THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: 09.05.2011
Judgment Pronounced on: 13.05.2011
+ CS(OS) No. 1362/1997
M/S. HERBICIDES (INDIA) LTD. .....Plaintiff
- versus -
M/S. SHASHANK PESTICIDES P.LTD. AND ...Defendants
Advocates who appeared in this case:
For the Plaintiff: Mr. Rajat Arora,
For the Defendant: Mr. K.R. Gupta, Mr. S.K. Gupta,
Mr. Nitin Gupta and Mr. Manish
Gupta, Advs.
CORAM:-
HON'BLE MR JUSTICE V.K. JAIN
1. Whether Reporters of local papers may
be allowed to see the judgment? Yes.
2. To be referred to the Reporter or not? Yes.
3. Whether the judgment should be reported Yes.
in Digest?
V.K. JAIN, J
1. This is a suit for recovery of Rs 24,90,665/-.
Defendant No. 1 is a company alleged to be owned and
controlled by defendant No. 4 and his family members.
Defendant No. 3 is the wife of defendant No. 4 and is
running business in the name and style of defendant No. 2
CS(OS)No. 1362/1997 Page 1 of 43
from the same premises, where defendant No. 1 is
functioning. Defendant No. 1-company entered into an
agreement to purchase one lakh litres of weedicide, namely
2, 4-D Ethyl Ester 38% EC in 200 litres packaging, at the
price of Rs 96.80 per litre plus local tax in staggered lots
commencing from October, 1995 and ending in December,
1995. In the event of non-supply or non-lifting of goods, the
party, in default, was to pay pre-determined compensation
at the rate of Rs 20/- per litre. The plaintiff claims to have
supplied 7000 litres of the aforesaid goods to defendant No.
1 in October, 1995. On the request of the defendant, invoice
in respect of these 7000 litre of goods were raised on one
M/s Paramount Pesticides Pvt. Ltd., nominee of the
defendant.
Vide letters dated 14th November, 1995 and 17th
November, 1995, defendant Nos.1 and 4 informed the
plaintiff that due to failure of season, the market had
crashed and they were not in a position to make any
commitment for lifting or for making financial arrangement
for further quantities. The plaintiff, thereupon, informed the
defendant that it had made all the necessary arrangements
for supply of contracted goods and its refusal to lift the
CS(OS)No. 1362/1997 Page 2 of 43
goods would cause immense loss to the plaintiff. The
plaintiff asked defendant No. 1 to make arrangements to
take delivery of the entire quantity during November and
December. Since the defendants have failed to act upon the
request and have also paid the price of 7000 litre of goods
supplied to it, the plaintiff is now seeking a sum of Rs
18,60,000/- towards pre-determined compensation at the
rate of Rs 20/- per litre of unlifted quantity of the goods, Rs
1,97,472/-+ 2,93,680/- toward balance price of 7000 litre of
goods after adjusting the payment of Rs 2 lakhs made by
the defendant and Rs 1,39,513/- (56,093 + 83,420) towards
interest at the rate of 18% per annum on the principal
amount due from the defendant.
2. The defendants have contested the suit and have
taken a preliminary objection that the suit is bad for mis-
joinder of parties since there is no privity of contract
between the plaintiff and defendant Nos. 2 and 3 and there
was no personal contract between the plaintiff and
defendant No. 4. They have also taken a preliminary
objection that suit against defendant No. 2, which is not a
legal entity, is not maintainable. On merits, it has been
alleged that the plaintiff was to deliver 10,000 litre of goods
CS(OS)No. 1362/1997 Page 3 of 43
by the eve of Diwali 1995 and the balance quantity was to
be delivered in regular intervals commencing from 1 st
November, 1995 and was to be completed by 15th December,
1995, but, the plaintiff failed to effect the delivery of any
part of the goods, despite receiving Rs 4 lakhs from them. It
is further alleged that after expiry of season, the plaintiff
tried to foist goods on defendant No. 1, but, at that time the
goods were of no use to them. The defendants have denied
having received 7000 litre of goods from the plaintiff and
having asked the plaintiff to raise invoice in the name of
Paramount Pesticides Pvt. Ltd. The defendant Nos. 1 and 4
have filed a counter-claim of Rs 5,45,000/- against the
plaintiff on the ground that it had not refunded the amount
of Rs 4 lakhs, received from them and, therefore was liable
to refund that amount along with interest amounting to Rs
1,44,000/- and Rs 1,100/- towards Advocate fee for service
of notice. In its replication, the plaintiff-company has
admitted receipt of total payment of Rs 4 lakhs from
defendant No. 1
3. The following issues were framed on the pleadings
of the parties:
CS(OS)No. 1362/1997 Page 4 of 43
1. Whether the suit is bad for mis-joinder of defendant
Nos. 2, 3 and 4 as parties, as alleged by defendants?
