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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.1168 OF 2007

KANCHAN UDYOG LIMITED                               ..........APPELLANT(s) VERSUS

UNITED SPIRITS LIMITED                ......RESPONDENT(s)

JUDGMENT

NAVIN SINHA, J.

The appellant’s  suit,  C.S.  No.839  of  1990,  for  damages  and  wrongful

termination  of  contract,  was  decreed  by  the  learned  Single  Judge  on

02.12.1999.  It has been reversed in appeal preferred by the respondent, on

14.01.2005 in APD No.14 of 2000, and the suit dismissed.

2. The  appellant  entered  into  an  agreement  with  the  respondent  for

establishment  of  a  non-alcoholic  beverages  bottling  plant  at  Dankuni,  West

Bengal, and sale under the respondent’s trade mark, 'Thrill',  'Rush', 'Sprint',

and 'McDowell’s Sparkling Soda.' The respondent provided technical consultancy

for establishment of the plant, incorporated in the Project Engineering Services

Agreement dated 11.09.1985.  A Bottler’s agreement dated 26.10.1985 was

separately executed, valid for ten years with a renewal option, containing the

respective  rights  and  obligations  of  the  parties,  along  with  a  Marketing

agreement.  The concentrate (Essence),  for preparation of the non-alcoholic

beverage, was to be supplied by the respondent. The beverage was to be sold

in  specified  districts  of  West  Bengal,  as  provided  for  in  the  marketing

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agreement.    

3. The appellant, on 15.12.1985 applied for loan, Exhibit ‘C’, to the West

Bengal  Industrial  Development  Corporation  (hereinafter  referred  to  as  'the

WBIDC')  for  establishment  of  the  bottling  plant  at  an  estimated  cost  of

Rs.226.80 lakhs. In accordance with procedures, it was processed by the West

Bengal Consultancy Organisation Ltd. (hereinafter referred to as 'WEBCON'),

which independently prepared a techno-economic feasibility report, ‘Exhibit F1’.

Loan was then advanced to the appellant by the WBIDC, and the West Bengal

State Financial Corporation. Commercial production commenced on 01.01.1987.

The  bottler’s  agreement  was  terminated  by  the  respondent  on  16.03.1988.

Commercial  production at  the plant ceased in May, 1989,  and the suit  was

instituted by the appellant in 1990.  The learned Single Judge decreed the Suit,

awarding damages for Rs.2,73,38,000/- towards loss of anticipated profits, and

a sum of  Rs.1,60,00,000/-  towards  costs  for  installation  of  the  plant,  after

deducting  Rs.9.05  lakhs  payable  by  the  appellant  to  the  respondent  as

consultancy charges. The respondent was held liable to pay to the appellant a

sum  of  Rs.4,24,33,000/-  with  interest  @  10%  from  the  date  of  suit  till

payment. The Division Bench in appeal reversed the decree, and dismissed the

Suit.

4. Sri  Paras  Kuhad,  learned  senior  counsel  appearing  for  the  appellant,

submitted  that  the  bottler’s  agreement  valid  for  ten  years,  was  terminated

unilaterally  and  prematurely  by  the  respondent  on  16.03.1988,  contrary  to

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clause 26 of the agreement. The appellant had never denied performance of its

obligations under the agreement. The appellant had not signed and returned

the  termination  letter,  in  acceptance,  as  reiterated  by  the  respondent  on

25.07.1988.  The  appellant  did  not  sign  any  fresh  agreement  with  M/s.

Venkateswara Essence & Chemicals Pvt. Ltd. (hereinafter referred to as ‘VEC’)

for supply of concentrates by it, in lieu of the respondent.  The acceptance of

concentrates by the appellant directly from M/s. VEC for a short time span,

under clause 5 of the agreement, cannot be construed either as novation of the

original  contract  under  Section  62  of  the  Indian  Contract  Act  (hereinafter

referred  to  as  ‘the  Act’),  or  acquiescence  to  any  new  arrangement  by

substitution of a new contract.  It was an act done under compulsion, and not

voluntarily. A novation of contract, can take place only by mutual consent in a

tripartite arrangement. In absence of any fresh tripartite agreement executed

between  the  parties,  it  is  futile  to  contend  novation.  The  respondent  also

continued to deal with the appellant under the original agreement, even while it

sought to persuade the appellant to sign the fresh agreement.

5.  The respondent was the domain expert. Relying on its assurance, the

appellant had made a business investment. A reasonable profit was, therefore,

naturally expected. The loss of anticipated profits was due to the failure of the

respondent  to  provide  adequate  aggressive  marketing  and  advertisement

support  under the bottler’s agreement, in an extremely competitive market.

