'Lex Mercatoria' by Hasit SethExperts Corner

  1. Introduction

This article explores recent progress in the  law of lost profit damages by analysing a landmark Privy Council case Attorney General of the Virgin Islands v. Global Water Associates Ltd.[1]. Lost profit damages for breach of a contract are available but their recovery is circumscribed by the conditions of parties’ contemplation and remoteness. Claims for lost profit damages have to overcome the barrier of remoteness.

 

Starting from Hadley v. Baxendale[2], many cases for lost profits have arisen in the context of services by logistics providers. Lost profit cases have also arisen in context of resale of goods, professional services and land transactions among others. They frequently occur in this pattern: A promised to B to supply goods or perform services, and B in turn further contracted with C to supply goods to be received from A or services to be performed by A under A’s contract with B (broadly called as “linked contracts”). This pattern of linked contracts is extremely common since the earliest trading days to the modern, global supply chains. The challenge has always been to prove parties’ contemplation at the time of contracting to foresee the risk of consequential loss from the breach of contract. Risks contemplated by the parties can lead to recovery of lost profits (also called “loss of profits” by many authors) that are not too remote.

 

2. Architecture of the Remedy of Damages

In India and few other former British colonies that adopted the Contract Act, 1872, damages under Section 73 are termed as “compensation”. Damages for breach of contract are payable by a party which broke the contract to a party that suffers the breach. Quantum of damages is defined by the loss or damage suffered by the party minus any allowed reductions like mitigation.

 

A party suffering from a breach of contract is entitled to recover damages that either:

  1. Naturally arose in the usual course of things; or
  2. Which the parties knew at the time of contracting to likely result from a breach.

The scope of damages that can be recovered is controlled by the requirement in Section 73 that the damages must not be from remote and indirect loss or damage.

 

Section 73’s language can be traced to Alderson B’s dictum in the celebrated 1854 English case Hadley v. Baxendale[3] as:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. (emphasis supplied)

 

The core rule of damages seeks to place a contract party suffering the breach in a position she would be in if the contract had been performed. This has been aptly stated by Parke B in Robinson v. Harman[4] as:

… what damages is the plaintiff entitled to recover? The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

 

Damages are available when a breach of contract is a proximate, direct cause(s) of a loss arising from such a breach. Damages are not recoverable when a breach of contract is a remote, indirect cause(s) for a loss arising from such a breach. Consequential damages are recoverable only if they were in the contemplation of the parties (or at least the defendant), otherwise such damages would be remote and hence not recoverable.

 

Allowing damages when such losses were in contemplation of parties is not an exception to the core rule of granting damages that arise naturally, but where a defendant has a notice of special circumstances, that notice enlarges the scope of the natural consequences of the breach[5].

 

Mayne[6] illustrates a common demand for lost profits that would have been made if the defendant had performed her contract promises as:

One very common instance in which damages are held to be too remote arises where the plaintiff claims compensation for the profits which he would have made, if the defendant had carried out his contract. It is by no means true, however, that such profits can never form a ground of damage … Loss of profits is recoverable so far as it is the natural result of the breach of contract, but not when it is founded on a special contract for resale, unknown to the defendant, which is frustrated by that breach.

Knowledge of the parties has to be objectively ascertained as to whether they contemplated certain events or losses to be within the scope of a contractual bargain. But this is not always easy to ascertain. Knowledge possessed by the contracting parties is classified into two types: imputed and actual. Imputed knowledge refers to the knowledge that the contracting parties ought to have of the loss consequent to a breach in ordinary course. But a defendant may possess actual knowledge outside the ordinary course which if the contract is breached in special circumstances will make the defendant liable[7][8].

Hadley v. Baxendale case’s ratio is considered an “orthodox” or “standard” approach, while the reformulated approach in Achilleas[9] case by two-Judges of the Bench is described as, “… defendant is only to be held liable for loss which it was the intention of the parties that he should bear i.e. loss for which he has ‘assumed responsibility’, or which falls within the scope of his duty”[10]. But Treitel considers Achilleas[11] case’s ratio is not any definite departure from the rule in Hadley v. Baxendale case and may be thought of as a requirement that the defendant has accepted or assented to the risk of loss over and above the contemplation in the foresight of the parties[12].

