India: Claiming Both Liquidated Damages And Risk Purchase Costs: A Myth Or A Reality?

I. INTRODUCTION

This article attempts to address a common issue which arises in disputes arising from breach of commercial contracts executed by and between the Principal Employer and the Contractor. In this era of rapid growth and development, timely execution of commercial contracts is of utmost importance. However, in course of performance of contracts, breaches by one party to the prejudice of the other party is also inevitable. Such breach calls for financial compensation to the affected/ aggrieved party for loss or injury by the party in breach in the nature of "damages".

Generally speaking, in case of breach of contract, a sum is awarded to restore the affected party to the economic position the parties expected to be in upon due and proper execution/ performance of the contract. However, it is not practically possible or viable to award damages in such manner and apply it as a straitjacket formula irrespective of the provisions of the contract. The affected party may claim damages with a view to restore itself to the economic position it occupied at the time of execution of the contract or to prevent the party in breach from being unjustly enriched. Apart from the above standard terms of contract, parties while executing modern day contracts agree for predetermined measure of damages in the form of "liquidated damages" to be paid upon breach of the contract by one of the parties. Usually, liquidated damages are quantified and limited to stipulated percentage of the contract value. However, merely because the parties agree to a maximum ceiling limit for claiming liquidated damages, that by itself does not preclude the parties from claiming or recovering damages on other accounts, if otherwise the contract provides for the same and the actual damages suffered is much more.

It is a common myth that in a contract that provides for payment of liquidated damages for its breach, the party complaining of the breach can recover from the party in breach only a reasonable compensation not exceeding the amount of the liquidated damages that has been agreed upon. The judgements of the Supreme Court, namely Fateh Chand vs. Bal Kishan Das¹, Kailash Nath Associates vs. Delhi Development Authority², and ONGC vs. Saw Pipes³, are wrongly relied upon to support the aforesaid myth. However, each of the aforesaid judgments, lays down the law only with respect to awarding damages under Section 74 of the Indian Contract Act, 1872 and do not mention Risk Purchase Costs being claimed under a separate contractual clause and hence do not throw light on the issue whether Liquidated Damages and Risk Purchase Costs may be claimed simultaneously. The proposition of law that the aggrieved party is only entitled to a reasonable compensation which should not exceed the sum of penalty or pre-determined amount which has to be paid after the breach of the contract, may be held to be correct, if the relevant provision of the contract does not expressly or by necessary implication keep alive the right to claim damages under the general law, the right to claim the same may be necessarily excluded.⁴

However, the above proposition may not hold good when the parties had specifically agreed to imposition of liquidated damages in the nature of penalties for a specific breach, for example, failure to meet specific milestone date or loss of profits or loss of production resulting therefrom. In addition to the provision for Liquidated Damages, subject to the terms of the contract the aggrieved party may be well within his or her rights to recover risk purchase costs/ additional costs and expenses incurred for engaging third parties for carrying out balance work / supply of materials, etc with a view to avoid delay in contemplation and/or mitigate further delay.

Therefore, claiming of Liquidated Damages and Risk Purchase Costs simultaneously is indeed a reality but would necessarily depend upon the terms and conditions of the contract which would essentially govern the right of the parties. But the mere existence of provision for Liquidated Damages in a contract which may provide for a maximum ceiling limit in terms of stipulated percentage of the contract value would per se not be a bar from recovering actual damages incurred under other heads.

II. CLAIM BOTH LIQUIDATED DAMAGES AND RISK PURCHASE

In the aforesaid background, subject to the provisions of the contract,⁵ Liquidated Damages and Unliquidated Damages (including Risk Purchase costs) both may be claimed for following reasons:

1. Different cause and purpose of Liquidated Damages Clause and Risk Purchase

Clause

Liquidated Damages are penal/ compensatory in nature which is imposed on the Contractor for the delay and damage suffered by the Principal Employer due to such delay in execution of the works under the contract. Additional costs/ Risk purchase costs on the other hand are in the nature of reimbursements claimed by the principal towards costs and expenses incurred for engaging third parties/ purchasing materials from third parties and includes additional costs incurred to avoid delay in contemplation and/ or mitigate further delay. Hence, Liquidated Damages is limited to the damages incurred generally due to delay (once the factum of delay has already occurred) and the other Unliquidated Damages including Risk purchase costs are wider in that sense as it generally relates to all costs and expenses incurred due to default to avoid delay in contemplation and/or mitigate further delay (the factum of delay may not have occurred and is being prevented). Moreover, this is further corroborated by the Supreme Court's holding in Steel Authority vs. Gupta Brothers⁶, that it may not be the intention of the party to recover for all types of breaches by way of a Liquidated Damages clause.

2. The Indian Contract Act, 1872 itself provides for compensation under the heads of 'loss or damage caused by breach of contract' under Section 73 and 'breach of contract where penalty stipulated for' under Section 74.

The Liquidated Damages component claimed for is under Section 74⁷ in the nature of a penalty for breaching the contract by failing to meet milestones and the remaining component of unliquidated damages may be claimed for under Section 73⁸ as loss suffered or damage caused by breach of contract i.e. direct costs of hiring third party/ purchasing materials which was the known natural consequence of default.