The assumption of the respondents that there existed a market for their brand

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products 'Thrill',  'Rush', 'Sprint',  was totally misconceived, believing in which

the appellant had made the investment. A party committing breach of contract,

was liable for such damages as are estimated as not unlikely to result from the

breach, at the time of making of the contract.  The appellate court erred in

relying upon future events, to hold that the appellant could not be foreseen to

earn profits. Any temporary difficulties that the appellant may have had in its

own  operations,  were  not  insurmountable,  and  could  have  easily  been

overcome, if the respondent had facilitated smooth running of the business and

earning of profits thereby.  The claim for damage was required to be assessed

by  a  broad  estimation,  taking  into  consideration  all  significant  factors,

evaluating  the  chances  for  earning  profit,  and  not  determination  of  actual

profitability. Reliance was placed on Wellesley Partners LLP v. Withers LLP,

(2015) EWCA Civ 1146.

6. The claim for loss of anticipated profits was not based on the WEBCON

report, ‘Exhibit F1’.  Neither was it based on ‘Exhibit W1’, the report prepared

by Dr. Baisya, the then technical survey manager of the respondent. It was

based on Exhibit  ‘C’, the loan application submitted by the appellant to the

WBIDC along with enclosures, containing details of profitability, cash flow, cost

of production and estimation of sales. It was prepared with the assistance of Dr.

Baisya, duly proved by Sri Binod Khaitan of the appellant.  The appellate court

did not express any reservation about the sufficiency of proof regarding the

document. The fact that it may not have been established to the satisfaction of

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the court, that it was jointly prepared with Dr. Baisya, does not detract from its

contents  or  admissibility  of  the  same.  The agenda notes  of  the meeting of

WBIDC dated 19.02.1986 which considered the profitability projections based

on  its  own  market  survey  report,  was  also  duly  proved  by  the  appellant’s

witness Sri Binod Khaitan. The original minutes, and the application for financial

assistance had been summoned by the court from WBIDC by subpoena. These

were cumulatively  sufficient  to  assess  estimated loss  of  production and the

profitability that would have accrued if the business had remained operational.

This loss of profitability was therefore clearly in contemplation of the parties at

the time of entering into the contract, and which alone would be the relevant

date for assessment of claim for damages. The breach by the respondent of the

bottler’s  agreement  was  the  direct  cause  for  loss  of  anticipated  profits.

Alternately, the  causation  had  to  be  determined  in  a  holistic  manner  by  a

cumulative assessment.  The claim for loss  of  profitability  is  based on gross

profits, and not net profits, as in that event several heads of claims regarding

expenses would automatically get covered.  The Project Services Agreement

demonstrates that success of the business was primarily the responsibility of

the respondent, dependent on the fulfillment of its obligations.

7.  The appellant had taken all reasonable steps for mitigation of damages

as  available  to  it,  by  exploring  alternate  use  of  its  bottling  plant  by  other

bottlers, including sale of the plant, relying on the Explanation to Section 73 of

the Act. The appellate court, despite noticing the efforts made by the appellant,

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erred in applying the test for success of the endeavor, instead of the endeavor

made.  The  appellant  was  not  expected  to  take  such  steps  involving

unreasonable expenses, risk or injury to itself. The respondents were required

to affirmatively demonstrate that the appellant had acted unreasonably, despite

availability of opportunity, in its duty to mitigate the loss.   Reliance was placed

on  M. Lachia Shetty & Sons Ltd. vs. Coffee Board, Bangalore, (1980) 4

SCC 636.  Even if the respondent were to succeed on this aspect, the only

consequence would be in the matter for computation of damages only, and not

its denial completely.  

8. The bottling plant set up by the respondent under the Project Services

Agreement was specific to their product and needs. It was not saleable in open

market. The investment of Rs.2.52 crores in establishment of the plant, by the

appellant,  was borne out from its balance sheets.  The learned Single Judge

erroneously awarded Rs.1.60 crores only.  It has been unjustifiably set aside in

appeal.  The claim for establishment cost of the plant, and loss of anticipated

profitability, do not constitute a double claim for damages. Capital  cost was

claimed towards cost of the plant, it having become non-operational and stood

scrapped. Loss of profitability was confined to loss of net profits that would

accrue by operation of the plant. The claim for costing, including the capital

cost of the project, and profitability are distinct issues.        If the plant had

remained operational,  the investment cost and profitability both would have

accrued.

