Delhi High Court
Xl Energy Limited vs Mahangar Telephone Nigam Limited on 20 July, 2018
$~21.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ FAO(OS) (COMM) No. 148/2018
Date of decision: 20th July, 2018
XL ENERGY LIMITED ..... Appellant
Through Mr. Abhijit Mittal, Mr. Abinav Sharma &
Mr. Dhruv Rohtagi, Advocates.
versus
MAHANGAR TELEPHONE NIGAM LIMITED ..... Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J. (ORAL):
CM No. 28598/2018
Exemption application is allowed, subject to all just exceptions.
FAO(OS) (COMM) No. 148/2018
XL Energy Limited in the present appeal under Section 13 of the
Commercial Courts, Commercial Division and Commercial Appellate
Division of High Courts Act, 2015 read with Section 37(1)(c) of the
Arbitration and Conciliation Act, 1996 (A&C Act, for short) has challenged
order dated 7th May, 2018 passed by the single Judge in O.M.P. (COMM.)
FAO(OS) (COMM) No. 148/2018 Page 1 of 7
No. 339/2017, XL Energy Limited versus Mahanagar Telephone Nigam
Limited.
2. Impugned order dismisses objections filed by the appellant under
Section 34 of the A&C Act and upholds the Arbitral Award dated 3rd June,
2017.
3. Respondent, a telecom service provider, had purchased 60,000 (Sixty
Thousand) CDMA phones from the appellant vide three purchase orders
dated 27th March, 2003 , 23rd May, 2003 and 7th August, 2004. Respondent
had sold/transferred these phones to their subscribers. Respondent had also
entered into three Annual Maintenance Contracts ('AMCs') with the
appellant dated 5th June, 2004, 24th November, 2004 and 3rd November,
2005 for repair of the phones. Respondent had paid fixed consideration as
per the AMC agreements to the appellant. In terms of these AMC
agreements, the appellant had furnished performance guarantee for three
years amounting to Rs.1,13,99,500/-.
4. Respondent on account of delay in repair and delivery of faulty
phones/handsets by the appellant to the concerned MTNL offices within the
stipulated period of 14 days, as per the AMC agreement had raised a claim a
of Rs.2,47,43,500/-. Consequent to the delay, customers/ subscribers were
denied and deprived of their phones for the said period. The respondent had
relied upon the following clause of the AMC agreements:-
"TERMS AND CONDITIONS OF THE
AGREEMENT:
FAO(OS) (COMM) No. 148/2018 Page 2 of 7
1. If the contractor fails to repair the faulty WLL
terminals (Handheld Type) and deliver the same in
the concerned MTNL office within stipulated period
of 14 days as mentioned above, the contractor shall
be liable to pay penalty for the entire period counted
from the date of making over the faulty terminals in
his repair center to the actual date of repair and
delivered including Saturdays, Sundays, and
holidays as under
Rs.100/- per day per terminal."
5. Arbitral award dated 3rd June, 2017 partly accepts the claim and the
appellant has been held liable to pay to the respondent Rs.1,13,99,500/-.
with interest @ 9% per annum from the date of filing of the claim on 3 rd
November, 2011. Balance claim of Rs. 1,33,44,000 was held to be barred
by limitation.
6. Appellant do accept and admit their failure to repair and deliver faulty
phones/handsets within the stipulated period of fourteen days. Computation
of damages @ Rs. 100 per day per terminal is not questioned. Facts
and
calculations are not disputed.
7. Appellant submits that the clause stipulating damages @ Rs. 100 per
day per terminal was a penalty clause and not a clause prescribing liquidated
damages. Further, the respondent was unable to prove and establish any loss
for failure to repair and rectify faulty phones within 14 days. Therefore, the
respondent was not entitled to damages as awarded. Reliance is placed on
Kailash Nath Associates versus Delhi Development Authority and
Another, (2015) 4 SCC 136.
8. In Kailash Nath Associates (supra), the principles summarized read :-
"43. On a conspectus of the above authorities, the
law on compensation for breach of contract Under
Section 74 can be stated to be as follows:
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.
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.
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.
4. The Section applies whether a person is a Plaintiff
or a Defendant in a suit.
5. The sum spoken of may already be paid or be
payable in future.
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.
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."
9. Learned arbitrator in the factual context with reference to relevant
clause has held that damages @ Rs. 100 per day per terminal for the period
of delay was reasonable compensation mutually agreed by the parties to be
paid as liquidated damages. The amount specified was a genuine pre-
estimate of damages and not a penalty clause. Thus, principle 1 in Kailash
Nath Associates (supra) was applicable. Aforesaid findings are as per law
and do not merit interference under Section 37 of the A & C Act.
10. On the question of proof of loss suffered, learned single Judge affirming
the view expressed by the arbitrator and has referred to statement of witness
and findings recorded in the award, to observe:-
"18. A perusal of the above cross-examination of
Shri Ramesh Singh shows that he has clearly
pointed out that the customers of the respondent had
to suffer as there was delay in return of the handsets.
It is manifest that the reputation of the respondent
suffered. In an industry disgruntled customers do not
help in expansion of business. It is quite clear that
when a manufacturer of mobile telephones is unable
to speedily repair defective telephones supplied to
its customers it is bound to cause a loss of
reputation/image. Such loss of reputation/image
would lead to loss of revenue. Such damages/loss of
revenue cannot easily be quantified as is sought to
be argued."
11. In the context of the present case, principle 6 in Kailash Nath
Associates (supra) would apply as the respondent had suffered loss and
damage to reputation and consequently business, on failure to repair and
deliver mobile phones to the customers of the respondent within 14 days. It
was difficult if not impossible to prove precise loss of reputation, which is
intangible. However, reasonable amount of loss that the respondent would
suffer was ascertainable and was mutually agreed and fixed in the AMC
agreements. Compensation in form of liquidated damages of Rs. 100 per day
per terminal for delay beyond 14 days is certainly reasonable, given the fact
that the respondent had purchased the phones/handsets and had additionally
paid consideration under the AMC agreements. Customers/subscribers who
had purchased the mobile phones had suffered and respondent had faced
their wrath and consequently had lost goodwill and reputation in the market.
12. The appellant had also pleaded novation under Section 62 of the
Contracts Act, as the parties had entered into a new arrangement with effect
from 14th February, 2007. This argument and contention was rejected, in
our opinion rightly, for the letter dated 30th March, 2007 of the respondent
had stated that performance guarantees would abide by the AMC
agreements. This stipulation and condition was accepted by the appellant.
Thus, learned arbitrator has held that the respondent had not waived and
given up their claim for damages for delayed repair and delivery. The said
finding is reasonable and cogent. Learned single Judge has agreed with the
finding, observing that the original AMC agreements were not entirely
novated.
13. Decision in FAO(OS) No. 227/2017, Mahanagar Telephone Nigam
Limited versus Finolex Cables Limited dated 18th September, 2017 is
distinguishable in view of the different nature of the contract and factual
matrix. In Finolex Cables Limited (supra), there was a default in supply of
cables, a product available in the market. Language of the clause was
different.
14. In view of the aforesaid discussion, we do not find any merit in the
present appeal, which is dismissed, without any order as to costs.
SANJIV KHANNA, J.
CHANDER SHEKHAR, J.
JULY 20, 2018
VKR
