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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS…1440-1441 OF 2015 (ARISING OUT OF SLP (C) NOS.35365-35366 OF 2012)

M/S. CONSTRUCTION & DESIGN SERVICES                          …APPELLANT

VERSUS

DELHI DEVELOPMENT AUTHORITY                            …RESPONDENT

J U D G M E N T

ADARSH KUMAR GOEL, J.

1. Leave granted.

2. These appeals  have been preferred against  final  judgment   

and order dated 10th February, 2012 in RFA(OS) No.35 of 2010 and  

dated 1st June, 2012 in R.P. No.369 of 2012  in RFA (OS) No.35 of  

2010 passed by the High Court of Delhi at New Delhi.

3. The question raised for our consideration is when and to what  

extent  can  the  stipulated  liquidated  damages  for  breach  of  a  

contract  be  held  to  be  in  the  nature  of  penalty  in  absence  of  

evidence of actual loss and to what extent the stipulation be taken  

to be the measure of compensation for the loss suffered even in  

absence of specific evidence.  Further question is whether burden of

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proving  that  the  amount  stipulated  as  damages  for  breach  of  

contract was penalty is on the person committing breach.

4. The  respondent  –  Delhi  Development  Authority  awarded  a  

contract vide agreement dated 4th October, 1995 to the appellant for  

constructing a sewerage pumping station at  CGHS area at  Kondli  

Gharoli at Delhi.  Clause 2 in the agreement provided as follows:

“the  contractor  shall  comply  with  the  said time schedule.  In the event of the  contractor  failing  to  comply  with  this   condition,  he  shall  be  liable  to  pay  as  compensation  an  amount  equal  to  one  percent  or  such smaller  amount as the  Superintending  Engineer  Delhi   Development  Authority  (whose  decision  shall  be  final)  may  decide  on  the  said   estimated  cost  of  the  whole  work  for   everyday that the due quantity of work  remains  incomplete;   provided  always  that the entire amount of compensation   to  be paid  under  the  provisions  of  this   clause  shall  not  exceed  ten  percent  of   the estimated cost of work as shown in   the tender.”

Since the work proceeded at slow pace and the appellant-defendant  

failed to complete the same, the contract was terminated on 17th  

September,  1999.   Under  Clause  2  of  the  agreement,  the  

Superintending Engineer of the respondent levied compensation of  

Rs.20,86,446/- for delay in execution of the project by an order of  

penalty  dated  21st July,  1999  and  called  upon  the  appellant  to  

deposit the same.   The said order reads thus :

“The work was being executed by you at   extremely  slow  pace.   You  had  to  complete  the  job  by  7.1.97.   You  had  failed  to  complete  the  work  even after

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expiry  of  2  years  six  months  after   stipulated  date  of  completion.   Despite   the clear direction from Hon’ble Supreme  Court to expedite the work and complete  the  job  by  June-99,  you  have  failed  to   comply the direction of Court and have  rather abandoned the work since 6.4.99  and you failed to complete the work till   date.

In exercise of the power conferred on me  under clause-2 of the agreement, I, R.C.   Kinger,  the  SE/CC-10/DDA  decide  and  determine  that  you  are  liable  to  pay  Rs.20,86,446/-  (Rs.  Twenty  lacs  eighty  six thousand four hundred forty six only)   as  and  by  way  of  compensation  as   stipulated in clause-2 of the agreement.”

5. On failure of the appellant to respond to the above order, the  

respondent filed suit No.1311 of 2002 before the Delhi High Court  

for  recovery  of  the  said  amount  with  interest.   The  appellant-

defendant failed to contest the suit inspite of service but made an  

application raising objection to the maintainability of the suit on the  

ground that vide order dated 19th December, 2001, a former Judge  

of  Delhi  High  Court  had  been  appointed  arbitrator  to  decide  the  

disputes  arising  out  of  the  contract.  The  said  application  was,  

however, dismissed on the ground that the matter in the suit was  

not within the purview of the arbitration.  The Court proceeded to  

decide the suit on merits.

6. Learned  single  Judge  dismissed  the  suit  holding  that  the  

plaintiff  had  not  treated  the  time  fixed  for  performance  of  the  

contract as of essence and the compensation stipulated in Clause 2

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of the agreement was in the nature of penalty.  The basis for levy of  

compensation had not been indicated so as to determine whether  

the compensation claimed was reasonable.  Reliance was placed on  

the judgment of  this  Court in  M/s. Arosan Enterprises Ltd.  vs.  

Union of India     and another  1   in support of the view that the time  

stipulated in the agreement was not treated to be of essence.  It was  

further observed that since the claim for compensation was based on  

sole discretion and not on the basis of loss suffered, the same was in  

the nature of penalty and thus, the said Clause could not be enforced  

in  view of  Section 74 of  the Contract  Act  as  laid  down in  Fateh  

Chand vs. Bal Kishan Das  2  , Maula Bux vs. Union of India  3  , M.L.  

