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State of Orissa and ors. Vs. Calcutta Company Limited - Court Judgment

LegalCrystal Citation
SubjectContract
CourtOrissa High Court
Decided On
Case NumberA.H.O. No. 2 of 1971
Judge
Reported inAIR1981Ori206
ActsContract Act, 1872 - Sections 74
AppellantState of Orissa and ors.
RespondentCalcutta Company Limited
Appellant AdvocateAdv. General
Respondent AdvocateR.C. Patnaik and ;P.K. Misra, Advs.
DispositionAppeal dismissed
Cases ReferredBhai Panna Singh v. Bhai Arjun Singh
Excerpt:
.....failure to provide such stacking yard till december, 1959; (iii) the defendants did not commit any breach of contract by modifying the contract; --as you have failed to supply the materials for kuakhai syphon work according to the terms of contract a penalty of rs. x which has been proved by the executive engineer clearly indicates that the chief engineer wanted that disciplinary action should be taken against the plaintiff and the chief engineer's direction ultimately got implemented in the shape of ext. ' learned advocate general concedes that the defendants have failed to establish actual damage but according to him. --the section is clearly an attempt to eliminate the somewhat elaborate refinements made under the english common law in distinguishing between stipulations providing for..........failure to provide such stacking yard till december, 1959; (iii) the defendants did not commit any breach of contract by modifying the contract; (iv) as no date was mentioned in the tender for supply of the materials, penalty would not be imposed under clause 2 of the agreement for non-supply of materials. so, the imposition of penalty was invalid; and (v) the plaintiff was entitled to refund of the security deposit. on these findings, plaintiff's suit was decreed, but without costs. 5. defendants challenged the decree in first appeal no. 166 of 1968 before this court and the plaintiff filed a memorandum of cross-objection in respect of disallowance of costs. a learned single judge by judgment dated 24-10-1975, after hearing parties dismissed the appeal as also the cross objection......
Judgment:

K.N. Misra, C.J.

1. Plaintiff, a Company incorporated under the Indian Companies Act with its registered office at Calcutta, entered into a contract with the State of Orissa through its officers for supply of materials meant for use in construction of projects and/or buildings of the State. Mutual rights and obligations were stipulated in the contract. When the security furnished by the plaintiff was forfeited and penalty was levied against it on the plea of breach, it filed a suit on 23-8-1965 for declaration that the order of forfeiture and the levy of penalty were liable to be set aside and for a direction that the amounts withheld be paid to the plaintiff. The plaintiff pleaded that it was the obligation of the defendants to provide a motorable road to the siphon site where delivery and stacking of materials were to be made. The defendants were under obligation to provide the stacking site too. They having failed to perform their part of the contract, the plaintiff could not make the supply according to the time schedule though it was ready to fulfil its obligation. It was also contended that the levy of penalty was unconscionable and otherwise bad.

2. All the defendants in a joint written statement contended that the plaintiff had no cause of action as the penalty and the forfeiture were in accordance with the terms of the contract. They disputed their obligation to provide the road and pleaded that they had indicated the stacking site. Plaintiff committed breach of the contract and in terms of the stipulations became liable to be visited with an order of forefeiture of the security deposit and levy of penalty.

3. In paragraph 11 of the written statement it was pleaded :--

'............These defendants had no responsibility or duty to provide a motorable road to the syphon site and the terms of contract do not provide that the place of stacking would be provided by these defendants. On the contrary Clause 29 of the conditions of the tender appended to the contract clearly shows that it is the responsibility of the plaintiff to provide and maintain the approach road at his own cost.' In paragraph 13 of the written statement, it was pleaded :--

'............Apart from the terms of thecontract, the defendant No. 2 had made sufficient arrangement and provided enough space to facilitate the stacking of the goods and the plaintiff was intimated of the same fact by letter Number 1.11.25/59-60, dated 3-12-1959. ......' The defendants further pleaded in paragraphs 22 to 24 thus:--

'22. ............According to the termsof the contract the Executive Engineer has full authority to rescind the contract and impose fine............

23. ............According to the termsof the contract, the defendants are entitled to withhold the security deposit till recovery of the penalty imposed on the plaintiff and so the refusal to refund the security deposit is legally justfied.

