Star Cement Limited vs . Union Of India & Ors.
2022 Latest Caselaw 624 Meg

     Serial No. 02
     Supplementary
     List



                        HIGH COURT OF MEGHALAYA
                              AT SHILLONG


WP(C) No. 288 of 2018
                                                 Date of Decision: 26.10.2022
Star Cement Limited                   Vs.                Union of India & Ors.
Coram:
               Hon'ble Mr. Justice W. Diengdoh, Judge

Appearance:
For the Petitioner/Appellant(s)   :         Dr. A. Saraf, Sr. Adv. with
                                            Mr. S.J. Saikia, Adv.
For the Respondent(s)             :         Dr. N. Mozika, DSG. with

Ms. A. Pradhan, Adv. for R 1.

Mr. M. Singh, Sr. Adv. with Mr. M.Z. Ahmed, Sr. Adv.

GP Capt. K. Singh Bhatti, Adv.

Ms. B. Dutta, Sr. Adv. for R 2-5.

i)       Whether approved for reporting in                      Yes/No
         Law journals etc.:

ii)      Whether approved for publication
         in press:                                              Yes/No


                        JUDGMENT AND ORDER

1. The petitioner company is engaged in the business of

manufacturing cement and for this purpose had entered into an agreement

with the respondent No. 3 - North Eastern Coalfields for purchase of coal.

In furtherance of this purpose, the parties have entered into a Coal Supply

Agreement (CSA) (termed as Fuel Supply Agreement in this petition,

which term shall be used interchangeably herein) under the terms and

conditions set therein.

2. The petitioner on being asked by the respondent No. 4 to furnish

a bank guarantee for an amount equal to 10% of the notified based price

of the annual coal requirement for issuance of Letter of Assurance (LOA)

has furnished a bank guarantee for an amount of ₹ 1,03,86,000/- (Rupees

one crore, three lakhs, eighty-six thousand) only in favour of respondent

No. 3 vide guarantee dated 27.03.2012 issued by the State Bank of India,

Commercial Branch, Kolkata.

3. Vide letter dated 27.02.2011 the respondent No. 5 informed the

petitioner of the notification dated 26.02.2011 issued by the Coal India

Limited notifying to the effect that the coal produced by the respondent

No. 3 has increased in value and if the petitioner wants its coal to be

delivered, it has to agree to the revised price and to pay the differential

amount. It is stated that such increase in price was more than 60% than

what was agreed upon at the time when the CSA was executed.

4. The petitioner vide its letter dated 16.03.2011 has requested the

respondents to consider the said revision of price and not to resort to the

increase of almost 60% of price in a single day which is disadvantageous

to the petitioner, but the same was not accepted by the respondents.

5. The petitioner then informed the respondent No. 3 to sell the

allotted quantity of coal through E-Auction route till the petitioner was in

need of coal which shall be intimated to the respondents by giving 30

days' notice in advance. The respondent No. 3 was also requested to keep

the CSA in abeyance and no penalty on account of the same to be charged

on the petitioner. However, the respondent No. 3 issued letter dated

18.07.2011 refusing to keep the CSA in abeyance and further stated that

coal price matters do not relieve the petitioner from any obligations under

the said CSA.

6. The respondent No. 3 vide invoice dated 18.08.2011 has

demanded that the petitioner pay an amount of ₹ 54,05,390/- (Rupees

fifty-four lakhs, five thousand, three hundred ninety) only as

compensation for short lifting of the coal by the petitioner to which the

petitioner vide letter dated 27.03.2012 has requested the respondent No. 3

to withdraw the same. However, the respondent No. 5 vide letter dated

11.05.2012 has raised another invoice dated 10.05.2012 on the petitioner

for compensation for short lifting of coal for the period 2011-12, the

amount being ₹ 74,24,699.91 (Rupees seventy-four lakhs, twenty-four

thousand, six hundred ninety-nine and ninety-one paise) only.

7. The respondent No. 3 through its General Manager has issued

letter dated 29.05.2012 upon the petitioner which is a notice for

termination of the Coal Supply Agreement (CSA) on the ground that there

was a short lifting of coal by the petitioner for the year 2011-12 which was

less than 30% of the Annual Contracted Quantity (ACQ) thus attracting

clause No. 15.1.4 of the CSA.

8. The petitioner then preferred an appeal before the respondent

No. 3 dated 26.06.2012 stating that the short lifting of coal was due to the

hefty increase in the price of coal by more than 60% of what was agreed

to by the parties and that the price of coal has been paid in full by the

petitioner to the respondent company and as such, charging invoice on the

coal not lifted in the name of compensation is completely illegal. The

petitioner has also filed appeal against the invoice dated 18.08.2011,

10.05.2012 as well as the Termination Notice dated 29.05.2012 to which

the respondent company threatened to invoke the Bank Guarantee

furnished by the petitioner during the pendency of the appeals before the

respondent No. 3.

