The  Court
proceeded to decide the suit on merits.
6.    Learned single Judge dismissed the suit  holding  that  the  plaintiff
had not treated the time  fixed  for  performance  of  the  contract  as  of
essence and the compensation stipulated in Clause 2 of the agreement was  in
the nature of penalty.  The basis for levy  of  compensation  had  not  been
indicated  so  as  to  determine  whether  the  compensation   claimed   was
reasonable.  Reliance was placed on the  judgment  of  this  Court  in  M/s.
Arosan Enterprises Ltd. vs. Union of India and another[1] in support of  the
view that the time stipulated in the agreement was  not  treated  to  be  of
essence.  It was further observed that since the claim for compensation  was
based on sole discretion and not on the basis of  loss  suffered,  the  same
was in the nature of  penalty  and  thus,  the  said  Clause  could  not  be
enforced in view of Section 74 of the Contract Act as  laid  down  in  Fateh
Chand vs. Bal Kishan Das[2], Maula Bux vs. Union of India[3], M.L.  Devendra
Singh vs. Syed Khaja[4], P. D'Souza  vs.  Shondrilo  Naidu[5]  and  Oil  and
Natural Gas Corporation Ltd. vs.  Saw Pipes Ltd.[6].  Learned  single  Judge
concluded as follows:-
"20.    The Court is of opinion that the plaintiff having  not  treated  the
contract as of the essence, and having extended the time for performance  on
several occasions, cannot now  fall  back  on  a  presumptive  condition  to
impose the maximum compensation leviable; enforcement of such  action  would
be giving effect to  a  penalty  clause.   As  far  as  granting  reasonable
compensation is concerned, the plaintiff has not shown even  the  basis  for
levying the compensation that it did in this case.  As  said  earlier,  this
aspect assumes significance, because the plaintiff was aware what extent  of
the contract was performed, as well as what was the exact  extent  of  loss,
in monetary terms, either by way of payment to another  contractor,  or  the
amount spent for completing the work.  In the circumstances,  the  Court  is
of opinion that the relief sought cannot be granted."

7.    On appeal, the Division Bench reversed the view taken by  the  learned
single Judge.  It was held that delay in a contract  of  construction  of  a
public utility service could itself be a  ground  for  compensation  without
proving the actual loss.  Accordingly, the suit was decreed for  payment  of
Rs.20,86,446/- with pendente lite and future interest @ 9%  per  annum.   It
was observed:
"5.   The respondent had been proceeded against ex-parte at  the  trial  and
has chosen not to appear even before us.  The evidence led by the  appellant
has remained unrebutted.

6.    Suffice would it be to state that  the  observations  of  the  Supreme
Court in para 68 of the decision reported as AIR 203 SC  2629  ONGC  v.  Saw
Pipes Ltd. are squarely applicable in the instant case as per which  delayed
constructions such as completing construction  of  road  or  bridges  within
stipulated time would be difficult to be linked with actual  loses  suffered
by the State and in such cases the pre-estimated damages  envisaged  in  the
contract have to be paid.

7.    Now, a Sewage Pumping Station is  not  something  from  which  Revenue
would be generated by the State.  It is a public utility service and  has  a
role to play in maintaining or  preserving  clean  environment.   If  Sewage
Pumping Station are not set up, sewage would stagnate as cess pools  in  low
lying areas and would cause environmental degradation, both  air  and  soil.
That apart,  in  a  delayed  project,  interest  on  blocked  capital  would
obviously be a measure of damages.

8.    The learned Single Judge has ignored as aforesaid  and  held  that  in
the absence of proof of damages, compensation levied under  clause-2  cannot
be recovered.  The learned Single Judge is incorrect  in  view  of  the  law
declared by the Supreme Court and thus we allow the  appeal  and  set  aside
the impugned decree.  Suit filed by the  appellant  is  decreed  in  sum  of
Rs.20,86,446/- with pendente lite and future interest @ 9%  per  annum  from
date of suit till realization  and  the  suit  filed  by  the  appellant  is
disposed of accordingly with costs all throughout."