Devendra  Singh vs. Syed  Khaja  4  ,  P.  D’Souza vs. Shondrilo  

Naidu  5   and Oil  and  Natural  Gas  Corporation  Ltd. vs.  Saw  

Pipes Ltd.  6  .  Learned single Judge concluded as follows:-

“20.    The Court is of opinion that the   plaintiff  having not treated the contract   as of the essence, and having extended  the  time  for  performance  on  several   occasions,  cannot  now  fall  back  on  a   presumptive  condition  to  impose  the  maximum  compensation  leviable;   enforcement  of  such  action  would  be  giving effect to a penalty clause.  As far   as granting reasonable compensation is   concerned,  the  plaintiff  has  not  shown  even  the  basis  for  levying  the  compensation that it did in this case.  As   said  earlier,  this  aspect  assumes  

1 (1999) 9 SCC 449 2 (1964) 1 SCR 515 3 (1969) 2 SCC 554 4 (1973) 2 SCC 515 5 (2004) 6 SCC 649 6 (2003) 5 SCC 705

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significance,  because  the  plaintiff  was   aware  what  extent  of  the contract  was  performed, as well as what was the exact  extent of loss, in monetary terms, either   by way of payment to another contractor,   or the amount spent for completing the  work.  In the circumstances, the Court is   of opinion that the relief sought cannot   be granted.”

7. On appeal, the Division Bench reversed the view taken by the  

learned  single  Judge.   It  was  held  that  delay  in  a  contract  of  

construction of a public utility service could itself be a ground for  

compensation without proving the actual loss.  Accordingly, the suit  

was decreed for payment of Rs.20,86,446/- with  pendente lite and  

future interest @ 9% per annum.  It was observed:

“5. The  respondent  had  been  proceeded  against  ex-parte  at  the  trial   and  has  chosen  not  to  appear  even  before  us.   The  evidence  led  by  the  appellant has remained unrebutted.

6. Suffice would it be to state that the  observations  of  the  Supreme  Court  in   para 68 of the decision reported as AIR   203 SC 2629 ONGC v. Saw Pipes Ltd. are  squarely applicable in the instant case as  per which delayed constructions such as  completing  construction  of  road  or   bridges within stipulated time would be  difficult  to  be  linked  with  actual  loses  suffered by the State and in such cases  the pre-estimated damages envisaged in  the contract have to be paid.

7. Now, a Sewage Pumping Station is   not  something  from  which  Revenue  would be generated by the State.  It is a   public  utility  service  and  has  a  role  to   play in  maintaining or  preserving clean   environment.  If Sewage Pumping Station  are not  set up,  sewage would stagnate  as  cess  pools  in  low  lying  areas  and

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would cause environmental degradation,   both  air  and  soil.   That  apart,  in  a   delayed  project,  interest  on  blocked  capital would obviously be a measure of   damages.

8. The  learned  Single  Judge  has  ignored as aforesaid and held that in the  absence  of  proof  of  damages,   compensation  levied  under  clause-2  cannot be recovered.  The learned Single   Judge  is  incorrect  in  view  of  the  law  declared by the Supreme Court and thus  we allow the  appeal  and set  aside  the  impugned  decree.   Suit  filed  by  the  appellant  is  decreed  in  sum  of   Rs.20,86,446/-  with  pendente  lite  and  future  interest  @  9%  per  annum  from  date of  suit  till  realization  and the  suit   filed  by  the  appellant  is  disposed  of   accordingly with costs all throughout.”  

8. The appellant filed a review petition which was dismissed.

9. We have heard learned counsel for the parties.

10. On  19th November,  2012  notice  was  issued  subject  to  the  

appellant depositing the entire decretal amount in this Court and by  

a subsequent order,  the amount was directed to be kept in term  

deposit  for  a  period of  one year to  ensure for  the benefit  of  the  

successful party.   Accordingly, the amount of Rs.20,86,500/- is said  

to have been deposited which has been kept in FDR which is going  

to mature on 8th February, 2015.

11. Learned counsel for the appellant submitted that the Division  

Bench erred in holding that the entire amount of stipulated damages  

was genuine measure of compensation when instead of any fixed  

amount, only the maximum amount of compensation was stipulated.