9. The petitioner being highly aggrieved by the action of the

respondent company, particularly the threat to invoke the Bank Guarantee

has approached the Guahati High Court at the Principal Bench as there

was no available Bench at Shillong at that time and the Court vide order

dated 29.06.2012 has directed the respondent authorities to consider the

appeal dated 26.06.2012 filed by the petitioner and to pass a speaking

order on merits. The Chairman, North Eastern Coalfields taking up the

appeals has decided the same and vide order dated 28.02.2013 had

dismissed the appeals. Pursuant to the dismissal of the said appeals, the

respondent company then invoked the Bank Guarantee for ₹ 1,03,86,000/-

(Rupees one crore, three lakhs eighty-six thousand) only and the State

Bank of India, Commercial Branch, Kolkata vide order dated 15.03.2013

paid the said amount to the respondent company.

10. The petitioner questioned the impugned actions of the

respondent company in increasing the price of coal by 60%, levy of

compensation vide invoices dated 18.08.2011 and 10.05.2012 and the

issue of Notice of Termination of Contract dated 29.05.2012 and has

accordingly preferred a writ petition before the Hon'ble Gauhati High

Court (Shillong Bench) numbered as WP(C) No. 47 of 2013. The Court

after hearing the parties has, vide order dated 26.11.2013 allowed the

petition.

11. The respondent company however preferred a writ appeal

against the said order dated 26.11.2013 before a Division Bench of this

Court numbered as WA No. 1 of 2014 which was disposed of vide order

dated 29.09.2016 directing the parties to take recourse of the settlement

mechanism provided in the agreement.

12. Pursuant to the direction of the Division Bench of this Court, the

representatives of the petitioner and the respondent company,

respectively, held a number of meetings on the following appeals made by

the petitioner being:

i. Waiver of ₹ 54,05,390.74 (Rupees fifty-four lakhs, five

thousand, three hundred ninety and seventy-four paise) only

claimed as compensation by the Coal India Limited for short

lifting for the period 2010-11;

ii. Waiver of ₹ 74,24,699.91 (Rupees seventy-four lakhs,

twenty-four thousand, six hundred ninety-nine and ninety-

one paise) only claimed as compensation by the Coal India

Limited for short lifting for the period 2011-12;

iii. Refund of amount of ₹ 1,03,86,000.00 (Rupees one crore,

three lakhs, eighty-six thousand) only of invoked Bank

Guarantee;

iv. Cancellation of notice of termination of CSA dated

04.02.2009;

v. To allow recalculation of the compensation for the year

2010-11 and 2011-12 as per the formula given under clause

4.5.1 of the CSA and;

vi. To allow the petitioner to lift the short-lifted quantity of coal

for the year 2011-12 as per CSA dated 04.02.2009 to

overcome/make up the short lifting which will ultimately

improve their lifting performance for the year 2011-12, as a

result of which both compensation and notice of termination

of CSA will be ineffective leading to the closure of the long

pending case.

13. The respondent company vide letter dated 08.06.2018 has

informed the petitioner of the decision taken on 10.07.2017 as regard the

appeals made by the petitioner and in effect has rejected all the appeals

made except for appeal No. 2 i.e., for waiver of compensation of ₹

74,24,699.91 (Rupees seventy-four lakhs, twenty-four thousand, six

hundred ninety-nine and ninety-one paise) only which was accepted.

14. Not being satisfied with the culmination of the proceedings

between the parties herein as regard the manner whereupon the appeal of

the petitioner company was disposed of by the respondent company which

has not conceded to most of the demand made, the petitioner has

accordingly approached this Court with this instant writ petition with a

prayer to declare as illegal the clauses 4.5, 9.1,9.2 and 15 of the said Coal

Supply Agreement and also to quash the invoices dated 18.08.2011 and

10.05.2012, Notice dated 29.05.2012, Minutes of the meeting dated

10.07.2017 and 28.08.2017 and the Final Order dated 08.06.2018.

15. Heard Dr. A. Saraf, learned Sr. counsel for the petitioner who

has submitted that the issue to be decided herein is whether liquidated

damages can be imposed if there is no loss to the party under Section 73

of the Indian Contract Act. Though there was short lifting of the coal by

the petitioner because of the increase of price upto 60%, the fact is that the

respondent No. 3 has sold the coal to some other party at a huge profit.

