Bombay High Court
Ultratech Cement Ltd. Formerly ... vs Sunfield Resources Pvt. Ltd on 21 December, 2016
Bench: Anoop V. Mohta
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL NO. 881 OF 2005
IN
ARBITRATION PETITION NO. 35 OF 2004
Ultratech Cement Ltd. (formerly Known as )
Larsen And Toubro Ltd.) an existing company )
under the Companies Act,1956 having its
ig )
registered office at Ahura Centre, 'B' Wing, )
2nd Floor, Mahakali Caves Road, Andheri (East) )
Mumbai-400093. ) ...Appellant
Versus
Sunfield Resources Pty. Ltd. )
Suite No.1003, 370 Pitt Street, )
Sydney 2000 NSW, Australia. ) ...Respondent
Mr.Pradip Sancheti, Senior Advocate with Dr.Birendra Saraf, Mr.Darshet
Jain, Mr.Sachin Chandarana, Mr.Vijeyandra Purohit i/b. Manilal Kher
Ambalal & Co., for the Appellant.
Mr.Sanat Mukharjee i/b. Mr.A.M.Vernekar, for the Respondent.
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CORAM : ANOOP V. MOHTA &
G.S. KULKARNI, JJ.
Pronounced on : 21st DECEMBER,2016
----
Judgment (Per G.S.Kulkarni,J.):
1. This appeal under Section 37 of the Arbitration and
Conciliation Act,1996 (for short "the Arbitration Act") arises from the
judgment and order dated 30 June 2005 passed by the learned Single
Judge whereby the Appellant's petition under Section 34 of the Arbitration
Act, challenging the Award of the Sole Arbitrator dated 4 July 2003 has
been rejected. The learned Arbitrator allowed the claim made by the
Respondent (original claimant) and rejected the counterclaim of the
Appellant (original Respondent). Thus there are concurrent findings of
two forums against the Appellants.
2. The factual antecedents in which the controversy arises may
be illustrated by the following facts:-
The Respondent-claimant is a company incorporated in
Australia having its principal place of business in Sydney. At the material
time, it was represented in India through its representative M/s.Ensource
Energy (India) Private Limited (for short "ENSOURCE"). The business of
the Respondent was interalia of supplying non-coking coal. The Appellant
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(formerly known as Larsen & Turbo Ltd.) had entered into contract dated
18 September 1999, with the Respondent, for bulk purchase of 'Steaming
non-coking coal', from the Respondent, which set out the terms and
conditions of the said transaction. The coal to be supplied by the
Respondent was of South African origin.
3. There is no dispute that under clause 4 of the contract the
cargo size was agreed and that the cargo was to be discharged at the
Appellant's jetty at Pipavav Port. The contract also provided for the
discharge of the cargo at Chennai Port as also the cargo size for discharge
at the said location. Clause 8 of the contract provided for "Timing" for
five items of firm cargo and option cargo to be separately indicated at a
later date. Clause 8 of the contract provided as follows:-
"8. Timing:
FIRM CARGO NO. LOADING AT LOAD DISCHARGE PORT
PORT
aa) AROUND 25th to L & T JETTY-
30th PIPAVAV
September,1999
bb) DECEMBER,1999 CHENNAI PORT
cc) FEBRUARY,2000 L & T JETTY-
PIPAVAV
dd) APRIL,2000 L & T JETTY-
PIPAVAV
ee) JULY,2000 CHENNAI PORT
ff) Option OPTION CARGO TO BE SEPARATELY
Cargo INDICATED AT A LATER DATE
4. Clause 10 of the contract provided for issuance of an arrival
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notice at the discharge port, tendering of notice of readiness,
commencement of laytime at discharge port, discharge rate, payment of
demurrage/ despatch, etc. The dispute between the parties arose under
clause 10(v) relating to demurrage. It would be thus appropriate to
reproduce clause 10(v) of the contract which reads as under:-
"10(v) Demurrage/Despatch:
At the discharging port, buyers shall pay demurrage to the
Seller or Vessel owners through sellers if required, at the rate not
exceeding US $ 8000.00 per day or pro-rata for part of the day and
sellers shall pay despatch to buyers if earned, at a rate of 50% of
demurrage rate, not exceeding US $ 4000.0 per day or pro-rata for
part of the day.
All demurrage or despatch to be settled within 60 days after
laytime statement submitted with supporting documents, like Notices
of Readiness, Statement of Facts and Time Sheets.
Any disagreement over the laytime statement must be raised
by the other party within 30 days after such statement is transmitted
and received, otherwise, the statement is accepted as correct."
(emphasis supplied)
5. It is not in dispute that under the contract and in compliance
with the schedule of shipment of cargoes incorporated in the contract, the
Respondent shipped to the Appellant from the Port of Richards Bay, South
Africa, five firm cargoes as under:-
Vessel Bill of Lading Quantity M/T Discharge Port
No. & Date
mv"Dakshineshwar 1 39206 Pipavav
" 10.10.1999
mv "Rishikesh" 1 37306 Chennai
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22.12.1999
mv 1 39123 Pipavav
"Dakshineshwar" 05.02.2000
mv"Pataliputpra" 3 & 4 13981 Pipavav
06.04.2000
mv"Pataliputpra" 1 36617 Chennai
11.05.2000
6. The cargoes were discharged from the vessels by the
stevedores appointed by the Appellant and the 'statement of facts' were
signed by the Master, the vessel's agents and the agents of the Appellant
who were the receivers. The Respondent's case is that in each of the
aforesaid shipments, the vessels went on demurrage. The Respondent
accordingly prepared laytime calculations based on the 'statement of facts'
and submitted the same to the Appellant alongwith the other documents
and commercial invoices for demurrage claims, for settlement. According
to the Respondent as per clause 10(v) of the contract (supra), the
demurrage payable by the Appellant to the Respondent in US dollars was
as under:-
Vessel Invoice Date Amount
US $
mv"Dakshineshwar" 29.06.2000 41027.78
mv "Rishikesh" 29.06.2000 94684.72
mv "Dakshineshwar" 29.06.2000 16678.48
mv"Pataliputpra" 14.07.2000 01159.44
mv"Pataliputpra" 14.07.2000 91787.50
245337.92
======
Respondent's case was that as per clause 10(v) of the contract, the
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demurrage claim was required to be settled within sixty days after
submission of laytime statement with supporting documents like Notices
of Readiness, Statement of Facts and Time Sheet. Further clause 10(v) of
the contract also provided, that any disagreement over laytime statement
must be raised by the other party within thirty days after such statement is
transmitted and received, otherwise, the statement would be accepted as
correct. The Respondent's case is that though invoices alongwith the
supporting documents were submitted by the Respondent to the
Appellant, there was no disagreement on the part of the Appellant and
thus as per Clause 10(v) the Appellant was under an obligation to settle
the demurrage within sixty days of the submission of the invoices, which it
failed to do. The correspondence between the parties in that regard being
crucial, the parties have interalia referred to the letters dated 30 October
2000, 1 November 2000, 2 November 2000 and 22 November 2000 of the
Respondents and letters dated 1 November 2000 and 9 November 2000 of
the Appellant.
7. The case of the Respondent was that, the Appellant despite
assurance of making payment, which intention could be clearly seen from
the said correspondence, in a sudden volte-face, by its letter dated 24
November 2000 invoked the arbitration clause as contained in the
contract, alleging that certain disputes have arisen between the parties,
without specifying, as to what was the dispute and sought appointment of
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an Arbitrator by giving names of the retired Hon'ble Judges, who can
arbitrate the dispute, and called upon the Respondent to give its consent,
failing which the Appellant would be constrained to make an application
under the Section 11 of the Arbitration Act. On receipt of this letter of the
Appellant, the Respondent replied the same by its letter dated 29
November 2000 and sought a clarification, to state as to what were the
disputes according to the appellants, had arisen between the parties. The
Respondent recorded that they were unaware about any dispute except
for the fact that there was an outstanding payment of US$ 247411.15,
payable by the Appellant to the Respondent, on account of demurrage
incurred at the discharging port and that the Appellant had informed the
Respondent that they are in the process of arranging payment.
8. On this background Mr. Justice M.N.Chandurkar, Former
Chief Justice of the Bombay High Court, was appointed as the Sole
Arbitrator to arbitrate the dispute between the parties in regard to the
demurrage claim of the Respondent, against the Appellant. Respondent's
claim for demurrage was for a sum of US $ 2,45,337.92 being the
demurrage payable on the vessels hired by the Respondent under the
contract with the Appellant, as also an interest claim payable by the
Appellant at 8% per annum on each of the demurrage claims, from the
respective due dates till payment or realisation.
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9. Before the learned Arbitrator, the Appellant resisted the
Respondent's claim by filing a reply to the statement of claim and disputed
its liability to pay any demurrage to the Respondent interalia on the
ground that under Clause 10(v) of the contract, demurrage was payable
to the vessel owner. The Appellant, thus asserted that the right of the
Respondent to claim demurrage was only in the form of an indemnity and
there was no evidence to show that the Respondent had made payment of
any demurrage to the vessel owner, and unless the Respondent establishes
and/or proves that it had paid demurrage to the vessel owner, the
Appellant was not liable to pay any demurrage.
10. On behalf of the Appellant a counter claim was made of an
amount of US$ 4,78,619.62 relating to a alleged loss suffered by the
Appellant stated on account of the breach of contract by the Respondent
in failing and neglecting to supply option cargo as per the terms and
conditions of the contract.
11. The Respondent contested the counter claim of the Appellant
by filing its reply. The Respondent raised an objection that the
counterclaim made in the said proceedings was not maintainable and
could not form the subject matter of the arbitration proceedings, for the
reason that the Appellant had never, prior to the notice dated 24
November 2000, nor in the said notice made any claim or raised any
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dispute regarding the amount as claimed in the said counterclaim.
12. The learned Arbitrator on all the issues (claim, counterclaim)
permitted the parties to file their respective pleadings, as also permitted
amendment to the pleadings and further replies and rejoinder thereto and
to place on record of the proceedings, the respective documents of the
parties.
13.
On the basis of the pleadings, the learned sole Arbitrator
framed the following issues on the Respondent's 'statement of claim' and
the Appellant's counterclaim:-
"Statement of Claim
1. Whether clause (v) of the Contract is in the nature of
indemnity as alleged in paragraph 2 of the reply and, if so, whether
the Claimant has suffered any loss or damage which is required to be
indemnified.
2. Whether clause (v) of the Contract only provides for a ceiling
on the amount payable as demurrage and whether the Claimant is
entitled to receive only such amount which is actually found payable
and paid as alleged in paragraph 2A of the Reply.
3. Whether the Respondent is entitled to exemption of certain
periods in the calculations of demurrage as alleged in paragraph 2B of
the reply.
4. Whether the vessels in question went on demurrage as alleged
in paragraph 6(a) of the Statement of Claim.
5. Whether demurrage in the amount of US $ 245,337.92 was
incurred as alleged in paragraph 6(b) of the Statement of Claim.
6. Whether the Claimant is entitled to a sum of US $ 245,337.92
as alleged in paragraph 10 of the Statement of Claim.
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7. Whether the Claimant is entitled to interest at the rate of 8%
p.a. on the aforesaid amount as alleged in paragraph 11 of the
Statement of Claim
Counterclaim
1. Whether the Respondent had exercised their option for option
cargo in accordance with the requirements of the said contract.
2. Whether the Claimant is estopped from pleading that
confirmation of option cargo beyond 15 th February,2000 is not valid
and/or whether there was a waiver of the said requirement as alleged
in paragraph 3A of the Counterclaim.
3. Whether the Respondent is entitled to recover from the
Claimant a sum of US $ 478,619.62 as alleged in paragraphs 4 and 5
of the Counterclaim ?
4. Whether the Respondent is entitled to interest at the rate of
18% p.a. on the said amount as alleged in paragraph 10 of the
Counterclaim."
14. The parties examined their respective witnesses. The
Appellant examined Mr.R.Venkateshwaran (R.W.1) and
Mr.D.S.Patwardhan Vice president (Shipping) (R.W.2) as their witnesses
and were cross examined by the Respondent. The learned Arbitrator
considering the documentary and the oral evidence and the submissions
of the parties delivered a reasoned Award dated 4 June 2003. The
operative award is as under:-
"(1) The Claimant is entitled to recover from the Respondent and
the Respondent is liable to pay to the Claimant an amount of US $
2,45,337.92.
(2) The Claimant is entitled to interest at 5% per annum in US
Dollars from 15th September,2000 till the date of the Award and
thereafter till payment.
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(3) The Counterclaim made by the Respondent is rejected.
(4) The Claimant will be entitled to costs of these proceedings
from the Respondent, which are computed at Rs.3,00,000.00 (Rupees
three lacs only)."
15. It would be profitable to note some of the material findings in
the Award of the learned Arbitrator:-
(As regards Issue No.4:- Whether the vessels in question went
on dumurrage.)
"(i) There is no dispute that the Statements of Facts, on the basis
of which the Invoices and lay time calculations have been made, have all
been signed by the representative of L & T. It is also not in dispute that
the lay time calculations in the case of each of the five vessels are made
on the basis of the Statements of Facts. The Statements of Facts and the
corresponding Invoices in respect of the vessels, m.v.Dakshineshwar
Voyage 1, Rishikesh, Dakshineshwar Voyage 2, Pataliputra Voyage 1 and
Patliputra Voyage 2 are at pages 35,40, 52, 32 and 60, respectively of the
pleadings compilation, and the corresponding Invoices are at pages 36,
46, 55, 64 and 73, respectively. These Statements of Facts are admittedly
signed by the Master of the vessel, the vessels' Agent and "the agents of
the receivers" i.e. the Respondent. In the Reply to the Statement of Claim,
in paragraph 9, L & T has specifically admitted as correct the contents of
paragraph 5 of the Statement of Claim, in which one of the statements
made was that "the Statements of Facts were signed by the Master, vessels'
agents and agents of the receivers", namely, the Respondent.
(ii) When a person signs a document, he is taken to have agreed
to the correctness of the statements made in the document and since the
Agent of L & T has signed the Statements of Facts, the statements made
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therein must be held to be binding on L & T. It must, therefore, be held
that the vessels in question had gone on demurrage as alleged in
paragraph 6(a) of the Statement of Claim.
(As regards Issue No.3 - The Appellant's entitlement to
exemption of certain periods in the calculations of demurrage.)
(iii) "The witness was, however, unable to give any explanation
for the delay caused in berthing of the vessel. Consideration of all the
material evidence would, therefore, indicate that L & T has failed to
establish that the anticipated strike or the strike had resulted in any delay
in berthing of the vessel m.v. Rishikesh on the ground alleged by it,
namely, that all the four berths were allotted to TNESB. Consequently, the
claim made for exclusion of the period of 17 days as stated for the first
time in evidence of Venkiteshwaran cannot be accepted.
In view of the fact that the averments made in paragraph 2B
of the Reply of L & T are not established, the further legal question as to
whether the Respondent was entitled to avail of the force majeure clause
does not really arise."
(As regards Issue Nos.1 & 2 - Whether Clause 10(v) of the
Contract is in the nature of indemnity and whether the Respondent is
entitled to receive only such amount which is actually found payable and
paid as alleged in paragraph 2A of the Reply.)
(iv) The question as to the nature of the liability created by the
first part of Clause 10(v) must necessarily be considered on a reading of
the Clause as a whole. The first part of Clause 10(v) creates an absolute
obligation against the buyer to pay demurrage to the seller or vessel
owner through the seller if required at a rate not exceeding US$ 8000.00
per day. At the same time a provision was also made that the seller shall
pay despatch to buyers if earned, at a rate of 50% of demurrage rate, not
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exceeding US $ 4000.00 per day or pro-rata for part of the day. The
manner of working out the claim for demurrage or despatch is set out in
the second paragraph of Clause 10(v), the effect of which, plainly, is that
the amount to be paid by way of demurrage or despatch has to be settled
within 60 days after lay time statement is submitted with supporting
documents, like notices of readiness, statement of facts and time sheets.
There is not a whisper in Clause 10(v) of the contract that the liability to
pay demurrage is dependent upon demurrage being paid by the seller to
the vessel owner. The contract in question is between the seller, namely
the Claimant, and the buyer, L & T. When the first paragraph of Clause
10(v) provides that the demurrage shall be paid "to the seller or vessel
owners through the sellers if required", it obviously contemplated that the
party which requires demurrage to be paid to the vessel owner is the seller
through whom the demurrage is to be paid. There is no privity of contract
between L & T and the vessel owner and the obligation to pay directly to
the vessel owner any amount of demurrage would arise only if the buyer
is so directed by the seller.
(v) That L & T also understood Clause 10(v) as not providing for
an indemnity is also clear from the evidence of witness Patwardhan.
Patwardhan was asked in cross-examination with regard to the payment
already made by L & T. Patwardhan was the person who, on his own
admission, was concerned with the decision to pay demurrage and such
demurrage had been paid earlier. He unambiguously stated, as already
pointed out, that the claim for demurrage paid to Glencore International
was on the basis of three documents, namely, (1) statement of facts given
by Glencore, (2) verification thereof and, if necessary, correction thereto,
and (3) charter party agreement. With reference to these statements, he
stated "the above documents are generally documents which I considered
while determining whether demurrage is to be paid or not". These
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statements of Patwardhan and the fact that demurrage was decided to be
paid by L & T earlier on the basis of the documents referred to above
clearly indicate that even L & T had never understood the clause relating
to payment of demurrage as being in the nature of an indemnity.
Admittedly, the amount of demurrage claimed by the Claimant is at the
rate which is payable by the Claimant to the ship owner under the
contract of affreightment. It is also important to point out that the
agreement between the parties that the claim for demurrage/despatch
should be settled within 60 days after lay time statement was submitted
with supporting documents also militates against the contention that the
contract is one in the nature of an indemnity.