8.    The appellant filed a review petition which was dismissed.
9.    We have heard learned counsel for the parties.
10.   On 19th November, 2012 notice was  issued  subject  to  the  appellant
depositing the entire decretal amount in this  Court  and  by  a  subsequent
order, the amount was directed to be kept in term deposit for  a  period  of
one year to ensure for the benefit of the successful  party.    Accordingly,
the amount of Rs.20,86,500/- is said to have been deposited which  has  been
kept in FDR which is going to mature on 8th February, 2015.
11.   Learned counsel for the appellant submitted that  the  Division  Bench
erred in holding that the entire amount of stipulated  damages  was  genuine
measure of compensation when instead of any fixed amount, only  the  maximum
amount of compensation  was  stipulated.   The  contract  in  question  only
envisaged the upper  limit  of  damages  which  could  be  claimed.   It  is
submitted that the agreement quoted in earlier part  of  the  order  clearly
shows that what is stipulated is that the compensation shall not exceed  10%
of the estimated cost and the amount to be  recovered  as  compensation  was
required to be determined by the Superintending Engineer.   The  respondent-
plaintiff has failed to show the actual amount of loss suffered  in  getting
the work executed from any other contractor.   In  these  circumstances,  at
best a part of it could be  taken  to  be  compensation  and  the  remaining
penalty.  He submitted that the judgment of this Court  in  Saw  Pipes  Ltd.
(supra) relied upon by  the  High  Court  is  distinguishable  in  the  fact
situation of the present case.   Without  determining  that  the  stipulated
compensation was reasonable, the maximum  amount  stipulated  could  not  be
treated as compensation.
12.   Learned  counsel  for  the  respondent-plaintiff  on  the  other  hand
submitted that even  though  in  the  order  passed  by  the  Superintending
Engineer no specific basis has been shown, notice was  duly  issued  to  the
appellant  defendant   before   determining   the   reasonable   amount   of
compensation and claiming 10% of the project cost which  was  stipulated  to
be the maximum compensation,  on  account  of  delay  in  execution  of  the
project.  On failure of the appellant to  respond,  the  entire  amount  has
been rightly held to be the estimate of damages for the  loss.   Burden  was
on the defendant to show that no loss or lesser loss  was  suffered  by  the
13.   We have given due consideration to the rival submissions.
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.
15.   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 utility project, the delay
itself can be taken to have resulted in loss in the  form  of  environmental
degradation and loss of interest on the capital are not without
any basis.
16.   Once it is held  that  even  in  absence  of  specific  evidence,  the
respondent could be held to have suffered  loss  on  account  of  breach  of
contract, and  it  is  entitled  to  compensation  to  the  extent  of  loss
suffered, it is for the appellant to show that  stipulated  damages  are  by
way of penalty.  In a given case, when highest limit is  stipulated  instead
of a fixed sum, in absence of evidence of loss, part of it can  be  held  to
be reasonable, compensation and the remaining by way of penalty.  The  party
complaining of breach can certainly be allowed reasonable  compensation  out
of the said  amount  if  not  the  entire  amount.   If  the  entire  amount
stipulated is genuine pre-estimate of loss, the  actual  loss  need  not  be
proved.  Burden to prove that no loss was likely to be suffered is on  party
committing breach, as already observed.
17.   It is not necessary to refer to all the  judgments  on  the  point  in
view of categorical pronouncement  of  this  Court  in  Saw  Pipes  (supra),
laying down as follows:-
"64. It is apparent from the aforesaid reasoning recorded  by  the  Arbitral
Tribunal that it failed to  consider  Sections  73  and  74  of  the  Indian
Contract Act and the ratio laid down in Fateh  Chand  case   wherein  it  is
specifically held that jurisdiction of the court to  award  compensation  in
case of  breach  of  contract  is  unqualified  except  as  to  the  maximum
stipulated; and compensation has to be reasonable. 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 proved to have been caused by  such  breach.  Therefore,  the
emphasis is on reasonable [pic]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  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.  Take  for
illustration: if the parties have agreed to purchase cotton  bales  and  th
same were only to be kept as a stock-in-trade. Such bales are not  delivered
on  the  due  date  and  thereafter  the  bales  are  delivered  beyond  the
stipulated time, hence there is breach of the contract. The  question  which
would arise for consideration is - whether by  such  breach  the  party  has
suffered any loss. If the price  of  cotton  bales  fluctuated  during  that
time, loss or gain could easily be proved. But if cotton  bales  are  to  be
purchased    for    manufacturing    yarn,    consideration     would     be