16. That the respondent company has imposed liquidated damages

for short lifting of the coal taking recourse to clause 4.5 of the Agreement

cannot be contemplated as facts would prove that no loss was incurred by

the respondent company. Demand for liquidated damages is not automatic

as proof of loss has to be shown by the respondent company and penalty

cannot be imposed as the stipulation in the said clause speaks of

compensation and not penalty.

17. Submitting that a perusal of clause 4.5 of the agreement would

show that the respondent company can demand compensation in case of

short lifting of coal, however compensation cannot be equated with

penalty. To further clarify this position, the learned Sr. counsel has cited

the case of Rathi Menon v. Union of India: (2001) 3 SCC 714 wherein at

para 24, the term compensation was explained as "...Though the word

"compensation" is not defined in the Act or in the Rules it is the giving of

an equivalent...." and also the case of Smt. Sova Ray & Anr. v. Gostha

Gopal Dey & Ors: (1988) 2 SCC 134 para 7 parts of which reads as

"...The expression 'penalty' is an elastic term with many different shades

of meaning but it always involves an idea of punishment..."

18. The learned Sr. counsel has submitted that the impugned

demand notice and the notice of termination of the CSA issued by the

respondent company amounts to imposition of penalty which is

impermissible in law as was held in the case of Maya Devi v. Lalta

Prasad: (2015) 5 SCC 588 para 19 wherein, it was held that "...The

imposition and the recovery of penalty on breach of a contract is legally

impermissible under the Contract Act..."

19. In this regard, the learned Sr. counsel has referred to certain

decisions in which the term liquidated damages has been explained, viz.,

the case of Fateh Chand v. Balkishan Dass: (1964) 1 SCR 515, para 8,

9, 15 & 16, Maya Devi v. Lalta Prasad: (2015) 5 SCC 588, para 19, 24,

26, Kailash Nath Associates v. Delhi Development Authority & Anr.:

(2014) 4 SCC 136, para 43, 43.1, 43.2, 43.3, 43.4, 43.5, 43.6, 43.7 & 44.

20. The learned Sr. counsel has also referred to the order dated

26.11.2013 passed by a Single Bench of this Court in WP(C) No. 47 of

2013 wherein at para 18 of the same, it was clearly observed that an

admission was made by both the learned counsels for the parties that on

failure of the petitioner to lift the coal, the same was subsequently sold

and as such, no loss was incurred by the respondent company. It is

submitted that though this order was set aside by the Division Bench since

the matter was referred for mediation and settlement, the fact remains that

the coal was not lying in the stock of the respondent company, but was

sold at a profit. There is nothing in the pleadings of the respondent

company to show that the coal was not sold and because of the short lifting

by the petitioner, loss was caused to the respondent company. The only

pleading is that because the clause in the agreement provided for

compensation in case of short lifting, the petitioner is therefore liable to

pay the compensation.

21. Mr. M. Singh, learned Sr. counsel for the respondents No. 2 to 5

has countered the submission and contentions made by the learned Sr.

counsel for the petitioner by stating at the outset, that coal is considered

an essential commodity and is scarce and in the recent past, there has

arisen an anomalous situation where the distribution of coal in the country

was not channelled properly resulting in genuine users not getting it. This

led to a number of litigation in the courts and finally, a Constitutional

Bench of the Supreme Court has directed the Government to bring out a

policy to prevent misuse of coal, such policy to include putting stringent

conditions in the contract. In this regard, the case of M/s Ashoka

Smokeless Coal India Pvt. Ltd v. Union of India & Ors: (2007) 2 SCC

640 para 188, 189 & 190 was cited by the learned Sr. counsel to submit

that when the terms of the contract between the parties herein was

prepared, this aspect of the matter was taken note of.

22. Since the petitioner company has failed to comply with the terms

of the contract, that is, there was no lifting of the coal during the relevant

period, only then the respondent Company, in view of the demand in the

market and the fact that the space was needed, diverted the coal, not with

a profit oriented motive, but for the purpose of circulation of the same.

23. Another contention raised by the learned Sr. counsel for the

respondents No. 2-5 is that under the contract agreement between the

parties, clause 16 speaks of 'Force Majeure' which is a circumstance or

situation which arises in course of the contractual period causing loss to

either parties not attributable to any specific action on their part. However,

the proviso to the said clause stipulates that a Force Majeure act shall not

include economic hardship, equipment failure or breakdown other than

those specifically set forth. In the case of the petitioner, any loss cause out

of short lifting or non-lifting cannot be a condition for exemption or for

demand of compensation.