OPP
2. Whether the suit has been filed by a duly authorized
person on behalf of the plaintiff? OPP
3. Whether any quantity of 2, 4-D, Ethyl Ester 38% EC
supplied by the plaintiff to defendant No. 1? OPP
4. Whether the defendant Nos. 1 and 4 are liable jointly
and severally to pay pre-determined compensation of
Rs 18,60,000/- to the plaintiff, as claimed? OPP
5. Whether the defendant Nos. 1 to 4 are liable jointly and
severally to pay the sum of Rs 6,30,665/- for the goods
supplied by the plaintiff to defendant? OPP
6. Whether the counter-claim has been instituted, signed
and verified by a duly authorized person on behalf of
defendant Nos. 1 and 4? OPD
7. Whether the defendant No. 1 is entitled to receive from
the plaintiff the sum of Rs 5,45,000/- as claimed in its
counter-claim? OPD
CS(OS)No. 1362/1997 Page 5 of 43
8. Whether the defendant No. 1 is entitled to receive any
interest, if so, at what rate and on what amount? OPD
9. Whether the plaintiff is entitled to receive any interest,
if so at what rate? OPP
10. Whether there exist any privity of contract between
the plaintiff and defendants 2&3? OPP
11. Whether the suit against defendant No. 2, non-
juristic person is maintainable? OPD
12. Whether any contract was entered into between the
plaintiff and defendant Nos.2 and 3 for the supply of
goods set out in the plaint and whether any goods were
supplied by the plaintiff to the defendants 2 and 3, if so
of what value? OPP
13. Relief.
Issues No. 10, 11 & 12
4. This is not in dispute that only the plaintiff-
company and defendant No.1-company were parties to the
agreement for supply of goods. Defendant No. 1 is a legal
entity and defendant No. 4 is one of its Directors. There is,
however, no privity of contract between the plaintiff and
CS(OS)No. 1362/1997 Page 6 of 43
defendant Nos. 3 and 4. If there is a breach of contract on
the part of defendant No. 1 or defendant No. 1-company has
failed to pay the price of the goods received by it from the
plaintiff-company, the remedy of the plaintiff-company lies
only against defendant No. 1 and neither defendant No. 3
nor defendant No. 4 is personally liable to discharge the
liability of defendant No. 1. Defendant No. 2 is not a legal
entity and is only a trade name adopted by defendant No. 3.
The issues are accordingly decided in favour of the
defendants and against the plaintiff. The names of
defendant No. 2 to 4 are struck off from the array of
defendants.
Issue No. 2
Ex.PW-1/1 is the copy of the Resolution passed by
the Board of Directors of the plaintiff-company, authorizing
Mr Ahok Dugar, Mr V.P. Singal, Mr R.K. Gupta and Mr
Paras Parakh and to commence & institute suits, etc. on
behalf of the plaintiff-company and to sign and verify the
pleadings etc. The suit having been instituted and the plaint
having been signed and verified by Mr Ashok Dugar, the
issue is decided in favour of the plaintiff and against the
defendants.
CS(OS)No. 1362/1997 Page 7 of 43
Issues No.3 & 5
5. PW-1/A, Mr. Ashok Dugar, Director of the plaintiff-
company, has stated that 7000 litre of goods in 35 drums
were dispatched vide GR dated 21st October, 1995
(Ex.PW1/5) and the delivery of the consignment was taken
by defendant Nos. 1 and 4, making endorsement in this
record on the back side of GR. It has come in the deposition
of PW-1 that the goods were moved by the plaintiff-company
from Jaipur to Delhi on Stock Transfer basis and the truck,
containing 7,000 litre of stock, was unloaded at the godown
of defendant No. 1. It has also come in his deposition that
defendant No. 4 Mr R.K. Gupta, who is the Director of
defendant No. 1-company, was in touch with the officials of
the plaintiff-company so that delivery could be taken at the
godown of defendant No. 1.
In rebuttal, DW-1, Mr R.K. Gupta, has stated that no
goods were supplied by the plaintiff to defendant No. 1. A
perusal of the Goods Receipt Ex.PW-1/5 shows that it bears
an endorsement of receipt of 35 drums on the back of the
document. It is also noted in the endorsement that one
drum had leakage from it. The GR pertains to 35 drums of
CS(OS)No. 1362/1997 Page 8 of 43
pesticides, the consignor as well as consignee is Harbicides
India Ltd. and the goods were sent from Jaipur to Delhi on
21st October, 1995. According to Mr Ashok Dugar, these
goods were received by Mr Vishesh Jain of the defendant,
who made the endorsement on the back of this document. It
has been admitted by Mr R.K. Gupta that Mr Vishesh Jain
is also a Director of defendant No. 1. Since Mr Ashok Dugar
had, in his deposition, claimed that these goods were
received by Mr Vishesh Jain, it was incumbent on defendant
No. 1 to produce Mr Vishesh Jain in the witness box to
controvert the deposition of Mr Ashok Dugar in this regard
and to prove that neither the goods were received by him
nor does the GR Ex.PW-1/5 bear an endorsement by him.
6. In Enuga Lakshmamma Vs. Vennapuse Chinna
Malla Reddy (Dead) by Lrs., 1985 (2) SCC 100, there was
dispute with respect to the date of birth of the
plaintiff/appellant. It was noticed that the father of the
plaintiff/appellant was not produced as a witness. Supreme
Court was of the view that non-examination of the father of
the plaintiff/appellant on the most material issue, namely,
the birth date of the plaintiff will have to be regarded as
fatal to the plaintiff's case and the High Court was right in
CS(OS)No. 1362/1997 Page 9 of 43
drawing adverse inference against the plaintiff on this
aspect.
In Iswar Bhai C. Patel @ Bachu Bhai Patel Vs.
Harihar Behera & Anr. 1999 (3) SCC 457, the appellant did
not enter the witness-box to deny on oath. The statement of
defendant/respondent No.2 that it was at the instance of
the appellant that he had advanced a amount of Rs 7,000/-
to the appellant by issuing a cheque on the account of
respondent No.1. The Court was of the view that the
appellant having not entered the witness box and having not
presented himself for cross-examination, an adverse
presumption has to be drawn against him on the basis of
the principles contained in Illustration (g) of Section 114 of
Evidence Act.