24. ............The plaintiff due to default in performing the contract as agreed to between the parties is liable to pay Rs. 96,405/- as penalty and after adjustment of the earnest money of Rs. 19,281/- in deposit and security money recovered from his bills, an amount of Rs. 65,641/- is still due from the plaintiff and the present suit is filed falsely to avoid the said liability.' 4. The trial Court came to hold that (i) the defendants were not liable under the contract to provide any approach road for the plaintiff's transport vehicles to carry the materials and the plaintiff was to make its own arrangements for such purpose;

(ii) the defendants were to provide stacking yard, and delay in delivery of the materials by the plaintiff was partly due to failure to provide such stacking yard till December, 1959;

(iii) the defendants did not commit any breach of contract by modifying the contract;

(iv) as no date was mentioned in the tender for supply of the materials, penalty would not be imposed under Clause 2 of the agreement for non-supply of materials. So, the imposition of penalty was invalid; and

(v) the plaintiff was entitled to refund of the security deposit. On these findings, plaintiff's suit was decreed, but without costs.

5. Defendants challenged the decree in First Appeal No. 166 of 1968 before this Court and the plaintiff filed a memorandum of cross-objection in respect of disallowance of costs. A learned single Judge by judgment dated 24-10-1975, after hearing parties dismissed the appeal as also the cross objection. Against this affirming decrep of the learned single Judge, the present appeal under the Letters Patent read with the Orissa High Court Order has been filed.

6. Learned Advocate General has contended that in the agreement dated 7-5-1959 (Ext. V/2), plaintiff had undertaken to supply chips and boulders for the construction of the Kuakhai Siphon. This contract was rescinded on 14-12-62 under Ext. Z/l. According to the learned Advocate General, the order dated 17-12-1962 under Ext. 11 imposed liquidated damages to the tune of Rupees 96,405/- by invoking the power under Clause 2 of the contract and that amount was not really a penalty. So far as the forfeiture of the security deposit is concerned, learned Advocate General fairly conceded that there is little scope for challenging the decree in favour of the plaintiff. The only question, therefore, for examination in this appeal is as to the legality of the imposition to the tune of Rs. 96,405/-under Ext. 11. Whether the demand under Ext. 11 would be a valid one or not would mainly depend upon whether it is liquidated damages under Clause 2 of the contract or penalty under the provisions thereof. We have already pointed out the several paragraphs of the written statement where the defendants categorically pleaded that under Ext. 11 dated 18-12-1962, a demand of penalty was raised. Ext. 11 itself states thus:--

'As you have failed to supply the materials for Kuakhai Syphon work according to the terms of contract a penalty of Rs. 96,405/- is imposed on you as per Clause 2 of H2 contract.'

D. W. 1, the Executive Engineer, has stated in his deposition:--

'...............Even then plaintiff could not supply the materials. As he could not supply materials as contracted notices were issued to him to show cause why penalty shall not be imposed. Ultimately, 10% of the contract amount was imposed on plaintiff as penalty.'

The Letter dated 6-7-1960 marked Ext. X which has been proved by the Executive Engineer clearly indicates that the Chief Engineer wanted that disciplinary action should be taken against the plaintiff and the Chief Engineer's direction ultimately got implemented in the shape of Ext. 11. Disciplinary action proposed has thus been reflected in a demand of penalty.

Ext. V/2 is the agreement relevant to the dispute. Clause 2 thereof which is pertinent provided :--

'The contractor is to deliver the materials on or before the date mentioned in the tender, failing which he shall be subject to pay or allow one per cent on the total amount of the contract for every day not exceeding ten days that he shall exceed his time as liquidated damages.'

Learned Advocate General concedes that the defendants have failed to establish actual damage but according to him. Clause 2 envisaged a pre-estimate of damages known in law as liquidated damages and action in the instant case under Ext. 11 had actually been raised in exercise of power under Clause 2 though by mistake the levy had been styled as penalty. Section 74 of the Contract Act provides :--

'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 may be, the penalty stipulated for.'