24. The learned Sr. counsel has also confirmed that in compliance

with the order dated 29.09.2016 of the Division Bench of this Court

directing for settlement and negotiation between the parties, the petitioner

company having set out its request considered as appeal before the

respondent company, after sitting together and having considered the

issues presented, the respondent company has, finally taking everything

into consideration have, vide the letter No. M&S/Legal/cmc/369 dated

08.06.2018 (Annexure-XXXIII of the writ petition) informed the

petitioner company that all the appeals made have not been accepted

except for the appeal for waiver of compensation for ₹ 74,24,699.91 for

the year 2011-12 was accepted and stands cancelled.

25. Yet another contention raised by the learned Sr. counsel for the

respondents No. 2-5 is on the issue of maintainability of this writ petition.

It is submitted that if on the issue of compensation or loss suffered in terms

of the contractual provisions, whether a writ would lie?

26. Referring to the case of Fateh Chand (supra) relied upon by the

petitioner, the learned Sr. counsel for the respondents No. 2-5 has

submitted that in that case, there was a contractual dispute which arises

from a suit which was dealt with in a complete trial and eventually, the

matter reached the Supreme Court where the Hon'ble Supreme Court has

decided the matter as reflected in the said judgment. However, in this

instant case, there is no trial but a writ was instead filed. Therefore, the

ratio of this judgment is not applicable to the case of the petitioner, it is

submitted.

27. The issue of 'res judicata' has also been raised by the learned Sr.

counsel for the respondents No. 2-5 who has submitted that the petitioner

in this writ petition has made identical prayer as those made in the earlier

writ petition which has since been disposed of by this Court. Whether

such successive writ applications can be moved in the same court on the

same cause of action? The answer is no, since the provision of res judicata

as incorporated in section 11 of the Code of Civil Procedure(CPC) though

may not strictly be applicable to successive writ applications, however the

general principle of res judicata is applicable as could be noticed from a

number of decisions of the Apex Court and High Courts, some of which

are cited being the case of M.S.M. Sharma v. Dr. Shree Khrishna Sinha

& Ors: AIR 1960 SC 1186 para 8; Radha Shyam Datta & Ors v. Patna

Municipal Corporation: AIR 1956 Patna 182, para 12; Shamsul Haque

Dastgirali v. The Assistant Custodian of Evacuee Property: AIR 1958

Madhya Pradesh 82, para 2; Daryao & Ors v. State of U.P. & Ors: AIR

1961 SC 1457, para 9 & 10.

28. It is also the submission of the learned Sr. counsel for the

respondents No. 2-5 that the dispute between the parties herein raised

some pertinent questions on the factual aspect, as to what would be the

exact loss caused to the petitioner or the respondent company, or if the

allegation that the respondent company has sold off the coal to others at a

huge profit, then what is the amount received is also a question of facts

which can only be determined by a civil court of competent jurisdiction

and as such, the petitioner cannot raise these issues before a writ court.

29. As to whether a writ is maintainable in a contractual matter, the

learned Sr. counsel has cited the case of Kerala State Electricity Board &

Anr v. Kurien E. Kalathil & Ors: (2000) 6 SCC 293, para 10, 11 & 12

wherein the Hon'ble Supreme Court has held that if a term of contract is

violated, ordinarily the remedy is not a writ petition under Article 226 of

the Constitution of India. The case of Godavari Sugar Mills Limited v.

State of Maharashtra & Ors: (2011) 2 SCC 439, para 8 was also cited in

this regard in which it was held that a petition under Article 226 of the

Constitution of India will not be entertained to enforce a civil liability

arising out of a breach of contract.

30. Another issue raised by the learned Sr. counsel for the

respondents is whether in a non-statutory contractual matter on the ground

that such contract is based on the superior bargaining power of one party

to such contract and whether the concept of arbitrariness,

unreasonableness, unfairness or irrationality can be brought before a writ

court while making a challenge to the same, considering the fact that the

principles of natural justice, fair play and legitimate expectation may not

have any role to play in such a situation. It is submitted that the Hon'ble

Supreme Court while dealing with a case of non-statutory contract has

held that the application of the principles or natural justice has no role to

play in such cases. This refers to the case of M/s Radhakrishna Agarwal

& Ors v. State of Bihar & Ors.: (1977) 3 SCC 457, para 23 & 25.

31. The case of Bareilly Development Authority & Anr. v. Ajai Pal

Singh & Ors.: (1989) 2 SCC 116, para 21, 22 & 23 as well as the case of

Assistant Excise Commissioner & Ors. v. Issac Peter & Ors.: (1994) 4

SCC 104, para 26 was cited to support the case of the respondents as far

as the applicability of the principles of arbitrariness, fair play and

unreasonableness is concerned.