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9. Sri Jaideep Gupta, learned senior counsel appearing for the respondent,

referring to clause 7 of the bottler’s agreement, submitted that it was not a

business partnership agreement.  The appellant was unable to run its business

for more than one reason, attributable to it alone.  The change in excise regime

dated  22.09.1987,  made  it  an  economic  compulsion  to  route  concentrates

through M/s. VEC to avoid higher excise duty, which in turn would affect the

price and saleability of the product, ultimately to the detriment of the appellant

itself.  At the Bangalore meeting, twelve out of fourteen bottlers, agreed for the

new  arrangement.  The  appellant  also  started  to  place  orders  and  received

concentrates directly from M/s. VEC from April 1988 but abruptly stopped doing

so in May, 1989. The claim for damages was raised belatedly only thereafter by

filing the suit in 1990, and after the appellant had shut down the plant because

of its own inability to run the business.  There had been no breach by the

respondent.  The original agreement underwent a novation sub silentio, in the

facts of the case, under Sections 8 and 62 of the Act, even if it had not been

formally  reduced  to  writing.   Reliance  was  placed  on  McDermott

International Inc vs. Burn Standard Co. Ltd. & Ors., (2006) 11 SCC 181.

Alternately, if the supply of concentrates was accepted by the appellant from

M/s. VEC in view of clause 5 of the bottler’s agreement, there had not been any

termination  of  the  contract  by  the  respondent.  The  appellant  had  further

acquiesced  to  the  new arrangement  for  supply  of  concentrates,  and  by  its

conduct had waived the claimed legal rights under the bottler’s agreement.

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10. The termination of the contract was not the causation or dominant cause

for loss of anticipated profits. Reliance was placed on  Galoo Ltd. & Ors. vs.

Bright Grahame Murray & Anr., (1994) 1 WLR 1360. The appellant rested its

claim for loss of expected profitability before the High Court on Exhibit ‘F1’ and

‘W1’, but failed to prove both the documents in accordance with law. In the

present appeal, for the first time, it was now being claimed on the basis of

Exhibit ‘C’.  Annexure ‘M’ to the plaint, the claimed loss of profitability is only a

reproduction  of  Exhibit  ‘C’.   The  latter  has  already  been  the  subject  of

independent consideration in Exhibit ‘F1’ the WEBCON report.  The appellant

failed to prove that Exhibit ‘C’ was prepared jointly with Mr. Baisya.  There was

absolutely  no  material  to  demonstrate  any  real  or  substantial  chance  for

earning profit by the appellant. Profit projections made in a loan application for

viability of a project to avail  finance, are mere speculative assumptions and

cannot be a yardstick to claim loss of anticipated profits. The appellant also

failed  to  take  steps  to  mitigate  its  losses  under  Section  73  of  the  Act  for

‘remedying the inconvenience caused’ by the breach either by utilisation of the

plant for bottling by others, availing concentrates from M/s.  VEC or selling the

plant immediately after closure in May, 1989 to fetch a higher rate, but did so

belatedly in 1996.  Reliance was placed on  M/s. Murlidhar Chiranjilal vs.

M/s. Harishchandra Dwarkadas & Anr., (1962) 1 SCR 653 and  Payzu v.

Saunders, (1919) 2 KB 581.

11. The  appellant  cannot  claim  both  reliance  loss  with  regard  to  the

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investment in establishment of the plant, and expectation loss with regard to

anticipated profitability from the plant, simultaneously. If no profit was likely to

accrue from the plant, award of reliance loss would confer a windfall on the

appellant and would increase the damages in proportion to the appellant’s own

inefficiency rather than in gravity of the breach and offend the principles of

causation. Reliance was placed on Pollock and Mulla, 14th edition, Cullinane vs.

British Rema Manufacturing Co. Ltd., (1954) 1 QB 292 and C&P Haulage

vs.  Middleton,  (1983)  3  All  ER 94.   The respondent  cannot  be made the

undertaker for the inability of the appellant to run its business profitably for

lack  of  sufficient  business  acumen.  The  award  of  Rs.1.60  crores  towards

establishment  cost  of  the  plant  is  also  erroneous.   It  does  not  take  into

consideration the depreciation of the plant, and assigns no reason for fixation of

the quantum.

12. We have considered the submissions. The learned Single Judge referring

to Section 73 of the Act, on basis of the averments made in the plaint, allowed

the claim for loss of anticipated profits relying upon Exhibit ‘F1’, the WEBCON

report, and Exhibit ‘W1’, the report prepared by Dr. R.K. Baisya, holding that

the respondent having committed breach of the agreement, was obliged to put

the appellant in the same position by grant of compensation, as the appellant

would have been if the contract had been performed. The appellant was also

entitled to  cost  of  the  plant,  as  it  was  useless  for  any other  purpose.  The

appellant  was  unable  to  mitigate  its  damages  as  the  product  did  not  find

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acceptability, and the efforts of the parties to persuade Pepsi and Coca Cola to

utilise  the  bottling  plant,  also  came to  naught.  The appellant  was  awarded

Rs.2,73,38,000/- towards loss of anticipated profits for ten years and a sum of

sum of Rs.1.60 lakhs towards the cost of plant, being the price it fetched in the

auction  sale  to  Cadbury-fry  by  the  West  Bengal  Financial  Corporation.   A

negative finding was returned in one line, on the issue if the suit was barred by

waiver and acquiescence, without any discussion.  