 

 3. Lost Profits (Loss of Profits) under the Contract Act, 1872

Lost profit (Loss of Profits) damages are available under Indian contract law. The only bar is remoteness. As noted above, the Indian contract law of damages tracks the English common law being firmly rooted in Hadley v. Baxendale rules that are enacted in statute’s Section 73.

 

There are illustrations to Section 73 that cover lost profits. For example, illustration (i) is a variation of Hadley v. Baxendale situation with damages being recoverable as lost profits in contemplation of the parties for normal operation but not for the loss of a remote government contract. Illustration (j) describes linked contracts where knowledge of a linked contract leads to lost profit damages. In Illustration (l), the builder has knowledge of the further linked contract and hence the builder is liable for lost profits. In illustrations (k, n, p, q and r), consequential damages are not being recoverable as being too remote. In all illustrations to Section 73 where parties had mutual knowledge of purpose of the contract liability for lost profits is shown to exist.

 

In a road construction project, when the Government breached the contract by improperly rescinding it, Supreme Court of India upheld grant of lost profits on the unfinished work[13]. But at times, the High Courts have rejected lost profits, because they were not proved[14][15]. Then there have been the courier related cases where if the defendant did not have knowledge of plaintiff’s special purpose or circumstances, lost profit damages have been disallowed[16][17]. Lost profits have had a long history in Indian contract law cases. But there is a dearth of lost profit judgments post-independence similar to the reduced count of contract damages decisions too. Hence, it is necessary to consider English law decisions on this point where the issue of contemplation has been refined over the years.

 

4. A Milestone: Attorney General of Virgin Islands v. Global Water Associates Ltd.

In a landmark recent decision Attorney General of the Virgin Islands v. Global Water Associates Ltd.[18] (2020), the Privy Council restated the law on lost profit (loss of profit) damages and remoteness of damages. In a decision that traces the law from Hadley v. Baxendale onwards,  the Privy Council undertook a comprehensive review of English law precedents on loss of  profit damages and remoteness of damages. The following discussion refers to the same case Attorney General of the Virgin Islands v. Global Water Associates Ltd. (2020).

 

D.1 The Two Contracts

The facts of the case involved two contracts that were to be operational in sequence: to build and then to operate a water plant. First contract was a design and build agreement (DBA). Second contract was a management operation and maintenance agreement (MOMA). Parties were Government of British Virgin Island (Government) and global water associates (GWA). The parties to the two contracts, DBA and MOMA, and the designated signatories were the same.  Both the DBA and MOMA were signed on the same day. Hence, the DBA was to be followed by MOMA with the same parties. The DBA and MOMA incorporated the common “design build documents”, which included the GWA’s proposal, Government’s approval and letter from a company pure stream stating that GWA were their authorised agents and their support for executing the project.

 

Government executed the DBA with GWA to build a water reclamation treatment plant. It also executed a MOMA with GWA to operate the same water plant from the commencement date, which was to be the first date on which the water plant produced specified quantity of water.

 

D.2 Breach of Contract

GWA claimed that the Government failed to provide a prepared site for the water plant, a requirement under the DBA. Hence, GWA could not build the water plant. GWA then issued a contractual remedy notice, which the Government failed to respond. Thereafter, GWA terminated the DBA. Due to this breach of DBA  by the Government, GWA claimed it had lost profits it could have earned from managing and operating the plant for 12 years under the MOMA. Hence, GWA claimed damages for the breach of an implied term under the MOMA that the Government would provide a prepared site under its DBA obligations.

 

D.3 Litigation

GWA initiated an arbitration for its claims for damages arising from the breach of the DBA and also the breach of an implied term of MOMA. The Arbitral Tribunal rejected GWA’s claim because there was no implied term in MOMA to provide a prepared site. Further, the damages claimed for lost profits to be earned under MOMA were too remote to be recoverable.

 

GWA’s challenged the award in the High Court for errors of law. A Single Judge Bench held in favour of GWA and remitted the award back to the arbitrators for assessment of damages.