32. It is finally submitted that under the facts and circumstances of

the case of the parties, this petition is devoid of merits and the same has to

be dismissed. Alternatively, this Court, if deemed fit can also direct the

petitioner company to approach the competent civil court for redressal of

its grievances.

33. In reply, the learned Sr. counsel for the petitioner has submitted

that the contention of the respondents that a writ application will not lie in

contractual matters is not the correct law as the Hon'ble Supreme Court in

the case of Unitech Limited and Ors v. Telengana State Industrial

Infrastructure Corporation (TSIIC) & Ors: 2021 SCC Online SC 99 has

clearly held that the exercise of jurisdiction of the Court under Article 226

of the Constitution cannot be ousted only on the basis that the dispute

pertains to the contractual arena. This is for the simple reason that the State

and its instrumentalities are not exempt from the duty to act fairly merely

because in their business dealings they have entered into the realm of

contract (para 41).

34. The argument advanced by the parties have been duly taken note

of by this Court. It may however be pointed out that the respondent No.

1/Union of India represented by the learned DSG has not advanced any

argument being considered only a formal party.

35. The parties having been heard in this matter, the issue of 'res

judicata' may be decided at the outset before one proceed to discuss the

contentious issues involved.

36. The authorities cited by the learned Sr. counsel for the

respondents as regard 'res judicata' would reveal that it has been accepted

that the provisions of res judicata as incorporated in Section 11 of the Code

of Civil Procedure may not strictly apply to successive writs application,

however the general principle of res judicata can be made applicable to

writ applications also. Consequently, once a decision is made on merit

under Article 226, a subsequent writ cannot be moved in the same court

on the same cause of action.

37. The contention of the respondents in this case is that this Court

on an earlier occasion has already dealt with the same facts and prayer of

the petitioner for issuance of directions or order on the challenge to

clauses 4.5, 9.1, 9.2 and 15 of the CSA dated 04.02.2009 as well as the

invoices for compensation dated 18.08.2011 and 10.05.2012 along with

the termination notice dated 29.05.2012 and also against the order dated

28.02.2013 wherein the bank guarantee was forfeited by the petitioner

company, the same having been decided in W. P.(C) No 47 of 2013 vide

order dated 26.11.2013 and which decision was later overturned in W.A.

No. 1 of 2014 vide order dated 29.09.2016, therefore the petitioner seeking

similar relief against the respondents in this instant writ petition cannot be

allowed, being hit by the principle of res judicata.

38. Though the contention of the respondents as regard the identical

contents of the prayer in the earlier petition and that this petition is correct,

however the respondent has failed to notice that the developments in the

dispute between the parties herein did not end only on the disposal of the

matter in W.P. (C) No 47 of 2013, but on appeal, the Division Bench of

this Court in W.A. No 1 of 2014 has directed the parties to take recourse

to the settlement provision made available in the FSA itself and has

annulled the decision made in W.P. (C) No 47 of 2013 only to allow the

parties to approach the matter on a fresh platform.

39. In this regard, the observations of the Division Bench may be

culled out to come to an understanding that having been relegated to the

'Settlement Mechanism' found within the provisions of the CSA, the field

is open to the parties to agitate the matter ab initio. The observations reads

thus:

"....When the parties are being relegated to the agreed settlement, it does appear necessary that the order impugned be annulled and also to make it clear that none of the observations made in the impugned order or even in this judgment shall be having any bearing on settlement of dispute by the parties in terms of the mechanism provided in the agreements..."

40. It is also on account of the said direction of the Division Bench

of this Court that the petitioner company has made an appeal before the

respondent company for waiver of the compensation amount of ₹

54,05,390.74 for the year 2010-11, ₹ 74,24,699.91 for the year 2011-12,

refund of Bank Guarantee of 1,03,86,000.00 etc, that the final order of the

respondent company conveyed through communication dated 08.06.2018

was made wherein only one appeal, that is waiver of compensation of ₹

74,24,699.91 was accepted and the rest rejected. This, in the opinion of

this Court has changed the texture of the litigation and additional cause of

action has arisen which has paved the way for the petitioner to approach

this Court by way of this instant writ petition. The principle of res judicata

is therefore found not applicable to the present case.

41. Much has been said by the parties as to whether a writ is

maintainable in a contractual matter to the extent that relevant authorities

have been cited by both sides, for and against. The case of Kerala State

Electricity Board (supra) and other similar cases have been cited by the

respondents to impress upon this Court that a dispute as regard the terms

of agreement in a contract cannot be the subject matter of a writ

proceedings, but would have to be pursued before a competent civil court.