Reliance has been placed on this provision and Clause 2 of the contract for supporting the levy. At common law, parties could name a penal sum as due and payable in the event of breach and the named sum according to the true intention of the parties could represent damages. Parties to a contract were also free by common consent to assent to a fixed measure of damages to avoid the difficulty that very often is found in quantifying the compensation. The use of the term penalty or liquidated damages by itself is not decisive and as was pointed out in the case of Kemble v. Farren, (1829)1 6 Bing 141 (31 RR 366), even what is described as liquidated damages could turn out to be penalty on the facts of a given case. The essence of a penalty was a payment of money stipulated as in terrorem while the essence of liquidated damages is a genuine covenanted pre-estimate of damages. As has been pointed out by the Judicial Committee in Michel Habib v. Sheikh Suleiman El Taji El Farouqui, AIR 1941 PC 101, a penal stipulation cannot be enforced. Liquidated damages must be the result of a genuine pre-estimate of damages and they do not include a sum fixed in terrorem. As was pointed out by the Supreme Court in the case of Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405, the question was one of construction of a contract to be judged as at the time it was made, and mere description as penalty or liquidated damages though relevant was not decisive.

In Anson's Law of Contract (24th Edition) at page 550, it has been indicated :--

'The parties to a contract not infrequently assess the damages at which they rate a breach of contract by one or both of them, and introduce their assessment into the terms of the contract By so doing, however, they do not exclude the application of the rule that damages for breach are intended to compensate the plaintiff for his actual loss, and it is a question of the proper construction of the contract to decide whether a sum fixed in this way, however the parties may have described it, is a penalty, in which case it cannot be recovered, or a genuine attempt to liquidate that is to say, to reduce to certainty, prospective damages of an uncertain amount, in which case the sum will be recoverable.'

Referring to Section 74 of the Contract Act, the Supreme Court in the celebrated case of Fateh Chand v. Balkishan Dass (AIR 1963 SC 1405 at Pp. 1410, 1411) (supra) pointed out:--

'The section 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 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 la 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 unit form principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty,' The Court again said (at p. 1411) :--

'Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty ,.',.,..... The measure of damages in the case of breach of a stipulation by way of penalty is by Section 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 proof 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.' The further observations of the Supreme Court in the said case may also be referred to (at p. 1412) :-- 'Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre-determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract pre- determining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression to receive from the party who has broken the contract does not predicate that the jurisdiction of the Court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The Court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach.'

7. In the instant case, as we have already pointed out, the Chief Engineer, prior to the impugned order under Ext. 11, directed disciplinary action to be taken against the plaintiff. There is no dispute that Ext. 11 was the outcome of such direction. Though Clause 2 of the agreement has been referred to in Ext. 11, at all relevant places the amount demanded by the defendants has been described as 'penalty'. In the memorandum of first appeal, the levy was referred to as 'penalty (see ground No. 3). Even ground No. 8 of the memorandum of the letters patent appeal-runs thus:--

'For that the Hon'ble High Court should have held that the Government is entitled to levy penalty at an agreed rate in case the plaintiff commits any default in performing the contract.' Therefore, for the first time in course of argument in this appeal before us, learned Advocate General tried to contend that the imposition was one of pre-estimated damage, i.e., liquidated damages and not 'penalty'. We do not think, it would be appropriate to allow the defendants for the first time to change the basic foundation of their case in the letters patent stage.

The decision of the Supreme Court in the case of Maula Bux v. Union of India, AIR 1970 SC 1955 was placed before us. In that case, the Supreme Court observed (at p. 1959):--

