The Kerala High Court has held that in the case of a breach of contract, no compensation can be granted under Sections 73 and 74 of the Indian Contract Act unless it resulted in an actual loss or damage to the aggrieved party.
The Bench comprising of Justice P.B. Suresh Kumar and Justice C.S. Sudha observed that proof of the extent of actual damage or loss suffered is dispensed with in Section 74 but it wouldn't mean that there need not be any loss or damage as it only meant that proof of actual damage or loss is not necessary.
Brief Facts of the Case
The appeal has been filed under Section 37 of the Arbitration and Conciliation Act, 1996.
The facts of the case are such that the appellant has been awarded contract for some railway work in 2000 for almost ₹1.20 crores to be completed within nine months.
The respondent terminated the contract before expiry of the completion period alleging breach on the appellant's part following which arbitration proceedings were initiated.
The Arbitral Tribunal ruled in favour of respondent and passed an award disallowing appellant's claims except claim 1 for release of ₹ 3,46,959/-, the risk liability amount which was partly allowed to the tune of ₹ 46,959/-. The Tribunal also established that the breach had caused no actual loss or damage to the respondent.
According to the Tribunal, since the breach of the contract had been committed by the appellant, the security deposit of ₹ 3 lakhs is liable to be forfeited and therefore, only an amount of ₹ 46,959/- was allowed.
Aggrieved, the appellant approached the District Court which dismissed the appeal.
Submitting that the Tribunal's observation that, since the breach of the contract had been committed by the appellant, the security deposit of ₹ 3 lakhs is liable to be forfeited and therefore, only an amount of ₹ 46,959/- was allowed was patently wrong, illegal and perverse.
He placed reliance on Fateh Chand Vs. Balkishan Das, 1963 Latest Caselaw 1 SC, Kunhiabdulla and Anr Vs. State of Kerala, 2004 Latest Caselaw 142 SC, M/s. Kailash Nath Associates Vs. Delhi Development Authority & ANR., 2015 Latest Caselaw 19 SC
High Court Observation
Whether even in the absence of legal injury, compensation is liable to be paid for breach simplicitor?
The Court after examining the relevant provisions noted that as per Section 74, it is not necessary for the party claiming compensation under this Section to prove that actual damage or loss has been caused and whether it is a case of liquidated damages or penalty, what the party faced with the breach gets is only reasonable compensation, subject to the limit of the amount stipulated in the contract itself.
The Court though opined that undoubdtedly Section 74 dispenses with proof of the extent of real or actual or factual loss or damage, but provides for grant of reasonable compensation, subject to the condition that it shall not exceed the sum stipulated as penalty in the contract but the same would not mean that there need not be any loss or damage. What is meant is only that proof of actual damage or loss is not necessary.
It noted:
"In the case on hand, it cannot be Section 74 that could have been invoked, because the Award does not say that any sum has been named in the contract as the amount to be paid in case of breach. In other words, the parties had never made a genuine pre-estimate of the amount to be paid in the event of any damage or loss likely to be caused by the breach or that there is any clause relating to liquidated damages in the contract."
The Court explained further that the words 'loss or damage' in the aforesaid sections would necessarily indicate that the party who complains of breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract. That is because every breach of every contract need not necessarily result in actual loss or damage. Compensation payable under Section 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, he cannot claim compensation.
Referring to Union of India v. Rampur Distillery and Chemical Co. Ltd, wherein it was held that a party to a contract taking security deposit from the other party to ensure due performance of the contract, is not entitled to forfeit the deposit on ground of default when no loss is caused to him in consequence of such default.
"When the question is one of forfeiture of security deposit in case of breach of contract, such sum does not ipso facto go to the respondents. If the party complaining is in a position to adduce evidence whereby the court can assess reasonable compensation, then without proof of actual loss, damages will not be awarded and amount mentioned by the contract will be penalty. In such circumstances, it has been held that the security amount is liable to be forfeited."
In the present case, the Award clearly says that no loss or damage has been caused to the respondent and therefore neither the provisions of Sections 73, 74 or 75 could have been invoked nor are they applicable in this case.
"The AT was certainly wrong in rejecting the claim of the claimant for release of the amount of security deposit of ₹ 3 lakhs. This finding in violation of the provisions of Sections 73 to 75 of the Contract Act, is certainly in contravention of the fundamental policy of Indian Law as contemplated in Section 34(2)(b)(ii) of the Act."
Read Judgement Here:
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