42. As a counter to this, the petitioner have maintained that the Apex

Court have, time and again, in appropriate cases, held that a writ petition

is maintainable in contractual matter involving the Instrumentalities of the

State. The case of ABL International Ltd. & Anr. v. Export Credit

Guarantee Corporation of India Ltd. & Ors.: (2004) 3 SCC 553 has been

cited to support this contention wherein at para 27 of the same, it was held

that:

"27. From the above discussion of ours, the following legal principles emerge as to the maintainability of a writ petition:

(a) In an appropriate case, a writ petition as against a State or an instrumentality of a State arising out of a contractual obligation is maintainable.

(b) Merely because some disputed questions of fact arise for consideration, same cannot be a ground to refuse to entertain a writ petition in all cases as a matter of rule.

(c) A writ petition involving a consequential relief of monetary claim is also maintainable."

43. Again the case of Unitech Limited & Ors (supra) at para 41 was

also referred to which reads as follows:

"41. Therefore, while exercising its jurisdiction under Article 226, the Court is entitled to enquire into whether the action of the State or its instrumentalities is arbitrary or unfair and in consequence, in violation of Article 14. The jurisdiction under Article 226 is a valuable constitutional safeguard against an arbitrary exercise of state power or a misuse of authority. In determining as to whether the jurisdiction should be exercised in a contractual dispute, the Court must, undoubtedly eschew, disputed questions of fact which would depend upon an evidentiary determination requiring a trial. But equally, it is well-settled that the jurisdiction under Article 226 cannot be ousted only on the basis that the dispute pertains to the contractual arena. This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract. Similarly, the presence of an arbitration clause does oust the jurisdiction under Article 226 in all cases though, it still needs to be decided from case to case as to whether recourse to a public law remedy can justifiably be invoked. The jurisdiction under Article 226 was rightly invoked by the Single Judge and the Division Bench of the Andhra Pradesh in this case, when the foundational representation of the contract has failed. TSIIC, a state instrumentality, has not just reneged on its contractual obligation, but hoarded the refund of the principal and interest on the consideration that was paid by Unitech over a decade ago. It does not dispute the entitlement of Unitech to the refund of its principal."

44. Looking into the facts and circumstances of this case, since the

contentious issue revolves around the interpretation of Clause 4.5 of the

said CSA as to whether the word 'compensation' can also mean 'penalty'

or 'liquidated damages', all other actions resorted to by the respondent

company being subsequent thereto, the same can be resolved at this forum

and as such, this Court is of the view that this writ is maintainable.

45. Even otherwise, going by the history of the litigation between

the parties, the court was approached by the petitioner in the year 2013

and even almost ten years down the line, no closure of the same have been

made, this lapse of time is also a factor as to why this Court would choose

to end the dispute between the parties without sending the petitioner to a

civil court for institution of a suit. In this connection, para 54 of the "ABL

International Ltd." (supra) case is referred to when it was held that:

"54. Apart from the above reasons given by us to interfere with the judgment of the Appellate Bench of the High Court, we have one other good reason why we should not drive the appellants to a suit. The claim of the appellants was rejected by the respondent in the year 1994. The respondent challenged the basis of rejection by way of a writ petition in the year 1996. The objection as to the maintainability of the petition was rejected by the High Court by its judgment dated 15-5-1997. We are now in the end of the year 2003. We at this distance of time and stage of litigation, do not think it proper to relegate the parties to a suit. To direct the appellants to approach a civil court at this stage would be doing injustice to the appellants. In this view of ours, we are supported by a number of decisions of this Court like in Shambhu Prasad Agarwal v. Bhola Ram Agarwal:(2000) 9 SCC 714 wherein this Court though noticed the fact that the appellants had an alternate remedy for issuance of a letter of administration, it refused to dismiss the appeal on the grounds: (SCC p. 715, para 5) Since considerable time has elapsed, the interest of justice demands that the proceeding should come to an end as early as

possible and that the appeal should not be dismissed merely on highly technical ground."

46. Moving forward, what has been the focus of the petitioner in this

case, is the issue of compensation demanded by the respondent company

as is present in Clause 4.5 of the CSA which was consequent to the failure

of the petitioner company to lift the coal or for short lifting of the coal, for

which the said demand for compensation for the year 2010-2011 and

2011-2012 was accordingly made. It is apparent that this is not a demand

for compensation, but an imposition of penalty since the definition of the

word 'compensation' according to Black's dictionary means 'equivalent

in money for the loss sustained' which was not the case here as no loss

was incurred to the respondent company on the short lifting of the coal by

the petitioner company. The admitted fact being that the respondent

company has already sold the coal not lifted by the petitioner company

and there is no pleading that loss was incurred as a result of such sale.