No explanation has been given by defendant No. 1 for
not producing Mr Vishesh Jain in the witness box. It can,
therefore, be presumed that had Mr Vishesh Jain been
produced in the witness box he would not have supported
the case of defendant No. 1 in this regard.
7. Ex.PW1/18 is the copy of the letters dated 20th
November, 1995, sent by the plaintiff-company to defendant
No. 1. It is subsequently stated in this letter that the
CS(OS)No. 1362/1997 Page 10 of 43
plaintiff had supplied only 7000 litre of goods to the
defendant No. 1 against its assurance to lift 60,000 litre of
goods during November, 1995, thereby leaving a shortfall of
56,000 litres. This letter was sent vide Courier Receipt
Ex.PW-1/19. Ex.PW-1/20 is the letter dated 29 th
November, 1995 from the plaintiff-company to defendant
No. 1 which purports to have been delivered by hand on 29 th
November, 1995 and bears the stamp of defendant No. 1.
Vide this letter, the plaintiff sought billing instructions for
the balance 5,000 liters supplied to defendant No. 1 and
also sought dispatch instructions for the balance 53,000
litres to be supplied, during November and 40,000 litre to be
supplied during December. This is not the case of the
defendant that Ex.PW-1/20 does not bear stamp of
defendant No. 1. In his affidavit, Mr R.K. Gupta did not
claim that the signature and stamp on this letter have been
forged by the plaintiff-company. Ex.P-1/21 is the letter
dated 23rd December, 1995 sent by the plaintiff-company to
defendant No. 1, referring to the telephonic discussion,
wherein the plaintiff had requested defendant No. 1 to place
further order for 93,000 litre, enclosing therewith invoice
No. 655 for supply of 5,000 litre of goods and informing that
CS(OS)No. 1362/1997 Page 11 of 43
2000 litre of goods had already been billed on Paramount
Pesticide Pvt. Ltd., Meerut as per the advice of the plaintiff.
This letter was sent by registered post vide postal receipt
Ex.PW-1/22 and the AD card bearing the stamp of
defendant No. 1 is Ex. PW.1/23. Section 27 of General
Clauses Act gives rise to presumption that service of notice
has been effected when it is sent to the correct address by
registered post. Similar presumption can be raised under
Section 114 (e) of Evidence Act, once it is proved that a
letter by registered post was sent at the correct address of
the addressee and the registered envelope is not received
back unserved, a statutory presumption of service on the
addressee arises. Therefore, even if the AD card filed by the
plaintiff is excluded from consideration, the service of this
letter stands proved on account of the letter having been
sent by registered post at the correct address of defendant
No. 1-company.
8. Moreover, no evidence has been led by defendant
No.1 to prove that the stamp on the AD Ex.PW-1/23 is not
of defendant No. 1-company and/or the signature and
stamp on this document have been forged by the plaintiff-
company. No such claim was made by Mr R.K. Gupta in his
CS(OS)No. 1362/1997 Page 12 of 43
affidavit by way of evidence and no other witness has been
produced by the defendant. Had the plaintiff not supplied
7000 litres of goods, defendant No. 1 would not have
remained silent to the averments made in this regard in the
letters Ex.PW-1/19 PW-1/20 and PW-1/21 and would have
definitely controverted the same by writing to the plaintiff-
company, immediately of receipt of these letters, that no
material at all had been supplied to it. Failure of defendant
No. 1 to controvert the averment made in the letters in this
regard indicates that these goods were actually supplied to
defendant No. 1 and the plea taken by the defendants in
this regard are false. The plaintiff-company, therefore, is
entitled to recover the balance price of that 7000 litre goods,
but only from defendant No.1. The balance amount,
payable towards price of 7000 litre of goods, after deducting
Rs 4 lakhs paid to the plaintiff-company, comes to Rs
91152/-. The issue is decided against accordingly.
Issues No. 4, 6 & 7
9. A perusal of Ex.PW-1/3 which is the letter of the
plaintiff-company dated 19th October, 1995, Ex.P-1/D1 &
D-4, which is the letter of defendant No. 1 dated 20 th
October, 1995, Ex.PW-1/4, which is the letter of the
CS(OS)No. 1362/1997 Page 13 of 43
plaintiff-company dated 21st October, 1995, Ex.P-2/D1 &
D4, which is the letter of defendant No. 1 dated 26 th
October, 1995, discloses the following terms agreed between
the parties:
(a) The total quantity agreed to be purchased by
defendant No. 1 was 1 lakh litres;
(b) The agreed price as per letter Ex.PW-1/3 was Rs
96.80 per litre + 2% local tax/CST Form in lieu of
the sale. The rate given in the letter of defendant
No. 1 is Rs 88 per litre + excise, which I am
informed comes to Rs 96.80 per litre only;
(c) 10,000 litres of the material was to be supplied by
the eve of Diwali, 1995;
(d) The supplies were to be completed by 15th
December, 1995; 60,000 litres were to be
supplied up to 30th November and the balance
quantity in December, 1995, and were to be made
at regular intervals, maintaining proper ratio.
(e) In case of either non-supply on the part of the
plaintiff or non-lifting of goods on the part of
CS(OS)No. 1362/1997 Page 14 of 43
defendant No. 1, a sum of Rs 20 per litre wasagreed to be paid as compensation by the party in
default.