13. The appellate court examined the copious oral and documentary evidence

in detail, and has rendered reasoned findings. It was held that Exhibit ‘F1’ and

Exhibit ‘W1’ had not been proved in accordance with law, and therefore, were

inadmissible in evidence. Serious doubt was expressed, for reasons discussed,

if the latter had even ever been tendered in evidence, holding that the two

documents  could  not  form  the  basis  for  awarding  damages  for  loss  of

anticipated profits.   We need not deliberate on the issue any further, as  in

appeal before us, the appellant has pressed the claim only on basis of the loan

application, Exhibit  ‘C’, submitted by it  to the WBIDC.  Annexure ‘M’ to the

plaint, the claim for loss of anticipated profits was held to be a reproduction of

Exhibit  ‘C’.   The  WEBCON  report,  Exhibit  ‘F1’  was  based  on  independent

assessment  including  consideration  of  Exhibit  ‘C’.  The  primary  document,

Exhibit  ‘F1’  not  having been proved,  any assumptions in Exhibit  ‘C’  already

considered in the latter, could not be the basis for a profit projection. There was

no  evidence  in  support  of  the  claim that  Exhibit  ‘C’  had  been  prepared  in

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association with Dr. R.K. Baisya.  No adverse inference could be drawn against

the respondent and it was for the appellant to have summoned Dr. Baisya as a

witness to prove its case, since he had since resigned and left the Company.

14. Contrary to the claim of the appellant, that the plant would be a profitable

enterprise in the second year of its operation ending March, 1988, the appellant

itself  acknowledged in its  letter  dated 09.05.1988, that the appellant would

make losses in the next six  years upto 1992-93,  requesting for  supplies  of

concentrates on credit for five years. The business of the appellant failed to

take  off  due  to  lack  of  business  acumen,  its  inability  to  manage  its  own

finances, and failure to deploy manpower distribution in accordance with its

own projections  in  the  loan application submitted  by  it  to  the  WBIDC.  The

respondent had provided sufficient advertising and marketing support to the

appellant, and its expenditure for the same was far in excess of that made by

the appellant, whose bank account reflected severe lack of financial resources,

leading  to  its  inability  to  make  payments  to  its  bottle  suppliers,  for  the

concentrates, consultancy fees etc.

15. In the bottlers conference on 15.10.1987 at Bangalore, consequent to the

new excise  regime,  twelve  out  of  fourteen  bottlers  had agreed  to  the  new

arrangement for supply of concentrates by M/s VEC, instead of the respondent.

The  appellant  also  placed  orders  on  M/s  VEC,  and  received  supplies  of

concentrates  directly  from  March,  1988  till  January,  1989  even  while  it

continued to avail marketing services from the respondent also. Thus business

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relations continued between the parties even after termination of the bottler’s

agreement.

16. A unilaterally projected profitability in a loan application, which is a mere

assumption, cannot be the basis for assessment of damages especially when

the appellant conceded that it  would not  be in a position to earn profit  till

1992-93. No evidence had been led with regard to the actual course of the

market for cold drinks during 1987-88, and whether other bottlers had made

profits.   The  appellant  had  failed  to  demonstrate  any  real  and  substantial

chance of earning profit, considering that there was no brand acceptance by the

consumers also.

17. Considering the principle of causation to award loss of anticipated profits

by breach of agreement, it was held in the facts of the case, that it was not the

result of the breach, but was a composition of various factors like lack of brand

acceptance, financial crunch of the appellant and lack of adequate infrastructure

by it.  The claim for damages was therefore, remote as there was not even a

speculated chance for making profit by the appellant.

18. The appellant had failed to take steps for mitigation of damages.  It was

the  respondent  which  had  pursued  matters  with  Pepsi  for  utilisation  of  the

appellant’s plant. The appellant had failed to satisfy that the proposal could not

go through for  reasons  not  attributable  to  it.   Likewise,  the  further  details

desired by Coca Cola do not appear to have been furnished by the appellant.

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Even though the plant stopped operation in May, 1989 when it was relatively

new, no effort was made for sale and/or utilisation of plant till its auction sale in

1996.