47. On compensation, the provision of Section 74 of the Indian

Contract Act, 1872 speaks of compensation for breach of contract where

penalty is stipulated for. The Hon'ble Supreme Court in the case of

Kailash Nath Associates v. Delhi Development Authority & Anr: (2015)

4 SCC 136, has summarised the law on compensation for breach of

contract at para 43, 43.1, 43.2, 43.3, 43.4, 43.5, 43.6, & 43.7 and 44 quoted

below as:

"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:

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 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."

48. In fact, the only stand of the respondent company is that the

petitioner by short lifting of the coal, has violated the terms of the CSA

and as a result, has cause loss of use of space and goodwill to the

respondent company. The very term compensation found in clause 4.5 of

the Agreement has been wrongly used to impose the cost demanded from

the petitioner company, that is, ₹ 54,05,390.74 (Rupees fifty-four lakhs,

five thousand, three hundred ninety and seventy-four paise) for the year

2010-11 and ₹ 74,24,699.91 (Rupees seventy-four lakhs, twenty-four

thousand, six hundred ninety-nine and ninety-one paise) for 2011-12,

which can only be construed as an imposition of penalty and thus

impermissible in law.

49. In this regard, the reliance of the petitioner in the case of Fateh

Chand (supra) is found relevant, though the argument of the respondents

that the ratio cannot be applied herein as the decision was made with

regard to a suit cannot be accepted as the counter of the petitioner that

once the Supreme Court has passed a judgment, it becomes binding on all

courts in India as per Article 141 of the Constitution of India is the correct

proposition.

50. In the case of Fateh Chand (supra), the Apex Court at para 8, 10,

15 & 16 of the same has held as follows:

"8. The section is clearly an attempt to eliminate the sometime 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.

10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 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 all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to 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 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.

15. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief' as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression "to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach.

16. There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that the property had depreciated in value since the date of the contract provided; nor was there evidence that any other special damage had resulted. The contract provided for forfeiture of Rs. 25,000 consisting of Rs. 1039 paid as earnest money and Rs. 24,000 paid as part of the purchase price. The defendant has conceded that the plaintiff was entitled to forfeit the amount of Rs. 1,000 which was paid as earnest money. We cannot however agree with the High Court that 13 percent of the price may be regarded as reasonable

compensation in relation to the value of the contract as a whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreed price could be awarded to the plaintiff. The plaintiff has been allowed Rs. 1,000 which was the earnest money as part of the damages. Besides he had use of the remaining sum of Rs. 24,000, and we can rightly presume that he must have been deriving advantage from that amount throughout this period. In the absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that the amount of Rs. 1,000 (earnest money) which has been forfeited, and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs. 24,000 during all this period would be sufficient compensation to him. It may be added that the plaintiff has separately claimed mesne profits for being kept out of possession for which he has got a decree and therefore the fact that the plaintiff was out of possession cannot be taken, into account in determining damages for this purpose. The decree passed by the High Court awarding Rs. 11,250 as damages to the plaintiff must therefore be set aside."

51. So compensation means 'equivalent in money for a loss

sustained'. In this case, since there is no evidence that any loss was

suffered by the respondent company as a consequence of the default by

the petitioner company, or for short lifting of the coal, to quantify such

compensation at about fifty four lakhs for the year 2010-11 and about

seventy four lakhs or so, for the year 2011-12, demand to be compensated

for the same is not proper as it has assumed the form of a penalty which

was not provided for under clause 4.5 of the CSA.

52. To allow the respondent company to impose penalty or to

demand compensation (supra) when, as a consequence of the short lifting

of the coal by the petitioner, the respondent company was able to sell it

off to some other parties, presumably at cost price or with profit,

realisation of the compensation from the petitioner company would only

tantamount to realisation of double monetary benefit which is not

acceptable, since the law or the provision of the CSA does not

contemplates such a situation.

53. On an overall analysis, taking into account the import of the

many authorities cited by the parties, some of which have been considered

relevant herein and was accordingly quoted or referred to, others which

are not found relevant and thus not quoted, this Court is of the considered

opinion that it is not open to the respondent company to impose penalty in

the guise of demand for compensation from the petitioner company.

