M/S. CHIMMCO BIRLA LTD ENGINEERING & PROJECTS DIVISION v. THE COCHIN PORT TRUST

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE V.CHITAMBARESH** **&** **THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI** **TUESDAY ,THE 19TH DAY OF FEBRUARY 2019 / 30TH MAGHA, 1940** **Arb.A.No. 22 of 2003** **AGAINST THE ORDER IN OP ARB 62/2002 of FIRST ADDITIONAL DISTRICT COURT, ERNAKULAM DATED 30-05-2003** ## **APPELLANT/RESPONDENT/CLAIMANT:** **M/S.CHIMMCO BIRLA LTD ENGINEERING & PROJECTS DIVISION, UCO BANK BUILDING, NO.5, PARLIAMENT STREET, NEW DELHI -110001.** **BY ADV.PAUL KURIAKOSE.K** ## **RESPONDENT/RESPONDENT:** **THE COCHIN PORT TRUST REPRESENTED BY THE CHIEF MECHANICAL ENGINEER, COCHIN PORT TRUST, WILLINGDON ISLAND, COCHIN-682008.** **BY ADVS. NOBY THOMAS CYRIAC SRI.ABRAHAM JOSEPH MARKOSE SRI.ABRAHAM MARKOS SRI.BINU MATHEW SRI.TOM THOMAS SRI.ISSAC THOMAS** **THIS ARBITRATION APPEAL HAVING BEEN FINALLY HEARD ON 12.02.2019, THE COURT ON 19.02.2019 DELIVERED THE FOLLOWING:** Arb.Appeal No.22/2013 2 ## **V.CHITAMBARESH &** ## **R.NARAYANA PISHARADI, JJ.** ************************** Arb.Appeal No.22 of 2003 ---------------------------------------------Dated this the 19[th] day of February, 2019 ## **J U D G M E N T** ## **R.Narayana Pisharadi, J** Legality of the levy of liquidated damages, on delay in execution of contract work, is the core issue for consideration in this appeal. 2. The Cochin Port Trust (hereinafter referred to as 'the respondent') invited global tenders for fabrication, supply, erection and commissioning of two cranes at the wharf at Ernakulam. The tender submitted by M/s.Cimmco Birla Limited (hereinafter referred to as 'the claimant') was the lowest and it was accepted. The order for the first crane was placed on 06.06.1994 and the order for the second crane was placed on 09.09.1994. As per the terms of the contract entered into between the claimant and the respondent, the work had to be completed and the commissioning of the first crane had to be done on or before the date 05.06.1995 and the second crane, on or before the date 09.09.1995. Time was the essence of the contract. However, Arb.Appeal No.22/2013 3 there was delay in completion of the work. The periodical requests made by the claimant, for extension of time for completion of work, were granted by the respondent subject to the condition in the contract with regard to levy of liquidated damages. After the completion of the work, when final bill submitted by the claimant was paid, the respondent deducted 15% on the executed value of the work as liquidated damages. The disputes which then arose between the parties were referred to arbitration as provided in the contract. 3. The arbitral tribunal consisted of three arbitrators. The arbitral tribunal found that all claims made by the claimant, except Claim No.1, cannot be allowed. Regarding Claim No.1 relating to liquidated damages, as per the majority award passed by the arbitral tribunal, it was found that, in the absence of proof of sustaining any specific loss, the respondent was not entitled to levy any liquidated damages from the claimant. The respondent was directed to pay an amount of Rs. 77,44,857/- to the claimant with interest at the rate of 15% per anum. 4. The respondent filed application under Section 34(1) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') in the District Court, Ernakulam challenging the majority award passed by the arbitral tribunal. The learned Additional District Judge found that the award passed is against the terms of the contract Arb.Appeal No.22/2013 4 between the parties and set aside the award. The claimant has challenged the aforesaid order in this appeal. 5. We have heard learned counsel for the appellant as well as the respondent. We have also perused the available records. 6. There is no dispute with regard to the fact that, as per the terms of the contract entered into between the claimant and the respondent, the work had to be completed and the commissioning of the first crane had to be done on or before the date 05.06.1995 and the second crane, on or before the date 09.09.1995. There is also no dispute with regard to the fact that the claimant did not complete the work within the period provided in the contract. 7. The time fixed for completion of the work was extended by the respondent periodically at the request of the claimant upto the date 31.01.1997. Extension of time was granted each time subject to the right of the respondent to recover liquidated damages as per the provisions of the agreement executed between the parties. 8. The work order, which forms part of the contract, provided that in the event of failure of the contractor to complete the work and hand over the equipment within the contractual delivery period, the contractor was liable to pay liquidated damages as per Article 23 of Section 3 of the bid document. It was also agreed that the maximum Arb.Appeal No.22/2013 5 liquidated damages shall be 15% of the total contract value separately for the crane and the spares. 9. The bid document is a part of the contract. Article 23.1.1 of the bid document reads as follows: _“In the event of failure of the seller to complete the work or supply of equipment with spares complete in all respects as per specifications as ordered within the completion period stipulated in the order/bid or within the extended period as may be granted by the owner in accordance with the relevant clause thereof (Provided the extension so granted will not affect the stipulation “time is essence of the contract”, as such extended time shall be added to the date of completion for the purpose of arriving the period of delay) the Seller shall pay to the Owner as liquidated damages and not as penalty for the delay, a sum equivalent to (1/2%) one half percentage of the total contract price of the item/items per week for such delay or part thereof, the maximum of which shall not exceed (15%) fifteen percentage of the total contract price of the item/items. The liquidated damages fixed as above shall be considered as reasonable compensation without any actual proof of loss or damage. The Owner shall have power to deduct sum or sums from the amount due to the Seller.”_ 10. Learned counsel for the appellant contended that a reading of Article 23.1.1 of the agreement would clearly indicate that in case Arb.Appeal No.22/2013 6 of extension of the period for completion of the work, the time originally fixed for completion of the work would get extended. Learned counsel also invited our attention to the stipulation made in Article 23.1.1 of the agreement that liquidated damages shall be payable by the claimant on failure to complete the work “ _within the extended period as may be granted by the owner”_ in accordance with the relevant clause _._ Learned counsel has contended that since extension of time was granted by the respondent and since the work was completed within the extended time, the respondent was not entitled to levy any amount as liquidated damages from the claimant. Learned counsel has also contended that since the respondent did not prove sustaining of any loss or damage on account of delay in completion of the work, liquidated damages could not be levied. 