Compensation for breach of contract — Liquidated damages — Contract Act 1872, section 74

The Life Insurance Corpn. of India had entered into a contract with M/s. Engineering Projects (I) Ltd. (EPI) for construction of 144 houses in the housing colony. The respondent in turn, entrusted the said work to M/s. B. K. Constructions (BKC) as a sub-contractor. As the progress of work was not in accordance with the terms agreed upon, the contract came to be terminated. Clause 17 of the agreement, provided for resolution of dispute through arbitration. However BKC without availing the said opportunity filed a suit against EPI seeking an order of injunction restraining them from awarding contract to any other person. Stay was granted. Aggrieved by the said order, EPI approached the High Court.

The Court, by consent of the parties, appointed an Arbitrator u/s.21 of the Act. The Arbitrator issued notice to the parties and thereafter passed the impugned award, rejecting the claim of BKC and partially upholding the counterclaim preferred by EPI. Thereafter EPI had filed an application before the Court for making the award as rule of the Court, whereas BKC had filed application for setting aside the award.

The Court observed that the Arbitrator in answering the counterclaim of EPI under the head ‘liquidated damages’ had taken note of only a portion of clause 13 which reads as under:

 “If the work is not completed in time, liquidated damages shall be levied at 1% per fortnight subject to a maximum of 10% contract valued.”

Thus the clause 13 provided for a penalty. It applied to a case where the contractor performs the contract but not within the stipulated time. In other words, there is delay in performing the contract. In the instant case, admittedly, the contract is not completed. The reason for breach of the contract is because of the non-completion of the contract and not adhering to the time schedule in completing the contract. The condition precedent for application of clause 13 is that the contract should be completed, construction agreed to be put up was not to be in terms thereof and within the stipulated time. The compensation stipulated in the sub-clause is to compensate for the delay in completing the contract. However, clause 16 of the contract provides that “if the progress of the work is not commensurate with the programme, EPI will have a right to get the work executed through other agency ‘at the risk and cost of sub-contractor’ and will ‘terminate the work’. Therefore, the claim for damages by EPI against BKC is that the applicant did not perform the contract, i.e., has not completed the contract, in which event measure of damage would be the cost of contract awarded to BKC and after termination of the work, if it is completed by another contractor, it is the cost incurred by EPI and the difference in the said amount is the damages sustained by the respondent. There is no preestimation and there cannot be pre-estimation and therefore no stipulation is found in the contract.

Insofar as demand for liquidated damages was concerned, the Court observed that in case of termination of contract for not completing the construction, the learned Arbitrator committed error in relying clause 13 which has no application to the facts of this case. As was the instant case for breach of contract, i.e., for terminating the contract for not completing the construction, and no damage is stipulated. When no liquidated damages is stipulated in the contract, section 74 of the Contract Act is not attracted. Admittedly both the parties had not adduced any evidence in support of their respective claims. In the absence of any evidence to show what was the loss sustained by the respondent, the Arbitrator committed error in awarding compensation, which is not based on any evidence. The award was held to be contrary to law and was liable to be set aside.