 

In the Government’s appeal, the court of appeal rejected GWA’s claim on the ground that the damages were too remote to recover. The court of appeal reasoned that even if Government had breached the DBA, which led to GWA terminating the DBA, for the purpose of MOMA, Government could have got the plant built by some other contractor. GWA in such case could then have operated the plant for 12 years under the MOMA. Hence, the court of appeal held that the parties could not have reasonably foreseen that breach of DBA would lead to MOMA being non-operational. Further, the court of appeal also rejected the argument that MOMA had an implied term that DBA obligations would be fulfilled. The court of appeal based its decision on the implied term being that the Government will make a water plant available to operate at the commencement of MOMA. GWA appealed to the Privy Council.

 

D.4 Privy Council’s Analysis

Analysing the remoteness of damages issue, the Privy Council noted Hadley v. Baxendale’s formulation were apt for an age when juries decided such questions. But now when Judges give reasons, the formulations are subjected to “closer scrutiny and some expansion”. (emphasis supplied)

 

Considering Victoria Laundry (Windsor) v. Newman Industries Ltd.[19] decision, the Privy Council chose to focus on its later review in Heron II[20] case. The Privy Council said that unusual market volatility or understanding of market which were the focus of  Achilleas[21] case were not at issue here. The Privy Council favoured Lord Walker of Gesting Thorpe’s preference in Achilleas[22] case because:

78.… arguably a vague expression (such as “real possibility”) … because it is more flexible once it is understood that what is most important is the common expectation, objectively assessed, on the basis of which the parties are entering into their contract.

He preferred the “real possibility” expression over various probabilities of the parties contemplating the event of breach being considered in Heron II[23] case because, “In the context of contractual liability, the Court is not solely concerned with percentage chance of such an event occurring, although that is not irrelevant.”

 

The Privy Council also considered Lord Burrow’s formulation in his book[24] that a loss is too remote if such loss could not reasonably have been in defendant’s contemplation as “a serious possibility”.

 (emphasis supplied)

The Privy Council also agreed with the Single Judge Bench’s determination of inapplicability of Singapore Court of Appeal’s Burgundy[25] case on facts where parties had entered into an escrow and a drilling contract. The Singapore Court of Appeal in that case had held that damage caused by failure to fund the escrow account was only loss of security and driller could still have performed the contract. But here, the Government’s failure to perform DBA had prevented GWA from making profits under the MOMA.

 

The Privy Council[26] summarised the legal position of remoteness of damages as:

  1. First, in principle the purpose of damages for breach of contract is to put the party whose rights have been breached in the same position, so far as money can do so, as if his or her rights had been observed.

 

  1. But secondly, the party in a breach of contract is entitled to recover only such part of the loss actually resulting as was, at the time the contract was made, reasonably contemplated as liable to result from the breach. To be recoverable, the type of loss must have been reasonably contemplated as a serious possibility, in the sense discussed in paras 27 and 28 above.

 

  1. Thirdly, what was reasonably contemplated depends upon the knowledge which the parties possessed at that time or, in any event, which the party, who later commits the breach, then possessed.

 

  1. Fourthly, the test to be applied is an objective one. One asks what the defendant must be taken to have had in his or her contemplation rather than only what he or she actually contemplated. In other words, one assumes that the defendant at the time the contract was made had thought about the consequences of its breach.

 

  1. Fifthly, the criterion for deciding what the defendant must be taken to have had in his or her contemplation as the result of a breach of their contract is a factual one.

(emphasis supplied)

D.5 Application of the Law to Facts

Returning to the facts at hand, the Privy Council noted four facts: (i) contract parties were identical, and the contracts were executed simultaneously; (ii) government knew and intended that DBA’s performance would lead to MOMA; (iii) design build documents incorporated into the DBA were the same as the ones incorporated into the MOMA; and (iv) absence of an express or implied term in the DBA limiting the government’s liability for loss of earnings. Further Privy Council rejected the contention that he existence of two contracts itself is an, “implicit limitation on liability for breach of contract”, in the DBA because there could be several reasons why the contracts were separated.

 

The Privy Council rejected the court of appeal’s reasoning that the Government could have got the water plant built by another contractor and yet met its obligations under the MOMA. It did so because of: (i) incorporation of same design build documents into both DBA and MOMA; (ii) same entity GWA was contracted to build the plant under DBA and operate it under MOMA too; and (iii) definition of commencement date in both contracts indicates a “completion of DBA to lead seamlessly into the operation of the MOMA”. Hence, arbitrators were correct in their finding on fact that MOMA could commence only after the DBA was completed.