'.........In case of breach of some contracts it may be Impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance, with established rules. Where the Court is unable to assess the compensation, the sum named by the parties it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him.' Learned Advocate General in support of his argument placed reliance on a single Judge decision of the Calcutta High Court in the case of Anand Construction Works v. State of Bihar, AIR 1973 Cal 550. Clause 2 of the contract in the Calcutta case was similar as in the case before us. In paragraph 41 of the judgment, the learned single Judge stated:-- 'In my opinion, if the above distinction as made by the Supreme Court ia borne in mind then the meaning of the language as provided in Section 74 of the Indian Contract Act becomes crystal clear. When it comes to the question of forfeiture of the security money because of the breach the sum forfeited does not, ipso facto, becomes reasonable compensation it actual loss can be proved. If the party complaining of the breach is in a position to adduce evidence whereby the Court can arrive at the amount of reasonable compensation then without proof of such reasonable compensation the damages will not be decreed. In such circumstances, the amount mentioned in the contract would amount to a penalty and such an amount is not receivable as reasonable compensation. But if the parties mention in the contract a figure which is their pre-estimate of the actual damages and if the party complaining of the breach is unable to assess the compensation because the same cannot be calculated in accordance with the established rules in the facts and circumstances of the particular case then the amount named in the contract itself would be considered as evidence of reasonable compensation. Under such circumstances, it becomes liquidated damages as is commonly known in English Common Law. It seems that the observations of Ameer Ali, J. in the above case reported in AIR 1934 Cal 285 (Mahadeo Prasad v. Siemens Ltd.) (supra) have in effect been supported by the above Supreme Court case reported in AIR 1970 SC 1955,'

8. We may usefully refer to a Bench decision of the Andhra Pradesh High Court in the case of Pasalapudi Brahmayya v. Teegala Gangaraju, AIR 1963 Andh Pra 310, where the learned Judges quoted with approval the principle indicated in certain decisions of the Indian Courts, In AIR 1956 Cal 41 Pravudayal v. Ramkumar, it was pointed out (at p, 44):--

'Where an agreement for sale provides that whichever party retracts from the contract will pay a certain sum as damages when the contract is broken the other party cannot under Section 74, Contract Act, recover simpliciter the sum whether as penalty or liquidated damages. He must first prove the actual damages he has suffered.' Reliance was also placed on the observations of the Bombay High Court in the case of Satyanarayan Amolakchand v. Vithal Narayan, AIR 1959 Bom 452, where it was observed (at p, 454) :-- 'No doubt Section 74 says that where a sum is stated in the contract as payable to a party if a breach thereof is caused by the other party the Court has power to grant compensation to the party even though actual loss or damage is not proved. But that does not mean that compensation can be awarded even though no loss whatsoever has been caused. For the very concept of award of compensation is bound up with loss or damage that results from a breach of contract. All that Section 74 permits is award of compensation even where the extent of the actual loss or damage is not proved and gives discretion to the Court to fix the amount. Where as here, no loss or damage has ensued there can be no question of awarding compensation.' Similar view has been taken by the Patna High Court in the case of Union of India v. Vasudeo Agarwal, AIR 1960 Pat 87 and in the decision of the Privy Council in the case of Bhai Panna Singh v. Bhai Arjun Singh, AIR 1929 PC 179. In the instant case there is no evidence at all that any damage has been sustained by the alleged breach.

9. There is evidence that by the time Ext. 11 came to be made, the plaintiff had made certain supplies. Both the courts have already found that under the contract, the defendants had the obligation to provide the place of stacking and supply could not be effected by the plaintiff as the place of stacking had not been indicated. The learned single Judge has found:--

'There is no dispute that under the terms of the suit contract the defendants are to make available stacking site where the materials to be supplied are to be stacked. So, as long as stacking site was not provided by the defendants, the plaintiff was under no obligation to carry the materials because it knew full well that before any valid accusation was made against it in non-supply of materials, the defendants were to fulfill their part of the contract by providing the stacking site which was a condition precedent to the plaintiff doing its part of the job under the contract'

Learned Advocate General took us through the evidence as also the terms of the contract. We find the conclusion of the courts below in regard to the mutual obligations unassailable. The plaintiff had made certain supplies. It demanded for specifying the space for stacking and the correspondence of the departmental officers shows that steps were being taken to demarcate the site. In these circumstances, it would be appropriate to accept the finding that defendants had failed to demarcate the stacking site. Once this is held to be the position, we do not think, the plaintiff can appropriately be held to have committed any breach of the contract. Therefore, the question raised by learned Advocate General does not at all arise. In our view, there is no merit in this appeal and the same has, therefore, to be dismissed with costs of this appeal to be paid to the plaintiff-respondent by the appellants.

B.N. Misra, J.

I agree.


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