10. Ex.P-4/D1&D4 is the letter dated 14th November,
1995, written by defendant No. 1 to the plaintiff-company,
enclosing therewith a circular issued by M/s Parijat
Agencies Pvt. Ltd and seeking review of the matter on
account of market conditions being bad and season having
been miserably failed. Ex.P-5/D1&D4 is the letter dated 17 th
November, 1995 written by defendant No. 1 to the plaintiff-
company, referring to the earlier letter dated 14th November,
1995 (Ex.P-4/D1&D4) and regretting that the season had
miserably failed and therefore, the market had crashed. It
was stated in this letter that since there was no lifting and
no finances in the market, defendant No. 1 was not in a
position to make any commitment for lifting or to make
financial arrangements. Defendant No. 1-company
expressed its inability to pursue the matter in the
circumstances and requested the plaintiff-company to make
CS(OS)No. 1362/1997 Page 15 of 43
some alternative arrangement. In view of these letters, it
cannot be disputed that defendant No.1-company had
refused to accept any further delivery from the plaintiff-
company and, thereby committed breach of contract to
purchase one lakh litre of goods from the plaintiff-company.
In its letter dated 20th November, 1995 (Ex.PW-
1/18), the plaintiff-company informed defendant No. 1 that
on account of firm written confirmation from it they had
already procured 40 M.T. of 2, 4-D Ethyl Ester technical
Remix/Acromax and also liquid Emulsifiers costing
approximately Rs 83 lakhs and defendant No. 1’s failure to
lift the material would put them to a great loss. Vide letter
dated 21st November, 1995 (Ex.PW-1/20), the plaintiff again
sought instructions for dispatch of remaining 93 litre of
goods. These letters indicate that the plaintiff-company had
obtained the necessary raw material and was in a position
to supply the remaining 93,000 litre of goods to defendant
No. 1.
11. In his affidavit by way of evidence, Mr Ashok
Dugar, Director of the plaintiff-company, has specifically
stated that the plaintiff duly made all arrangements and
procured all the raw-material, consisting mainly of 2,4-D
CS(OS)No. 1362/1997 Page 16 of 43
Ethyl Ester Technical and required stabilizers, solvents and
drums etc. at a considerable cost. According to him, the
plaintiff purchased a total quantity of 60 MT of 2,4-D Ethyl
Ester Technical at the relevant time which also included 39
MT of 2,4-D Ethyl Ester Technical required for formulation
of one lakh litres of the said goods. The said 39 Mt was
procured at a landed cost of Rs 73,61,250/-. He has further
stated that the plaintiff had also procured other emulsifiers,
drums, solvents, etc. at an approximate value of Rs
15,00,000/- in order to fulfil its obligations in supplying one
lakh litres of the said goods to the defendants 1 and 4. He
has also referred in his evidence to Ex.PW-1/6 to 15, which
are the invoices by the Atul Products Ltd. on the plaintiff,
during August, 1995 to November, 1995 towards supply of
2,4-D, Ethyl Ester Technical.
12. The learned counsel for the defendant has objected
to the invoices being read in evidence on the ground that
they have not been proved in accordance with law as the
person, who procured the invoices, has not been produced
in the witness-box. In support of his contention that mere
putting exhibit marks on the document does not by ipso
facto amount to proof of the document. The learned counsel
CS(OS)No. 1362/1997 Page 17 of 43
for the defendant has referred to decisions of Sait Tarajee
Khimchand And Ors. vs Yelamarti Satyam Alias
Satteyya And Ors., AIR 1971 SC 1865 and Narbada Devi
Gupta vs Birendra Kumar Jaiswal And Anr. AIR 2004 SC
175.
13. Even if these invoices are excluded from
consideration, the deposition of PW-1, read along with
letters sent by the plaintiff-company to defendant No. 1-
company, clearly shows that the plaintiff-company had
procured the requisite raw-material for supply of one lakh
litre of the material to defendant No. 1-company. Vide letter
dated 20th November, 1995 (Ex.PW-1/18) in response to
defendant No.1’s letter dated 17th November, 1995, the
plaintiff-company informed it that on their firm written
confirmation, it had already procured 40 M.T. of 2, 4-D
Ethyl Ester technical Remix/Acromax and also liquid
Emulsifiers costing approximately Rs 83 lakhs and their
declining to lift the material when the goods were ready for
dispatch was not only against business ethics, but will also
put the plaintiff to a great loss. Defendant No. 1-company
was requested to make balance payment so as to enable the
CS(OS)No. 1362/1997 Page 18 of 43
plaintiff-company to deliver the balance quantity of 53,000
litres which was to be delivered in November, 1995 and to
make necessary arrangement for further 40,000 litres which
was to be supplied during December 1995. There was no
response from defendant No. 1 to this letter. Vide letter
dated 29th November, 1995 (Ex.PW-1/20), the plaintiff again
requested defendant No. 1 to send dispatch instructions for
the balance 53000 litres to be supplied during November
and 40,000 litres to be supplied during December so as to
enable it to arrange immediate supply from Jaipur plant.
