Supreme Court On Contractual Damages and Liquidated Damages

The Supreme Court of India, in SAHAKARMAHARSHI BHAUSAHEB THORAT SAHAKARI SAKHAR KARKHANA LTD. VS THYSSEN KRUPP INDUSTRIES INDIA PVT.LTD., Civil Appeal No. 3194 of 2014, dismissed the appeal filed by the appellant, thereby upholding the High Court's decision that had set aside a portion of the arbitral award amounting to Rs. 68.15 lakhs.

The disagreement was rooted in an agreement entered into on November 17, 1992, between the respondent and the appellant for design, procurement, production, and supply of equipment for a continuous fermentation process. The contract had a minimum alcohol yield guaranteed under performance. The contract provided for liquidated damages provisions. There was the delay and a failure to achieve the promised yield, following which the appellant went to arbitration. The arbitration clause was invoked by the appellant claiming various damages. The Arbitral Tribunal granted portions of the claim, giving rise to proceedings before the Civil Court and the High Court. The High Court, in the impugned order, set aside the arbitral award with regard to the Rs. 68.15 lakhs claim as being speculative. This led the appellant to approach the Supreme Court with an appeal.

The claim made by the appellant before the Arbitral Tribunal consisted of delay damages, failure of guaranteed performance, loss of production, and a refund of the amount incurred on the plant of Rs. 107.54 lakhs. Whereas the Arbitral Tribunal had earlier allowed certain of the claims, such as liquidated damages and refund, these were assailed in later court proceedings. The Supreme Court's current judgment centered on the claim of Rs. 68.15 lakhs by the appellant for loss incurred on account of non-functioning machinery, which the High Court had held as speculative.

The Supreme Court observed that the appellant's claim for Rs. 68.15 lakhs was essentially a claim for a refund of the investment made in the plant, as stated in paragraph 16 of their claim before the Arbitral Tribunal, rather than a claim based on the rectification or replacement costs under Clause 21 of the agreement. The Apex Court highlighted that despite Clause 21 providing the appellant with the option to replace defective machinery at the expense of the respondent if the respondent did not do so, this choice was not availed by the appellant.

The Apex Court also noted that the claim of Rs. 68.15 lakhs by the appellant was interpreted as a refund of investment claim, and not as rectification or replacement costs under Clause 21 of the agreement.

Clause 21 of the agreement entitled the appellant to replace faulty machinery at the cost of the respondent, which was not availed.

Clause 15 of the agreement stipulated liquidated damages for non-performance, which the appellant had already availed.

Section 74 of the Contract Act limits the claim for damages to what is expressly provided under the contract when liquidated damages are stipulated.

The appellant kept the plant and machinery and did not seek the remedy of replacement under Clause 21. The Court also observed that the contract already contained liquidated damages in Clause 15 in case of non-performance of the warranties contained in Clause 8, and the appellant had received part payment under this clause. Following Section 74 of the Indian Contract Act, 1872, the Supreme Court held that the claim for damages by the appellant was limited to the express terms of the contract. Hence, Supreme Court rejected the appeal thereby confirming the order of the High Court.

Coram: Justice Abhay S. Oka and Justice Ujjal Bhuyan
Between: SAHAKARMAHARSHI BHAUSAHEB THORAT SAHAKARI SAKHAR KARKHANA LTD. VS THYSSEN KRUPP INDUSTRIES INDIA PVT.LTD 2025 INSC 219
Date of Judgment: 14-02-2025