 

The Privy Council hence advised Her Majesty to allow the GWA’s appeal.

 

Conclusion

The Privy Council decision in Attorney General of the Virgin Islands v. Global Water Associates Ltd.,[27] (2020) case discussed above further strengthens the law of lost profit damages and remoteness of damages. In particular, the decision crystalises the standard of contemplation of parties to be objectively determined that either both or at least the defendant “reasonably contemplated as a serious possibility” the type of loss arising from the breach of the contract. This is also the standard mentioned in Professor Andrew Burrows’s  (now Lord Burrows) book referred above.

Lost profits (loss of profits) damages would be recoverable and not considered too remote if the parties or at least the defendant had contemplated as a serious possibility the type of loss arising from the breach of contract.

Milton said in his poem Paradise Lost:

Our torments also may in length of time

Become our elements

Similarly, may each step in the development of law of damages for the loss of profits and remoteness lead us to ever more precise standards to determine the contemplation of parties.

 

Advocate, practices as an independent counsel in the Bombay High Court and in arbitrations

[1] Attorney General of the Virgin Islands v. Global Water Associates Ltd., 2021 AC 23 : (2020) 3 WLR 584 : 2020 UKPC 18.

[2] Hadley v. Baxendale, 1854 EWHC Exch J70, [1854] 9 Ex. 341.

[3] Id. (Further citations to Hadley v. Baxendale are not repeated for brevity).

[4] Robinson v. Harman, (1848) 1 Exch 850, 855.

[5] William B. Hale, Handbook on the Law of Damages 78 (Roger W. Cooley, 2nd edn., 1912).

[6] John D. Mayne and Lumley Smith, A Treatise on the the Law of Damages: Comprising their Meausre, the Mode in Which they are Assessed and Reviewed, the Practice of Granting New Trials, and the Law of Set-off  55 (6th edn., 1899).

[7] Frederick Pollock and Dinshah Mulla, Indian Contract & Specific Relief Acts 1535 (13th edn., 2006).

[8] Victoria Laundry (Windsor) v. Newman Industries Ltd (1949) 2 KB 528.

[9] Transfield Shipping Inc.v Mercator Shipping Inc, 2009 AC 61 : 2008 UKHL 48.

[10] Treitel, The Law of Contract, §§ 20-109 (Edward Peel, 14th edn., 2015).

[11] Transfield Shipping Inc., (2009) 1 AC 61 : (2008) 3 WLR 345 : 2008 UKHL 48.

[12] Treitel, supra note 10,§§ 20-110.

[13] A.T. Brij Paul Singh  v. State of Gujarat, (1984) 4 SCC 59, 65.

[14] NTPC Ltd. v. Sri Avantika Contractors (I) Ltd., Delhi High Court, OMP (COMM) 428/2017, decided on 12-5-2020.

[15] National Highways Authority of India v. Ijm-Gayatri Joint Venture, Delhi High Court, OMP (COMM) 428/2017, decided on 12-5-2020.

[16] Madras Railway Company v. Govinda Rau, 1898 SCC OnLine Mad 4 : ILR (1898) 21 Mad 172.

[17] Dominion of India v. All India Reporter Ltd., 1951 SCC OnLine MP 35 : AIR 1952 Nag 32.

[18] Attorney General of the Virgin Islands, 2021 AC 23 : (2020) 3 WLR 584 : 2020 UKPC 18.

[19]Victoria Laundry (Windsor), (1949) 2 KB 528.

[20] Koufos v. C. Czarnikow Ltd., (1969) 1 AC 350 : (1967) 3 WLR 1491.

[21] Transfield Shipping Inc., (2009) 1 AC 61 : (2008) 3 WLR 345 : 2008 UKHL 48.

[22] Id.

[23] Koufos, (1969) 1 AC 350 : (1967) 3 WLR 1491.

[24] Andrew Burrows, A Restatement of the English Law of Contract 20 (2016).

[25] Burgundy Global Exploration Corpn v. v Transocean Offshore International Ventures Ltd., 2014 SGCA 24.