Again, there was no response from defendant No.1. These
letters, coupled with the deposition of PW-1 Ashok Dugar,
are sufficient to prove that the plaintiff-company had either
produced the remaining 93000 litres of the finished product
or at least 53000 litre which was the balance quantity to be
supplied in November, 1995 or it had at least procured the
necessary raw material and was ready to supply those goods
to defendant No. 1-company immediately on receiving
dispatch instructions and requisite payment from it. Even
otherwise, it is difficult to say that the plaintiff-company
would not have procured raw material even up to 17 th
November, 1995, when it had to supply 600 litres of
CS(OS)No. 1362/1997 Page 19 of 43
material during November, 1995 and 40,000 of material
during December, 1995. The plaintiff-company had agreed
to pay liquidated damages at the rate of Rs 20 per litre in
case of its failure to supply the goods, within the agreed
time. Therefore, it would not have taken the risk of paying
those damages to defendant No.1-company and, therefore,
must have procured the necessary raw material for this
purpose.
14. It was contended by the learned counsel for the
defendants that even if there was breach of contract on
behalf of defendant No.1 and despite the contract between
the parties providing for payment of liquidated damages in
case of breach of contract on the part of either party, the
plaintiff-company is not entitled to damages since there was
no proof of any damages having been actually suffered by it.
In support of his contention, he has relied upon the decision
of Supreme Court in Fateh Chand vs. Balkishan Dass, AIR
1963 SC 1405, Maula Bux vs. UOI AIR 1970 SC 1955 and
Gopal Krishnaji vs. Mohamed. Haji, AIR 1968 SC 1413.
The learned Counsel for the plaintiff on the other hand
contended that since the contract between the parties
stipulated payment of liquidated damages which was a bona
CS(OS)No. 1362/1997 Page 20 of 43
fide and genuine pre-estimate of the loss which the plaintiff
company was likely to suffer because of breach of contract
on the part of the defendant, it was not necessary for the
plaintiff company to prove the actual damages and it is
entitled to recover the liquidated damages at the rate
stipulated in the contract. In support of his contention that
the plaintiff-company is entitled to damages at the agreed
rate of Rs 20 per litre, the learned Counsel for the plaintiff
has relied upon BSNL vs. Reliance Communication Ltd.
(2011) 1 SCC 394 and ONGC vs. Saw Pipes Ltd AIR 2003
SC 2629.
15. In the case of Fateh Chand (supra), the agreement
for sale of the suit property provided that if the vendee fails
to get the sale deed registered by 1st June, 1949, a sum of
Rs 25,000/- which he had paid to the vendor, shall be
deemed to be forfeited and the agreement cancelled.
Alleging that the agreement was rescinded, on account of
default on the part of the defendant and the amount of Rs
25,000/- paid by him had been forfeited, the plaintiff filed a
suit for recovery of possession of the suit property which he
had delivered to the vendee. Referring to Section 74 of
Indian Contract Act, Supreme Court, inter alia, observed as
CS(OS)No. 1362/1997 Page 21 of 43
under:
“The measure of damages 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 proof of “actual
loss or damages”; 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.” (emphasis
supplied)
16. In the case of Maula Bux (supra), the contract
between the plaintiff and defendant-Union of India provided
for forfeiture of the security deposit in case of rescission of
CS(OS)No. 1362/1997 Page 22 of 43
the contract. Government of India rescinded the contracts
and forfeited the amount which the plaintiff had deposited
with it. A suit for recovery of Rs 20,000/- was the filed by
the plaintiff against Union of India. The suit was dismissed
by the Trial Court, holding that though the Government of
India was justified in rescinding the contract, they could not
have forfeited the amount of deposit as they had not
suffered any loss in consequence of the default committed
by the plaintiff. The High Court, however, awarded a sum of
Rs 416.25 to the plaintiff along with interest. The High
Court, in awarding the aforesaid sum to the plaintiff, took
into consideration the decision of Supreme Court in the
case of Fateh Chand (supra), but felt that the aforesaid
judgment did not purport to overrule the previous trend of
authorities to the effect that earnest money deposited by
way of security for due performance of a contract does not
constitute penalty contemplated under Section 74 of Indian
Contract Act and even if it was held otherwise, the
Government was entitled to receive from the plaintiff
reasonable compensation not exceeding that amount,
whether or not actual damage was proved to have been
caused.
CS(OS)No. 1362/1997 Page 23 of 43
17. Setting aside the order of High Court and restoring
that of the Trial Court, the Supreme Court, inter alia,
observed as under:
“Where under the terms of the contract
the party in breach has undertaken to
pay a sum of money or to forfeit a sum of
money which he has already paid to the
party complaining of a breach of contract,
the undertaking is of the nature of a
penalty……
…..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 case of breach even if no
actual damage is proved to have been
suffered in consequence of the breach of
contract. But the expression “whether or
not actual damage or loss is proved to
have been caused thereby” is intended to
cover different classes of contracts which
come before the Courts. 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 if 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…….
CS(OS)No. 1362/1997 Page 24 of 43
……In the present case, it was possible
for the Government of India to lead
evidence to prove the rates at which
potatoes, poultry, eggs and fish were
purchased by them when the plaintiff
failed to deliver “regularly and fully” the
quantities stipulated under the terms of
the contracts and after the contracts were
terminated. They could have proved the
rates at which they had to be purchased
and also the other incidental charges
incurred by them in procuring the goods
contracted for. But no such attempt was
made.”