19. Relevant to the discussion, is the bottler’s agreement.  Clause 7 of the

same stipulated that the Company and the bottler were not partners or agents

of each other. The bottler was required to make sufficient investment to meet

the best quality standards, and satisfy every demand of beverages, within the

specified territory by promoting and developing the merchandise in a proper

and vigorous manner so as to compete effectively with other competing brands.

The availability of trained personnel for the purpose was the responsibility of

the  appellant.   It  was  required  to  prepare  a  marketing  programme before

October of the current year, for the next year. The expenses for advertising and

promotional  activities  would  attract  the  Company’s  participation  and  be

normally not less than 50% of the agreed quantum.  The appellant was also at

liberty to develop its own promotional campaigns locally.  The agreement thus

contained the mutual  rights  and obligations.  Though the appellant  contends

lack of adequate advertising and market support by the respondent, nothing

has  been  demonstrated  with  regard  to  the  steps  taken  by  it  to  fulfill  its

obligations under the agreement.  This assumes relevance in view of findings of

the appellate court, regarding the financial crunch faced by the appellant, its

failure to  pay suppliers  of  concentrates and bottles,  requesting for  deferred

payment of the same, the request not to insist on payment of consultancy fees,

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and inability to deploy sufficient manpower as per its own projection contained

in the loan application on which it seeks to rely.   

20. Clause 5 of the bottler’s agreement provided for supply of concentrates by

the respondent, or from such suppliers as shall be nominated by it.  Twelve out

of fourteen bottlers had agreed at the Bangalore convention on 15.10.1987 to

the  new  arrangement  for  supply  of  concentrates  through  M/s.  VEC.  The

appellant  also  commenced  placement  of  orders  directly  and  received

concentrates from M/s. VEC since 22.04.1988 and continued to do so even after

its  letter  dated  11.01.1989,  by  placing  orders  on  08.03.1989  till  it  finally

discontinued after closure of the plant in May, 1989. It is not the case of the

appellant, based on evidence, that M/s. VEC failed to supply concentrates, or

that  it  did  not  meet  standards,  or  was  insufficient  to  meet  its  marketing

obligations, much less that any other of the twelve bottlers had complained in

this regard.  The bottling of McDowells Sparkling Soda was an entirely different

issue  and  could  have  been  continued  by  the  appellant  notwithstanding  the

controversy  regarding  the  concentrates.  The  plea  of  the  respondents  for

novation of the contract referring to Section 8 and 62 of the Act,  sub silentio

finds support from the observations in McDermott International Inc. (supra)

as follows:

“151. Clause 5 of the contract categorically states that MII was to procure the material which was to be reimbursed by BSCL. The extra amount incurred by MII for procuring materials having extra  thickness,  therefore,  was  not  payable.  To  the aforementioned extent, there has been a novation of contract. MII had never asserted, despite forwarding of the contention of

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ONGC, that it would not comply therewith. It, thus, accepted in sub silentio.”

21. The novation of a contract could take place sub silentio was also noticed

in BSNL vs. BPL Mobile Cellular Ltd., (2008) 13 SCC 597 as follows:  

“45….. They might have also been held bound if they accepted the new rates or the periods either expressly or sub silentio…..”  

22. The learned Single Judge framed an issue also with regard to waiver,

estoppel and acquiescence, then answered it in the negative in a singular line,

without any discussion. Waiver and acquiescence may be express or implied.

Much will again depend on the nature of the contract, and the facts of each

case. Waiver involves voluntary relinquishment of a known legal right, evincing

awareness of the existence of the right and to waive the same. The principle is

to be found in Section 63 of the Act.  If a party entitled to a benefit under a

contract, is denied the same, resulting in violation of a legal right, and does not

protest, foregoing its legal right, and accepts compliance in another form and

manner, issues will arise with regard to waiver or acquiescence by conduct. In

the facts of the present case, the conduct of the appellant in placing orders and

receiving supply of concentrates directly from M/s. VEC, for a period of nearly

one year, and continuing to do so even after it wrote to the respondent in this

regard, without recourse to any legal remedies for denial of its legal right to

receive concentrates from the respondent, undoubtedly amounts to waiver by

conduct and acquiescence by it to the new arrangement. The plea that it was

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done  under  compulsion,  and  not  voluntarily,  is  devoid  of  any  material,

substance  and  evidence.  It  is  unacceptable  and  merits  no  consideration.

