India: To Prove Or Not To: Enforcing A Claim For Liquidated Damages

Contractual Purpose and Statutory Basis for Liquidated Damages

Liquidated damages are priorly estimated sums of compensation which are decided by parties at the time of formation of a contract, to be enforced if a breach is caused. Caution presupposed to have been observed by the parties when such formula for estimation of damages are affixed in contractual clauses.

This is in furtherance of the understanding that losses suffered that may be intangible or otherwise hard to establish are tentatively reflected by liquidated damages – the purpose for such inclusion itself being to dispense with the requirement to show proof.1 This understanding may also be gathered from reading of Section 74 of the Indian Contract Act, 1872, which uses the phrase "whether or not actual damage or loss is proved to have been caused"2 to enforce a claim for liquidated damages. A 'genuine pre-estimate of losses'3 is understood to be indicated in such clauses, unless they are unreasonable, excessive4, illegal5 or in the nature of a penalty.

A STRINGENT ONUS OF PROOF

Courts have been skeptical in enforcing liquidated damages clauses as it is, unless the Claimant establishes at least some semblance of loss6 – such a demand still being within the boundaries of possible tenderable proof. However, in most instances, they have demanded a strict threshold of proof to establish the exact nature and degree of loss or damage that has been caused on account of the repudiation of the contract.7 This demand defeats the very purpose for which liquidated damages clauses are inserted in contracts. For instance, expenses of standing nature such as deploying supervisory staff, manning of construction sites, etc. which may be incurred due to delays in delivering as per key deadlines in complex infrastructure contracts, especially when other interfacing contracts are dependent on the meeting of such deadlines or causing delivery of defective/faulty tools/supplies which are pre-requisites in the performance of allied construction contracts further necessitate the automatic trigger-based enforceability for liquidated damages clauses in comprehensive contracts.8

A REAL LOSS BASED ON HYPOTHETICAL ESTIMATION

Merely by reason of the fact that liquidated damages are pre-estimates and reflect tentatively of losses that may be incurred on the happening or non-happening of certain events in contractual performance, it cannot be said that such clauses are hypothetical and therefore must be rendered infructuous. As long as such estimates are determined in a genuine manner (by applying appropriate formulae, in consonance with fluctuating factors such as exchange rates, long-term price inflation, etc.) and stemming from a genuine cause (such as, loss to an organization on account of no-show by a hired professional expert leading to withdrawal from specific project9, etc.), they must be enforced as a 'genuine pre-estimate of loss' sans actual proof.

As long as this fundamental test of genuineness is met, Courts must loosely and willingly enforce liquidated damages provisions in contract without demanding proof of actual loss caused. This approach must be further lax when it is evident from the communications between the parties that extensions for performance were being denied and therefore, time was of essence in such contracts.10

CONCLUSION

The question surrounding the nature of a liquidated damages clause in a contract must be objectively assessed to establish whether it functions 'in terrorem' (as a penalty and therefore having deterrent effect) or simply represents a genuine pre-estimate of loss suffered on account of the breach.11 As long as it serves a compensatory function, liquidated damages should be allowed without the requirement to quantify exact losses. Many a times, Courts refuse to entertain claims that involve mutual faults of both parties and therefore require apportionment of delay liability, in order to assess whether liquidated damages must be awarded or not.12 Such kind of a cryptic 'all-or-nothing' approach is untenable; such an approach must only be adhered to in situations where the claimant of damages expressly acts against contractual provisions (for e.g., allowing extension of time when such was expressly barred by the contract).

Courts must be open and willing to enforce claims for liquidated damages, relying more on equitable doctrines. This would necessarily require a judicial approach that is premised on a more elastic standard of rendering proof of loss and awarding liquidated damages as it is, as long as the pre-requisite of genuinity is met.

Footnotes

1 M.S. Mohd Danuri, M.E. Che Munaaim and L.C. Yen, 'Liquidated Damages in the Malaysian Standard Forms of Construction Contract: The Law and Practice', Construction Law Journal (2009), p. 2

2 § 74, The Indian Contract Act, 1872

3 X.L. Energy Ltd. v. Mahanagar Telephone Nigam Ltd., MANU/ DE/1892/2018

4 Ledella Ravichander v. Satyam Computer Services Limited, 2011 SCC AP 76

5 Shiva Jute Baling Ltd. v. Hindley and Co. Ltd., AIR1959SC 1357

6 Leviable liquidated damages in the form of a price reduction clause as was in the case of Engineers India Ltd. v. Tema India Ltd., MANU/ SCOR/07762/2018

7 Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405; Maula Baux v. Union of India, AIR 1970 SC 1995; ONGC v. Saw Pipes, 2003 (5) SCC 705

8 Philips Hong Kong Ltd. v. The Attorney General of Hong Kong, (Privy Council) 1993 WL 963001

9 Tullett Prebon Group v. Ghaleb El-Hajjali, [208] EWHC 1924 (Queen's Bench)

10 Sudhir Gensets Limited v. Indian Oil Corporation, 2011 (177) DLT 438

11 Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Co Ltd, [1914] UKHL 1

12 Gogo v. Los Angeles County Flood Control Dist., (1941) 45 CA2d 334

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