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The contract in question only envisaged the upper limit of damages  

which could be claimed.  It is submitted that the agreement quoted  

in earlier part of the order clearly shows that what is stipulated is  

that the compensation shall not exceed 10% of the estimated cost  

and the amount to be recovered as compensation was required to be  

determined  by  the  Superintending  Engineer.   The  respondent-

plaintiff  has  failed  to  show the  actual  amount  of  loss  suffered in  

getting  the  work  executed  from  any  other  contractor.   In  these  

circumstances,  at  best  a  part  of  it  could  be  taken  to  be  

compensation and the remaining penalty.   He submitted that  the  

judgment of this Court in  Saw Pipes Ltd. (supra) relied upon by  

the High Court is distinguishable in the fact situation of the present  

case.   Without determining that  the stipulated compensation was  

reasonable, the maximum amount stipulated could not be treated as  

compensation.  

12. Learned counsel for the respondent-plaintiff on the other hand  

submitted  that  even  though  in  the  order  passed  by  the  

Superintending Engineer no specific basis has been shown, notice  

was duly issued to the appellant defendant before determining the  

reasonable amount of compensation and claiming 10% of the project  

cost  which  was  stipulated  to  be  the  maximum compensation,  on  

account  of  delay  in  execution  of  the  project.   On  failure  of  the  

appellant to respond, the entire amount has been rightly held to be

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the estimate of damages for the loss.  Burden was on the defendant  

to show that no loss or lesser loss was suffered by the plaintiff.

13. We have given due consideration to the rival submissions.

14. There is no dispute that the appellant failed to execute the work  

of construction of sewerage pumping station within the stipulated or  

extended time.   The said  pumping station  certainly  was  of  public  

utility to maintain and preserve clean environment, absence of which  

could result in environmental degradation by stagnation of water in  

low lying areas.   Delay also resulted in loss of interest on blocked  

capital as rightly observed in para 7 of the impugned judgment of the  

High Court.  In these circumstances, loss could be assumed, even  

without  proof  and  burden  was  on  the  appellant  who  committed  

breach to show that no loss was caused by delay or that the amount  

stipulated as damages for breach of contract was in the nature of  

penalty.  Even if technically the time was not of essence, it could not  

be presumed that delay was of no consequence.

15. Thus, even if there is no specific evidence of loss suffered by   

the respondent-plaintiff, the observations in the order of the Division  

Bench  that  the  project  being  a  public  utility  project,  the  delay   

itself can be taken to have resulted in loss in the form of environmental  

degradation  and  loss  of  interest  on  the  capital  are  not  without   

any basis.

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16. Once it  is  held that even in absence of  specific  evidence,  the  

respondent could be held to have suffered loss on account of breach of  

contract,  and  it  is  entitled  to  compensation  to  the  extent  of  loss  

suffered, it is for the appellant to show that stipulated damages are by  

way  of  penalty.   In  a  given  case,  when  highest  limit  is  stipulated  

instead of a fixed sum, in absence of evidence of loss, part of it can be  

held  to  be reasonable,  compensation  and  the  remaining by  way of  

penalty.   The party complaining of  breach can certainly  be allowed  

reasonable  compensation  out  of  the  said  amount  if  not  the  entire  

amount.   If  the entire amount stipulated is  genuine pre-estimate of  

loss, the actual loss need not be proved.  Burden to prove that no loss  

was likely to be suffered is  on party committing breach, as already  

observed.

17. It is not necessary to refer to all the judgments on the point in  

view  of  categorical  pronouncement  of  this  Court  in  Saw  Pipes  

(supra), laying down as follows:-

“64. It  is  apparent  from  the  aforesaid   reasoning  recorded  by  the  Arbitral   Tribunal that it failed to consider Sections  73 and 74 of the Indian Contract Act and  the ratio laid down in   Fateh Chand   case  wherein  it  is  specifically  held  that   jurisdiction  of  the  court  to  award  compensation  in  case  of  breach  of   contract is  unqualified except as to the  maximum stipulated; and compensation  has to be reasonable. Under Section 73,   when  a  contract  has  been  broken,  the  party  who  suffers  by  such  breach  is   entitled to receive compensation for any   loss  caused  to  him  which  the  parties  