54. The relevant provision of law upon which the concept of 'bank

guarantee' is founded is Sections 126 and 127 of the Indian Contract Act,

1872. A bank guarantee can be said to be an assurance given by a bank on

behalf of a customer which undertakes to pay or discharge the liability of

a debtor in case of any default. A bank guarantee essentially stems out of

a contractual obligation to reassure a third-party creditor that his financial

interest will not be affected in case of loss or in the event of default. By

issuing bank guarantee, a bank ordinarily undertakes to pay the amount

specified in the guarantee on demand made by a beneficiary in accordance

with the terms and conditions agreed to by the parties. A conditional

guarantee is one which presupposes a claim under the guarantee on proof

of breach of the terms of the contract or any loss occurring as a result of

such breach. The object of a bank guarantee is to ensure due performance

of the contract or it can also be towards security deposit for a contract.

55. Generally, courts would exercise restraint on prayer to injunct a

bank guarantee being invoked or to encash the same except on two

grounds namely; fraud and secondly, irretrievable injury, where a creditor

is restrained from exercising his right of encashment. If the bank guarantee

has come about as a result of fraud on the part of the creditor, the whole

transaction is vitiated. The other exception to the encashment of a bank

guarantee is irretrievable harm or injustice to one of the parties.

56. The prayer of the petitioner company in this case to restrain the

respondent company to encash the bank guarantee can only be on the

ground of irretrievable injury or injustice. In the case of Dwarikesh Sugar

Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. & Anr: AIR

1997 SC 2477, the Hon'ble Supreme Court speaking on bank guarantee

has observed at para 20 as:

"20. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles

which the Courts must apply which considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. M/s. Indian Charge Chrome, (1994) 1 SCC 502: (1993 AIR SCW 4002), Larsen & Toubro Ltd. v. Maharashtra State Electricity Board, (1995) 6 SCC 68: (1975 AIR SCW 4134), Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) Pvt. Ltd. (1995) 6 SCC 76: (1995 AIR SCW 3821) and U.P. State Sugar Corporation v. Sumac International Ltd. (1997) 1 SCC 568: (1997 AIR SCW 694). The general principle which has been laid down by this court has been summarised in the case of U.P. State Sugar Corporation's case as follows: (at p. 697 of AIR SCW):

"The law relating to invocation of such bank guarantees in by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficial is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour, it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country."

Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations

of Sir John Donaldson, M.R. in Bolivinter Oil S.A. v. Chase Manhattan Bank, (1984) 1 All ER 351, are apposite:

"The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge .It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged."

(emphasis supplied)

57. On the facts of this case, as noted above, the fact that Clause 4.5

binds the parties as far as short lifting of the coal is concerned, inasmuch

as, it was incumbent upon the purchaser/petitioner company to maintain

the agreed level of ACQ (Annual Contracted Quantity), short lifting of the

same to be visited by a demand of compensation, this being part of the

Agreement, the same cannot be questioned by any of the parties. However,

as observed, the fact that no compensation can be demanded as there was

no loss incurred as a result of the short lifting since the same coal was sold

off to some other party, the petitioner company cannot be faulted for

seeking injunction on invocation of the security deposit/bank guarantee as

in the opinion of this Court, invocation of the bank guarantee would result

in irretrievable loss and injury to the petitioner company. Considering the

time factor as regards the proceedings, this Court having observed that

sending the parties to the civil court would not serve the ends of justice,

pending final settlement between the parties herein, restraining the

respondent company from encashing the bank guarantee is reasonable and

justifiable.

58. What flows from the above proposition is that the respondent

company cannot be allowed to gain from the drawback of short lifting of

the coal by the petitioner company solely on the ground that no loss was

incurred in the process thereof, the notice for termination of the

Agreement is also not found justified by this Court. The same is not

allowed.

59. Consequently, the prayer of the petitioner is found reasonable

and the same is hereby allowed.

60. The respondent No. 3 is hereby directed to rescind its demand of

compensation from the petitioner company for the sum of ₹ 54,05,390.74

(Rupees fifty-four lakhs, five thousand, three hundred ninety and seventy-

four paise) for the year 2010-11 and ₹ 74,24,699.91 (Rupees seventy-four

lakhs, twenty-four thousand, six hundred ninety-nine and ninety-one

paise) for 2011-12 and to refund the Bank Guarantee as well as to refrain

from putting into effect the notice for termination of the CSA dated

29.05.2012.

61. Since the dispute between the parties could not be resolved

through the settlement process as directed by the Division Bench of this

Court and since the petitioner as a result of the breakdown of the same has

now approached this Court with this instant petition, the matter having

been finally decided judicially herein, it stands to reason that the final

order of the respondent company dated 08.06.2018 is hereby set aside and

quashed to the extent indicated above.

62. Petition disposed of. No costs.

Judge

Meghalaya 26.10.2022 "D. Nary, PS"