[26] Attorney General of the Virgin Islands, 2021 AC 23, 35-36.

[27] Id.

Case BriefsTribunals/Commissions/Regulatory Bodies

Appellate Tribunal for Electricity (APTEL): A Coram of Manjula Chellur, J. (Chairperson) and S.D. Dubey (Technical Member), allowed an appeal which was filed under Section 111 of the Electricity Act, 2003 against order passed by the Uttar Pradesh Electricity Regulatory Commission (State Commission) whereby the State Commission had rejected the petition of the Appellant seeking loss of fixed charges on account of the lower plant availability of 54.78% only, during the year 2017-18, which was directly due to the Appellant being not able to declare capacity to the full extent wholly and exclusively due to the persistent non-payment of the bills in accordance with the terms of Power Purchase Agreement (PPA) by the Respondent No. 2, Uttar Pradesh Power Corporation Limited (UPPCL) for the Electricity generated and supplied by the Appellant.

Facts:

The Appellant is a generating company within the meaning of Section 2(28) of the Electricity Act, 2003 having established a 3 x 660 MW power plant in villages, existing under the provisions of the Companies Act, 2013 in the State of Uttar Pradesh. The Respondent 1 – State Commission is the Electricity Regulatory Commission for the State of Uttar Pradesh exercising powers and discharging its functions under the provisions of the Electricity Act, 2003, it determined the tariff for the supply of electricity and also exercises the powers to adjudicate and decide on any disputes that arise between the Appellant and UPPCL. The Respondent 2 UPPCL is the Apex Body in the State of Uttar Pradesh which is overseeing the distribution and supply of electricity for and on behalf of the Distribution Companies (Respondents 3-6). They have authorized UPPCL to execute/sign the Power Purchase Agreements and also to carry out all necessary actions on their behalf in relation to the power purchase and supply. For the establishment of the generating station of the appellant, a Memorandum of Understanding (MoU) dated 22-04-2010 was entered into between the Government of Uttar Pradesh (GoUP) and a consortium of companies led by Bajaj Hindusthan Sugar Limited (BHSL) under a Special Purpose Vehicle (SPV), the Appellant which had already been incorporated by Respondent 2. The Appellant and UPPCL had entered into a PPA. The State Commission had allowed provisional tariff of Rs 1.88 towards fixed cost and Rs 2.95 as variable charge computed on capital expenditure of Rs 12,868 crores incurred. The said provisional tariff of fixed charges was further revised to Rs 2.24 with effect from 07-03-2018. The final tariff of the Appellant was pending determination from the date of commercial operation. The Appellant had been supplying the entire capacity of the generating station to UPPCL in terms of the PPA however UPPCL had been making substantial delays in making payment of the Appellant’s invoices as per the provisions of the PPA and not been providing and maintaining the payment security mechanism as per PPA. The Appellant had filed a petition before the State Commission seeking directions for payments of the outstanding dues. The State Commission had dismissed the petition based on the undertaking of UPPCL to clear all the dues forthwith and that the escrow mechanism would be created at the earliest. during the year for the purchase of coal and the Appellant was left with only a sum of Rs 2,833 crore out of which the Appellant had to meet its debt service obligations, working capital cost and O&M Charges including salary payment as essential and inevitable cash outgo prior to incurring any amount on procurement of coal. The Appellant kept on financing the coal purchase during the period from working capital facilities to the extent best possible and finally consumed the entire working capital facilities limits as available from time to time. Due to non-payment by UPPCL and the Appellant became a defaulter of its lenders with respect to working capital facilities also in addition to the default of payment of interest and installments of its term loans. This forced the Appellant in a financially stressed situation and the lenders started adjusting the entire money they received towards their dues, owing to which there was no or very little money available with the Appellant.

Arguments:

The Counsel for the appellant, submitted that due to default on the part of UPPCL the appellant has suffered financial misery and was required to pay the coal companies 100% of the cost of coal and also pay 100% of the railway freight in advance, for which the Appellant is required to be paid in time to ensure adequate working capital. The UPPCL have not disputed the fact that it has continuously defaulted in payment of the monthly bills of the Appellant for continuously 10 months in a row. The only defense of UPPCL was that the Appellant was compensated by Late Payment Surcharge (LPSC).