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knew when they made the contract to be  likely to result from the breach of it. This   section  is  to  be  read  with  Section  74,   which  deals  with  penalty  stipulated  in  the contract,  inter alia (relevant for the  present  case)  provides  that  when  a   contract  has  been  broken,  if  a  sum is   named in the contract as the amount to   be paid in case of such breach, the party   complaining  of  breach  is  entitled,   whether or not actual  loss is proved to   have  been  caused,  thereby  to  receive   from  the  party  who  has  broken  the  contract  reasonable  compensation  not  exceeding the amount so named. Section  74 emphasizes that in case of breach of   contract,  the  party  complaining  of  the  breach is entitled to receive reasonable   compensation whether or not actual loss   is proved to have been caused by such  breach.  Therefore,  the  emphasis  is  on   reasonable  compensation.  If  the  compensation  named in  the contract  is   by  way of  penalty,  consideration  would   be different and the party is only entitled   to reasonable compensation for the loss  suffered. But if the compensation named  in  the  contract  for  such  breach  is   genuine  pre-estimate  of  loss  which  the  parties  knew  when  they  made  the  contract  to  be likely  to  result  from the  breach  of  it,  there  is  no  question  of   proving  such  loss  or  such  party  is  not   required to lead evidence to prove actual   loss  suffered by  him.  Burden is  on  the  other party to lead evidence for proving  that  no  loss  is  likely  to  occur  by  such  breach. Take for illustration: if the parties   have  agreed  to  purchase  cotton  bales   and the same were only to be kept as a   stock-in-trade.  Such  bales  are  not   delivered on the due date and thereafter   the  bales  are  delivered  beyond  the  stipulated time, hence there is breach of   the contract.  The question which would  arise for consideration is — whether by  such breach the party has suffered any  loss.  If  the  price  of  cotton  bales  fluctuated during that time, loss or gain  could  easily  be  proved.  But  if  cotton

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bales  are  to  be  purchased  for   manufacturing yarn, consideration would  be different………..

67. Take for illustration construction of a  road  or  a  bridge.  If  there  is  delay  in   completing  the  construction  of  road  or   bridge within the stipulated time, then it  would be difficult to prove how much loss   is suffered by the society/State. Similarly,   in the present case, delay took place in   deployment  of  rigs  and  on  that  basis   actual production of gas from platform B- 121 had to be changed. It is undoubtedly   true  that  the  witness  has  stated  that  redeployment plan was made keeping in  mind  several  constraints  including  shortage  of  casing  pipes.  The  Arbitral   Tribunal,  therefore,  took  into  consideration  the  aforesaid  statement  volunteered by the witness that shortage  of  casing  pipes  was  only  one  of  the  several reasons and not the only reason   which led to change in deploym7ent of   plan  or  redeployment  of  rigs  Trident  II   platform B-121.  In  our  view,  in  such  a   contract,  it  would  be  difficult  to  prove   exact loss or damage which the parties  suffer because of the breach thereof. In   such a situation, if the parties have pre- estimated  such  loss  after  clear   understanding,  it  would  be  totally   unjustified  to  arrive  at  the  conclusion  that  the  party  who  has  committed  breach of the contract is not liable to pay  compensation.  It  would  be  against  the  specific provisions of Sections 73 and 74  of  the  Indian  Contract  Act.  There  was   nothing  on  record  that  compensation  contemplated by the parties was in any  way  unreasonable.  It  has  been  specifically  mentioned  that  it  was  an  agreed genuine pre-estimate of damages  duly  agreed by the parties.  It  was also  mentioned that the liquidated damages  are  not  by  way of  penalty.  It  was  also   provided  in  the  contract  that  such  damages  are  to  be  recovered  by  the  purchaser from the bills for payment of   the  cost  of  material  submitted  by  the

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contractor.  No  evidence  is  led  by  the  claimant to establish that the stipulated  condition was by way of penalty or the  compensation contemplated was, in any  way, unreasonable. There was no reason   for the Tribunal not to rely upon the clear   and  unambiguous  terms  of  agreement  stipulating  pre-estimate  damages  because  of  delay  in  supply  of  goods.   Further,  while  extending  the  time  for   delivery  of  the  goods,  the  respondent  was informed that it would be required to   pay stipulated damages.”

18. Applying  the  above  principle  to  the  present  case,  it  could  

certainly be presumed that delay in executing the work resulted in  

loss  for  which  the  respondent  was  entitled  to  reasonable  

compensation.   Evidence  of  precise  amount  of  loss  may  not  be  

possible but in absence of any evidence by the party committing  

breach that no loss was suffered by the party complaining of breach,  

the  Court  has  to  proceed  on  guess  work  as  to  the  quantum  of  

compensation to be allowed in the given circumstances.  Since the  

respondent  also  could  have  led  evidence  to  show  the  extent  of  

higher  amount  paid  for  the work got  done or  produce  any other  

specific material but it did not do so, we are of the view that it will  

be  fair  to  award  half  of  the  amount  claimed  as  reasonable  

compensation.

19. Accordingly,  this  appeal  is  partly  allowed  and  the  decree  

granted  by  the  High  Court  is  modified  to  the  effect  that  the  

respondent-plaintiff  is  entitled to half  of the amount claimed with  

rate of interest as awarded by the High Court.  Out of the amount

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deposited in this Court, the respondent will be entitled to withdraw  

the said decretal amount and the appellant will be entitled to take  

back the remaining .   

20. The appeals are disposed of accordingly.

……………………………………………J.         (T.S. THAKUR)

……………………………………………J.                      (ADARSH KUMAR GOEL)

NEW DELHI FEBRUARY 4, 2015