2012 (10) TMI 1165 - HC - Indian Laws

Summary

Issues Involved:
1. Validity of the imposition and recovery of liquidated damages/penalty without judicial/quasi-judicial determination.
2. Applicability of the dispute redressal mechanism under Clause 24 of the General Condition of Contract.
3. Legal principles governing the recovery of damages for breach of contract.

Summary:

1. Validity of the Imposition and Recovery of Liquidated Damages/Penalty:
The petitioner challenged the imposition of damages/penalty amounting to Rs. 5,42,90,686/- by the respondents, arguing that no liability on account of damages/penalty has been crystalized as there is no judicial/quasi-judicial determination thereof either by any Court or by the Arbitrator. The court held that the respondents cannot recover the amount of penalty and liquidated damages without adjudication by the Arbitral Tribunal/Court when the imposition of the penalty/liquidated damages is challenged by the petitioner. The court emphasized that as per Section 73 of the Contract Act, compensation for breach of contract can only be awarded after proving actual loss or damage suffered. The court cited the Supreme Court's ruling in Union of India Vs Raman Iron Foundry, AIR 1974 SC 1265, which stated that a claim for liquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority.

2. Applicability of the Dispute Redressal Mechanism:
Clause 24 of the General Condition of Contract provides a dispute redressal system, which includes referring disputes to a competent authority and, if necessary, to a Standing Empowered Committee. The court noted that the petitioner had previously withdrawn writ petitions with liberty to invoke the alternative remedy of arbitration available under the contracts. The court reiterated that disputes between the parties should be redressed based on the mechanism provided under Clause 24.

3. Legal Principles Governing the Recovery of Damages for Breach of Contract:
The court discussed the principles under Sections 73 and 74 of the Contract Act, highlighting that damages for breach of contract must be proved and are awarded to compensate for actual loss or damage suffered. The court referred to the Supreme Court's decision in ONGC Ltd. Vs Saw Pipes Ltd., AIR 2003 SC 2629, which held that reasonable compensation can be claimed for breach of contract, whether or not actual loss is proved, provided it is a genuine pre-estimate of loss. The court concluded that even if there is a clause of liquidated damages, it is for the court to determine whether it represents a genuine pre-estimate of damages, and the person claiming liquidated damages must prove that legal injury resulted from the breach.

Conclusion:
The court quashed the impugned communication dated 11.06.2012 addressed to the respondents No. 04 to 42, ruling that the respondents cannot recover the imposed penalty/liquidated damages from other contracts being executed without judicial determination. The writ petition was allowed, and the rule was made absolute.