Breach of Contract and Liquidated Damages: Supreme Court’s Ruling on Industrial Machinery Dispute

The Supreme Court of India recently delivered a significant judgment in the case of Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd. vs. Thyssen Krupp Industries India Pvt. Ltd., addressing issues of breach of contract, liquidated damages, and arbitration in commercial agreements. The dispute revolved around a supply agreement for industrial machinery and the alleged failure of the supplied equipment to meet performance guarantees.

The appellant, a sugar cooperative, had entered into an agreement with the respondent, Thyssen Krupp Industries India Pvt. Ltd., for the supply of a fermentation plant. The contract stipulated performance guarantees, including a guaranteed yield of alcohol per metric ton of molasses. However, after multiple trials, the appellant claimed that the machinery failed to meet the agreed performance levels. This led to arbitration, a series of legal battles, and ultimately, an appeal before the Supreme Court.

Background of the Case

The contract between the parties was executed on November 17, 1992, under which the respondent was to design, manufacture, and supply machinery for a continuous fermentation process at the appellant’s factory. The agreement included an arbitration clause and a guaranteed minimum yield of 280 litres of alcohol per metric ton of molasses. The contract value was ₹93.20 lakhs.

According to the appellant, the machinery was delivered with a 24-week delay and failed to meet the guaranteed yield. Several trial runs were conducted, with the highest yield reaching only 237.68 litres per metric ton. Following this, the appellant issued a legal notice on October 19, 1994, seeking damages of ₹237.83 lakhs, which was disputed by the respondent.

Key Disputed Issues

Delay in supply of machinery.
Failure to meet the performance guarantee.
Claim for liquidated damages under the contract.
Quantum of damages for loss suffered due to underperformance.
Whether the arbitration award was within the jurisdiction of the tribunal.

Arguments by the Petitioner

The appellant contended:

The respondent breached the contract by failing to deliver a machine that met the agreed performance levels.
Multiple trial runs showed the machine did not achieve the promised alcohol yield.
The appellant suffered substantial financial losses due to the non-performance of the machinery.
The Arbitral Tribunal correctly awarded ₹68.15 lakhs as damages for underperformance.
The High Court erred in setting aside part of the arbitration award.

Arguments by the Respondent

The respondent argued:

The machinery supplied was complete and functioned within the rated capacities.
The appellant did not invoke the contract’s replacement clause, which allowed for rectification of defects.
The claim of ₹68.15 lakhs was speculative and not supported by contract provisions.
Under Section 74 of the Contract Act, liquidated damages must be limited to the amount stipulated in the contract.
The High Court correctly held that speculative damages cannot be awarded beyond contract terms.

Supreme Court’s Observations

The Court examined key provisions of the contract:

Clause 8: Performance guarantee requiring a yield of 280 litres of alcohol per metric ton.
Clause 15: Liquidated damages provisions for non-performance.
Clause 21: Maintenance warranty allowing the buyer to demand rectification or replacement of defective machinery.

The Court found that the appellant did not invoke Clause 21, which would have allowed them to demand a replacement or rectification of the machinery at the respondent’s cost. Instead, the appellant claimed damages as a refund of the machinery’s price, which was inconsistent with the contract.

Verbatim Court Observations

The Court made key legal pronouncements:

“The appellant got liquidated damages as provided in the agreement on account of breaches committed by the respondent. The claim for damages will remain confined to what is expressly provided under the Agreement in view of Section 74 of the Contract Act.”

“Assuming that the entire plant and machinery was a failure or scrap, the appellant had the right to replace the same and claim the cost from the respondent. However, that was not done.”

“The claim of ₹68.15 lakhs was speculative, as it was not based on the contract’s terms but rather on an assertion that the machinery was non-functional.”

Final Judgment

The Supreme Court upheld the High Court’s ruling and dismissed the appeal. The key conclusions were:

The claim of ₹68.15 lakhs was not justified under the contract.
The appellant had already received liquidated damages as per the contract.
The arbitration tribunal exceeded its jurisdiction by awarding additional speculative damages.
The contract’s provisions must be strictly followed in assessing damages.

Conclusion

This judgment reaffirms that contract law, particularly under Section 74 of the Contract Act, limits compensation to amounts stipulated in the agreement. Courts and arbitration tribunals cannot award speculative damages beyond contractual provisions. Businesses must ensure their contracts clearly define liability, damages, and rectification mechanisms to avoid prolonged litigation.

Petitioner Name: Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd..
Respondent Name: Thyssen Krupp Industries India Pvt. Ltd..
Judgment By: Justice Abhay S. Oka, Justice Ujjal Bhuyan.
Place Of Incident: Pune.
Judgment Date: 14-02-2025.

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