In Saw Pipes Ltd (supra), the respondent offered
to supply casing pipes to the appellant, who accepted the
offer and issued a detailed order containing terms and
conditions of which the goods were to be supplied on or
before 14th November, 1996. The contract provided for
payment of liquidity damages to the appellant. After
referring to Sections 73 and 74 of the Contract Act,
Supreme Court, inter alia, observed as under:
“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 theCS(OS)No. 1362/1997 Page 25 of 43
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 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 the 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. Question which
would arise for consideration is–whether
by such breach 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 beCS(OS)No. 1362/1997 Page 26 of 43
purchased for manufacturing yarn,
consideration would be different
(emphasis supplied)….Take for illustration construction of a
road or a bridge. If there is delay in
completing the construction of road or
bridge within stipulated 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. 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 deployment 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 party who has committed breach of
the contract is not liable to pay
compensation. It would be against the
specific provisions of Section 73 and 74 of
the Indian Contract Act. There was
nothing on record that compensation
contemplated by the parties was in any
way unreasonable.”
CS(OS)No. 1362/1997 Page 27 of 43
In para 69 of the judgment, the Court, inter alia,
concluded as under:
“(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 provided in Section 73 of
the Contract Act.
(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 consequence of the breach of
a contract.
(4) In some contracts, 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.”
CS(OS)No. 1362/1997 Page 28 of 43
In BSNL (supra), the contract between the parties
provided for payment of liquidity damages to the appellant.
On the question as to whether a sum named in the contract
is a pre-estimate of reasonable compensation for the loss or
by way of penalty, Supreme Court referred to the following
extract from Law of Contract (10th Edn.):
“a payment stipulated as in terrorem of
the offending party to force him to
perform the contract. If, on the other
hand, the clause is an attempt to
estimate in advance the loss which will
result from the breach, it is a liquidated
damages clause. The question whether a
clause is penal or pre-estimate of
damages depends on its construction and
on the surrounding circumstances at the
time of entering into the contract”.
As regards the liquidity damages, the Court
observed as under:
“Lastly, it may be noted that liquidated
damages serve the useful purpose of
avoiding litigation and promoting
commercial certainty and, therefore, the
court should not be astute to categorize
as penalties the clauses described as
liquidated damages. This principle is
relevant to regulatory regimes. It is
important to bear in mind that while
categorizing damages as “penal” or
“liquidated 68 damages”, one must keep
in mind the concept of pricing of theseCS(OS)No. 1362/1997 Page 29 of 43
contracts and the level playing field
provided to the operators because it is on
costing and pricing that the loss to BSNL
is measured and, therefore, all calls
during the relevant period have to be
seen.”
18. It would be appropriate to notice here that in the
case of Maula Bux vs. UOI (supra) the contract between the
parties was for supply of goods to the government and
therefore loss of the government on account of non-supply
of the goods could have been easily proved by the
government as was also noted by Supreme Court. In ONGC
vs. Saw Pipes Ltd (supra) the contract pertained to supply
of pipes required for deployment of rigs which were to be
used for production of gas and the plan for redeployment
and a revised plan had to be made for deployment of rigs on
account of various constraints including shortage of casing
pipes which were to be supplied by Saw Pipes Ltd. and
shortage of casing pipes being only one of the several
reasons leading to delay in deployment of rigs, the actual
damages on account of delay in supply of casing pipes could
not have been ascertained by the Court. In BSNL vs.
Reliance Communication Ltd. (supra), there was an
interconnection agreement between the parties which
CS(OS)No. 1362/1997 Page 30 of 43
provided for payment of liquidated damages and considering
that the telecom services in India are operating under
regulatory regime where all service providers are to be
afforded level playing field. The Court was of the view that
the compensation claimed by BSNL was pre-estimate of
damages and was not penal in nature.
19. In Shiva Jute Baling Ltd vs. Hindley and
Company Ltd, AIR 1959 SC 1357, the appellant company
entered into a contract with the respondent company for
supply of 500 bales of jute. The contract proved that in the
event of default of tender or delivery, the seller shall pay to
the buyer as and for liquidated damages, Rs 10 per ton plus
the excess (if any) of the market value over the contract
price, the market value being that of jute contracted for on
the day following the date of default. On the appellant
taking the stand that the contract had stood cancelled, the
respondent claimed default on the part of the appellant and
the matter was referred for arbitration. Upholding the
compensation awarded by the Arbitrator in terms of the
contract between the parties, Supreme Court, inter alia,
observed as under:-
CS(OS)No. 1362/1997 Page 31 of 43
“The argument under this head is that
the liquidated damages provided under
clause (12) of the contract include not
only the difference between the contract
price and the market price on the date of
default but also a further sum of 10s. per
ton. Reference in this connection is made
to Sections 73 and 74 of the Indian
Contract Act, and it is said that the extra
amount of 10s. per ton included in the
sum of liquidated damages is against the
provision of these section and therefore
the award being against the law of India
is bad on the face of it and should not be
enforced in India. Section 73 provides for
compensation for loss or damage caused
by breach of contract. It lays down that
when a contract has been broken, the
party who suffers by such 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. Section 74 provides
for breach of contract where penalty is
stipulated for or a sum is named and lays
down 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, 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. What clause (12) of
the contract provides in this case is theCS(OS)No. 1362/1997 Page 32 of 43
measure of liquidated damages and that
consists of two things, namely, (i) the
difference between the contract price and
the market price on the date default and
(ii) an addition of 10s. per ton above that.
There is nothing in s. 73 or s. 74 of the
contract Act, which makes the award of
such liquidated damages illegal.
Assuming that the case is covered by s.
74, it is provided therein that reasonable
compensation may be awarded for breach
of contract subject to the maximum
amount named in the contract. What the
arbitrators have done is to award the
maximum amount named in the contract.