(vi) In my opinion, if a similar clause like Clause 10(v) has been
construed by a High Court in India, propriety demands that in so far as
arbitration proceedings are concerned, that construction of the Clause
should be accepted, particularly in view of the fact that the two Clauses,
namely, the Clause which fell for consideration before the High Court and
the Clause in the instant case are more or less similar. I am, therefore,
inclined to reject the argument advanced on behalf of L & T that
demurrage has necessarily to be construed in all cases as providing for
liquidated damages and having regard to the settled position of law that a
claim for liquidated damages cannot be granted without proof of actual
loss.
(vii) It is also important to point out that so far as the amount of
demurrage is concerned, it was L & T's representative who insisted upon
the figure of demurrage being intimated to it. L & T wrote to Ensource
Energy (India) Pvt.Ltd., agent of the Claimant, on 16 th September,1999 in
reply to a Fax message dated 15 th September,1999 relating to nomination
of the vessel m.v.Dakshineshwar. This nomination was made by Ensource
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Energy by Exhibit C-24 on 15th September,1999 and L & T was asked to
send acceptance before noon of 16th September,1999. By Exhibit C-25
dated 16th September,1999, among the various items, information was
sought by L & T from Ensource Energy with regard to
demurrage/despatch amount and item No.6 of this letter refers to
"demurrage/despatch rate to be indicated". It was in pursuance of this
letter that the demurrage rate of US $ 7,000 was intimated. On the facts
of the present case, therefore, it is clear that the figure of demurrage did
not and was never intended to present an amount of liquidated damages.
Consequently, the argument of the learned Counsel for L & T that the
claim for demurrage must be rejected as no loss has been proved has to be
rejected."
16. On this background the Appellant challenged the award by
filing a petition under Section 34 of the Act. The Appellant's contention
before the learned Single Judge interalia was that Clause 10(v) of the
contract was in the nature of an indemnity and thus there would be a
liability to pay demurrage only if the Respondent had actually made
payment of the same to the vessel owner. It was further contended that
payment of demurrage was required to be considered as providing for
liquidated damages, for which the Respondents were required to prove
actual loss, as a claim for demurrage is a claim arising from a breach of
contract namely detention of the vessel beyond the agreed period of time.
An amount agreed to be paid for such breach would be governed by the
provisions of Section 73 and 74 of the Indian Contract Act, and thus the
Respondent would become entitled to a reasonable compensation for loss
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suffered except in a case where the Respondent could satisfy that it is not
possible to prove the quantum of damages. It was contended that the
award was thus contrary to the universally accepted concept of demurrage
being in the nature of damages. The Appellant on the basis of the force
majeure clause defended the demurrage claim in respect of one of the
vessel m.v.Rishikesh on the ground that there was a strike at Chennai Port
from 6 a.m. on 18 January 2000 to 6 a.m. on 25 January 2000 as the said
vessel had berthed on 24 January 2000, was not in dispute.
17. The learned Single Judge repelled the contentions as urged
on behalf of the Appellant and rejected the Section 34 Petition of the
Appellant. The Appellant thus being aggrieved by the judgment of the
learned Single has preferred this Appeal under Section 37 of the Act.
Appellants Submissions
18. Learned Senior Counsel for the Appellant in assailing the
impugned order has made the following submissions:-
(i) The claim for demurrage is in the nature of liquidated damages. It is
submitted that the learned Arbitrator had committed an error in holding
that the demurrage did not represent liquidated damages but was in the
nature of a fixed charge. It is submitted that it is a universally accepted
concept that the demurrage is in the nature of liquidated damages which
is well recognized in the private international law. He supports this
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submission by relying on the views , of the well-known authors namely
(a) John Schofield "Laytime & Demurrage", 3 rd Edition; (b) Payne and
Ivany's "Carriage of Goods by Sea", 12 th Edition; (c) McGregor on
Damages, 18th Edition. Reliance is also placed on the decisions in the
case of (i) President of India Vs. Lips Meritime Corporation1, (ii)
Nanhoomal Jyoti Prasad Vs. Commissioner of Income Tax 2 (iii)
Hindustan Fertilizer Corporation Vs. C.V.Jani & Co.3, (iv) Adithyaa,
rep. By Prop. N.Santhanam Vs. Food Corporation of India4, (v)
Narmada Cement Company Vs. Chowgule Steamship5.
(ii) It is next submitted that proof of damages was necessary as
the claim for damages is a claim arising in the event of breach of the
contract namely detention of the vessel beyond the agreed period of time.
It is submitted that as such, any amount agreed to be paid under the
contract for such a breach (whether such sum specified by way of
liquidated damages or an upper limit fixed) would be governed by the
provisions of Section 73 and 74 of the Indian Contract Act. It is submitted
that the Respondent being a seller, if had suffered any damages, the
Respondent could have easily proved the same by producing the claim or
on demand made by Glencore-the owners of the vessels and any payment
made thereunder. In support of this submission, reliance is placed on the
1 (1987)2 Lloyd's Law Reports 311(H.L)
2 123 ITR 269 (All)
3 2010 SCC Online Del 54
4 2014(1) MWN (Civil) 13
5 Judgment dt. 30.4.2003 in Arbitration Petition no.107 of 2003 by Bombay High Court
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observations of the Supreme Court in paragraph 50 in the case of "Oil
and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd."6 . Then reliance
is placed on the observations of the Supreme Court in paragraph 43 of the
decision in the case "Kailash Nath Associates Vs. DDA"7.
(iii) It is next contended that the Respondent has not suffered any
loss. Admittedly the Respondent-seller was not the vessel owner and the
goods were shipped in a third party vessel under the Contract of
Affreighment (COA). Therefore, between two alternatives in clause 10(v)
of the contract, the relevant portion of the clause applicable is the portion
relating to payment of demurrage to the vessel owner. It is submitted that
the quantum of damage would be exclusively within the knowledge of the
Respondent and in order to claim the same from the Appellant, the
burden of proof under Section 106 of the Indian Evidence Act was heavily
on the Respondent to prove such loss/damage. It is submitted that thus it
is apparent that the Respondent has not incurred any loss or as such the
question of award of any damage did not arise. It is submitted that the
contention of the Respondent that it is difficult / impossible to prove
extent of damage suffered by him relying on the passage from 18th
Edition of McGregor on Damage is misconceived. It is submitted that the
following extract in the 18th Edition of McGregor on Damages in fact
supports the Appellant's contention that the demurrage is in the nature of
6 AIR 2003 SC 2629
7 (2015) 4 SCC 135
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damages:-
"27-075. ....... the normal measure of such damages will be
constituted by the amount lost through loss of use of the ship. For
this, one illustration - they are quite numerous - is provided by
Gatoil Anstlat V. Omenial, The Balder London (No.2) where the
owners of a ship, wrongfully prevented by the charterers from
withdrawing her from a charter, were awarded as damages the
difference between the charter rate and the market rate of hire for the
period in question."
The submission is that the above extract deals with the scenario where the
shipowner is itself claiming demurrage which is distinct from the present
case where the Respondent is not the owner and has chartered another's
Vessel. In this situation, the Respondent could have proved damage
suffered by it by merely producing the amounts or demurrage paid by it to
the vessel owner. The above extract of 'McGregor on Damages' gives only
one of the illustrations of the manner in which the damage can be proved
and would not be applicable in the present case where the Respondent has
chartered the vessel of the vessel owner.
(iv) The next submission is that the Respondent cannot profiteer
or make windfall out of claim for damages. It is submitted that very word
"damages" is meant that the party suffering due to breach of contract is
compensated for the loss suffered by it. This submission is stated to be
supported by relying on paragraph 44 of the judgment of the Supreme
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Court in the case "Kailash Nath Associates" (supra)
(v) It is next submitted that in any case under Clause 10(v) of the
contract the obligation of the Appellant to pay demurrage relates to the
demurrage payable by the Respondent-seller to the vessel-owner, as the
said clause of the contract specifically recognizes payment of demurrage
to the vessel owner, as the clause provides that "Buyer shall pay demurrage
to the seller or vessel-owner through the seller, if required". The clause is
required to be interpreted in such a manner that the word "if required"
are not rendered otiose. The use of words "if required" indicate that in a
case where the seller transports the goods by a ship belonging to a third
party (vessel owner), the demurrage, would be payable to the vessel
owner and, therefore, the words "if required" relate to the liability, if any,
of payment of demurrage to the vessel owner. In contrast, if the seller
himself is the vessel owner, then obviously, the demurrage is payable to
the seller as he would suffer loss by reason of vessel being detained
beyond the agreed period of time.
(vi) As regards the counterclaim as made by the Appellant, the
contention before the learned Arbitrator was the quantity of coal to be
supplied was set out in clause 4 of the agreement. In addition to the five
shipments agreed to be supplied, there was an option cargo (sixth
shipment), which was to be confirmed by communication of likely
shipment schedule confirming the same. That the Appellant confirmed
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the option cargo. The correspondence would thus indicate that the
Appellant had exercised the option and opted for the option cargo.
However, the Respondent failed and neglected to deliver the same. A
letter dated 20 January 2000 of the Appellant cannot and does not in any
way derogate from the above opposition. Thus, learned Arbitrator
committed a patent error in not considering the undisputed position
emerging from the admitted documents.
Respondents Submissions
19. On the other hand, the learned Senior Counsel appearing for
Respondent submits that the present appeal raises the following four
broad matters:-
(i) The Appellant's original challenge (based on indemnity) to the
Respondent's claim for demurrage;
(ii) The Appellant's subsequent challenge (based on liquidated damages
and invoking Section 74 of the Indian Contract Act) to the Respondent's
claim for demurrage;
(iii) The Appellant's challenge (based on the strike at Chennai Port)
restricted to Respondent's claim for demurrage on the vessel m.v.Rishikesh
only; and
(iv) The Appellant's challenge to the dismissal of its counterclaim.
20. It is submitted that the Appellant in its submissions has not
PVR 22 app881-05.doc
touched item (i) above and the Appellant barely touched item (iii) and
(iv). It is submitted that the main thrust of the Appellant's argument was
devoted for seeking to show that demurrage is liquidated damages and
thus not allowable under Indian Law without proof of actual damage. It is
submitted that the essential matters in items (iii) and (iv) above were
clearly factual as item (iii) turned on whether or not the strike at Chennai
Port had in fact caused delay to the unloading of the vessel Rishikesh.
That item (iv) turned on whether the Appellant had exercised its option to
call for an additional shipment before the contractual due date for
exercising the option or, alternatively, whether notwithstanding failure to
exercise the option in due time, the parties had nevertheless, by mutual
consent, agreed on such additional shipment. It is submitted that the
Appellant did not make any attempt to rebut the extensive and detailed
reasons put forward by the learned Arbitrator in arriving at his decision
on both these issues and therefore, the Respondent did not deal with these
issues in making their submissions.
21. The learned Counsel for the Respondent in support of the
Respondent's case has drawn our attention to the correspondence ensued
between the parties in regard to the demurrage claim made by the
Respondent. It is submitted that the Appellant in fact never denied the
claim and the letters of the Appellant clearly go to show that there was no
denial to make payment and in fact the Respondents were assured for
PVR 23 app881-05.doc
payment towards demurrage. It is submitted that the Appellant never
disputed the statement of facts on the calculation of demurrage on each of
the shipment for which a specific maximum limit was provided in the
contract itself. On the basis of the correspondence, the Respondent
submits that at no time prior to its letter of 24 November 2000 demanding
Arbitration did the Appellant find anything in the laytime calculations to
dispute and that the Appellant never lacked any documents to carry out
its own check. It is submitted that that the Appellant's story that it lacked
any documentation is contradicted by its own letter of the 1 November
2000 that attributed the delay on its part to "certain organisation
changes". It is submitted that when on 9 November 2000 it sought to
provide some excuse for delay, all it could come out with was "certain
difficulties in documentation as per the requirement of Indian law for
remittance in foreign exchange". It is submitted that even the Contract of
Affreightment (COA) was supplied by the Respondent to the Appellant
after the Appellant complained that it was having difficulty with remitting
the demurrage in foreign exchange. It is submitted that the statement
made by the Appellant, in its letter of reference to Arbitration dated 24
November 2000, that the reference was made because there were "certain
disputes" between the parties was palpably false as no disputes existed
and the Appellant's further allegation in the said letter of reference that
attempts were made to settle the disputes amicably and these had failed,
was also palpably false, and this was so, because this false averment was
PVR 24 app881-05.doc
necessary in order to comply with the Arbitration Clause 25 in the
Contract (at Vol. VII at page 19) which required that a reference was to be
made only in the event of failure to settle the dispute amicably. It is
further submitted that this documentary evidence is to be coupled with
the conclusive admissions made by Mr.Patwardhan (Appellant's Vice
President in charge of shipping), in the course of his cross-examination.
When making its counterclaim, the Appellant stated that it had itself
entered into a separate contract of purchase of coal from Messrs Glencore
International AG (Vol VII page 167). It is submitted that the contract was,
as usual, on the Appellant's same standard contract form as in the present
case. It is submitted that the witness was specifically asked in the cross
examination (Vol IV at page 773 paragraph 39) as to what were the
documents on the basis of which he had allowed payment of demurrage
to Glencore International under that contract, to which he answered that
the documents were : Statement of Facts, verification thereof and
necessary corrections, and the Charter Party agreement. The witness
stated that "the above documents are generally documents which I consider
while determining whether demurrage is to be paid or not". It is further
submitted that paragraph 22 of the cross examination is to the same
effect. It is submitted that at paragraph 39 of his cross examination (Vol IV
at page 773) when confronted with the Appellant's letter dated 2
November 2000 (Vol VII page 260), the said witness stated that whatever
verification was to be done of the Respondent's demurrage claim, was
PVR 25 app881-05.doc
completed by the end of the year 2000 leaving only some disputed
amounts. It is submitted that the witness added as follows:- "It is correct
that by end of the year 2000 all documents necessary for verification were
available to us."
22. On the basis of the above, the Respondent would submit that
the following consequences are incontrovertible:-
(i) Not only did Clause 10(v) of the Contract, when it listed out
the documents on the basis of which demurrage would be payable, it also
makes no mention of proof of actual payment of demurrage;
(ii) At no stage in the correspondence that went on for months
after the last shipment was over did the Appellant call for proof of actual
payment;
(iii) That the Appellant in fact assured the Respondent that it
would be remitting the demurrage and that delay was (first version) on
account of organization changes or (second version) on account of
difficulty of remittance in foreign exchange;
(iv) That the Appellant's own Vice-President in charge of releasing
demurrage payments, Mr.Patwardhan, did not, even in other cases, call for
proof of actual payment before releasing payment of demurrage to its
sellers;
(v) That on Mr.Patwardhan's own admission, the Appellant was
able to and in fact did complete its verification of Respondent's demurrage
PVR 26 app881-05.doc
claim by end of the year 2000 (leaving only some disputed items) and
needed no further documents for that verification.
23. The Respondent would thus submit that the case as urged in
the appeal on behalf of the Appellant, whether grounded on indemnity or
on liquidated damages, flies in the face of express terms of the contract
and thus palpably contrary to the Appellant's own well established
commercial practice. It is submitted that significantly the said stand as
now being urged solemnly in the appeal are nothing but a cynical ploy to
avoid payment of a liability that the Appellant never at the relevant time
considered disputable.
24. The Respondent would urge that in any event whatever be
the Appellant's motive, the fact remains that the objection to demurrage
was to be taken more than thirty days from the dates on which the
laytime statements in each of the claim was submitted and received. It is
thus submitted that it must follow that by reason of clause 10(v) of the
Contract, the Appellant must be taken as having accepted that the
demurrage claim is correct and for this reason alone the Respondent's
claim should stand to be adjudged in its favour.
25. It is submitted that the original defence of the Appellant was
that the demurrage was in the nature of an indemnity and thus was not
PVR 27 app881-05.doc
payable without proof of actual payment by Respondent to the ship owner.
It is submitted that in fact this case is only lightly touched in the course of
arguments.
In this context it is submitted that the question of whether or
not in general law demurrage is based on indemnity or is a stand-alone
and independent provision was considered by the U.K. Court of Appeal in
the case of "FAL Oil Co.Ltd Vs. Petronas Trading Corporation"8 It is
submitted that the Appellant has not sought to argue that the law
expressed in "FAL Oil Co.Ltd" (supra) is not the same in India. It is
submitted that in the present case there is no cross reference of any kind
to the Contract of Affreightment (COA). On the contrary, the detailed
provisions as to the calculation of laytime and of demurrage contained in
Clause 10 clearly show that demurrage is an independent liability, for if
the liability was only a transferred liability of demurrage arising under the
Contract of Affreightment, all these provisions would be otiose. It is
submitted that the demurrage would be only that liability that had arisen
under the Contract of Affreightment, and only relevant provisions for
calculating laytime would be those found in the Contract of Affreightment
and not in the Sale Contract. That would mean giving a go-by to the
specific terms of the present contract.
26. As regards the contention of the Appellant's founded on the
8 (2004)2 Lloyds Rep.282=(2004) EWCA Civ 822
PVR 28 app881-05.doc
words in Clause 10(v) that "buyers shall pay demurrage to the seller or
vessel owners through sellers if required", the Respondent would urge
that these words do not avail to the benefit of the Appellant at all. It is
submitted that the learned Arbitrator dismissed the arguments while
holding that all that it means is that if the seller so requires, the buyer will
pay demurrage to the shipowner through the seller. For the reason that
there is no privity of contract between the buyer and the shipowner and
payment to the shipowner is only dependent on whether the seller so
directs it. The Respondent would submits that this is the natural and
plain reading of the clause and no reason is suggested to show that it is
wrong. It is submitted that on the contrary, a detailed laytime provisions
in Clause 10 and the fact that, out of the documents specified in Clause
10(v) to be submitted in proof of the demurrage claim, none relate to
proof of actual payment to the shipowner, clearly establish that demurrage
was intended as an independent and stand-alone liability.
