Kerala High Court: The Division Bench of P.B. Suresh Kumar and C.S. Sudha, JJ., expressed that,

“…compensation payable under Sections 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, person concerned cannot claim compensation.”

The words ‘loss or damage’ in the Sections 73 and 74 would necessarily indicate that the party who complains of breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract. That is because every breach of every contract need not necessarily result in actual loss or damage.

An appeal was filed under Section 37 of the Arbitration and Conciliation Act, 1996 against the District Court’s Order.

Appellant was the petitioner before the lower court and the claimant before the Arbitral Tribunal.

Respondent warded the work of ‘doubling of track between Shornur and Mangalore, Cannanore-Uppala section: collection and stacking of 50mm size machine crushed hard stone ballast alongside the alignment/station yards/on top of the new formation between Kottikulam and Kasaragod stations to the claimant for a value of Rs 1,19,39,274. The work had to be completed within a period of 9 months, alleging the breach by claimant, the contract was terminated by the respondent.

In view of the above, disputes arose between the parties and arbitration proceedings were initiated.

Aggrieved with the order of the arbitral tribunal, the claimant/contractor took up the matter before the District Court. The said application which was filed under Section 34 was dismissed by the impugned order.

Analysis, Law and Decision

Firstly, the High Court referred to Sections 73 and 74 of the Indian Contract Act, 1872.

Bench noted that for a case coming under Section 74, it is not necessary for the party claiming compensation under this Section to prove that actual damage or loss has been caused.

Whether even in the absence of legal injury, compensation is liable to be paid for breach simplicitor?

The Court stated that whether it is a case of liquidated damages or penalty, what the party faced with the breach gets is only reasonable compensation, subject to the limit of the amount stipulated in the contract itself. Section 74 dispenses with proof of the extent of real or actual or factual loss or damage, but provides for grant of reasonable compensation, subject to the condition that it shall not exceed the sum stipulated as penalty in the contract.

Adding to the above, Bench expressed that the proof of the extent of loss or damage suffered in fact, i.e., proof of the extent of actual damage or loss suffered is dispensed within Section 74. This would not mean that there need not be any loss or damage. What is meant is only that proof of actual damage or loss is not necessary.

In Court’s opinion, Section 74 could not be invoked in the present matter because the Award did not say that any sum had been named in the contract as the amount to be paid in case of breach.

“Parties had never made a genuine pre-estimate of the amount to be paid in the event of any damage or loss likely to be caused by the breach or that there is any clause relating to liquidated damages in the contract.”

Elaborating further, the Bench stated that compensation payable under Sections 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, person concerned cannot claim compensation.

In the Supreme Court decision of Union of India v. Rampur Distillery and Chemical Co. Ltd., (1973) 1 SCC 649, it was held that a party to a contract taking security deposit from the other party to ensure due performance of the contract, is not entitled to forfeit the deposit on the ground of default when no loss was caused to him in consequence of such default.

If the party complaining is in a position to adduce evidence whereby the court can assess reasonable compensation, then without proof of actual loss, damages will not be awarded and amount mentioned by the contract will be penalty. In such circumstances, it has been held that the security amount is liable to be forfeited.

The Award in the present matter clearly did not say that any loss or damage had been caused to the respondent, hence neither the provisions of Sections 73,74 or 75 could have been invoked nor the said sections are applicable in the present case.

In view of the above discussion, Arbitral Tribunal was certainly wrong in rejecting the claim of the claimant for release of the amount of security deposit of Rs 3 lakhs.

Arbitral Tribunal’s finding of the provisions of Section 73 to 75 of the Contract Act, was certainly in contravention of the fundamental policy of Indian Law as contemplated in Section 34(2)(b)(ii) of the Act.

Concluding the matter, High Court allowed the appeal and set aside the impugned order. [Devchand Construction v. Union of India, 2022 SCC OnLine Ker 826, decided on 16-2-2022]

Advocates before the Court:

For the Appellant:

Santha Varghese, Ranjith Varghese and Rahul Varghese, Advocates

For the Respondent:

Sri. S. Ananthakrishnan, SC, Railways

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