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If clause for damages present, Party entitled to reasonable compensation whether or not actual loss occurred

High Court of Delhi

Mahanagar Telephone Nigam Limited v. Haryana Telecom Limited




Party complaining breach of contract is entitled to reasonable compensation whether or not actual loss is proved to have been caused

Mahanagar Telephone Nigam Limited ('MTNL') has filed present petition under Section 34 of Arbitration & Conciliation Act, 1996 challenging an Award dated 12th March, 2003 passed by Arbitral Tribunal ('AT') in disputes between MTNL and Respondent, Haryana Telecom Limited ('HTL'). AT held that, since MTNL failed to prove actual loss or damage on account of delayed delivery of goods and since, mere delay in supplies was unlikely to cause damages, question of even fixing a reasonable compensation under Section 74 of Indian Contract Act, 1872 ('ICA') did not arise. Consequently, MTNL was asked to refund HTL sum of Rs. 1,03,20,763 together with interest @ 12% from the date of Award till the date of payment.

In present case, it is not possible for Court to agree with submission on behalf of HTL that, MTNL was required to prove actual loss suffered by it. Purpose of first part of Clause 16.2 is to provide for a genuine pre-estimate of damages payable as LD even without requirement of having to prove actual loss. Section 74 of ICA emphasises that, in case of a breach of contract, party complaining the breach is entitled to reasonable compensation whether or not actual loss is proved to have been caused.

In present case, AT proceeded on erroneous basis that, first part of Clause 16.2 required proof of actual loss. In fact, first part of said clause applied only where "delayed portion of supply does not in any way hamper commissioning of system." If it did, then second part of Clause 16.2 applies. Very interpretation of Clause 16.2 and of Section 74 of ICA by AT was, therefore, flawed.

Specifically, AT has overlooked legal position as explained in ONGC v. Saw Pipes Limited and, in particular, its observation that "in some contracts, it would be impossible for Court to assess compensation arising from breach and if compensation contemplated is not by way of penalty or unreasonable, Court can award same, if it is genuine pre-estimate by parties as measure of reasonable compensation." Conclusions of AT that: "Forfeiture of part of price is out of all proportion to damage" and that "It is unconscionable for purchaser to retain and withhold part of price" is not on basis of analysis of pleadings or evidence. Specifically, plea of MTNL that it purchases materials from several sources and "delay caused by one of suppliers by itself cannot be pleaded and proved" and, therefore, present case "falls within that class where Court may not be able to assess compensation on account of breach of contract to supply some material" was not even discussed by the AT. Purport of HTL's letter No. Nil dated 6th May, 1995 to MTNL stating that, it was ready to "accept price and L/d as acceptable to MTNL" was also not examined.

Interpretation of Clause 16.2 by AT is such that, no fair minded or reasonable person would adopt in facts and circumstances of case. Impugned Award is also contrary to settled legal position as regards Section 74 of the ICA. Consequently, impugned Award is set aside on ground that, it is contrary to provisions of contract, the ICA and also opposed to fundamental policy of Indian law as explained in decisions of Supreme Court. MTNL is not liable to return sum claimed from it by HTL.


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A bench comprisi…