27. The Respondent contends that the Appellant's second line of
defence is namely "demurrage is in the nature of liquidated damages"
cannot be accepted. It is submitted that the Respondent has preliminary
objection on this for the reason that this defence was never pleaded in the
Appellant's reply before the learned Arbitrator. It is submitted that it was
advanced for the first time by the Appellant's Counsel before the learned
Arbitrator only at the final stage of arguments, after the evidence of both
PVR 29 app881-05.doc
sides had been closed and Respondent's Counsel had completed his
arguments. It is submitted that this is clear from the issues framed by the
parties and adopted by the learned Arbitrator and it is confirmed that
until final stage of hearing the issue of "liquidated damages" was never
even in contemplation. It is further submitted that in the written
submissions before the learned Arbitrator, the Respondent had specifically
objected to and challenged the Appellant's right to take this defence. It is
submitted that however without considering this argument, the learned
Arbitrator proceeded to consider this point and however rejected it. The
Respondent would thus submit that the Respondent's preliminary
objection being not considered in the Award, does not prevent the
Respondent in this Appeal from defending the Award even on a point
taken (sub silentio) against it. It is submitted that such a course would be
entirely permissible in a civil appeal and it would be extraordinary if it
were not available in a petition under Section 34 of the Act. The
Respondent would submit that the argument on liquidated damages is not
a simple legal argument, for its determination also requires investigation
into the facts of which two are more significant. Firstly, was the
demurrage provision a genuine pre-estimate of damages and would, in its
absence, calculation of damages be a difficult task. The Respondent relies
on paragraph 2A of the Appellant's reply before the learned Arbitrator to
contend that the Appellant never put the Respondent to a notice that the
Appellant would be challenging the demurrage claim on the ground that it
PVR 30 app881-05.doc
amounts to liquidated damages. It is submitted that the submission on
pleadings, as made by the Appellant herein can be employed in the
manner now sought by the Appellant, then, pleadings will become a death
trap.
28. As regards the Appellant's submissions that the demurrage is
liquidated damages under the Indian Law, it is submitted that there is
conceptual difference between the compensatory debt/charge and
damages. It is submitted that two parts of a contract are the primary terms
and the secondary terms. The obligations that parties are required to
perform in the course of the execution of the contract such as payment of
price (in a sales contract), Freight (in a transportation contract), fees (in a
service contract) etc. are the primary terms of the contract. The
secondary terms, on the other hand, deal with obligations when the
contract has been broken, such as clauses regulating damages payable for
the breach, clauses providing for termination for the breach, arbitration
clauses etc. The monetary obligations falling in the Primary category are
in the nature of debt or charge. Monetary obligations falling in the
secondary category are in the nature of damages. When dealing with the
situation where one party has been unable to perform a primary
obligation fully, commercial contracts do not invariably treat it as a breach
of contract, for doing so would usually cause disruption of the working of
the contract. What is often done is to introduce a degree of flexibility into
PVR 31 app881-05.doc
the term imposing the primary obligation by providing for compensation
to the other party when the contract has been imperfectly performed.
Though liquidated damages provisions are part of the secondary terms of
the contract, the distinction between them and compensatory charge
provisions which fall among the primary terms, is of little practical
significance in jurisdictions where liquidated damages do not require
proof of actual loss. Both impose a liability for liquidated sums, and
neither of them require proof of actual loss.
29. It is submitted that if one looks at the contract in the present
case, the clear impression would be that the demurrage provision in
clause 10(v) is in the nature of compensatory charge. Nowhere does the
clause characterise the failure to discharge within the laytime as a breach
of the contract. It merely contents itself by saying that demurrage shall be
payable at a particular rate. Furthermore, the coupling of the demurrage
with the despatch (which is obviously not in the nature of damages) again
points to demurrage being no more than an adjustment provision, in the
same way that clause 12 is an adjustment provision to the "Total moisture'
term in clause 5.
30. The Respondent would then submit on the issue 'as to what
does Indian Law lay down on the nature of demurrage?' Referring to
clause 25 of the contract which reads that "The contract will be governed
PVR 32 app881-05.doc
and construed in accordance with Indian Law.", the Respondent would
submit that the issue thus revolves itself into whether or not demurrage,
in Indian Law, is liquidated damages or a compensatory charge or debt. It
is submitted that the contract does not state that the demurrage payable
under clause 10(v) is in the nature of liquidated damages and that no
Indian statute lays down such a proposition. It is submitted that the other
source of law consists of the decisions of Indian Courts, referring to the
decisions in (i)Hindustan Paper Corp. Vs. Wellbrines Chemicals P.Ltd. 9;
(ii)Nanhoomal Jyoti Prasad Vs. Commissioner of Income Tax (supra);
(iii)M/s.Raichand A. Shah vs. Union of India 10; (iv) Narmada Cement
Company Vs. Chowgule Steamship (supra); (v) Adithyaavs Vs. Food
Corporation of India (supra); (vi) Hindustan Fertilizer Corporation Vs.
C.V.Jani & Co (supra). Relying on these decisions, it is submitted that
there is no Indian Judicial Authority binding on this Court which deals
with the nature of demurrage, whether as liquidated damages or fixed
charge. In the absence of any binding pronouncement of Indian Courts on
whether or not demurrage partakes of the nature of liquidated damages or
of the nature of a debt, the Appellant has turned to judgments of the UK
Courts and the UK textbooks to establish what the India Law on the
subject is. These authorities of UK courts are only persuasive. As
authorities, statements in textbooks stand on a lower footing than Court
judgments. It is submitted that in assessing what law is right for India or
9 (2002)3 Cal LT 114
10 AIR 1964 SC 1268
PVR 33 app881-05.doc
Indian Court has but one guide and that is what would be the public
policy of India referring to the decision In "ONGC Vs. Saw Pipes" (supra)
and its discussion on the "Public Policy of India' as contained in paragraph
31.
31. The Respondent on the above backdrop submits that the
demurrage claims arise in the hundreds, day in and day out, whenever
ships take more time to load or discharge than contemplated by the
shipping contracts. Common business sense requires that they be dealt
between the parties expeditiously and without recourse to lengthy
procedures for proving actual damages. One does not have to go far for
proof of this. It is thus submitted that clause 10(v) of the present
contract which is in the Appellant's own standard form contract, clearly
depicts this position. The list of documents to be looked at is very limited.
The period of time within which the demurrage is to be settled is limited
to 60 days. The time given for submission of disagreement is only 30 days
from the date of receipt of the laytime statement. Most importantly of all
the Appellants own Vice President in charge of shipping has testified to
the extremely limited nature of the scope of inquiry that he conducts
before releasing demurrage payments to sellers.
32. The Respondent would then submit that it is required to be
borne in mind that proof of actual loss in international sales contracts
PVR 34 app881-05.doc
such as the present, where the seller has to engage a ship to carry the
cargo for delivery to the buyer cannot end merely by showing that the
seller has paid demurrage to the vessel-owner under his contract of
Affreightment (COA) or Charterparty. It is thus submitted that if the
Appellant is right in its assertion that demurrage requires proof of actual
loss, then a seller would have to lead evidence to show not only that he
has paid demurrage to the vessel-owner but he must further lead evidence
to prove whether and to what extent the vessel-owner had suffered
"actual loss" by detention of his vessel and where, as in the present case,
the person (Glencore International) from whom the seller has engaged the
vessel is not itself the vessel-owner but has chartered the vessels in
question from the actual vessel-owner (vessels belonging to Shipping
Corporation of India), the difficulty is even worse confounded. The seller
would then require to prove (i) not only its charterparty with its disponent
owner but also (ii) the charter party of its disponent owner with the
actual vessel-owner; (iii) the factum of his own payment; (iv) the factum
of payment by the disponent owner, and finally (v) proof of actual loss
(namely list of freight earnings) suffered by the actual vessel-owner. The
Respondent submits that in this context in the Appellant's written
submissions before the learned Arbitrator ( Volume V paragraph 2.5, page
917 to 919) the Appellant itself has contended that not only had Sunfield
to prove the actual amount paid and payable to Glencore but also the
actual amount paid and payable by Glencore to the vessel-owner. The
PVR 35 app881-05.doc
Respondent submits that the Appellant would be perfectly right if the
provisions of Section 74 of the India Contract Act are held to be applicable
to demurrage under a Sales contract and in that event every time the
seller claims demurrage, he will have to lead evidence not only of
shipping contract and payment, but his disponent owner's contract with
the vessel-owner and payment of demurrage to the vessel-owner under
the contract, for which evidence will have to be led about the loss suffered
by the vessel-owner himself by reason of his ship being detained. It is
submitted that none of these extraordinary difficulties arise under English
law wherein it is well established that in a case of liquidated damages, the
claimant need not have to prove actual loss.
33. The Respondent would then submit that it is very well for the
Appellant to argue that Indian Law must follow English Law, presumably
because everyone knows English Law, but the view that English law has
taken on demurrage is the product of the English Courts' anxiety to
implement the intention of the parties. It is submitted that nothing
describes this linkage, in the matter of demurrage, between English Law
and the public purpose that underlies that law than the following passage
from McGregor on 'Damages'(18th Edition (page 493):-
"(a) Sum held to be liquidated damages. The courts
implement the intention of the parties in the case of
liquidated damages by holding the claimant entitled to
PVR 36 app881-05.doc
recover the stipulated sum on breach, without requiring
proof of the actual damages and irrespective of the
amount, if provable, of the actual damage."
Thus, in view of the above it is, submitted that in England the
classification of demurrage as liquidated damages fulfills and implements
the intention of the parties because under English Law the recovery of
liquidated damages does not require proof of actual damages.
34.
It is thus submitted that both the present contract and the
behaviour of commercial men (as exemplified by the Appellant's own Vice
President in charge of shipping) clearly bring out the Indian companies
and shipping people share which they must, the same anxiety as English
businessmen and shipping people to settle demurrage without recourse to
long drawn out proof of actual damages. It is submitted that it is
therefore imperative for the Court to have a legal policy which is
acceptable to the commercial practices which internationally prevail,
failing which it would be detrimental to the international business
interest.
35. The Respondent would then submit that the Appellant's case
that when Indian contracts incorporate demurrage terms, the parties have
in mind the special legal concepts of demurrage found in English
PVR 37 app881-05.doc
Judgments and English textbooks and thus Indian contracts must be
interpreted accordingly. The Respondent submits that Ensource's answer
would be "Nothing can be further from the truth. An Indian businessman
signing sales contracts is not animated by thoughts of "Aktieselskabet
Reidar V. Arcos Limited, (1926)2 KB 83" as relied upon by the Appellant".
It is submitted that but by the conception that he derives from and shares
with businessmen around the world, that demurrage claims are and
should be settled expeditiously ('60 days' in the present contract) on the
basis of Statement of Facts, Notice of Readiness and Time Sheets.
36. It is submitted that the argument of the Appellant to "allow"
demurrage to escape the rigours of Section 74 of the Indian Contract Act
will open floodgates, and every claimant whose claim would fall under
that section would escape it. It is submitted that the short answer is " if
(i) a claimant can show that his contract not only does neither describe
nor treat the payment in question as liquidated damages but treats it as a
compensatory charge; and (ii) that the charge is one that in the very
nature of things and by the necessities of international commerce calls out
for expeditious resolution; and (iii) that the only reason advanced as to
why it should be treated as liquidated damages is that, it is the law of a
foreign land with discrepant legal provisions, then why should his claim
not be treated as falling outside Section 74 ? What reasons compels the
application of Section 74 to such a claim? The above three conditions
PVR 38 app881-05.doc
open not a floodgate, but a rational door founded on sound policy and
justice.
37. It is thus submitted on behalf of the Respondents that the
Appellant submissions that this Court should treat demurrage as
liquidated damages, should be rejected. This is for the reason that
nothing in the contract, nothing in Indian law, nothing but undue
deference to UK cases stands in the way. It is submitted that once this
course is adopted, the Court will be seen to "implement the intention of
the parties" to quote the words of McGregor.
38. The Respondent has made an alternative submission that
even if demurrage be treated as liquidated damages, actual loss is difficult
to prove. The Respondent makes this submission on the footing that the
English law of demurrage as liquidated damages applies to India. It is
submitted that the recent authoritative exposition on the intent and scope
of Section 74 of the Indian Contract Act, is in the decision of the Supreme
Court in the case of "Kailash Nath Associates Vs. DDA, "(supra) and
commenting on the observations of the Supreme Court in its decision in
paragraphs 43.1 to 43.6 the Respondent submits that for a claim for
liquidated amount fixed by contract to be allowable without proof of
actual loss, two requirements need to be satisfied: firstly it must be shown
that the amount fixed is not in the nature of penalty but is a genuine pre-
PVR 39 app881-05.doc
estimate of damages (paragraph 43.1) and secondly, that actual loss be
difficult or impossible to prove (paragraph 43.6). As regards the first
requirement, it is submitted that law makes a distinction between two
kinds of damages fixed by contract-Liquidated Damages and Penalty, the
first being a genuine pre-estaimate of damages and the latter being a sum
named in terrorem. It is submitted that the demurrage whether is a
liquidated damage, should not be a question in these proceedings. In
making this submission the Respondent referred to the written
submissions of the Appellant before the Arbitral Tribunal wherein the
Appellant has stated to have admitted (Vol. V. page 912 para 2.2) that at
no point in his oral submissions before the Tribunal, the Appellant's
Counsel questioned this position. It is submitted that in fact the learned
Counsel for the Appellant repeatedly put his case on the footing that
demurrage in this case constituted liquidated damages. It is submitted
that the second requirement namely that proof of actual loss would be
difficult to establish. It is submitted that it was the case of the Appellant
before the learned Arbitrator that in a case of demurrage payable under a
sales contract such as the present, proof of actual loss would inevitably
require, proof not only of payment by the seller of demurrage to its
disponent owner but also of the payment and payability of demurrage by
the disponent owner to the vessel-owner. That would require proof that
the vessel-owner himself suffered loss as a consequence of the detention
of his vessel and the quantum of that loss, and that loss is to be quantified
PVR 40 app881-05.doc
on the basis of the "amount lost by the use of the vessel" over the period
of vessel's detention. A reference is made to McGregor on damages page
1040 (para 27-075) where, in discussing the normal measure of
unliquidated damages for detention of a vessel, the learned Author states
that "The normal measure for such damages will be constituted by the
amount lost through loss of use of the ship."
39. It is then submitted that the market freight rate that the ship
can earn is of course vitally dependent on a variety of factors namely on
the size of the ship, her age, the kind of cargo she is capable of carrying,
the cargo-loading equipment she has on board, the length of the intended
voyage, whether the voyage in contemplation is to be a coastal voyage or
a foreign-going voyage, etc. It is submitted that moreover the market
rates are regularly changing in response to market forces. It is stated that
apart from these serious difficulties in proving the market freight rate, one
basic difficulty would be : how could one even ascertain the the market
rate for voyages for as short a period as the periods of detention involved
in this case which are
"Dakshineshwar 5 days 2 hrs
Rishikesh 11 days 19 hrs
Pataliputra 11 days 11 hrs
Dakshineswar 2 days 2 hrs
Pataliputra 3 hrs."
PVR 41 app881-05.doc
It is the Respondent's question as to who would taking a vessel for such
short periods? Even for Rishikesh and Pataliputra the very period for
loading and discharging any cargo would take longer than the demurrage
days, leaving aside the time necessary in completing the voyage. It is
further submitted that even proving the going market freight rate is very
difficult. Unlike the markets for oil or steel, there are no published rates
for voyage fixtures. The only way to prove the going freight rate would be
to call an expert witness (a broker) to give evidence of the rates he had
managed to fix in or around that same period. Only sheer coincidence
would ensure that on the relevant dates he had managed to broker a deal
for that length of days, and for that class of ship and that port of loading.
All of this goes to show that proof of actual loss may not be completely
impossible, but it would be difficult in the extreme and how much more
so when it is not the vessel-owner who is proving his lost market earnings
but a seller whose connection to the vessel-owner is separated by one or
more intermediate charterers. There is no good reason why a vessel-owner
should lend his aid in proving loss of his earnings to aid a seller with
whom he does not have a contract. It is submitted that paragraph 68 of
the Judgment in "ONGC Vs. Saw Pipes"(supra) the Supreme Court has
given examples of cases where it would be difficult to prove actual loss. It
is thus submitted that the Appellant has not been able to adduce even
more detailed proof of the difficulties in proving actual loss. And that the
Appellant by failing to plead the liquidated damages point, has only itself
PVR 42 app881-05.doc
to blame. It is submitted that in any event, even on the basis of the plain
facts inherent in the hiring of ships, it is clear that proof of actual loss for
a vessel-owner (and many times more for a seller) would be difficult in
the extreme. This is just such a case that the Supreme Court had in
contemplation when it opened the door in Section 74 to claim
compensation without proof of actual loss.
40. The Respondent would then contend that in this case the
Appellant's case is rooted in malafides from the very outset. It is submitted
that the objection to the Appellant's demurrage claim was never disputed
at any time before the filing by the Appellant's of its reply in the
Arbitration. Not only that, the Appellant had repeatedly assured the
Respondent that its claims were being paid. It is submitted that during
the arbitration itself, the Appellant advanced arguments one after other to
cover the deficiencies of each succeeding argument inasmuch as firstly an
indemnity defence it had never hinted at before; secondly next by
amendment to its reply advancing an argument suggesting that the actual
demurrage rate was never agreed to and only a maximum provided, and
then, when that was seen to have no substance, by argument on
liquidated damages advanced at the final stage of oral arguments. It is
submitted that at the hearing of this appeal, the learned Counsel for the
appellant virtually abandoned the Appellant's original defence founded on
indemnity and non-fixation of the demurrage rate. It is submitted that
PVR 43 app881-05.doc
also virtually abandoned in this appeal was Appellant's counter claim. It
is thus submitted that the findings of the learned Arbitrator on the
falsehoods on which that counterclaim was based and then incorporated
in the evidence of Mr.Venkiteshwaran exposes the utter lack of common
honesty that characterised Appellant's conduct in the arbitration
proceedings.