Issues:

  1. Whether the Appellant has changed its prayers during the course of the proceedings in the matter and if so, should the change of prayer be allowed?
  2. Whether Second Respondent has paid the outstanding amounts to the Appellant in accordance with the terms of the PPA and the Regulations specifically in light of the contention of UPPCL that the average payment made during the period was never more than 90 days;
  3. If not, whether the Appellant has actually suffered losses solely due to the non-payment of its outstanding dues in time;
  4. Whether the Regulations can be relaxed to allow the Appellant to recover its full fixed cost for the impugned period and as a consequence, can the PAF of Appellant be reduced to 54.78% from 85%;
  5. Whether late payment surcharge as envisaged in the Regulations and PPA are adequate to compensate the loss;
  6. Whether in facts and circumstances of the case, the Appellant is entitled to carrying cost?

Findings:

The Tribunal while setting aside the order of the State Commission allowed the appeal explaining all the issues at length. The Court relied on the principle founded in 1848 in Robinson v. Harman which supported innocent parties in the event of breach of contract. The Court further answered the issues at length as follows:

Issue No. 1: that the Appellant has not changed its prayer during the course of the proceedings either through its short Rejoinder Note or in Final Written submissions, as alleged by the Second Respondent.

Issue No. 2: that the second Respondent (UPPCL) has not paid the outstanding amounts to the Appellant in accordance with the terms of the PPA and the Regulations. We dismiss the concept of average payments introduced by R2 to justify its default of non-payment. We further observe that the outstanding of the Appellant remained substantial during most of the period in financial year 2017-18. Further, Respondent UPPCL has failed to establish Escrow/ Payment Security Mechanism as yet despite repeated categorical directions by the State Commission in its various orders.

Issue No. 3: Having established a clear correlation between delayed payments and coal shortage, we hold that the Appellant has actually suffered losses solely due to the non-payment of its outstanding dues in time by R-2. As a result, the applicant was not able to procure sufficient coal to declare full Capacity in spite of its generating units being technically available.

Issue No. 4: Having regard to various rulings of his Tribunal and the Hon’ble Apex Court, we are of the view that the instant case is a fit case to relax the Norms to allow the Appellant to recover its full fixed cost for the impugned period at actual PAF of 54.78% instead of normative 85% in the interest of justice and equity.

Issue No. 5: that in view of the facts& circumstances of the matter, late payment surcharge as envisaged in the Regulations and PPA is not meant for or otherwise, adequate to compensate the consequential loss suffered by the Appellant in full. Hence, it is entitled to further relief over and above LPSC.

Issue No. 6: that as per the settled principles of law, the Appellant is entitled to restitution and thus, to carrying cost from the date of capacity lost to date of actual payment at the prevailing rate of interest in accordance with UPERC Regulations.

[Lalitpur Power Generation Co. Ltd. v. Uttar Pradesh Electricity Regulatory Commission, 2020 SCC OnLine APTEL 82, decided on 28-09-2020]


Suchita Shukla, Editorial Assitant has put this story together

Case BriefsForeign Courts

Supreme Court of Canada: Full Bench comprising Wagner, C.J., Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer, JJ. allowed an appeal against a class action lawsuit claiming disgorgement from the Atlantic Lottery Corporation (ALC), a corporation which approves licenses for Video lottery terminals (VLTs).

The class action was instituted on behalf of any natural person who paid to play VLTs in the area in the six years preceding the lawsuit, which claimed that VLTs are deceptive and dangerous and contravene the Criminal Code’s (1985) prohibition of games similar to “three-card monte”. The plaintiffs claim that ALC breached its duty by not warning players of “the inherent dangers associated with VLTs, including the risk of addiction and suicide ideation.” The claim relies on three causes of action i.e., waiver of tort, breach of contract and unjust enrichment, to seek a gain-based award quantified by the profit ALC earned by licencing VLTs. ALC’s application against the claim before a certification judge failed, as did its appeal in the Court of Appeal, which allowed the plaintiff’s lawsuit to proceed to trial.