Alternatively, if it was an assignment under Clause 5 of the agreement, there

had been no termination of the contract by the respondent. Waiver by conduct

was considered in P. Dasa Muni Reddy vs. P. Appa Rao, (1974) 2 SCC 725,

observing as follows:

“13. Abandonment  of  right  is  much  more  than  mere  waiver, acquiescence or laches…..Waiver is an intentional relinquishment of a known right or advantage, benefit, claim or privilege which except for such waiver the party would have enjoyed. Waiver can also be a voluntary surrender of a right.  The doctrine of waiver  has  been  applied  in  cases  where  landlords  claimed forfeiture  of  lease  or  tenancy  because  of  breach  of  some condition  in  the  contract  of  tenancy. The  doctrine  which  the courts  of  law will  recognise is  a rule  of  judicial  policy that a person will not be allowed to take inconsistent position to gain advantage  through  the  aid  of  courts.  Waiver  some  times partakes of the nature of an election. Waiver is consensual in nature.  It  implies  a  meeting  of  the  minds.  It  is  a  matter  of mutual  intention.  The  doctrine  does  not  depend  on misrepresentation.  Waiver  actually  requires  two  parties,  one party waiving and another receiving the benefit of waiver. There can be waiver so intended by one party and so understood by the other. The essential element of waiver is that there must be a  voluntary  and  intentional  relinquishment  of  a  right.  The voluntary choice is the essence of waiver. There should exist an opportunity  for  choice  between  the  relinquishment  and  an enforcement of the right in question…..”

23. Waiver  could  also  be  deduced  from  acquiescence,  was  considered  in

Waman Shriniwas Kini vs. Ratilal Bhagwandas & Co., 1959 Supp (2) SCR

21, observing as follows:

“13……Waiver  is  the  abandonment  of  a  right  which  normally everybody is at liberty to waive. A waiver is nothing unless it amounts to a release. It signifies nothing more than an intention

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not  to  insist  upon  the  right.  It  may  be  deduced  from acquiescence or may be implied….”

24. Exhibit  ‘C’  was  a  loan  application,  submitted  by  the  appellant  to  the

WBIDC.  There  is  no  evidence  that  it  was  prepared  together  with  the

respondent.  The intent and purpose of a loan application is entirely different,

relevant only for the purpose of the borrower vis-à-vis the lender. The most

fundamental characteristic a prospective lender will want to examine in a loan

application are assessment of the Credit History of the Borrower, Cash Flow

History and Projections for the Business, Collateral that is Available to Secure

the Loan and Character of the Borrower. The profitability projections in such an

application are only broad estimates based on assumptions and presumptions

of the borrower intended to convince the lender of the viability of its project, in

absence  of  which  the  loan  application  itself  may  not  be  considered.  The

appellant’s projections in it of assumed estimated profitability for viability of the

project also went completely awry from its own admission that there was no

likelihood of profit in the next 5 to 6 years.  Viability of the project for sanction

of loan cannot lead to an automatic presumption of profits, in the facts of the

case, especially when there is evidence that the appellant did not even deploy

manpower in accordance with the projections made by it in the loan application.

It was not sanctioned on basis of the assumption of the appellant for earning

profits.   The  loan  was  sanctioned  by  the  WBIDC  on  basis  of  the

techno-economic  feasibility  report  by  WEBCON  Exhibit  ‘F1’.  The  loan

application, after consideration, lost its independent identity and got subsumed

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in  Exhibit  ‘F1’.Annexure ‘M’  to the plaint  containing the projected estimated

profitability was only a reproduction of Exhibit ‘C’. The primary document was

Exhibit ‘F1’, which took into consideration Exhibit ‘C’ also.  The former being

inadmissible in evidence, as not having been proved in accordance with law, the

appellant cannot seek to prove indirectly  what it  has been unable to prove

directly.  The  conclusion  of  the  appellate  court  that  Exhibit  ‘F-1’  being  the

primary document, the claim for loss of anticipated profits on basis of Exhibit ‘C’

was unsustainable, cannot be faulted with.

25. In the facts of the present case, it cannot be held that the breach alone

was the cause for loss of anticipated profits, much less was it the primary or

dominant reason. The appellate court has adequately discussed the appellant’s

letter dated 04.07.1987 thanking the respondent for its  advertising support.

During  the  year  1986-87,  the  respondent  spent  Rs.2,05,13,376.14  for

advertising purposes evident from its balance sheet. Similarly, in 1987-88, it

spent Rs.1,65,87,158.73 towards advertisement and sale promotions.  On the

contrary, for the year ending 31.03.1987, the appellant spent Rs.6,68,856.00

towards advertisement and in the year 1987-88 it spent only Rs.39,288.00.

