Liquidated Damages Under Indian Law: Supreme Court’s Ruling in Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd. v. Thyssen Krupp Industries India Pvt. Ltd.

The Supreme Court of India, in its recent decision in Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd. v. Thyssen Krupp Industries India Pvt. Ltd[1]., reaffirmed the principles governing liquidated damages under Indian contract law. The ruling addressed key aspects of contractual damages, particularly when a contract contains a stipulation for liquidated damages and whether additional compensation beyond such a clause can be claimed.

Background of the Case

The dispute arose from a contract dated November 17, 1992, wherein the respondent, Thyssen Krupp Industries India Pvt. Ltd., agreed to design, manufacture, and supply machinery for a fermentation plant based on the Encillium process patented by the National Chemical Laboratory, Pune. The contract stipulated that the machinery would yield a minimum of 280 litres of alcohol per metric tonne of molasses.

However,  Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd., alleged that the machinery failed to meet the guaranteed yield, producing only a maximum of 237.68 litres per metric tonne in multiple trial runs. Furthermore, the delivery of the machinery was delayed by 24 weeks. Consequently,  Thyssen Krupp Industries sought liquidated damages as per the contract and additional compensation for losses incurred due to non-performance under the following heads:

1. Liquidated damages for delay in supply for machinery
2. Damages for actual losses suffered in yield of alcohol during the performance trials
3. Damages suffered due to the non-performing equipment and machinery
4. Amount spent in acquiring the plant
5. Past interest leviable on damages

Arbitration and Lower Court Proceedings

The dispute was referred to arbitration under the terms of the contract. The Arbitral Tribunal initially awarded the appellant Rs. 159.79 lakhs, including liquidated damages for delayed delivery, compensation for actual losses, and reimbursement for expenses incurred.

The High Court, however, partially set aside the award, reducing the claim to Rs. 2.09 lakhs for delay and Rs. 18.64 lakhs for guaranteed performance failure, holding that the claim of Rs. 68.15 lakhs for non-performance was speculative and not covered under the liquidated damages clause. Both parties challenged the order of the High Court before the Supreme Court of India.

Supreme Court’s Ruling

The Supreme Court upheld the High Court’s decision, emphasizing that:

1. Liquidated Damages Clause is Binding: The contract contained a specific clause (Clause 15) providing liquidated damages for delays and failure to meet performance guarantees. As per Section 74 of the Indian Contract Act, 1872, compensation for breach cannot exceed the stipulated liquidated damages unless additional actual losses are proved.
2. No Additional Damages Beyond Contract Terms: The appellant sought Rs. 68.15 lakhs as compensation for loss due to non-performance of the machinery. However, the Court held that such a claim was outside the contract’s stipulated liquidated damages clause and therefore not recoverable.
3. Failure to Invoke Replacement Clause: The contract also included a replacement clause (Clause 21), allowing the appellant to replace defective machinery at the respondent’s cost. However, the appellant did not invoke this clause and instead sought damages equivalent to the cost of the entire plant – what is claimed is the virtual refund of the entire amount spent . The Court ruled that this was inconsistent with the contractual framework.
4. Concluding remarks of the SCI

Para 29

The appellant got liquidated damages as provided in the agreement on account of breaches committed by the respondent. The claim for damages of the appellant will remain confined to what is expressly provided under the Agreement in view of Section 74 of the Contract Act. The appellant retained the plant and machinery and did not take the benefit of clause 21. Therefore, as rightly held by the HighCourt, the appellant was not entitled to the claim of Rs.68.15 lakhs as it was claimed in the statement of claim as the refund of the amount spent by the appellant on the acquisition of plant and machinery.

Legal Implications

The ruling reaffirms key principles regarding liquidated damages under Indian law:

• Enforceability of Liquidated Damages: Courts will uphold contractual clauses that specify liquidated damages .
• Adherence to Contractual Remedies: When a contract provides specific remedies (such as machinery replacement), courts expect parties to utilize those remedies rather than seek broader compensatory damages.

Conclusion

The Supreme Court’s decision in this case strengthens the principle that liquidated damages clauses in commercial contracts are to be strictly enforced. The judgment underscores the importance of clear contractual stipulations and the necessity for parties to follow prescribed remedies rather than claiming speculative damages. This ruling serves as a crucial precedent for businesses and legal practitioners dealing with contractual disputes in India.