41. It is finally submitted that the Appellant's attempt to thrust
English Judge-made law upon the Law of India even where the
compulsions that led to the former are so different from the legal context
in our country stands ought to be, rejected, and that such a finding on this
issue would lift a burden from our maritime commerce and alternative
approach to the same problem by way of giving effect to the judgment in
"Kailash Nath Associates" (supra) would be equally effective in allaying
fears that Indian Law is too hide-bound to address the necessities of
Indian commerce.
Questions for Consideration
42. Considering the rival submissions and the arguments as
advanced by the learned counsel, the following questions would fall for
our consideration in adjudication of this appeal:-
(i) Whether the claim for demurrage is in the nature of liquidated
damages or a fixed charge, and what would be its nature in the contract in
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question?
(ii) Whether the Respondent was required to prove that it had suffered
any loss and/or it had actually paid the vessel owner, in making a claim
for demurrage ?
Discussion and Reasons
43. We may at the outset observe that the Appellant's plea that
the claim for demurrage is a claim in the nature of liquidated damages
was not a specific plea as raised by the Appellant in the reply to the
Respondent's statement of claim. The Appellant's case can also be seen
interalia from the issues framed by the learned Arbitrator relevant being
firstly: whether clause 10(v) of the contract is in the nature of indemnity,
and if so, whether the Respondent had suffered any loss or damage which
was required to be indemnified. Secondly, as to whether the amount
mentioned in clause 10(v) of the contract only provided for ceiling on the
amount payable as demurrage and whether the Respondent was entitled to
receive only such amount which is actually found payable and paid as
alleged in paragraph 2A of the reply by the Appellants. We have already
noted the details of the issues as framed by the learned Arbitrator. From a
perusal of the Award it is clear that the Appellant in the course of its final
submissions raised the issue that the claim for demurrage is in the nature
of liquidated damages. In the circumstance there being no specific
pleadings on facts, on this issue, before the learned Arbitrator, when no
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doubt such an issue becomes a mixed issue of fact and law, on this
background, we find that this issue was thus considered by the learned
Arbitrator and the learned Single Judge only as a legal issue. We
therefore examine the issue accordingly.
44. As noted above there is a finding of fact as recorded by the
learned Arbitrator that the vessels, as claimed by the Respondent, went
on demurrage. These findings are recorded on the basis of statement of
fact, lay time calculation, which were submitted to the Appellant
alongwith other documents like the commercial invoices for demurrage,
claims for settlement etc. The learned Arbitrator has recorded a finding
that the 'statement of facts', on the basis of which the invoices and lay
time calculations have been made are all signed by the representative of
the Appellant. The Appellant also specifically admitted the Respondent's
case in paragraph 5 of the statement of claim in which one of the
statement was that "the statement of facts were singed by the Master, the
vessels' agents and the agents of the receivers namely the Respondent." The
learned Arbitrator has recorded that once it was admitted that the
representative of Appellant has signed the Statements of facts without any
reservation, the burden was clearly on the Appellant to show that any of
the statements made therein was incorrect. The learned Arbitrator thus
held that the vessels had gone on demurrage. Further the learned
Arbitrator also rejected the case of the Appellant as defended on the
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ground of force majeure (Clause 20 of the Contract) in regard to the
Respondent's claim for demurrage in respect of m.v.Rishikesh . Thus it is
clearly established that the vessels went on a demurrage. These findings
of fact as recorded by the learned Arbitrator as reflecting the correct
factual position, were accepted by the learned Single Judge. We,
therefore, do not find that there is any material, to regard this factual
conclusion and the concurrent finding on this issue, as recorded by both
the forums, can be regarded as not acceptable and/or perverse on any
count.
45. In view of the clear position that the vessels went on a
demurrage, we examine the consequences as would fall in terms of clause
10(v) of the contract (supra). The contract is admittedly between the
Appellant as a buyer and the Respondent as a seller. As noted above, the
Appellant's contention before the learned Arbitrator was that the
Respondent's right, to claim and recover demurrage from the Appellant
(as pleaded in paragraph 2 of the reply filed before the learned
Arbitrator) was on the ground that it was only in the form of an
indemnity. The Appellant stated that as the Respondent did not show that
the Respondent paid the alleged demurrage to the vessel-owner, therefore
the Respondent cannot be said to have suffered any loss or damages. The
Appellant therefore contended that the Respondent cannot assert that the
claim be indemnified. In other words, the Appellant's stand was that
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unless the Respondent proved, that the Respondent itself had incurred a
liability to pay the demurrage, to the owner of the vessel, and in fact paid
demurrage to the vessel-owner, the Respondent cannot have a cause of
action against the Appellant. Alebit not in the written statement the
Appellant in their final submissions before the learned Arbitrator,
contended that the amount of demurrage represents 'liquidated damages'
and thus unless the Respondent established that it had suffered any loss,
the Respondent was not entitled to claim any amount by way of
demurrage. Thus two fold submissions were canvassed firstly in the
written statement that the claim was in the nature of indemnity requiring
proof of payment to the vessel owner and secondly de hors any written
pleadings that the claim is in the nature of 'liquidated damages', interalia
requiring a proof of payment to the vessel-owner.
46. In the above context it is necessary to first consider the
purport of clause 10(v) of the contract (supra) under which the
Respondent claims its entitlement for demurrage. The rival contentions,
therefore, are required to be tested on what would be the correct meaning
and intention between the parties in agreeing to clause 10(v) of the
Contract coupled with the manner the parties commercially understood
the clause as reflected from the correspondence and as to how the parties
acted upon the same. In this context, our first endeavour would be to
consider Clause 10(v) of the contract (supra) in its entirety. From a
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perusal of clause 10(v), it can be clearly seen that it can be bifurcated in
two parts. The wordings of the first part indicate that it creates an
obligation on the buyer to pay demurrage to the seller or vessel-owner
through the seller if required at a rate not exceeding US $ 8000 per day. It
also correspondingly creates a provision that the seller shall pay despatch
to the buyers if earned, at the rate of 50% of demurrage rate, not
exceeding US $ 4000 per day or pro-rata for part of the day. The
significant content of clause 10(v) is the requirement that all demurrage
or despatch is required to be settled within sixty days after laytime
statement is submitted with supporting documents like notices of
readiness, statement of facts and time sheets. This shows that the parties
agreed to the manner of working out the claim for demurrage or
despatch. This on the basis of laytime statement submitted with
supporting documents and statement of facts and time sheet, that the
parties would settle demurrage or despatch.
Further a vital requirement of clause 10(v) is that, if there is
any disagreement in the laytime statement, then the party which has so
disagreed must raise such a disagreement within thirty days after such
statement is transmitted and received, otherwise the effect is that it is
agreed that the statement is accepted as correct. It may thus be observed
from a plain reading of clause 10(v), that the contention of the Appellant
that the liability to pay demurrage would be depending upon the
demurrage being paid by the seller to the vessel-owner is not in any
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manner reflected from clause 10(v). In our opinion the Appellant is trying
to create an unwarranted confusion of the wordings "to the seller or vessel-
owner through the seller". These wordings in the first part of Clause 10(v)
simply provide for an option that either the demurrage be paid to the
seller or if the seller so feels, he may require the buyer to pay to the
vessel-owner. It can therefore be clearly gathered that ultimately it is the
desire of the seller as to how it should be paid. It also cannot be
forgotten, that the contract in question is a contract between the
buyer(appellant) and the seller(respondent) and the vessel-owner has no
privity of contract with the buyer (the appellant), and therefore the
parties have explicitly agreed that it is only when the seller (respondent)
so desires the buyer would be required to make payment of demurrage to
the vessel-owner. There can be no other reading of these words of clause
10(v). The Appellant's interpretation on this count therefore cannot at all
be accepted.
47. As regards the first contention on the part of the Appellant
before the learned Arbitrator namely of indemnity, though this issue was
urged before the learned Arbitrator, it was not argued in this appeal on
behalf of the Appellant. However for the sake of completeness, we deal
with the same. In this regard we may observe that on a plain reading of
clause 10(v), it cannot be construed as a contract of indemnity as Section
124 of the Contract Act would envisage. The requirement of Section 124
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of the Contract Act is that when a person contracts to indemnify another,
the latter may compel the indemnifier to place him in a position to meet
the liability that may be cast upon him without waiting until the
indemnity holder has actually discharged that liability. This surely is not
the position as clause 10(v) of the contract in question would
contemplate. From the documents as placed on record, it is clear that the
Appellant understood clause 10(v) as not providing for any indemnity,
and more particularly clear from the evidence of Mr.Patwardhan who was
asked in cross examination with regard to demurrage payments made by
the Appellant in some contracts. Mr.Patwardhan admitted that he was the
person who had taken the decision to pay demurrage and such demurrage
was paid in similar contracts. Mr.Patwardhan also stated that the claim for
demurrage paid to Glencore International in another contract was on the
basis of three documents namely (i) statement of facts given by Glencore,
(ii) verification thereof and if necessary, correction thereto, and (iii)
charter party agreement. Referring to these three documents,
Mr.Patwardhan stated that these documents are generally documents
which he considered while "determining whether demurrage is to be paid
or not." The learned Arbitrator taking into consideration the entire
correspondence between the parties which did not indicate any different
position than what the Appellant had in similar contracts, has recorded a
finding that the demurrage was decided to be paid by the Appellant
earlier on the basis of the said documents which clearly indicate that the
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Appellant never understood the clause relating to payment of demurrage
as being in the nature of an indemnity. This is a finding of fact indicating
how the parties positioned themselves commercially. What cannot be lost
sight is that clause 10(v) provides for a complete code within which the
parties agree to settle a claim for demurrage. It provides for all the
safeguards as noted by us, so that any dispute on the payment of
demurrage can be avoided. This contemplates the following three
factors:- Firstly that the rate of demurrage was not to exceed US $ 8000
per day. Secondly, the demurrage is required to be settled within 60 days
after laytime statement is submitted with the supporting documents like
'Notices of Readiness', 'Statement of Facts' and 'Time Sheets'. Thirdly, any
disagreement over the laytime statement must be raised by the other party
within 30 days after such statement is transmitted and received, failing
which the statement would be considered to be accepted as correct. The
parties, therefore, cannot raise a contention which would fall outside this
agreement. Significantly, this is not the arrangement as agreed between
the parties only for 'demurrage' but also for 'despatch'. In view of this
clear position, the argument of the Appellant that clause 10(v) was in the
nature of indemnity cannot be accepted, as rightly rejected by the learned
Arbitrator and the learned Single Judge.
48. Now coming to the main bone of the contention that the
demurrage to be paid to the Respondent would be in the nature of
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liquidated damages. On this proposition, on behalf of the Appellant,
reliance is placed on (a) John Schofield "Laytime & Demurrage", 3 rd
Edition; (b) Payne and Ivany's "Carriage of Goods by Sea", 12 th
Edition; (c) McGregor on Damages, 18th Edition, and the decisions in
that regard which we have noted above.
49. Before we analyse the legal position, it would be appropriate
to examine how the parties understood clause 10(v) in the working of the
contract, namely the test of commercial understanding of the clause. In
this regard, it would be profitable to take note of some correspondence
between the parties. As an illustration we refer to a letter dated 6 March
2000 of Ensource to the Appellant with a specific attention of
Shri.D.S.Patwardhan, Vice President. Ensource who are the agent of the
Respondent in India were authorised to deal with the Appellant in respect
of shipping arrangements of the contract cargo. We may note that similar
letters were addressed in respect of each of the shipment and what is to
be noted is the specific amount of demurrage/despatch on which
acceptance of the Appellant was sought to each of the shipment being
subject matter of such letters. Admittedly, the amount of demurrage
which has been quoted and for which acceptance was sought is within the
specified amount agreed between the parties under clause 10(v). We
illustratively reproduce this letter:-
" 6th March,2000
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M/s.Larsen & Toubro Limited
Metropolitan,
Bandra-Kurla Complex,
Mumbai-400050
Fax No.6541433
Kind Attn: Shri.D.S.Patwardhan, Vice-President
Ms.Punam Ingle
Dear Sirs,
Sub: Steaming (non-coking) coal in Bulk from South Africa
L & T Jetty Pipavav - Your P.O.No: IMP/990520 dd) cargo
Our Principals have please to nominate the following vessel for L&T Jetty-
Pipavav.
M.V.PATALIPUTRA OR SUB
INDIAN FLG BLT 1986
47,175MT DWT ON 11.825M SSW
5HO/HA
LOA/BEAM 189/30.4M
4x25T CRANES + 4x8 CBM GRABS
55215 CBM GRN
ALL DTLS ABT
LOADABLE QUANTITY : 40,000MT+10%
LOADPORT LAYCAN : 21st MARCH- 4th APRIL 2000
DEM / DES RATE : US $ 7000/DHD
FTA RBCT : 29th /30th March 2000 AGW WP
KINDLY SEND US YOUR ACCEPTANCE AT THE EARLIEST.
Best regards,
Yours faithfully,
for ENSOURCE ENERGY (INDIA) PVT.LTD.
N.Dhanaraj
CC to : Shri.D.S.Patwardhan VP, Awarpur Cement Works."
(emphasis supplied)
This letter of Ensource was confirmed by the Appellant by letter dated 7
March 2000 in which the Appellant accepted all the conditions and most
importantly the condition of demurrage rate of US $ 7000. Some recitals
in the Appellant's said letter are as under:-
"This has reference to the fax message dated 06 th March 2000
received today as regards nomination of vessel "m.v.Pataliputra" for
L&T Jetty Pipavav.
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The vessels specifications are generally acceptable to us and we
hereby convey our approval to the same. .... .... ...."
Thus the demurrage/despatch rate was specifically indicated and agreed
at US $ 7000. This was the method by which, in respect of each of the
shipment, the demurrage rate was indicated and accepted by the
Appellants. Further the parties also confirmed the shipment in respect of
each of the vessels as agreed. Ensource had also furnished lay-time
calculation in regard to each of these vessels. The lay-time calculations
were not disputed in any manner and the communication in that regard
from Ensource and Glencore were forwarded and accepted by the
Appellant. The Appellant never disputed the statements of facts which
were forwarded by the Respondent as per the requirement of clause 10(v)
of the contract. All this makes it clear, that as regards the demurrage was
concerned, the Appellants were intimated the figure of demurrage by the
Respondent as regards each of the shipment under the contract. The
Appellant by its various letters addressed to Ensource (agent of the
Respondent) accepted the rate. Further the conditions as contemplated in
the second part of clause 10(v) about settlement of any issues in that
regard, within the stipulated time, had also worked itself out as it is a
matter of record that there was no disagreement on any of the lay-time
statements, as none was raised on behalf of the Appellant which was to be
raised within 30 days after such statement was transmitted and received,
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failing which the contract clause provided that the statement was
accepted as correct.
50. The learned Arbitrator has recorded a finding of fact that as
regards the amount of demurrage is concerned, it was the appellant's
representative who insisted upon the figure of demurrage being intimated
to it. The appellant wrote to Ensource Energy Pvt. Ltd., the agent of the
claimant, on 16 September 1999, in reply to a Fax message dated 16
September 1999 in relation to nomination of the vessel m.v.
Dakshineshwar. This nomination was so made by Ensource on 15
September 1999 (Exhibit "C-24") and the Appellant was asked to send
acceptance before noon of 16 September 1999. By letter dated 16
September 1999 (Exhibit "C-25") amongst various items, information was
sought by the appellant from Ensource with regard to demurrage/dispatch
amount and item no.6 of this letter refers to "demurrage/dispatch rate to
be indicated." It is observed that in pursuance of this letter the demurrage
rate at US $ 7000 was intimated. Thus, it was clear from this
correspondence that the figure of demurrage was mutually accepted to be
the amount to be paid by the Appellant if the vessels were to go on a
demurrage. These facts clearly show the real intention of the appellant
as to how the appellant commercially understood and accepted the
consequence of the demurrage clause. In this background and in the facts
and circumstances of the case the Respondents in our opinion would not
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be so inaccurate to submit that the Appellant understood the payment as a
fixed charge amount to be paid under the contract. However, later on the
Appellant discovered the legal side of it namely the Appellant's contention
that the Respondent's claim is in the nature of liquidated damages for
which loss was required to be proved by the Respondent and as no loss
has been proved by the Respondent, the Respondent is not entitled to its
claim for demurrage.
51.
Apart from the above apparent commercial understanding of
the contractual terms and the position taken by the parties in the working
of the contract, we now test the legal side of the Appellant's argument,
whether demurrage is in the nature of liquidated damages or its a fixed
charge. The contention of the Appellant is on the basis of the extract in
(a) John Schofield "Laytime & Demurrage", 3 rd Edition; (b) Payne and
Ivany's "Carriage of Goods by Sea", 12 th Edition; (c) McGregor on
Damages, 18th Edition, and on the basis of the decisions as we have
noted above. We thus examine the concept of demurrage.
Concept of demurrage
52. As the entire issue in this appeal is in regard to the claim of
the Respondent on demurrage, it would be appropriate to consider the
concept of demurrage. A contract for carriage of goods in a ship is called
in law a Contract of Affreightment (COA) and is also called a charterparty
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under which the entire vessel or some part of her may be used or
employed by the charterer for a voyage or series of voyages or for a period
of time. In Halsbury's laws of England, Fourth Edition (Vol. 43(2) in
Chapter 14 Heading (H) describes "Terms as to loading and discharge" and
(J) describes "Terms as to demurrage and damages for detention".