3. No bar in claiming liquidated and unliquidated damages on account of separate breaches concurrently

The Supreme Court in Steel Authority vs. Gupta Brothers⁹, has held that existence of a Liquidated Damages clause is not a bar to recovery of damages under other clauses under the contract. The Bombay High Court in Oil & Natural Gas Corporation Limited vs. Soconord OCTG and Soconord vs. Oil & Natural Gas Corporation Limited¹⁰, has followed the Supreme Court's aforesaid view and in Simplex Infrastructures Limited vs. Siemens Limited & Anr.¹¹, has noted that reimbursements of payments made on behalf of the Contractor is separate from Liquidated Damages. Similarly, the Delhi High Court in M/s Saraya Distillery vs. Union of India and Anr.¹², has noted that there can be different remedies 'without prejudice to each other' under the contract for different breaches of the contract, for instance, right of repurchase (loss claimed on account of repurchase) and right of the purchaser to recover damages for breach of the contract.

Hence, in view of the foregoing judgments it is fairly settled that there is no bar that once there is a Liquidated Damages clause in respect of a particular claim, damages cannot be awarded although they arise on account of another claim albeit under the same contract.

4. Ceiling on Liquidated Damages not applicable to Damages claimed on another account

The Bombay High Court in Oil & Natural Gas Corporation Limited vs. Soconord OCTG and Soconord vs. Oil & Natural Gas Corporation Limited¹³, has held that if a Liquidated Damages clause stipulates a ceiling on account of delay in delivery then such a clause would not prevent a party from claiming damages on account of the goods supplied under the contract being defective. Hence, in furtherance of the legal principle that Liquidated Damages and Risk Purchase costs may be claimed simultaneously, it is only fair that the ceiling provided for the claim on account of Liquidated Damages is not made applicable to the claim on account of Risk Purchase costs.

III. CONCLUSION

It is a settled position of law that for interpreting a provision of a contract, the intention behind execution of the contract by the parties is sacrosanct and needs to be determined. If the parties to a contract, out of their own free will and volition agreed to concurrently apply different provisions of the contract within their ambit for dealing with different breaches, the provision for liquidated damages stipulating a maximum ceiling limit would be construed merely as one of the modes to recover damages for a specific breach only. Such a provision would not act as a bar in a case where the contract itself provides for and allows the affected party to claim damages under various other heads including – Risk Purchase Costs/ Additional Costs in addition to and apart from the stipulated Liquidated Damages. Therefore, Liquidated Damages and Other Damages (Unliquidated) such as Risk Purchase costs/ Additional Costs both can be claimed simultaneously and the ceiling on Liquidated Damages claim cannot be made applicable to claim of damages under other heads.

Footnotes

1. (1964) 1 SCR 515

2. (2015) 4 SCC 136

3. 2003 (5) SCC 705

4. Sir Chunilal V. Mehta and Sons Ltd. vs. Century Spinning and Manufacturing Co. Ltd., 1962 Supp. (3) SCR 549

5. In situations where provisions of the contract between the parties reveal that the parties agreed to claim for liquidated damages or risk purchase then the intention of the parties crystallized into the words of the contract will prevail. An example of such a clause is as follows:

Failure and termination: If the contractor fails to deliver the stores or any Installment thereof within the period fixed for such delivery or at any time repudiates the contract before the expiry of such period, the Secretary may without prejudice to the right of the Purchaser to recover damages for breach of the contract:

(I) recover from the contractor as agreed "liquidated damages" and not by way of penalty a sum equivalent to 2% of the price of any stores which the contractor has failed to deliver within the period fixed for delivery in the schedule for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after expiry of the aforesaid period, or

(II) purchase or authorise the purchaser elsewhere without notice to the contractor, on the account and at the risk of the contractor of the stores not go delivered or others of a similar description (where stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily procurable) without cancelling the contract in respect of the Installments not yet due for delivery, or

(III) cancel the contract or a portion thereof and if so desired purchase or authorise the purchase of the stores not so delivered or others of a similar description (where stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily procurable) at the risk and cost of the contractor. If the contractor had defaulted in the performance of the original contract, the purchaser shall have the right to ignore his tender for risk purchase even though the lowest.

[See Henrys Clerks Co. vs. Union of India, ILR (1980) II Delhi, para 7. Please note that in this case the Delhi High Court did not comment on the issue of whether liquidated damages and risk purchase both can be claimed simultaneously.]

6. 2009 (10) SCC 63, paras 21 to 26

7. Section 74: Compensation for breach of contract where penalty stipulated for:

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.

Explanation- A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Exception- When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 1*[Central Government] or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Explanation. - A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested".

8. Section 73: Compensation for loss or damage caused by breach of contract:

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. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract - When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.

Explanation - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

9. Ibid.

10. 2014 SCC Online BOM 1277, paras 28, 43-46

11. 2015 (5) MhLJ 135, paras 4, 13

12. AIR 1984 Del 360, paras 2-3, 8-9, 11-12

13. Supra note 10.

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