67. Take for illustration construction of a road or a bridge.  If  there  is
delay  in  completing  the  construction  of  road  or  bridge  within   the
stipulated [pic]time, then it would be difficult to prove how much  loss  is
suffered by the society/State. Similarly, in the present  case,  delay  took
place in deployment of rigs and on that basis actual production of gas  from
platform B-121 had to be changed. It is undoubtedly true  that  the  witness
has  stated  that  redeployment  plan  was  made  keeping  in  mind  several
constraints including shortage  of  casing  pipes.  The  Arbitral  Tribunal,
therefore, took into consideration the aforesaid  statement  volunteered  by
the witness that shortage of casing  pipes  was  only  one  of  the  several
reasons and not the only reason which led to change in deploym7ent  of  plan
or redeployment of rigs Trident II platform B-121. In our view,  in  such  a
contract, it would be difficult to prove exact  loss  or  damage  which  the
parties suffer because of the breach thereof. In such a  situation,  if  the
parties have pre-estimated such loss after clear understanding, it would  be
totally unjustified to arrive at the  conclusion  that  the  party  who  has
committed breach of the contract is  not  liable  to  pay  compensation.  It
would be against the specific provisions  of  Sections  73  and  74  of  the
Indian  Contract  Act.  There  was  nothing  on  record  that   compensation
contemplated by the parties  was  in  any  way  unreasonable.  It  has  been
specifically mentioned  that  it  was  an  agreed  genuine  pre-estimate  of
damages duly  agreed  by  the  parties.  It  was  also  mentioned  that  the
liquidated damages are not by way of penalty. It was also  provided  in  the
contract that such damages are to be recovered by  the  purchaser  from  the
bills for payment of the cost of material submitted by  the  contractor.  No
evidence is led by the claimant to establish that the  stipulated  condition
was by way of penalty or the compensation  contemplated  was,  in  any  way,
unreasonable. There was no reason for the Tribunal  not  to  rely  upon  the
clear and unambiguous terms of agreement  stipulating  pre-estimate  damages
because of delay in supply of goods. Further, while extending the  time  for
delivery of the  goods,  the  respondent  was  informed  that  it  would  be
required to pay stipulated damages."

18.   Applying the above principle to the present case, it  could  certainly
be presumed that delay in executing the work resulted in loss for which  the
respondent was entitled to reasonable  compensation.   Evidence  of  precise
amount of loss may not be possible but in absence of  any  evidence  by  the
party committing breach that no loss was suffered by the  party  complaining
of breach, the Court has to proceed on guess  work  as  to  the  quantum  of
compensation  to  be  allowed  in  the  given  circumstances.    Since   the
respondent also could have led evidence to show the extent of higher  amount
paid for the work got done or produce any other  specific  material  but  it
did not do so, we are of the view that it will be fair to award half of  the
amount claimed as reasonable compensation.
19.   Accordingly, this appeal is partly allowed and the decree  granted  by
the High Court is modified to the effect that  the  respondent-plaintiff  is
entitled to half of the amount claimed with rate of interest as  awarded  by
the High Court.  Out of the amount deposited in this Court,  the  respondent
will be entitled to withdraw the said  decretal  amount  and  the  appellant
will be entitled to take back the remaining .
20.   The appeals are disposed of accordingly.

                                              (T.S. THAKUR)

                                              (ADARSH KUMAR GOEL)

FEBRUARY 4, 2015

[1]    (1999) 9 SCC 449
[2]    (1964) 1 SCR 515
[3]    (1969) 2 SCC 554
[4]    (1973) 2 SCC 515
[5]    (2004) 6 SCC 649
[6]    (2003) 5 SCC 705

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