Paragraph 1506, 1508 and 1509 thereunder reads thus:-
"1506.Demurrage days and payment of dispatch money. At the
expiration of the lay days, the charterer may be allowed, in
consideration of an additional payment called 'demurrage', a
further number of days, known as 'demurrage days'. Sometimes
no further time is expressly allowed, but it is simply provided that
the charterer is to pay demurrage at the rate of so much a day for
every dayy that the ship is detained beyond the lay days.
Conversely, it is often provided that the charterer is to be paid
'dispatch money' for days saved in loading or discharging. It is,
therefore, important, for the purpose both of ascertaining when
the lay days expire and the liability for demurrage begins and of
calculating the amount of demurrage payable, to define what is
meant by the word 'day' in a charterparty. In practice, its
meaning is usually made more or less clear by the insertion of
qualifications. Once a ship is on demurrage, the charterers are in
continuing breach of contract and may claim exemption from
liability to pay demurrage only under clearly worded exemption
clauses to that effect.
1508. Charterer's right to demurrage days. The specification of
lay days and demurrage days in the charterpary is equivalent to a
contract on the part of the charterer that he will not delay the
ship for a further period, and also to a contract on the part of the
shipowner that during those days the ship is to be at the
charterer's disposal. The charterer has, therefore, the right to
make use of both the lay days and the demurrage days for the
due performance of his obligation either to load or to discharge,
and it would seem that he commits no breach of contract in
detaining the ship until the expiration of the demurrage days. If
the charterparty does not specify the number of lay days,
demurrage, where provided for, will become payable at the
expiration of a reasonable time, and will continue to be payable,
if the charterparty does not specify the number of demurrage
days, as long as the ship is detained by the charterer.
However, detention after the lay days or after the
demurrage days, where either are specified, and, in other cases,
detention after the expiration of a reasonable time for loading or
discharging, constitutes a breach of contract on the part of the
charterer. In respect of this breach of contract the charterer is
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liable for any damage actually suffered by the shipowner in
consequence of the delay and not merely for the agreed rate of
demurrage, which will only be applicable to a claim for damages
for the actual detention of the ship.
The detention does not, however, entitle the shipowner to
treat the contract as repudiated and sail away forthwith; it seems
that he may only do this if the charterer's conduct is such as to
show that he does not intend to perform the charterparty, or if the
detention lasts so long as to frustrate the commercial purpose of
the adventure.
1509. When the demurrage is payable.
Demurrage in the strict sense of the word is payable only where
there is an express term to that effect. In the absence of any such
term the shipowner is not entitled to claim demurrage as such,
nor is the charterer justified in detaining the ship beyond the
expiration of the time allowed by the charterparty for loading or
discharging, as the case may be. If, therefore, he detains her for
any further time, he is guilty of a breach of contract, and is liable
to pay damages for her detention as soon as the lay days expire.
The distinction between demurrage and damages for
detention is that the first is liquidated and the second
unliquidated damages. Demurrage being liquidated damages, no
damages are recoverable for delay in payment of demurrage as
there is no cause of action for late payment of damages."
(emphasis supplied)
53. The extract from John Schofield "Laytime & Demurrage",
3rd Edition, Chapter 6 of the "Laytime and Demurrage" is as under:-
" CHAPTER 6
DEMURRAGE
Meaning and Nature
The Charterparty Laytime Definitions 1980 define demurrage as
follows"
"DEMURRAGE" means the money payable to the owner for delay for
which the owner is not responsible in loading and/or discharging
after the laytime has expired.
However, this definition avoids what at one time was
unclear, namely whether a failure to complete loading and
discharging in the allowed laytime of itself constituted a breach of
charter. The current view is that demurrage is liquidated damages
for such a breach. In origin, however, demurrage did not mean a
sum payable for breach of contract but a sum payable under and by
reason of a contract for detaining a ship at the port of loading or
discharge beyond the allowed time. In Lockhart V. Falk,(1875)LR
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10 Ex.132, at page 135, Baron C Cleasby said:
The word demurrage no doubt properly signifies the agreed
additional payment for an allowed detention beyond a
period either specified in or to be collected from the
instrument; but it has also the popular or more general
meaning of compensation for undue detention; and from the
whole of each charterparty containing the clause in question
we must collect what is the proper meaning to be assigned to
it."
... ... ... ...
More recently, in Union of India Vs. Compania Naviera
Aeolus SA (The Spalmatori) (1964) AC 868 at p.899, Lord
Guest said:
Lay days are the days which parties have stipulated for the
loading or discharge of the cargo, and if they are exceeded
the charterers are in breach; demurrage is the agreed
damages to be paid for delay if the ship is delayed in loading
or discharging beyond the agreed period.(Lord Reid also
took the view that failure to complete loading/discharing
within the allowed laytime was a breach of contract.)"
(emphasis supplied)
54. Payne and Ivany's "Carriage of Goods by Sea" Twelfth
Edition in which Chapter 10 deals with "Demurrage and desptach
money" narrates the concept of demurrage:-
"Chapter 10
Demurrage and despatch money
(A) DEMURRAGE
It is first necessary to define 'demurrage' and 'damages for
detention' and to show the difference between them. A
number of lay days are allowed to the charterer. It is
important to notice when these commence, and to notice the
effect of lay time being fixed. It is necessary to ascertain
when loading is complete, what the rate of demurrage is and
the persons by whom demurrage is payable.
THE DIFFERENCE BETWEEN DEMURRAGE AND DAMAGES
FOR DETENTION.
A charter-party generally fixes a number of days called 'lay
days' in which the ship is to be loaded or discharged, as the
case may be.
'Demurrage' is a sum named in the charter party to
be paid by the charterer as liquidated damages for delay
beyond such lay days.
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The shipowner is entitled to sue for 'damages for
detention' if
(i) the lay days have expired and demurrage has not
been provided for; or
(ii) the time for loading or discharge is not agreed, and
a reasonable time for loading or discharge has expired; or
(iii) demurrage is only to be paid for an agreed number
of days and a further delay takes place."
(emphasis supplied)
55. The Maritime Law by Christopher Hill, (Fifth Edition)
would describe 'Demurrage' as under:-
"What is demurrage/
Demurrage is liquidated damages. The rate of demurrage is
fixed, agreed between owner and charterer at the time of the
concluding of the charter party and the rate is stated in the
charterparty. On the basis that it is fixed and unalterable
the author prefers to think of demurrage as a penalty
imposed upon the charterer for exceeding the laytime period
and delaying the ship beyond the agreed laytime in order to
complete loading or discharging. The rate of demurrage is
linked in with the rate of freight so that the shipowner
satisfies himself as far as he can that overall by the time the
voyage is fully completed he will have balanced his books
and made a reasonable profit.
Demurrage should be contrasted with damages for
detention the latter being unliquidated, assessable damages
payable by a charterer for detaining the ship for whatever
reason (there may be reasons other than exceeding laytime-
e.g. Repairs necessitated after the causing of damage to the
ship by charterers' stevedores for whose negligence the
charterers are vicariously liable).
Due to the 'penalty' nature of demurrage, it runs
continuously from the point when laytime expires. Laytime
exceptions do not interrupt the running of demurrage. This
is typified by the oft-used expression "once on demurrage,
always on demurrage'.
If demurrage itself, as opposed to laytime, is to be
interrupted by any excepted period, such an exception must
be expressly provided for in the charterparty. This was
made clear in The Dias (1978) 1 Lloyd's Rep.325. It cannot
be assumed that laytime exceptions apply equally to
demurrage as they do to laytime. They do not unless
expressly stated as applying also to demurrage."
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56. A cumulative reading of the above wealth of material would
clearly bring out the meaning and concept of 'demurrage' as under:-
(I) On expiration of lay days, the charterer may be allowed, in
consideration of additional payment called 'demurrage', a further number
of days known as 'demurrage days'.
(II) Demurrage is the agreed amount of damage which is required to be
paid for the delay of the ship caused by default of charterers.
(III) It would be payable principally for the acts which are not the
responsibility of the owner in loading and/or discharging after the laytime
has expired.
(IV) Demurrage thus is liquidated damages, the rate of which is fixed
agreed between the owner and the charterer.
(V) Once a ship is on demurrage, the charterers are in continuing
breach of contract and may claim exemption from liability to pay
demurrage only under clearly worded exemption clauses to that effect.
(VI) Detention after the expiration of a reasonable time for loading or
discharging, constitutes a breach of contract on the part of the charterer.
For such breach of contract the charterer is liable for any damage actually
suffered by the shipowner in consequence of the delay and not merely for
the agreed rate of demurrage, which will only be applicable to a claim for
damages for the actual detention of the ship.
(VII) Demurrage in the strict sense of the word is payable only where
there is an express term to that effect. In the absence of any such term
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the shipowner is not entitled to claim demurrage as such, nor is the
charterer justified in detaining the ship beyond the expiration of the time
allowed by the charterparty for loading or discharging, as the case may
be. The distinction between demurrage and damages for detention is that
the first is liquidated and the second unliquidated damages.
(VIII) Demurrage being liquidated damages, no damages are recoverable
for delay in payment of demurrage as there is no cause of action for late
payment of damages.
57. Thus in a given case the parties may commercially
understand a demurrage clause as a fixed charge and accordingly consider
and discharge their obligation albeit the underlying legal position as
above. This certainly will depend on the facts and circumstances of each
of such case.
58. The Appellant's endeavour in insisting that the demurrage
necessarily is required to be accepted as liquidated damages is wholly to
bring the claim of the Respondent within the purview of Section 73 and
Section 74 of the Contract Act. This is for two fold purposes, as the
Appellant would urge, firstly that the claim for demurrage is a claim
arising out of breach of a contract, and secondly, a party would be entitled
for damages for breach of a contract, only on application of the test
underlying Section 73 and Section 74 of the Contract Act, that is 'the
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proof of loss' and 'entitlement for a reasonable compensation/damages'. It
is only because in respect of a general claim for damages these
consequences would flow from Section 73 and Section 74 of the Contract
Act, the Appellant intends to categorize the claim for damages as any
other general claim and contend that such a claim cannot succeed unless
the claimant (Respondent) proves that it has suffered losses.
59. Thus even if the contention of the appellant that payment of
demurrage is liquidated damages is to be accepted and thus would attract
Section 74 of the Contract Act, we consider as to whether the test of proof
of damages would be a sine qua non, for the Respondent to sustain its
claim. We examine this, adverting to the factual position which has come
on record before the learned Arbitrator, that the vessels have gone on
demurrage and that the amount of demurrage as claimed by the
Respondent, is the amount as agreed between the parties and that the
respondents claim is not above the said agreed amounts. We may add here
that there is not an iota of material brought on record by the Appellant to
support this contention, that the Appellant at any time considered
payment of demurrage conditional either as a indemnity or conditional to
proof of loss to be furnished by the Respondent. On this conspectus we
examine the principal contention as urged on behalf of the Appellant that
the Respondent's claim for demurrage being in the nature of liquidated
damages. On behalf of the Appellant elaborate submissions are made as
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noted above on the application of Sections 73 and 74 of the Indian
Contracts Act,1872 (for short 'the Contract Act'). We thus examine the
application of the provisions of Section 73 and 74 of the Contract Act and
the legal position as enunciated in the various decisions, and more
particularly in the context of liquidated damages in its application to a
demurrage claim, to the facts in hand.
60. Chapter VI of the Contract Act pertains to "Of the
consequences of breach of contract." Under this Chapter, Section 73
provides for 'Compensation of loss or damage caused by breach of contract'
and Section 74 provides for 'Compensation of breach of contract where
penalty stipulated for'. Section 74 was amended by Act VI of 1899 which
added certain words to the section and illustrations (d), (e), (f) and (g) as
also the Explanation. Previous to the amendment the first paragraph of
Section 74 read as under:-
"When a contract has been broken, if a sum is named in the contract
as the amount to be paid in case of such breach, the party
complaining of the breach is entitled, whether or not actual damage
or loss is proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation not
exceeding the amount so named."
It would be profitable to extract both Section 73 and Section 74 of the
Contract Act as they stand today, as the entire focus of the submissions of
the parties revolves around the application of these provisions and the law
as would emerge thereunder. Sections 73 and 74 read thus:-
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73. Compensation of loss or damage caused by breach of
contract
When a contract has been broken, the party who suffers by such
breach is entitled to receive, form the party who has broken the
contract, compensation for any loss or damage caused to him thereby,
which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely
to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss
of damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling
those created by contract : When an obligation resembling those
created by contract has been incurred and has not been discharged,
any person injured by the failure to discharge it is entitled to receive
the same compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.
Explanation : In estimating the loss or damage arising from a breach
of contract, the means which existed of remedying the inconvenience
caused by non-performance of the contract must be taken into
account.
74. Compensation of breach of contract where penalty
stipulated for [When a contract has been broken, if a sum is named
in the contract as the amount to be paid in case of such breach, or if
the contract contains any other stipulation by way of penalty, the
party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive from
the party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty
stipulated for
Explanation.-- A stipulation for increased interest from the date of
default may be a stipulation by way of penalty.]
Exception.-- When any person enters into any bail-bond,
recognizance or other instrument of the same nature or, under the
provisions of any law, or under the orders of the [Central
Government] or of any [State Government], gives any bond for the
performance of any public duty or act in which the public are
interested, he shall be liable, upon breach of the condition of any such
instrument, to pay the whole sum mentioned therein.
Explanation.-- A person who enters into a contract with Government
does not necessarily thereby undertake any public duty, or promise to
do an act in which the public are interested."
Thus, Section 73 provides that a party who suffers under a
breach of contract becomes entitled to receive from a party who has
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broken the contract, compensation for any loss or damages caused to him.
Compensation can be recovered for loss or damage which naturally arose
in the usual course of things from such breach, or which the parties knew,
when they made the contract, it is likely to result from the breach of it,
and that, such compensation is not to be given for any remote and indirect
loss of damage sustained by reason of the breach. The third paragraph of
Section 73 applies the same principle where breach occurs of obligations
and resembling contracts. The fourth para of section 73 provides that
while assessing damage means which existed to the person claiming
damages of remedying inconveniences caused by non-performance must
be considered. It is well-settled that the illustration to the Section
represent the general rules that can be followed while interpreting a
Section. As regards Section 74, it provides for Compensation of breach of
contract where penalty is stipulated in the contract itself. Thus if a
contract is broken, and if a sum is named in a contract as amount to be
paid in case of breach or if any other stipulation by way of penalty, it
provides that the party complaining of the breach becomes entitled,
whether or not actual damage or loss is proved to have been caused, to
receive from the party who has broken the contract reasonable
compensation, not exceeding the amount so named or the penalty
stipulated for.
61. The intention of the legislature as embodied in Section 74
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can be noted from the ineffable observations of Ameer Ali, J. in
"Mahadeoprasad Vs. Siemens (India) Limited"11 wherein His Lordship
considering the claim for liquidated damages of the plaintiff observed
thus:-
"That brings me to the question of damages for the breach
of the guarantee, which, as I indicated at the outset, was
ultimately the only point argued on behalf of the
defendatns. The question involves a point of law, namely,
the effect of section 74 of the Contract Act. Speaking for
myself, I have never understood section 74. I am always
convinced of the difficulty of a particular point when both
sides say it is perfectly simple.
I will deal first with the point of law involved and
then with the main question of fact which underlies every
issue as to damages, including the question of mitigation.
What is the effect in Indian Law of "naming a
"figure?"
I should perhaps say now that I have no doubt that
these parties at the time of the compromise fully considered
their position. The figures named are undoubtedly large,
but I have no doubt that they were arrived at after
consideration, and I think the harshness of the contract (if
you can call it that) is not so much the fixing of these
particular figures as the unconditional undertaking to
fulfill a very stringent guarantee under what must have
been almost unknown circumstances.
However, the point is a point of law and has been
argued as such on behalf of the defendant company, and
quite rightly and very ably argued. What is the effect of
naming a sum, having regard to section 74?
... ... ...
Before I state what I consider to be the law in the
form of propositions, I desire to say something about the
section itself. In the first place, by reason of the fact that
there has been an amendment, it does not make sense at
all. The second clause of the section contains the phrase
"any other stipulation by "way of penalty" which has been
added. In contradistinction to "other" is "a sum named in
the "contract as the amount to be paid, etc." According to
11 ILR VOL. LX CALCUTTA 1379
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English law and phraseology, such a sum would not be a
penalty at all. For the purposes of this case I disregard the
clause in question referring to a "penalty." It is then clear
that the Indian law professes simply to be oblivious to the
fact that in England "sums named in the contract" have
been divided into distinct species: (a) liquidated damages,
(b) penalties. The Indian law has not heard of them.
In all cases, when a sum is named, certain
consequences shall follow. What are those consequences ?
The plaintiff is entitled "whether or not actual damage or
loss is proved to have been caused, to receive reasonable
compensation not exceeding the "amount, etc." It should
be noted here that, by reason of the last clause, we again
get away from penalty, because in English law the sum
named, if a penalty, ceases to have any effect at all either
as a lower or upper limit. In Indian Law it remains an
upper limit, or maximum.
The other point to be noticed as "whether or not
"actual damage or loss is proved." Now, what is the sense
of that, if you have to disregard the figure named entirely?
If it is simply a maximum,what is the sense of it ? It may
have little sense upon any reading, but none at all if one
has to disregard the sum named entirely, i.e., for all
purposes except as a maximum.
Now, there are cases in Calcutta which I have not
had time to look into, but there is one, The Brahmaputra
Tea Co.Ltd. Vs. Scarth, (1985) I.L.R. 11 Calc.545,550,
551" where this Section is discussed:
It is clear that the court might have awarded the full
sum stipulated without any proof of damages or
loss.