The Court, however, held that the plaintiffs’ plea is bound to fail since it does not disclose a reasonable cause of action. The bench opined that while disgorgement is a remedy against actionable misconduct, the plaintiffs seek to use it as an independent cause of action under an entirely new category of wrongful conduct, which is akin to negligence but does not require proof of damage. Denying relief on this ground, the Court asserted that “granting disgorgement for negligence without proof of damage would result in a remedy arising out of legal nothingness.” As for the argument concerning the similarity of VLTs to three-card monte, the Court rejected it since the prohibition was directed at the game’s attribute and not its feature of deception.

The Court opined that gain-based recoveries in cases of breach of contract require the consideration of the legitimate interest which such an award seeks to vindicate. Since the award sought by the plaintiffs is measured by the defendant’s gain, it seeks to serve a compensatory purpose which distinguishes it from disgorgement and that makes a gain-based remedy inappropriate. Moreover, the contract between ALC and the plaintiffs under which the plaintiffs paid to play on the VLTs cannot be said to have been vitiated since a benefit derived by a defendant from a valid contract is not unjustified. The plaintiffs failed in establishing a causal connection between the alleged breach of contract and the gain to be disgorged. However, four judges on the Bench dissented by allowing the appeal in part, striking down disgorgement and unjust enrichment as causes of action, instead suggesting that the lawsuit be focused on a breach of duty of care, the adequacy of ordinary remedies resulting from it and whether exemplary damages ought to be awarded. [Atlantic Lottery Corporation Inc. v. Babstock, 2020 SCC 19, decided on 24-07-2020]

Case BriefsForeign Courts

Supreme Court of the Democratic Socialist Republic of Sri Lanka: A Full Bench of Buwaneka Aluwihare, Priyantha Jayawardena and Murdu N. B. Fernando, JJ., dismissed an appeal which was filed on the ground that the High Court Judge had erred in attaching liability to the defendant to pay damages.

The original action in the High Court was filed in order to recover damages with legal interest from the defendant-appellant for breach of contract. The defendant had entered into an agreement with the Commissioner-General of the Department of Educational Publications in the Ministry of Education (hereinafter “Commissioner-General”) to print several school textbooks and the parties had agreed to print the whole order for a specific amount within a specified deadline. The contention of the Plaintiff was that the defendant had failed to meet the deadline and complete the order and whatever part of the order was complete even that was delivered after the specified deadline because of which the Commissioner General was compelled to commission three other printing agencies to print the remainder. Exercising rights stipulated in clauses (15), (21) and (23) of the Agreement the Commissioner-General, on behalf of the State, sought to recover the damages as it was the defendant’s default that had caused additional expenses. Having failed to secure the recovery by way of a letter of demand, the Attorney General had instituted an action in the High Court, where the Court had answered all the issues raised in favour of the plaintiff. The counsel for the defendant-appellant had submitted that the facts of the case were not disputed but he only wished to canvass the conclusions reached by the trial Judge, the defendant had contended that the Agreement was terminated by mutual consent and not pursuant to a breach basing their arguments on the conduct of the plaintiff such as not serving notice to show cause, not blacklisting the defendant, awarding subsequent contracts and making payments without any deductions in the form of a penalty but there was stark paucity of any evidence and the High Court had held that the defendant had failed to substantiate their position that they were not in breach of the agreement.

The Court while dismissing the appeal explained that they agreed with the Judgment of the High Court as the defendant-appellant had neither produced evidence establishing that they had not fulfilled their obligations nor had they controverted the evidence led by the Plaintiff to this effect. [Tisara Packaging Industries Ltd. v. Attorney General, SC CHC Appeal No. 17 of 2010, decided on 18-10-2019]

Case BriefsForeign Courts

Pakistan Supreme Court: The Bench of Gulzar Ahmed,  Faisal Arab and Ijaz UL Ahsan, JJ., dismissed the petition filed against a Judgment of the Lahore High Court through which the appeal filed by the petitioner regarding the termination of his services was dismissed.