The  fact  that  it  was  unable  to  pay  for  the  concentrates  seeking  deferred

payment, acknowledgement on 09.05.1988 that it would continue to suffer loss

for the next six years upto 1992-93 seeking long term credit for five years for

supply  of  concentrates  and its  acknowledgement in letter  dated 27.04.1987

that due to “many factors already discussed with you we have not been able to

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run the factory and the sales of our product have not picked up in the market”,

and not to press for payment of consultancy fees, failure to deploy adequate

manpower as per its own projections demonstrates the poor financial condition

of the appellant as the prime reason for its inability to run the plant and earn

profits.  As against  a value of  Rs.4,26,685.19 of  raw materials  in 1989,  the

appellant  had  an  over  draft  of  Rs.13,89,000.00.   It  had  a  credit  entry  of

Rs.5,135.00 only in July, 1988 in its account with the State Bank of India.  The

current  account  with  the  Union  Bank  of  India  reflected  a  balance  of

Rs.1,28,619.25  on  28.03.1989.   The  Bank balance  on  31.03.1989 reflected

from its balance sheet was only Rs.43,345.38, and its loss as reflected in the

balance sheet on 31.03.1987 was Rs.18,47,018.11.  In the facts of the present

case, it cannot be held that the breach by the respondent was the cause, much

less  the dominant  cause for  loss  of  anticipated profits  by the  appellant.  In

Galoo Ltd. (supra) the emphasis was on the common sense approach, holding

that the breach may have given the opportunity to incur the loss but did not

cause the loss, in the sense in which the word “cause” is used in the law.  The

following passage extracted therein from Chitty on Contracts, 26th ed. (1989)

Vol. 2, pp. 1128-1129, para 1785 may be usefully set out:  

“The important  issue in  remoteness of  damage in  the law of contract is whether a particular loss was within the reasonable contemplation of the parties, but causation must also be proved: there  must  be  a  causal  connection  between  the  defendant’s breach  of  contract  and  the  plaintiff’s  loss.  The  courts  have avoided laying down any formal tests for causation: they have relied  on  common sense  to  guide  decisions  as  to  whether  a breach of contract is a sufficiently substantial cause of plaintiff’s loss.”  

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26. Wellesley Partners LLP (supra) itself carves out an exception to the

principle that a contract breaker is liable for damage resulting from his breach,

if at the time of making the contract, a reasonable person in his shoes would

have had damage of that kind in mind as not unlikely to result from a breach.

After noticing The Achilleas (2009) AC 61 it was observed:

“69……The  Achilleas  shows  that  there  may  be  cases,  where based on the individual circumstances surrounding the making of the contract, this assumed expectation is not well founded.    

The observations noticed therein from para 23 and 24 of the Parabola case

(2011) QB 477 are also considered relevant as follows:   

“23….The next task is to quantify the loss. Where that involves a hypothetical  exercise,  the  court  does  not  apply  the  same balance of probability approach as it would to the proof of past facts. Rather, it estimates the loss by making the best attempt it can  to  evaluate  the  chances,  great  or  small  (unless  those chances amount to no more than remote speculation) taking all significant factors into consideration. 24…..The  judge  had  to  make  a  reasonable  assessment  and different  judges might come to different  assessments without being unreasonable. An appellate court will be slow to interfere with the judge’s assessment.

27. The appellate court with reference to evidence has adequately discussed

that  the  appellant  failed  to  take  steps  to  mitigate  it  losses  under  the

Explanation to Section 73 of the Act. We find no reason to come to any different

conclusion from the materials on record.  If concentrates were available from

M/s. VEC, the appellant had to offer an explanation why it stopped lifting the

same after having done so for nearly a year, and could have continued with the

business otherwise and earned profits as observed in  Payzu Ltd. (supra).  It

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could also have taken steps to sell the unit after its closure in May, 1989 rather

than to do so belatedly in 1996.  No reasonable steps had been displayed as

taken by the appellant for utilisation of its bottling plant by negotiations with

others  in  the business.   Nothing had been demonstrated of  the injury  that

would have been caused to it thereby.  

28. That leaves the question with regard to reliance loss and the expectation

loss. Whether the two could be maintainable simultaneously or were mutually

exclusive?  In Pullock & Mulla, 14th Edition, Volume II, page 1174, the primary

object for protection of expectation interest, has been described as to put the

innocent party in the position which he would have occupied had the contract

been performed.  The general  aim of the law being to protect the innocent

party’s  defeated  financial  expectation  and  compensate  him  for  his  loss  of

bargain,  subject  to  the  rules  of  causation  and  remoteness.  The purpose  of

protection of reliance interest is to put the plaintiff in the position in which he

would have been if the contract had never been made. The loss may include

expenses  incurred  in  preparation  by  the  innocent  party’s  own performance,

expenses  incurred  after  the  breach  or  even  pre-contract  expenditure  but

subject  to  remoteness.  The following  passage from the same is  considered

appropriate for extraction:

“No Recovery for Both, the Expectation Loss and the Reliance loss.”