That you get from the section itself. Then :
No doubt the court has a discretion to fix what it
considers reasonable compensation; but when the
parties have already agreed among themselves as to
what the penalty should be, we think the court
should not, in fixing the compensation, wholly
ignore the amount agreed on, unless this is, on its
face, wholly unreasonable with reference to the
position of the parties and the breach provided
against.
which does not get you very far.
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To my mind, the following is the intention of the
legislature:-
(1) The plaintiff must prove his damage in a general
sense;
(2) the contract made by the parties estimating their
damages is in itself evidence;
(3) if there is no other evidence of damage, I can
conceive of certain cases where this evidence alone will be
considered sufficient, nor do I think that the Judicial
Committee intended by anything said in Panna Singh V.
Firm Bhai Arjan Singh, (1920) 33 C.W.N.949" to
exclude such a possibility;
(4) the sum named, however, is not conclusive evidence,
that is to say, if there is other evidence or circumstances
showing that it was excessive, the court will not consider
itself bound by it;
(5) if, on the other hand, the other evidence and
circumstances indicate that the damage equals or may
equal, or is likely to exceed the amount named, the Court
will abide by it, and lastly,
(6) in case (4), that is to say, where the other evidence
shows that it is unreasonable, the plaintiff will have to
prove his damages irrespective of the figure."
(emphasis supplied)
We are in respectful agreement with the above interpretation of Ameer
Ali J. when it is held that for the purposes of Section 74, the plaintiff
must prove damage in a general sense as the contract made between the
parties estimating their damages is in itself evidence of damages. In the
facts of the present case admittedly there is a breach of the contract once
the vessels have gone on demurrage. The amount which is claimed by the
Respondent is the amount of demurrage as agreed between the parties.
There is no other evidence to show as to what was demanded by the
Respondent was unreasonable or there was no legal injury caused to the
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Respondent. In fact that was never the case of the Appellant. The
appellant cannot be expected to go beyond the explicit terms of the
contract to which it was all throughout conscious as also on which it had
acted upon.
62. The observation of Ameer Ali, J. in Mahadeoprasad Vs.
Siemens (India) Limited (supra) in effect are also supported by the
observations of the Supreme Court in "Fateh Chand v. Balkishan Das12"
referring to Section 74 of the Contract Act, their Lordship of the
Constitution Bench in paragraph 8 observed thus:-
"(8) ... ... ...
The section is clearly an attempt to eliminate the somewhat elaborate
refinements made under the English common law in distinguishing
between stipulations providing for payment of liquidated damages
and stipulations in the nature of penalty. Under the common law a
genuine pre-estimate of damages by mutual agreement is regarded as
a stipulation naming liquidated damages and binding between the
parties: a stipulation in a contract in terrorem is a penalty and the
Court refuses to enforce it, awarding to the aggrieved party only
reasonable compensation. The Indian Legislature has sought to cut
across the web of rules and presumptions under the English common
law, by enacting a uniform principle applicable to all stipulations
naming amounts to be paid in case of breach, and stipulations by
way of penalty. The second clause of the contract provides that if for
any reason the vender fails to get the sale-deed registered by the date
stipulated, the amount of Rs. 25,000/- (Rs. 1,000/- paid as earnest
money and Rs. 24,000/- paid out of the price on delivery of
possession) shall stand forfeited and the agreement shall be deemed
cancelled. The covenant for forfeiture of Rs. 24,000/- is manifestly a
stipulation by way of penalty.
... ... ...
(10) ... ... ..... ...The measure of damages in the case of breach of a
stipulation by way of penalty is by S. 74 reasonable compensation
not exceeding the penalty stipulated for. In assessing damages the
Court has, subject to the limit of the penalty stipulated, jurisdiction
to award such compensation as it deems reasonable having regard to
12 AIR 1963 SC 1405
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all the circumstances of the case. Jurisdiction of the Court to award
compensation in case of breach of contract is unqualified except as to
the maximum stipulated; but compensation has to be reasonable,
and that imposes upon the Court duty to award compensation
according, to settled principles. The section undoubtedly says that the
aggrieved party is entitled to receive compensation from the party
who has broken the contract, whether or not actual damage or loss is
proved to have been caused by the breach. Thereby it merely
dispenses with proof of "actual loss or damages"; it does not justify
the award of compensation when in consequence of the breach no
legal injury at all has resulted, because compensation for breach of
contract can be awarded to make good loss or damage which
naturally arose in the usual course of things, or which the parties
knew when they made the contract, to be likely to result from the
breach. "
63.
The legal journey of section 74 and consistent to what has
been held by Ameer Ali J. in Mahadeoprasad Vs. Siemens (India)
Limited (supra) is well reflected in several other decisions between
period of Fateh Chand v. Balkishan Das, AIR 1963 SC 1405 up to
Kailash Nath Associates Vs. DDA, (2015)4 SCC 135. We discuss some
decisions in this context.
64. In "Shiva Jute Baling Limited. Vs. Hindley and Company
Limited"13, the case concerned the Appellant-Indian Company which had
entered into a contract with the Respondent company incorporated in
England for the supply of bales of jute. Clause 12 of the contract provided
that in the event of default of tender or delivery, the seller shall pay to the
buyer as and by way of liquidated damages 10 s. per ton plus the excess
(if any) of the market value over the contract price. There was also a
13 AIR 1959 SC 1357
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provision for arbitration in London, and the appellant having failed to
supply the bales as contracted and disputes having arisen between the
parties, the respondent referred the matter to the arbitration of the
'London Jute Association'. The arbitrators awarded liquidated damages
provided under clause 12 of the contract i.e. not only the difference
between the contract price and the market price but also a further sum of
10 s per ton. The respondent had prayed that judgment be pronounced in
accordance with the award and decree be passed accordingly. The
appellant contended that extra amount of 10 s per ton included in the
sum of liquidated damages was against the provisions of Sections 73 and
74 of the Contract Act and therefore, the award being against law of India
was bad on the face of it and should not be enforced in India in view of
the provisions of Section 7(e) of the Arbitration (Protocol and
Convention) Act. In this context the Supreme Court held that there was
nothing in Sections 73 and 74 of the contract Act which made the award
of such liquidated damages illegal. Both these sections provide for
reasonable compensation and Section 74 contemplates that the maximum
reasonable compensation may be the amount which may be named in the
contract. The arbitrators having awarded the maximum amount so
named and nothing more, their award in the circumstances could not be
said to be bad on the face of it, nor could it be said to be against the law
of India as contained in these sections of the Contract Act. The
observations in that regard are contained in paragraph 14 of the Report
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which reads thus:-
"The argument under this head is that the liquidated damages
provided under cl. (12) of the contract include not only the
difference between the contract price and the market price on the
date of default but also a further sum of 10s. per ton. Reference in
this connection is made to ss. 73 and 74 of the Indian Contract Act,
1872 (IX of 1872) and it is said that the extra amount of 10s. per
ton included in the sum of liquidated damages is against the
provision of these sections and therefore the award being against the
law of India is bad on the face of it and should not be enforced in
India. Section 73 provides for compensation for loss or damage
caused by breach of contract. It lays down that when a contract has
been broken, the party who suffers by such breach is entitled to
receive from the party who has broken the contract, compensation
for any loss or damage caused to him thereby, which naturally arose
in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the
breach of it. Section 74 provides for breach of contract where
penalty is stipulated for or a sum is named and lays down that
when a contract has been broken, if a sum is named in the contract
as the amount to be paid in case of such breach, or if the contract
contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage
or loss is proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty
stipulated for. What cl. (12) of the contract provides in this case is
the measure of liquidated damages and that consists of two things,
namely, (i) the difference between the contract price and the market
price on the date of default, and (ii) an addition of 10s. per ton
above that. There is nothing in s. 73 or s. 74 of the Contract Act,
which makes the award of such liquidated damages illegal.
Assuming that the case is covered by s. 74 , it is provided therein
that reasonable compensation may be awarded for breach of
contract subject to the maximum amount named in the contract.
What the arbitrators have done is to award the maximum amount
named in the contract. If the appellant wanted to challenge the
reasonableness of that provision in cl. (12) it should have appeared
before the arbitrators and represented its case. It cannot now be
heard to say that simply because cl. (12) provided for a further sum
of 10s. per ton over and above the difference between the contract
price and the market price on the date of the default, this was per se
unreasonable and was therefore bad according to the law of India
as laid down in ss. 73 and 74, of the Contract Act. Both these
sections provide for reasonable compensation and s. 74
contemplates that the maximum reasonable compensation may be
the amount which may be named in the contract. In this case the
arbitrators have awarded the maximum amount so named and
nothing more. Their award in the circumstances cannot be said to
be bad on the face of it, nor can it be said to be against the law of
India as contained in these sections of the Contract Act. The second
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contention must also fail." (emphasis supplied)
65. In the case Pandit Janki Nath Zutshi & Anr. Vs. Ghulam
Qadir Mir and Others14, His Lordship S.Murtaza Fazl Ali observed that it
is well settled that after the amendment of 1899 in Section 74 of the
Contract Act in India, the legislature abolished the distinction between
'penalty' and 'liquidated damages'. Section 74 would thus show that even
though the parties may by agreement settled a fixed sum as damages for
the breach of the contract, the Court is not powerless to grant relief to the
party committing default, if it is held that the amount of damages fixed by
the parties is unconscionable or penal. Once the Court comes to this
finding, it is open to it to grant such reasonable compensation as the court
may in the circumstances determine. The Court considering the decision
in "Bhai Panna Singh Vs. Arjun Singh"15 and the decision in "Badhava
Singh Vs. Charan Singh"16 has made the following observations in
paragraph 13 which read thus:-
"13. In a later case, Michel Habib V. Sulaiman El Taji
AIR 1941 PC 101 the same principle was enunciated and
it was held that the amount fixed by the parties in the
contract would not include a sum fixed in terrorem
covering breaches of contract of varying degrees. Their
Lordships further held that the agreed liquidated
damages in order to be enforced must be the result of a
genuine pre estimate of damages. In this connection, their
Lordships observed as follows:-
"Agreed liquidated damages, if to be enforced must
14 AIR 1964 Jammu & Kashmir 26
15 AIR 1929 PC 1/9
16 AIR 1955 Raj 87
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be the result of a "genuine pre-estimate of damages" to
use the illuminating phrase of Lord Duneain. They do not
include a sum fixed in terrorem covering breaches of
contract of many varying degrees of importance the
possible damages from which bear no relation to the fixed
sum, and which obviously have at no time been estimated
by the contracting parties. It seems right therefore, to
conclude that now when the code is applied to contracts,
"damages" will be taken to mean actual damages, and
the article will only apply to an agreement which
represents "a genuine pre-estimate of damages". Where
there is such an agreed sum "no more and no less" can be
awarded. But if the court applying well known rules has
to conclude that the sum agreed was a penalty, whatever
it may be called in the agreement, then the penal
stipulation will not be enforced". It seems to me that
where the clause relating to the award of damages as
consequence of the breach of the contract is an integral
part of the contract and has been added as a guarantee
for the performance of the contract, and the sum fixed is
pre-estimate of damages, agreed to by the parties, the
courts should normally carry out the terms of the
contract and grant damages as agreed to between the
parties. I am supported in this view by a decision of the
Nagpur High Court reported in Champat Rao Mahadeo
V. Mahadeo Bajirao, AIR 1937 Nag 143, and also
Vaithinatha Iyer V. Govindaswami Odayar, AIR 1922
Mad 67. The question as to whether or not the amount
fixed in the contract is pre-estimate of damages or is a
penalty will have to be determined according to the facts
of each case. In the instant case, we have to find out as to
whether the clause relating to withholding of the balance
of the consideration money of Rs.20,000/- was a penalty
or was really a pre-estimate damage as agreed to between
the parties. (emphasis supplied)
66. The learned Single Judge of this Court in "Indian Drugs and
Pharmaceuticals Ltd., Hyderabad Vs. Industrial Oxygen Co.Ltd, Poona
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& Anr."17, considering Section 74 of the Indian Contract Act has observed
thus:-
"If the very purpose of putting a genuine pre-estimate is to avoid
litigation and introduce certainty in computation of difficult
question of assessment of damages, it seems to be in the highest
degree unlikely that the intention would have been that the clause of
liquidated damages will not come into operation till the entire
contract has been broken."
67. In "K.P.Subbarama Sastri & Ors. Vs. K.S.Raghavan & Ors"18
the Supreme Court affirming the full Bench decision, held that Section 74
of the Contract Act in the context whether a particular stipulation in a
contractual agreement is in the nature of a penalty has to be determined
by the court against the background of various relevant factors, such as
the character of the transaction and its special nature, if any, the relative
situation of the parties, the rights and obligations accruing from such a
transaction under the general law and the intention of the parties in
incorporating in the contract the particular stipulation which is contended
to be penal in nature, it was observed that if on such a comprehensive
consideration, the court finds that the real purpose for which the
stipulation was incorporated in the contract was that by reason of its
burdensome or oppressive character it may operate in terrorem over the
promiser so as to drive him to fulfill the contract, then the provision will
be held to be one by way of penalty. The following are the observations of
the Full Bench of Kerala High Court which are affirmed in the decision:-
17 AIR 1986 BOMBAY 186
18 AIR 1987 SC 1257
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".... .... .... We quote below the observations made by the
full Bench in paragraphs 6 & 7:
"6. The question whether a particular stipulation in a
contractual agreement is in the nature of a penalty has to be
determined by the court against the background of various
relevant factors, such as the character of the transaction and
its special nature, if any, the relative situation of the parties,
the rights and obligations accruing from such a transaction
under the general law and the intention of the parties in
incorporating in the contract the particular stipulation which
is contended to be penal in nature. If on such a comprehensive
consideration, the court finds that the real purpose for which
the stipulation was incorporated in the contract was that by
reason of its burdensome or oppressive character it may
operate in terrorem over the promiser so as to drive him to
fulfil the contract, then the provision will be held to be one by
way of penalty."
"7. Where a contract provides for payment of money in
instalments and contains also a stipulation that on default
being committed in paying any of the instalments the whole
sum shall become payable at once, the true test for
determining whether the said condition is in the nature of a
penalty is to find out whether the amounts referred to in the
agreement were debita in praesenti although solvenda in
futuro or whether they were to become due to the promisee
only on the respective dates when the instalments were
payable. If on a proper construction of a contract it is found
that the real agreement between the parties was to the effect
that the whole amount was on the date of the bond a debt due
but the creditor for the convenience of the debtor allowed it to
be paid by instalments intimating that if default should be
made in the payment of any instalments he would withdraw
the concession, then the stipulation as to the whole amount of
the balance becoming payable would not be penal; if, on the
other hand, on a proper consideration of the terms of the
contract the court comes to the conclusion that the debt itself
arises or becomes due and payable by the debtor only on the
respective dates fixed for the instalments the stipulation that
on default being made in the payment of any instalment the
whole of the balance should become due and payable would be
in the nature of a penalty."
68. In "Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes
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Ltd."19 discussing Sections 73 and 74 of the Indian Contract Act,1872 and
considering the law in that regard as laid down in the decisions in the
cases Fateh Chand v. Balkishan Das20, Maula Bux v. Union of India21,
Union of India v. Rampur Distillery and Chemical Co. Ltd. 22 and Union
of India v. Raman Iron Foundry23, the Supreme Court held that genuine
pre-estimate of damages by mutual agreement was in effect a stipulation
naming liquidated damages and was binding on the parties. The
observations in paragraphs 40, 41, 46 and 69 read thus:-
"40
It cannot be disputed that for construction of the contract, it
is settled law that the intention of the parties is to be gathered from
the words used in the agreement. If words are unambiguous and are
used after full understanding of their meaning by experts, it would
be difficult to gather their intention different from the language
used in the agreement. If upon a reading of the document as a
whole, it can fairly be deduced from the words actually used therein
that the parties had agreed on a particular term, there is nothing in
law which prevents them from setting up that term. {Re: Modi &
Co. v. Union of India [(1968) 2 SCR 565]}. Further, in construing a
contract, the Court must look at the words used in the contract
unless they are such that one may suspect that they do not convey
the intention correctly. If the words are clear, there is very little the
court can do about it. {Re: Provash Chandra Dalui and another v.
Biswanath Banerjee and another [1989 Supp (1) SCC 487]}.
41. Therefore, when parties have expressly agreed that
recovery from the contractor for breach of the contract is pre-
estimated genuine liquidated damages and is not by way of
penalty duly agreed by the parties, there was no justifiable
reason for the arbitral tribunal to arrive at a conclusion that
still the purchaser should prove loss suffered by it because of
delay in supply of goods.
... ... ...
From the aforesaid Sections, it can be held that when a
contract has been broken, the party who suffers by such
19 AIR 2003 SC 2629
20(1964) 1 SCR 515 at 526
21(1969) 2 SCC 554
22(1973) 1 SCC 649
23(1974) 2 SCC 231
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breach is entitled to receive compensation for any loss which
naturally arise 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. Further, in case where Court arrives at the
conclusion that the term contemplating damages is by way of
penalty, the Court may grant reasonable compensation not
exceeding the amount so named in the contract on proof of
damages. However, when the terms of the contract are clear
and unambiguous then its meaning is to be gathered only
from the words used therein. In a case where agreement is
executed by experts in the field, it would be difficult to hold
that the intention of the parties was different from the
language used therein. In such a case, it is for the party
who contends that stipulated amount is not reasonable
compensation, to prove the same .
... ... ...
69. From the aforesaid discussions, it can be held that:-
(1) Terms of the contract are required to be taken into
consideration before arriving at the conclusion whether the
party claiming damages is entitled to the same;
(2) If the terms 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
and that is what is provided in Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73 and,
therefore, 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. The
Court is competent to award reasonable compensation in case
of breach even if no actual damage is proved to have been
suffered in consequences of the breach of a contract.