If the appellant wanted to challenge the
reasonableness of that provision in clause
(12) it should have appeared before the
arbitrators and represented its case. It
cannot now be heard to say that simply
because clause (12) provided for a further
sum of 10s. per ton over and above the
difference between the contract price and
the market price on the date of the
default, this was per se unreasonable and
was therefore bad accordingly to the law
of India as laid down in Sections 73 and 74
of the Contract Act. Both these sections
provide for reasonable compensation and
s. 74 contemplates that the maximum
reasonable compensation may be the
amount which may be named in the
contract. In this case the arbitrators have
awarded the maximum amount so named
and nothing more. Their award in the
circumstances cannot be said to be bad
on the face of it, nor can it be said to be
against the law of India as contained in
these sections of the Contract Act.”
CS(OS)No. 1362/1997 Page 33 of 43
20. The propositions of law which emerge from the
statutory provisions contained in Section 73 & 74 of the
Indian Contract Act when examined in the light of a
cumulative reading of aforesaid decisions of Supreme Court
can be summarized as under:
a) If a party to the contract commits breach of the
contract, the party who suffers loss/damage on
account of such breach is entitled to receive such
compensation from the party in breach of the contract
which naturally arose in usual course of business, on
account of such breach or which the parties to the
contract knew, at the time of making the contract, to
be likely to result on account of its breach. However,
the party suffering on account of the breach is entitled
to recover only such loss or damage which arose
directly and is not entitled to damages which can be
said to be remote.
b) In case the agreement between the parties provides for
payment of liquidated damages, the party suffering on
account of breach of the contract even if it does not
prove the actual loss/damage suffered by it, is entitled
to reasonable damages unless it is proved that no loss
CS(OS)No. 1362/1997 Page 34 of 43
or damage was caused on account of breach of the
contract. In such a case, the amount of reasonable
damages cannot exceed the amount of liquidated
damages stipulated in the contract.
Any other interpretation would render the words
“whether or not actual damage or loss is proved to
have been caused thereby” appearing in Section 74 of
the Indian Contract Act absolutely redundant and
therefore the Court needs to eschew such an
interpretation.
c) If the amount stipulated in the contract, for payment
by party in breach of the contract, to the party
suffering on account of breach of the contract is shown
to be by way of penalty, the party suffering on account
of the breach is entitled only to a reasonable
compensation and not the amount stipulated in the
contract. If it is shown by the party in breach of the
contract that no loss or damage was suffered by the
other party on account of breach of the contract, the
party in breach of the contract is not liable to pay any
amount as compensation to the other party.
CS(OS)No. 1362/1997 Page 35 of 43
d) If the nature of the contract between the parties is
such that it is not reasonably possibly to assess the
damages suffered on account of breach of the contract,
the amount stipulated in the contract, for payment by
the party in breach should normally be accepted as a
fair and reasonable pre-estimate of damages likely to
be suffered on account of breach of the contract and
should be awarded.
21. In the case before this Court, though the plaintiff
company has not proved the actual damages suffered by it
on account of breach of contract by defendant No.1
company it cannot be disputed that some loss or damage
was definitely suffered by the plaintiff company on account
of the breach. No evidence has been led by defendant No.1
to prove that either on account of increase in price of raw
material/finished goods or for some other reason the
plaintiff company did not suffer any loss on account of the
failure of defendant No.1 to lift the balance quantity of
93,000 litres. As noted earlier, the facts and the
circumstances of the case including the letters written by
the plaintiff company to defendant No.1 from time to time,
coupled with the deposition of PW-1 Shri Ashok Dugar,
CS(OS)No. 1362/1997 Page 36 of 43
clearly show that the plaintiff company had either procured
the requisite raw material or had produced the finished
product, may be to the extent of 53,000 litres if not 93,000
litres. Vide its letter dated 21st October, 1995 (Exh. PW-
1/4) plaintiff company had written to defendant No.1 that
since the product agreed to be supplied to it was required
for application in wheat crop in north India and if it is not
disposed then, it will have to be stocked for next year and
therefore, there should not be any doubt left about their
lifting the entire quantity. The plaintiff company went to the
extent of requesting defendant No.1 company to re-assess
and let it know if defendant wished them to reduce any
quantity. In its reply dated 26.10.1995 Exh. (P-2 D1 and
D4) defendant No.1 did not dispute that if the contract
goods were not lifted by it, the plaintiff company would have
to carry the same for one year. In its letter dated
17.11.1995 (Exh. P-5 D1 & D4) which is an admitted
document, defendant No.1 company itself informed the
plaintiff company that the season had miserably failed, the
market had crashed and therefore they were not in a
position to make any commitment for lifting or making
financial arrangement. Therefore it cannot be disputed
CS(OS)No. 1362/1997 Page 37 of 43
that the goods agreed to be sold by the plaintiff to defendant
No.1 were seasonal in nature and if they were not sold by
December, 1995 the plaintiff company had necessarily to
carry the inventory upto next season. If the plaintiff
company did not manufacture any goods other than 7000
litres supplied by it to defendant No.1, it would have stored
the raw material procured by it till next season when it
would have utilized it for manufacturing the finished
product. The plaintiff company in such a case, suffered
damages on account of interest which it paid or it could
have earned on the amount paid for procurement of raw
material and would also have incurred cost in storing that
raw material for about one year. If the plaintiff company
had manufactured the remaining 93,000 litres of finished
product, it was deprived of use of the money which
defendant No.1 company would have paid to it in case it had
not committed breach of the contract and thereby it
incurred loss of interest on the amount which it would have
received from defendant No.1 company besides incurring
expenditure on storage of finished products. If the plaintiff
company partly manufactured the finished product and had
to store them upto the next year along with the raw material
CS(OS)No. 1362/1997 Page 38 of 43
required for production of the remaining quantity of the
finished product, the plaintiff company suffered a loss on
account of expenditure incurred in storage of the finished
product and raw material besides loss of interest on the
amount paid by it for the raw material. Even if I take a
conservative interest @ 12% p.a. the plaintiff company
would have suffered loss of about Rs.10 per litre besides the
expenditure incurred on storage of raw material/finished
product for about one year. In these circumstances, it can
hardly be disputed that the plaintiff company is entitled to
recover at least Rs.10 per litre from defendant No.1
company by way of damages for the loss suffered by it due
to breach of contract on the part of defendant No.1
company.