Although  the  rules  as  to  damages  seek  to  protect  both  the expectation and the reliance interests, the innocent party cannot ordinarily recover both expectation loss, viz., loss of profit, and reliance loss, viz., expenses incurred in reliance on the promise;

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that would involve double counting. He has to choose between the two measures. However, he  cannot  claim reliance losses  to  put  himself  in  a better position that if  the contract  had been fully  performed: else, the award of damages for reliance losses would confer a windfall  on  the  plaintiff,  and  would  increase  the  damages  in proportion to the claimant’s inefficiency in performance, rather than in proportion to the gravity of the breach, and probably of normal  principles  of  causation.  In  such  cases,  therefore,  the plaintiff  can  recover  the  loss  on  account  of  the  wasted expenditure or outlay only to the extent of the expected gain; and the onus of proving lies on the party committing the breach to show that the reliance costs (or any part of them) would not have been recouped, and would still have been wasted, had the contract been performed.”

29. In C & P Haulage (supra), which considers Cullinane (supra) also, it has

been observed as follows:

“The  law  of  contract  compensates  a  plaintiff  for  damages resulting from the defendant’s breach; it does not compensate a plaintiff for damages resulting from his making a bad bargain. Where it can be seen that the plaintiff would have incurred a loss on the contract as a whole, the expenses he has incurred are losses flowing from entering into the contract,  not losses flowing from the defendant’s  breach.  In  these circumstances, the  true  consequence  of  the  defendant’s  breach  is  that  the plaintiff  is  released  from  his  obligation  to  complete  the contract-or in other words, he is saved from incurring further losses. If the law of contract were to move from compensating for  the  consequences  of  breach  to  compensating  for  the consequences  of  entering  into  contracts,  the  law  would  run contrary to the normal expectations of the world of commerce. The burden of  risk would be shifted from the plaintiff  to the defendant.  The  defendant  would  become  the  insurer  of  the plaintiff’s’ enterprise. Moreover, the amount of damages would increase not in relation to the gravity or consequences of the breach but in relation to the inefficiency with which the plaintiff carried  out  the  contract.  The  greater  his  expenses  owing  to inefficiency, the greater the damages.”

30. In  view of  the  conclusion,  that  the  appellant  was  not  entitled  to  any

expectation loss towards anticipated profits, for reasons discussed, any grant of

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reliance loss would tantamount to giving a benefit to it for what was essentially

its own lapses. There are no allegations of any deficiency in the plant.  Contrary

to its  claim of  Rs.2.52 crores towards cost of  the plant,  the learned Single

Judge awarded Rs.1.60 crores without any discussion for the basis of the same.

Though the appellant had preferred a cross appeal, it did not press the same.

31. The  aforesaid  discussion  leads  to  the  inevitable  conclusion  that  the

appellant had failed to establish its claim that the breach by the respondent was

the cause for loss of anticipated profits, that the profitability projection in its

loan application was a reasonable basis for award of damages towards loss of

anticipated profits.  The appellant  had failed to  abide by its  own obligations

under Exhibit ‘C’ and lacked adequate infrastructure, finances and manpower to

run its business.  It also failed to take reasonable steps to mitigate its losses.

The appeal lacks merit and is dismissed.  

………………………………….J.                 (Ranjan Gogoi)

……….………………………..J.    (Navin Sinha)   

New Delhi, June 19, 2017

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ITEM NO.4       COURT NO.2             SECTION XVI                S U P R E M E  C O U R T  O F  I N D I A                        RECORD OF PROCEEDINGS

CIVIL APPEAL NO.1168/2007 KANCHAN UDYOG LIMITED                         APPELLANT (S)                                 VERSUS UNITED SPIRITS LIMITED     RESPONDENT(S) Date : 19/06/2017 This appeal was called on for pronouncement of  judgment today. For parties: Ms. Snehal Kakrania, Adv.

for M/s Khaitan & Co., AOR Mr. Saurav Gupta, Adv.  For Mr. Niraj Gupta, AOR Ms. Meera Mathur, AOR [N/P]

         Hon'ble  Mr.  Justice  Navin  Sinha  pronounced  the

judgment of the Bench comprising Hon'ble Mr. Justice Ranjan Gogoi and His Lordship

The  appeal  is  dismissed  in  terms  of  the  signed reportable judgment.  

[VINOD LAKHINA] A.R.-cum-P.S.

[ASHA SONI] COURT MASTER

[SIGNED REPORTABLE JUDGMENT IS PLACED ON THE FILE]