(4) In some contracts, it would be impossible for the Court to
assess the compensation arising from breach and if the
compensation contemplated is not by way of penalty or
unreasonable, Court can award the same if it is genuine pre-
estimate by the parties as the measure of reasonable
compensation."
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69. In "Board of Trustees of Port Vs. Pioneer Engineer & Anr."24
again considering the decisions of the Supreme Court in the case "Fateh
Chand v. Balkishan Das, 1964 SCR (1) 515"; "Maula Bux v. Union of
India (UOI), 1970 (1) SCR 928"; "ONGC Ltd. v. Saw Pipes Ltd., (2003)
5 SCC 705" accepted the legal position that in every case of breach of
contract, the person aggrieved by the breach is not required to prove
breach or actual loss/damages suffered by him before he can claim a
decree and the Court is competent to award a reasonable compensation
even if no actual damages is proved in support in consequence of the
breach, when the contractual clause prescribes the liquidated damages in
genuine pre-estimate. The observations in paragraphs 23 read thus:-
"23. After indicating that reasonable compensation is the principle
underlying Section 74 of the Contract Act, the Supreme Court
clarified that though Section 74 says that whether or not actual
damage is proved, the aggrieved party is entitled to receive
compensation thereby it only dispenses with proof of actual loss or
damage. This does not justify the award of compensation when in
consequence of the breach no legal injury at all has resulted, because
compensation for breach of contract can be awarded only to make
good loss or damage which naturally arose in the usual course of
things or which the parties know when they made the contract to be
likely to result from the breach. Extracts from the judgment in Fateh
Chand's case have been quoted in later judgments of the Supreme
Court with approval and there could be no dispute that Fateh Chand
is still a good law and holds the field.
70. In Kailash Nath Associates Vs. DDA (supra) was a case
where the Court was dealing with a 'forfeiture clause' whereby the
earnest money was forfeited. The Appellant therein was a successful
24 2006(5) Bom.C.R. 628
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bidder and on deposit of 25% of the bid amount being the earnest money
had requested for extension of time for payment of balance amount, time
was extended. The Appellant also had sought consent of the Respondent
for payment of balance amount with 18% interest. For payment of the
balance 75% of the amount the case was forwarded to the Ministry of
Urban Development since the land was nazul land which was also agreed
by the Respondent. The Central Government had informed that the land
was not nazul land. However, three years after such information from the
Central Government, the Respondent cancelled the bid allotment
forfeiting the earnest money as the Appellant failed to pay the balance
amount. Interalia in this context the suit which was filed by the
Appellant seeking specific performance of the agreement and damages,
which was dismissed by the learned Single Judge of the High Court.
However ordering refund of earnest money on the ground that the
Respondent did not suffer any loss since the said plot was sold to a third
party for about three and half times higher price and cancellation of
allotment and consequent forfeiture of earnest money was made without
notice to the Appellant. The Division Bench, however, set aside the order
of the learned Single Judge relying on Section 74 of the Contract Act
holding that the proof of loss is not required to recover the earnest money.
In this context the Supreme Court considering the law on the issue
("Fateh Chand v. Balkishan Das, 1964 SCR (1) 515"; "Maula Bux v.
Union of India (UOI), 1970 (1) SCR 928"; "ONGC Ltd. v. Saw Pipes
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Ltd., (2003) 5 SCC 705") and other decisions and the scheme of Section
73, 74 and 75 of the Contract Act held that compensation can be
awarded for damages or loss suffered. If damage or loss is not suffered,
the law does not provide for a windfall. The respondent had sold the plot
for a price three and half times more than the price at which it had sold to
the appellant and thus it was held that in the facts of the case, the
Respondent was not put to any damage but profited in their auction. The
terms and conditions of the auction contract stipulated that the earnest
money can be forfeited only in case of default, breach or non compliance
of any of the terms and conditions of the auction or on misrepresentation.
It was held that having extended the time twice by setting up High Power
Committee and also granting consent to payment of balance amount, the
respondent never insisted on payment of balance bid amount. Hence, it
was held that there was no breach of the terms and conditions of the
auction and the Respondent therefore had arbitrarily forfeited the earnest
money. In this context it was observed that Section 74 of the Contract
Act is sandwiched between Section 73 and 75 of the Contract which deals
with compensation for loss or damages caused for breach of the contract
and compensation for damage which a party may sustain through non
fulfillment of a contract, after such party rightfully rescinds such contract.
In that context analysing various authorities, the their Lordships in
paragraphs 43 and 44 held thus:-
"43. On a conspectus of the above authorities, the law on compensation for
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breach of contract under Section 74 can be stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated amount
payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if it
is a genuine pre-estimate of damages fixed by both parties and found
to be such by the Court. In other cases, where a sum is named in a
contract as a liquidated amount payable by way of damages, only
reasonable compensation can be awarded not exceeding the amount so
stated. Similarly, in cases where the amount fixed is in the nature of
penalty, only reasonable compensation can be awarded not exceeding the
penalty so stated. In both cases, the liquidated amount or penalty is the
upper limit beyond which the Court cannot grant reasonable compensation.
43.2 Reasonable compensation will be fixed on well known
principles that are applicable to the law of contract, which are to be
found inter alia in Section 73 of the Contract Act.
43.3 Since Section 74 awards reasonable compensation for damage
or loss caused by a breach of contract, damage or loss caused is a
sine qua non for the applicability of the Section.
43.4. The Section applies whether a person is a plaintiff or a
defendant in a suit.
43.5 The sum spoken of may already be paid or be payable in
future.
43.6 The expression "whether or not actual damage or loss is
proved to have been caused thereby" means that where it is
possible to prove actual damage or loss, such proof is not
dispensed with. It is only in cases where damage or loss is
difficult or impossible to prove that the liquidated amount
named in the contract, if a genuine pre-estimate of damage or
loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money
under a contract. Where, however, forfeiture takes place under the
terms and conditions of a public auction before agreement is
reached, Section 74 would have no application.
44. The Division Bench has gone wrong in principle. As has been
pointed out above, there has been no breach of contract by the
appellant. Further, we cannot accept the view of the Division Bench
that the fact that the DDA made a profit from re-auction is
irrelevant, as that would fly in the face of the most basic principle on
the award of damages - namely, that compensation can only be
given for damage or loss suffered. If damage or loss is not suffered,
the law does not provide for a windfall." (emphasis
supplied)
71. The decision of the learned Single Judge (Ashok Kumar
Ganguly, J.) of the Calcutta High Court in "Hindustan Paper Corp. Vs.
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Wellbrines Chemicals P.Ltd"(supra) concerned a claim for demurrage as
made on behalf of the disponent only, who had chartered a vessel from
M/s.Shipping Corporation of India Ltd. under a charterparty agreement.
There was a demurrage clause. There was inter alia a dispute under the
contract which was referred for arbitration. The Arbitrators had awarded
Rs.11,83,645.80 towards demurrage and interest to be paid thereon by
the petitioner. In assailing the award, the petitioner contended that the
Arbitrators have awarded demurrage as liquidated damages which was
contrary to the express provisions of the Contract Act. On this
background, the learned Judge applied the test of commercial practice
and referring to the decision of the Supreme Court in the case "Fateh
Chand v. Balkishan Das" (supra) and "Union of India v. Raman Iron
Foundry" (supra) and referring to the English law on 'demurrage'
observed that the concept of demurrage is capable of two shades of
meaning. Firstly the demurrage means a sum agreed by the charterer to
be paid as liquidated damages for the detention of the ship beyond its
stipulated or reasonable time for loading or unloading as described in
"Scrutton on Charterparty, 20th Edition, page 298". It was observed that
the other meaning which can be attributed to the concept of demurrage is
that demurrage means nothing more than a liquidated sum payable by the
charterer to the owner for the further time taken in loading or unloading
after the expiry of the lay time. It was observed that in view of this second
interpretation the demurrage is nothing but a liquidated price payable to
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the owner for using the ship beyond the period of lay time and on this
interpretation, demurrage sounds more in debt than in damages. The
learned Judge referred to the observations of the Queen's Bench in the
case of "Clink v. Rod Ford", reported in "(1891)1 Queens' Bench, 625".
In this context the learned Judge has made the following observations:-
"103. From a perusal of the award, it appears that in the award, the
Joint Arbitrators have noted submission of the petitioner that in
English Law demurrage is a form of liquidated damage. But, the
award does not say whether the said contention is correct also in the
context of the Indian Law.
104. This Court is of the view that even under the English Law, the
concept of demurrage is capable of two shades of meaning. On a strict
meaning, demurrage means a sum agreed by the charterer to be paid
as liquidated damages for the detention of the ship beyond its
stipulated or reasonable time for loading or unloading (see Scrutton
on Charterparty, 20th Edition, page 298}.
105. Another meaning is also attributed to the concept of demurrage.
The second interpretation of this concept is that demurrage means
nothing more than a liquidated sum payable by the charterer to the
owner for the further time taken in loading or unloading after the
expiry of the lay time. In view of the second interpretation,
demurrage is nothing but a liquidated price payable to the owner for
using the ship beyond the period of lay time. On this interpretation,
demurrage sounds more in debt than in damages. The learned
counsel for the respondent in developing this argument has placed
reliance on a decision of the English Court of Appeal in the case of
Clink v. Rod Ford, reported in (1891)1 Queens' Bench, 625. At page
630 and 631 of the report, Lord Justice Brown held as follows :
"Now the word "demurrage" has a primary and a secondary
sense and with regard to the construction of that word, I will
take the language used by Cleasby J. in Lodchart v. Falk (Law
Rep. 10 Ex. 132 at l35) -- a case which it is impossible I think
to distinguish from the present -- as expressing shortly that
which no doubt is expressed in many other judgments,
namely, the way in which we ought to deal with the question
of interpretation. He says : The word "demurrage" no doubt
properly signifies the agreed additional payment (generally
per day) for an allowed detention beyond a period either
specified in or to be collected from the instrument; but it has
also a popular and more general meaning of compensation
for undue detention, and from the whole of each charterparty
containing the clause in question we must collect what is the
proper meaning to be assigned to it", So far as to the meaning
of the word "demurrage". It is an elastic word; it has a strict
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sense, but it can be stretched beyond its strict sense.....The
word "demurrage" having two meanings we must look at the
Charterparty to see if it is used in the strict sense or in the
more popular and elastic sense."
106. Therefore, the principle, which is deducible from the above
passage is that the question whether the stipulation relating to the
demurrage sounds more in damage than in debt is a question which
falls within the domain of interpretation of the particular clause in
the charterparty. In the instant case, the stipulation relating to the
demurrage is contained in clause 25 of the Charterparty. The said
clause is set out below :
"Clause 25. If the vessel is detained longer than the time
allowed for loading/discharging, demurrage shall be paid by
charterers to owners at the rate of Rs. 1,50,000/- (Rupees
One Lakh Fifty thousand only) per running day or pro-rate
and despatch money for all working time saved at the
loading/discharge Port will be paid to charterers at half the
demurrage rate per running day or pro-rate."
ig (emphasis supplied)
The learned Judge also referred to the decision of the
Supreme Court in the case "M/s. Raichand Amulakh Shah v. Union of
India and Ors."(supra) which case pertained to a claim for demurrage
under section 46C of the Railways Act, 1890. The learned Judge also
referred to the decisions of the Supreme Court in the case "Consumer
Education and Research Centre Vs. Union of India"25, "United
Breweries Ltd. V. The State of Andhra Pradesh" 26 and "Chunilal Mehta
V. Century & Manufacturing Co.Ltd.27" has observed thus:-
"108. The statutory law in India also shows that the term demurrage
has been employed more in the sense of liquidated charge or debt
rather that as liquidated damages. Reference, in this connection, may
be made the Constitution Bench decision of the Hon'ble Supreme
Court in the case of M/s. Raichand Amulakh Shah v. Union of India
and Ors., reported in AIR 1964 SC 1468. In that case, Section 46C of
25 AIR 1995 SC 922
26 AIR 1997 SC 1316
27 AIR 1962 SC 1314
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the Railways Act, 1890 came up for consideration. In para 7 sub-
para (ii) at page 1271 of the report, the Hon'ble Supreme Court inter
alia, held as follows :-
"Demurrage is therefore a charge levied on the goods not
unloaded from the wagons within the free time of six daylight
hours and wharfage is the charge levied on goods not removed
from the railway premises after the expiry of the free time
allowed for that purpose. Wharfage and demurrage are,
therefore, charges levied in respect of goods retained in the
wagons or in the railway premises beyond the free time
allowed for clearance under the rules."
.....
112. This Court finds that in none of these decisions cited by the
learned counsel for the petitioner, there is any observation or any
suggestion by the learned Judges that the person who is receiving
liquidated damages is first required to give the detailed evidence of
proof of damage in support of his case. In fact, cases of liquidated
damages of the kind which are stipulated in the charterparty between
the parties, are those cases where proof of actual damage is
practically not possible. But then this stipulation in the charterparty
of liquidated damages cannot be called a penalty. Liquidated damages
is a genuine pre-estimated sum of damages where proof of damage is
not possible or is very onerous. In such a situation, the liquidated
damages is adopted as the reasonable compensation. The concept of
penalty is a different thing and in essence is a payment of money
stipulated as in terrorem of the offending party, but the essence of the
liquidated damages is a genuine and reasonable pre-estimated
damages. In order to acquire the character of penalty, the sum
stipulated must be proved to be extravagant and unconscionable. But
here, no such evidence has been laid by the petitioner before the
Arbitrator that the stipulated amount mentioned in clause 25 is
either extravagant or unconscionable. In fact, no such evidence could
be led as the amount was a mutually agreed reasonable sum.
113. Reference, in this connection, may be made to the judgment of
the Hon'ble Supreme Court in the case of Chunilal Mehta v. Century
& Manufacturing Co. Ltd., . In that matter, questions came up on a
contract between the Company and Chunilal appointing Chunilal as
its Management Agent. It has provided in that contract that in the
event, the Managing Agency is terminated, the Managing Agent will
be entitled to receive from the company as compensation by way of
liquidated damages for the loss of appointment and the same amount
is not less than Rs. 6,000/- per month for the unexpired portion of
the agency. Considering the compensation for termination which was
provided for payment to Chunilal, the learned Judges of the Hon'ble
Supreme Court in par 11 at page 1319 of the report, after
constructing Sections 73 and 74 of the Contract Act, held that where
the parties have themselves provided for the precise amount of
damages that would be payable that party must be 'deemed to
exclude right to claim an unascertained sum of money as damages'. It
was also held in the said para 11 that if the Court accepts that the
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parties intended to confer on the Managing Agent merely a right
under Section 73 of the Court Act, in that case, 'the entire clause
would be rendered otiose'. Therefore, the requirement of proof under
Section 73 of Contract was held not applicable to such a situation.
Therefore, there is no difference in the Indian Law either. And the
Hon'ble Supreme Court upheld the award of a sum of Rs. 6,000/- to
the Agent for the unexpired period of the term of Agency and the
interest thereon."
72. We may also usefully refer to the decision in the case of
"Suisse Atlantique Societe D'Armement Maritime S.A. Vs. N.V.Rotterdamsche
Kolen Centrale"28 by a charterparty dated December 1956, the respondents
agreed to charter a vessel from the appellants for the carriage of coal from
the United States to Europe. The charter was to remain in force for a total
of two years consecutive voyages. The vessel had with all possible
dispatch to sail and proceed to a port in the United States and, having
loaded a cargo of coal, proceed with all possible dispatch to a port in
Europe. She had to be loaded at a specified rate per running day and, if
she was detained beyond the loading time, the respondents were to pay
$1,000 a day demurrage. Similarly, if she were detained longer than was
required to unload her at the stipulated rate per day and that was not due
to strikes, etc., or other causes beyond the control of the respondents, the
respondents, who were to discharge the cargo, were to pay demurrage at
the rate of $1,000 a day. In September,1957, the appellants regarded
themselves as entitled to treat the charterparty as repudiated by reason of
the respondents' delays in loading and discharging the vessel. That was
28 1966(2) the All England Law Reports 61
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not accepted by the respondents, and, in October,1957, the appellants and
respondents agreed, without prejudice to their dispute, that from
thenceforward the charterparty would be carried out. Between then and
the end of the charter the vessel made eight round voyages. The
appellants alleged that, due to delays in loading and unloading for which
the respondents were responsible, the vessel did not make as many
voyages as she should have done, with the result that they were deprived
of the freights they would have earned on the additional voyages and,
after giving credit for the demurrage payments received by them, claimed
damages from the respondents. The appellants contended that, if the
delays for which the respondents were responsible, were such as to entitle
the appellants to treat the charterparty as repudiated, the demurrage
provisions did not apply and they were entitled to recover the full loss that
they had suffered. On this conspectus their Lordships of House of Lord
held that the appellants, having elected in October,1957, to affirm the
charterparty, continued bound by its provisions, including the demurrage
provisions, and on the true construction of the charterparty the demurrage
provisions (Clause 3) were not to be regarded as limiting the respondents'
liability but were provisions for payment of agreed damages, and on proof
of breach by detention (within clause 3) the appellants were entitled only
to the agreed damages, and not to damages for loss of profit, i.e., loss of
freight, notwithstanding that the breach was deliberate and that the loss
of profit was willfully caused, if those were the facts. Lord Viscount
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Dilhorne and Lord Upjohn observed that there is a difference between a
fundamental breach of contract and breach of a fundamental term; in the
case of a fundamental breach the question is whether, having regard to
the character of the breach, performance has become something totally
different from what the contract contemplated, but a breach of a
fundamental term goes to the root of the contract and, without regard
having to be had to other circumstances, entitles the party not in breach to
repudiate the contract.
73. In this context the learned Counsel for the Respondent has
appropriately placed reliance on the decision of the English Court in
"(1)Fal Oil Co.Ltd., (2) Credit Agricole Indosuez (Suisse). -and-.