The facts of the case were that the petitioner was appointed as an ECG Technician in District Headquarters Hospital, Rawalpindi in 2005 on a contract basis. In 2009, his services were terminated. He challenged his termination through a representation which was not decided. He, therefore, approached the High Court in its constitutional jurisdiction. The High Court directed the respondents to decide the petitioner’s representation. This was dismissed by the departmental authority. The petitioner challenged the said order which was allowed. The respondents, feeling aggrieved, challenged the said judgment through two separate Intra Court Appeals which were allowed; the above facts raised the current contention. The Counsel for the petitioner, Sardar Abdul Raziq Khan and Syed Rafaqat Hussain Shah submitted that the Division Bench of the High Court fell in error in reversing the findings of the Single Judge in a mechanical manner, ICA filed by the Rawalpindi Medical College , which was neither a party to the proceedings nor directly aggrieved of the order, was not competent and the ICA filed by the Government of Punjab was barred by time and the Division Bench erred in law in entertaining the appeals. The respondents defended this by raising the point of law that if two appeals against the same impugned judgment are filed, one of which is within time, the other appeal should also be entertained and decided on merit rather than being dismissed on technical grounds.

The Court held that the appeal filed by the RMC was within time and even if the appeal filed by the Government of Punjab was barred by time, the Division Bench had a legal basis and lawful justification to entertain and decide both appeals on merits. Further, the Court found that the order of petitioner’s appointment was void and no period of limitation runs against a void order. The second issue that was considered was that the dispute between the parties related to contract employment. The Court stated that it is settled law that a contract employee is debarred from approaching the High Court in its constitutional jurisdiction. The only remedy available to a contract employee is to file a suit for damages alleging breach of contract or failure to extend the contract. Therefore, it was held that the petitioner approached the wrong forum in the first place and the Single Judge had exceeded his jurisdiction by interfering in a purely contractual matter. The appeal was thus dismissed. [Qazi Munir Ahmed v. Rawalpindi Medical College and Allied Hospital, 2019 SCC OnLine Pak SC 3, Order dated 06-03-2019]

Case BriefsHigh Courts

Hyderabad High Court: While deciding the instant appeal under Section 483 of the Companies Act, 1956 read with Clause 15 of the Letters Patent against the admission of Company Petition No. 231 of 2015, filed for its winding-up under Section 433(e) read with Sections 434(1)(a) and 439 of the Companies Act, 1956, the Division Bench of Sanjay Kumar and Uma Devi, JJ., observed that it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. Thus no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages.

The appellant company was awarded a contract by Surana Ventures Limited to set up a 35 MW per annum capacity photo-voltaic cell manufacturing plant at Fab City, Hyderabad. In turn, the appellant company engaged services of several sub-contractors and suppliers for discharging this contractual obligation. The respondent company was one of the sub contractors upon whom a Purchase Order dated 15.04.2011 was placed by the appellant company to manufacture and supply of certain water and waste-water plant components for use in the proposed manufacturing plant. The Purchase Order contained the terms and conditions of the contract as it contemplated that time was the essence of the work and all deliveries/works had to be completed. However Surana Ventures shelved the project in August, 2011 and the contract was frustrated thereafter. As a result the appellant company claimed that it could not proceed further thereafter, in so far as Purchase Order. The respondent company stated that it had invested its entire monies into the project and kept the plant ready and was at the disposal of the appellant company and thus requested them to pay the balance amount. With the appellant denying the liability to pay, the company petition for winding-up the appellant company was presented by the respondent on 01.05.2015. The Company Judge admitted the winding up petition stating that the appellant company’s defense of Surana Ventures shelving the project is unsustainable and did not make any observation on the issue as to whether there was breach of contract by the appellant company in respect of its obligation under the Purchase Order.

The Court observed that the Company Judge lost sight of such an important issue as to the presence of a breach of contract by the appellant company as this was a crucial aspect which was raised by way of a bonafide dispute by the appellant company and required to be addressed at the threshold to assess as to whether the respondent made out a prima facie case for admission of the winding-up petition. The Court also observed that when damages are assessed the Court in the firstly must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant. Noticing the existence of several debatable issues raised by the appellant which were ignored by the Company Judge, the Court thus set aside the order of admission dated 25.10.2017 and dismissed Company Petition No. 231 of 2015. [MW High Tech Projects India Pvt. Ltd. v. M/s. Grauer & Weil (India) Ltd., 2017 SCC OnLine Hyd 409, decided on 06.12.2017]