22. It was contended by the learned Counsel for the
defendants that it was incumbent upon the plaintiff
company to make efforts to mitigate the losses and no
evidence has been produced to prove any such effort. In
support of his contention he has relied upon Pannalal
Jugatmal vs. State of Madhya Pradesh AIR 1963 MP 242
and Firm Bhagwandas Shobhala Jain, a Registered Fir,
and Anr. vs. State fo Madhya Pradesh AIR 1966 MP 95.
CS(OS)No. 1362/1997 Page 39 of 43
In the case of Pannalal (supra) the Court was concerned
with a case attracting Section 73 of the Indian Contract Act
and not a case to which the provisions of Section 74 of the
Indian Contract Act applied. During the course of the
judgment the Court referring to Section 73 of the Indian
Contract Act observed as under:
14. Now, the rule is that damages are
compensatory and no penal and that one who has
suffered loss fro breach of contract must take every
reasonable step that is available to him to mitigate
the extent of damages caused by the breach. He
cannot claim tobe compensated by the party in
default for loss which is really due not to the breach
but to his own failure to behave reasonably after
the breach. This rule is incorporated in the
explanation to Section 73 of the Contract Act.
In case of Bhagwandas (Supra) which again was a
case attracting applicability of Section 73 of the Indian
Contract Act, the Court interalia observed as under:
33. It has also to be remembered that the
law imposes a duty upon the plaintiffs to take
all reasonable steps to mitigate the loss caused
by a breach of contract and debars him from
claiming compensation for any part of theCS(OS)No. 1362/1997 Page 40 of 43
damages which is due to his neglect to do
so;………………..
However, in the case before this Court since
admittedly the goods were seasonal in nature and therefore
could not have been disposed of till next year, it cannot be
said that the plaintiff company could have disposed them of
soon after there was breach of contract on the part of
defendant No.1. Moreover, since the market had crashed
and there were no buyers in the marked for the product as
is evident from the letter written by defendant No.1 to the
plaintiff on 17.11.1995, the plaintiff company would not
have been in a position to sell the goods manufactured by it
on the instructions of defendant No.1 company at a
remunerative price. Even if the plaintiff company had not
manufactured the finished goods, it would not have been
possible for it to sell the raw material procured by it, at the
same price at which it was procured. The raw material
meant for manufacture of seasonal goods could not have
fetched a ready buyer at the cost price of the plaintiff
company, in case it could not have been consumed for
about a year.
CS(OS)No. 1362/1997 Page 41 of 43
Since there was no breach of contract on the part
of the plaintiff, defendant no.1 is not entitled to recover any
amount from it and the counter claim is therefore liable to
be dismissed. The plaintiff company on the other hand is
entitled to recover a sum of Rs.9,30,000/- though only from
defendant No.1 company as damages @ Rs.10 per litre. The
issues are decided accordingly.
Issue No. 8
23. In view of my findings above, I hold that defendant
No.1 is not entitled to any interest from the plaintiff.
Issue No. 9
24. The plaintiff has claimed interest @ 18% p.a. on
the price of 7000 litres of the finished product which it had
supplied to defendant No.1 company. No agreement
between the parties for payment of interest has either been
pleaded or proved by the plaintiff. However, since this is a
suit for price of goods sold and delivered, interest can be
awarded to the plaintiff under Section 61(2) of the Sales of
Goods Act. Considering the nature of transaction between
the parties, I am of the view that interest should be awarded
to the plaintiff company @ 12% p.a. Calculated on the
aforesaid rate, the amount of interest comes to Rs.93,008/-.
CS(OS)No. 1362/1997 Page 42 of 43
The plaintiff is entitled to recover the aforesaid amount from
defendant No.1 as interest. The issue is decided
accordingly.
Relief
25. In view of my findings on other issues defendant
No.1 is not entitled to recover any amount from the plaintiff.
The plaintiff however, is entitled to recover a total sum of
Rs.11,14,160/-from defendant No.1 company alone.
ORDER
For the reasons given in the preceding paragraphs
a decree of Rs.11,14,160/- with proportionate costs and
pendent lite and future interest @ 12% p.a. is hereby passed
in favour of plaintiff and against defendant No.1. The suit
against the other defendants is dismissed without any order
as to costs.
Decree sheet be prepared accordingly.
(V.K. JAIN)
JUDGE
MAY 13, 2011
bg/vn
CS(OS)No. 1362/1997 Page 43 of 43