Patronas Trading Corporation SDN BHD"(Neutral Citation Number:
((2004)EWCA Civ 822)"(supra) wherein after the exhaustive study of the
earlier case law on the subject, the Court summarised its findings in
paragraph 42 of the judgment. The Court held that the question of
whether or not demurrage in a sale contract was an indemnity or an
independent provision is a matter of construction of each such contract. If
the contract makes any reference to or incorporates the demurrage
provisions of the Charterparty or other third party contract (e.g.
"demurrage as per Charterpary") that would be an indication that
demurrage was only indemnificatory. On the other hand in the absence of
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any such cross-reference the natural inference would be that demurrage
was independent. In the latter case there was nothing in law preventing a
seller from making a profit from the demurrage provision in its sale
contract. Lord Justice Mance considering the English decision in
paragraph 42 has observed as under:-
"42. This examination of the authorities leads to
conclusions, which I can summarise as follows:
i) Provisions in a sale contract regarding laytime and
demurrage should be approached without any pre-
conceptions or presumption as to their likely nature. That
follows from general principle, as well as from the passage
quoted above from Houlder Bros.
ii) The scope and effect of such provisions is a question
of construction. See Suzuki
iii) The underlying rationale of any sale contract
demurrage provision is that the receiving party may suffer
loss under a charter or other third party contract.
However, this is consistent with the provision operating
either by way of indemnity or independently. An
independent provision can, subject to the law on penalties,
be justified as a genuine pre-estimate of the receiving
party's exposure.
iv) Although the authorities distinguish generally
between (a) provisions operating as an indemnity and (b)
independent provisions, the precise nature and effect of
any demurrage provision depends upon the context and
wording of the particular provisions, including the scope
of any reference to or incorporation of the demurrage
provisions of any charterparty or other third party
contract.
v) In the absene of any cross reference in the said
contract provisions to a charterparty or other contract
under which demurrage liability may arise, the natural
inference is that the sale contract fall within category (b);
of Houlder Bros. And also the dicta in Ets. Soules. But it is
of course conceptually possible to have an implied as well
as an express cross-reference of this nature.
vi) In cases where there is some form of cross-reference
to a charterparty or other third party contract under
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which demurrage liability may arise, the nature, purpose
and effect of the cross-reference become critical. There are
two broad situations, corresponding with categories (a)
and (b) mentioned in conclusion (iv) above. In the first,
the sale contract creates a liability for demurrage by way
of "indemnity", that is to pay only if and so far as such a
liability exists under the charter or other third party
contract (although Suzuki is the only clear reported
example in the authorities). It would no doubt also be
conceptually possible for sale contract provisions to
operate by way of "indemnity", but subject to the
additional qualification or precondition that any liability
for demurrage can and should only arise so far as
consistent with other sale contract terms (e.g. as to the
length of permissible laytime). But such a construction is
likely to lead to the practical problems identified in
Houlder Bros. And the authorities provide no positive
example of The second situation (exemplified by a number
of authorities) is one where the sale contract provisions
simply refer to or incorporate provisions of a charterparty
or other third party contract (or at least one of such
provisions e.g. as to the rate of demurrage) in an
otherwise independent sale contract scheme. The extent of
any such reference or incorporation is then itself of course
a matter of construction."
74. Thus adverting to the enunciation of law as laid down in the
above decisions it is clear that in the context of liquidated damages as
agreed between the parties, when the contract is broken, the party who
suffers by such breach would be entitled to receive compensation for any
loss which would naturally arise in the usual course of things from such
breach. The claimant would be required to prove his damage in general
sense as the contract made by the parties estimating their damages is in
itself evidence, unless there is some other evidence to show that the
subject claim was unreasonable. The parties when agree to an amount to
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be paid in case of a breach, in such a case, there may not be any necessity
of leading evidence for proving damages, unless the Court arrives at a
conclusion that no loss is likely to occur because of such breach. More
particularly when an agreement is executed by the experts in the field and
when an agreement is so arrived in their commercial wisdom, it cannot be
construed that the intention of the parties was different from what they
have agreed in having such a stipulation in the contract. The burden in
such a case would be on the party who contends that the stipulated
amount in the agreement is not reasonable compensation, to prove the
same. (see para 46 "ONGC Vs. Saw Pipes" (supra)). The expression as
used in Section 74 "whether or not actual damage or loss is proved to
have been caused, thereby", means that where it is possible to prove
actual damage or loss, such proof is not dispensed with and that only in
cases where damage or loss is difficult or impossible to prove that the
liquidated amount named in the contract, if a genuine pre-estimate of
damage or loss, can be awarded. (see para 46.6 Kailash Nath Associates
Vs. DDA)
75. We may also note that the decision of His Lordship Ashok
Kumar Ganguly, J. in the case Hindustan Paper Corp. Vs. Wellbrines
Chemicals P.Ltd. (supra), in our opinion, does not deviate from the
accepted principle, that demurrage is in the nature of liquidated damages,
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however additionally it only recognizes the manner in which it is
commercially understood in a charterparty agreement. In that context His
Lordship has made the observations relying on the English Law that as to
whether the stipulation relating to the demurrage sounds more in damage
than in debt, is a question which falls within the domain of interpretation
of the particular clause in the charterparty. His Lordship interpreting
Clause 25, which fell for consideration in the said decision, made the
observations that in the facts of the case it was not contended on behalf of
the petitioner that the demurrage clause sounds only in damage and not
in debt. His Lordship observed as to whether in a given case the
demurrage would be required to be considered as liquidated damages or a
fixed charge is required to be tested in the context of the agreement
between the parties in regard to the demurrage and such interpretation
would be required to be derived on the facts of each of such case. We are
in agreement with these observations of His Lordship. We are, therefore,
of the opinion that a straight jacket argument that the demurrage is in the
nature of fixed charge would not be acceptable and it would be required
to be tested in the context of the agreement between the parties. We may
so observe, also for the reason that in respect of certain enactments for
example under the Majour Port Trust Act or the Railways Act as their
Lordships were concerned, in the case of M/s.Raichand A. Shah vs.
Union of India (supra) the Court considered demurrage as fixed charge in
the context of Railways Act. Thus the position may differ from contract
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to contract. However, this would not displace the well established concept
of demurrage being in the nature of liquidated damages as understood in
a commercial contract and as extensively discussed by us above.
76. We may therefore, answer the questions as framed by us in
para 42 as under.:
(i) The claim for demurrage is in the nature of liquidated
damages and in some contracts by virtue of statutory provisions as for
example in Railways Act as considered by the Supreme Court in
M/s.Raichand A. Shah vs. Union of India (Supra) can be in the nature of
a fixed charge. Thus, the test to be applied would vary and depend on the
nature of the agreement and how the parties have understood such a
clause under the contract. The endeavour of the Court would be to gather
the intention of the parties not only from the words of the agreement but
also the understanding of the same by the parties who are themselves
expert in the field and as reflected in the pleadings.
(ii) The contention of the Appellant that the respondent was
required to prove that he has suffered any loss and/or he has actually paid
the vessel-owner in making a claim for demurrage is misconceived and
cannot be accepted for the reason as we have extensively set out including
our observations on the applicability of the test laid down by Ameer Ali, J.
in Mahadeoprasad Vs. Siemens (India) Limited (supra), on the contract
itself being the evidence estimating the damages. In fact the appellant
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never contended before the Arbitral Tribunal that the claim of the
Respondent was unreasonable and if the Appellant was to so contend, the
burden to prove that it was unreasonable, was on the appellant (see para
46 ONGC Vs. Saw Pipe (supra))
77. We are thus afraid that the contention of the appellant on the basis
of the decision in Kailash Nath (Supra), that the Respondent would be
required to prove the damage and only thereafter the respondent would
be entitled for a reasonable compensation, cannot be accepted. This is for
two fold reasons firstly in Kailash Nath their Lordships in para in
paragraph 43.1 have clearly held that where a sum is named in a contract
as a liquidated amount payable by way of damages, the party complaining
of a breach can receive as reasonable compensation such liquidated
amount only if it is a genuine pre-estimate of damages fixed by both
parties and found to be such by the Court. Once this is the test as laid
down by their Lordships and clearly applicable to the facts of the case
then the immediate question is whether or not the appellant had brought
any material before the Arbitral Tribunal to show that it is not a genuine
pre-estimate of the damages. (see para 46 "ONGC Vs. Saw Pipes"
(supra)). We may observe with certainty that as seen from the
correspondence and the succinct observations of the learned arbitrator,
that the Appellant never disputed the demurrage amount as fixed qua
each of the vessels, much less to place any material contrary to the claim
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of the respondent and that the same was not a genuine pre estimate of the
damages. Further in the facts of the present case we do not see how the
observation of their Lordships in paragraph 43.6 would not help the
Respondents. As noted above the contract in question is between a foreign
party (respondent) and a Indian party (appellant). The terms of
demurrage and the amount thereof at the maximum pre-estimated and
fixed at US$ 8000 and as regards each of the individual shipments, the
same is confirmed by letters between the agents and the Appellant which
is within the amount so fixed in the demurrage clause 10(v). If that be the
case then to dislodge such an agreed figure, there ought to have been
some material brought on record by the Appellant that the same is not the
genuine pre-estimate. In any event the principles as laid down by Ameer
Ali J. in Mahadeoprasad Vs. Siemens (India) Limited are clearly
applicable in the fact situation, as the agreement between the Appellant
and the Respondent estimating their damages would itself be an evidence
in the absence of no other evidence as regards the claim amount to be
unreasonable.
It can also be very well be said in the facts of the present case
and considering peculiarity of the contract, the pre-estimate of the amount
of demurrage/damage, as agreed between the parties is also required to
be accepted, for the reason that such damage or loss was impossible to
prove. We are in complete agreement with the contention as urged on
behalf of the Respondent that considering the nature of the contract being
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a shipping contract, having peculiar traits on a variety of aspects and the
parties in that context having agreed to the rate of demurrage,
considering several factors which also would have elements of
international commerce and trade, it would not only be unreasonable but
wholly unrealistic and impossible to call upon the respondent to prove the
loss suffered by it. In fact, in our opinion, Clause 10(v) of the Contract
reflects the certainty with which the parties expected to position
themselves on the issue of demurrage. The very purpose of agreeing to
the specified amount of demurrage was to avoid litigation and complexity
in assessing damages in that regard. The present case would completely
fall within the examples of cases as discussed in paragraph 69 of the
judgment in ONGC Vs. Saw Pipes (supra) being cases where it is very
difficult to prove actual loss. Thus the respondent had become entitled for
the demurrage as pre-estimated. In our opinion and with quite certainty
the appellants contentions in this context are completely an afterthought
and an attempt by hook or crook to avoid the liability under the contract.
We may also observe that to the misfortune of the Respondent despite a
crystal clear position on their entitlement for the demurrage claim, the
Appellant has made the Respondent suffer for last sixteen years to
deprive them of this legitimate entitlement.
78. Having considered the Award and the impugned Judgment of
the learned Single Judge and the rival contentions, we may thus
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summarise our observation and conclude that the case of the Appellant
firstly that clause 10(v) of the Contract was in the nature of indemnity
cannot be accepted, as noted by us there is no whisper in the clause 10(v)
of the Contract that the liability to pay demurrage is depending upon the
demurrage being paid by the Respondent. In any case, there was no
privity of contract between the Appellant and the owner of the vessel.
Further the Appellant also understood clause 10(v) is not providing for
indemnity is also abundantly clear from the evidence of Mr.Patwardhan,
Vice President, who clearly admitted that as per the commercial practice
being followed by the Appellant, the claim for demurrage was on the basis
of three documents, firstly statement of facts, secondly verification thereof
and necessary corrections thereof and thirdly the charter party agreement.
According to his evidence, these are generally the documents which would
be considered while determining whether demurrage is to be paid or not.
It is significant that in the entire correspondence, there is no indication
whatsoever by the Appellant to even remotely suggest that they have
understood the clause 10(v) being in the nature of indemnity as at no
point of time and in the normal course by dealing such proof of payment
of demurrage to the vessel owner was sought for. There was no denial of
the fact that there was COA agreement between the Respondent and the
vessel owner. The fallacy in the argument is completely exposed from the
specific stipulation of the second part of clause 10(v) which requires that
demurrage or despatch should be settled within 60 days after lay time
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statement is submitted with supporting documents. There is no material
which would support the contention of the Appellant that the clause
10(v) being in the nature of indemnity. We may observe that the
Appellant being quite sure that they would fail on their contention that
payment of demurrage would be in the nature of indemnity under clause
10(v), at the fag end of the arbitration proceedings, without any pleadings
in that regard, in their final submissions agitated the issue that the
demurrage was in the nature of liquidated damages, to contend that
unless the Respondent proves that the damages are occurred to them by
making payment to vessel owner the Respondent is not entitled for the
said claim. However, in our clear opinion as the law in that regard would
stand that as we have considered above, these submissions could not have
availed to the benefit of the Appellant. This is for two fold reasons. The
Arbitral Tribunal has allowed the claim of the Respondent interpreting the
terms of the contract. For the purpose of interpretation of clause 10(v) of
the contract, the learned Arbitrator has taken into consideration the
intention of the parties which is covered not only in the words as they are
used in the agreement but also on the basis of the several facts which have
come on record on the basis of the evidence. It is by now well established
that when the contract is broken, the party who suffers a breach is entitled
to receive compensation for any loss which naturally would arrive in the
usual course of things from such breach. In the present case, the Appellant
knew when they entered into a contract with the Respondent, that a
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particular loss is likely to result from such breach and therefore the
appellant agreed for payment of demurrage charges at the agreed rate. If
such is the situation, then, as their Lordships have observed in paragraph
46 of the decision in the case "Oil and Natural Gas Corporation Ltd. Vs.
SAW Pipes Ltd." there was no 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. This is surely not a case where the
Appellant has in any manner demonstrated that the
amount/compensation which was asked by the Respondent was not a
reasonable amount/compensation. There was no material to support such
a contention. The observations in paragraph 46 of the decision in the case
Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd.(supra) as
noted by us above are therefore applicable in full force.
79. Thus, in our opinion, applying the well settled principle of
interference in an arbitration award, we may observe that when there are
two equally possible or plausible views of interpretation on a clause in the
contract, it was legitimate for the learned Arbitrator to accept the one or
the other interpretation. The parties being commercial men have also
understood the demurrage clause in the manner as it is writ large as borne
out from the facts. Thus, in this situation we cannot agree with the
contention as urged on behalf of the Appellant that the interpretation of
clause 10(v) as made by the learned Arbitrator and accepted by the
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learned Single Judge, in any manner requires to be disturbed applying the
test of interference as permissible under Section 34 of the Arbitration and
Conciliation Act. It is well settled that the interpretation of the contract
was within the jurisdiction of the Arbitrator and unless there is a manifest
disregard of the contractual provision or the learned Arbitrator commits
an apparent error of law which goes to the very jurisdiction of the
Arbitrator, the Court would be loath to interfere in the arbitral award. We
are thus of the considered opinion that this is not one of the cases wherein
such manifest error or perversity in the award of the learned Arbitrator
has occurred.
80. As regards the counterclaim as made on behalf of the
Appellant, we may observe that though it was argued before the learned
Single Judge and the learned Single Judge has rejected the contention of
the appellant, no submissions were made in that regard before us.
However, in the written submissions some contentions have been urged
that the learned Arbitrator ought to have allowed the counterclaim. In
this situation, we do not propose to have any detail discussion on this
issue. In any event for sake of completeness , we may observe that we are
in complete agreement with the reasoning on the counterclaim as made
by the learned Arbitrator and also of the learned Single Judge. The issue
on counterclaim is as regards option cargo. It was completely a factual
issue. The learned Arbitrator has recorded a finding of fact that the
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appellant was required to exercise an option in relation to the option
cargo which was not exercised by the appellant within the time allowed
by the contract. As rightly observed by the learned Single Judge, a finding
of fact could not have been disturbed in the limited jurisdiction under
Section 34 of the Arbitration Act in the absence of any perversity or error
apparent on the face of the record or that the finding suffers from the
violation of principles of natural justice. It was not a case of the appellant
that the learned Arbitrator has not applied his mind. The learned
Arbitrator has recorded a finding possible to the record, in the facts and
circumstances of the case. This findings therefore in any event cannot be
disturbed. The contention on the counterclaim is therefore, misconceived
and has been rightly rejected by the learned Single Judge.
81. Before concluding we may observe that the parameters of
jurisdiction in interference of Arbitral Award under Section 34 read with
Section 37 of the Arbitration Act are well settled. This Bench in a recent
decision in the case "Waverley Pvt. Ltd. Vs. Diversey India Pvt.Ltd."29
considering the decision of the Supreme Court in "M/s.Chebrolu
Enterprises Vs. Andhra Pradesh Backward Class Co-op. Finance Corpn.
Ltd." 30, in paragraph 11 held as under:-
"11. Therefore, taking overall view of the matter and
considering the power and scope of Appellate Court under
Section 37 of Arbitration Act and we have also noted that
30 (2015)12 SCALE 207
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the reason provided by the learned Judge is well within the
frame work of law and the record. Recently, the Supreme
Court in M/s.Chebrolu Enterprises Vs. Andhra Pradesh
Backward Class Coop. Finance Corpn. Ltd. in Civil
Appeal No.8918/2015 on 28.10.2015 has reinforced thus
"This Court or even the Appellate Court would not look
into the finding of facts unless they are perverse." No case
is made out to interfere with the impugned judgment."
82. In view of the above deliberation we may observe with
certainty that the learned Single Judge has appropriately dismissed the
Appellant's petition under Section 34 of the Arbitration Act. Resultantly,
the appeal fails and is accordingly rejected.
(G.S.KULKARNI, J.) (ANOOP V. MOHTA, J.)