11. _Per contra_ , learned counsel for the respondent submitted that extension of the period for completion of the work was granted by reserving the right of the respondent to recover liquidated damages as provided in the agreement. Learned counsel contended that since extension of the period for completion of the work was granted subject to such condition, the respondent is entitled to recover the amount of liquidated damages from the claimant. Learned counsel further contended that when stipulation regarding recovery of liquidated Arb.Appeal No.22/2013 7 damages is made in the agreement, it is not necessary to prove actual loss or damage. 12. The contention of the appellant/claimant is attractive but without any substance. Mere extension of time granted by the respondent for completion of the work will not extinguish the right of the respondent to levy liquidated damages from the claimant. A close scrutiny of Article 23.1.1 of the agreement reveals that the right of the respondent to levy liquidated damages will get extinguished only if extension of time for completion of work is granted “in accordance with the relevant clause” in the agreement. The relevant clause is Article 23.1.2. It provides as follows: _“No variation made in the work or supply shall be any excuse for delay in completing the work or supply, nor prevent the reduction of the said liquidated damages, unless an extension of the completion period shall have been granted by the ” Owner in writing of such variation._ (emphasis supplied). Extension of time mentioned in the aforesaid clause is with regard to extension of time on account of variation made in work or supply. If any such extension, as provided under Article 23.1.2, is granted by the respondent, then it would affect the right of the respondent for liquidated damages. If any delay is caused in completing the work on Arb.Appeal No.22/2013 8 account of laches on the part of the claimant and instead of terminating the agreement, if extension of time for completion of work is granted by the respondent, such extension of time will not extinguish the right of the respondent to levy liquidated damages. 13. Copies of the letters sent by the respondent to the claimant, granting extension of time for completing the work, have been made available for our perusal. These letters reveal that extension of the period for completion of the work was granted each time by the respondent by reserving the right to recover liquidated damages as provided in the agreement. Despite such specific condition, the claimant continued the execution of the work. It would indicate that, even at the time of granting the extensions, the claimant was agreeable to pay liquidated damages. 14. Even assuming that as per Article 23.1.1 of the agreement liquidated damages could be levied from the claimant only if the work was not completed within the extended period, since the right to levy liquidated damages was reserved by the respondent at the time of granting extension and since the claimant proceeded with the work on the basis of such extension of time, it amounted to modification of the terms of the contract to that extent by the parties. 15. It is specifically provided in the agreement that the Arb.Appeal No.22/2013 9 liquidated damages fixed shall be considered as reasonable compensation and not as a penalty, without any actual proof of loss or damage. When parties had expressly agreed that recovery of amount from the contractor for breach of the contract is genuine liquidated damages and it is not by way of penalty, there was no justifiable reason for the arbitral tribunal to arrive at a conclusion that still the respondent should prove loss suffered by it due to delay in execution of the work. 16. The right to claim liquidated damages is enforceable under Section 74 of the Indian Contract Act. Where such a right is found to exist, no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages, there can be no presumption that they, at the same time, intended to allow the party who has suffered by the breach to give a go by to the sum specified and claim instead a sum of money which was not ascertained or ascertainable at the date of the breach (See **Chunilal** ## **Mehta v. Century Spinning and Manufacturing Company Limited: AIR 1962 SC 1314** ). 17. Sections 73 and 74 of the Indian Contract contain the provisions with regard to payment of compensation for loss or damage caused to a party by breach of contract. The aforesaid provisions Arb.Appeal No.22/2013 10 indicate that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arises in the usual course of things from such breach. These sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the court arrives at the conclusion that no loss is likely to occur because of such breach. 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. Section 74 of the Contract Act 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. The emphasis is on reasonable compensation. 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. 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 Arb.Appeal No.22/2013 11 such breach. If the terms of the contract 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 (See **Oil and Natural Gas Corporation Limited v. Saw Pipes Limited : AIR 2003 SC 2629** ). 17. The observations made by the Apex Court in **ONGC** (supra) are relevant here. The Apex Court stated as follows: _"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. .... 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. It has been specifically mentioned that it was an agreed genuine pre - estimate of damages duly_ Arb.Appeal No.22/2013 12 _agreed by the parties. It was also mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods. Further, while extending the time for delivery of the goods, respondent was informed that it would be required to pay stipulated damages"._ 18. The learned Additional District Judge has rightly found that the award passed by the arbitral tribunal is against the terms of the contract between the parties and therefore, liable to be set aside in the light of the decision of the Apex Court in **ONGC** (supra). The appeal is liable to be dismissed. Consequently, the appeal is dismissed. No costs. (sd/-) ## **V.CHITAMBARESH, JUDGE** (sd/-) ## **R.NARAYANA PISHARADI, JUDGE** jsr/18/02/2019 True Copy PS to Judge