REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1766 OF 2019

MAHANAGAR TELEPHONE NIGAM LTD. … APPELLANT

VERSUS

TATA COMMUNICATIONS LTD. … RESPONDENT

J U D G M E N T

R.F. NARIMAN, J.

1.  The present appeal arises out of a dispute under the Telecom

Regulatory Authority of India Act,  1997. The relief sought through a

petition  before  the  Telecom  Disputes  Settlement  and  Appellate

Tribunal, New Delhi [“TDSAT”] by the respondent, Tata Communication

Ltd. against the appellant, Mahanagar Telephone Nigam Ltd., is for a

recovery  of  a  sum of  INR 1,10,57,268/-  plus  interest  thereon.  The

question that arose between the parties is whether the appellant was

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justified  in  adjusting  this  amount  from  the  dues  payable  to  the

respondent by deduction from the bills raised by the respondent. Since

the Purchase Order dated 01.10.2008 forms the basis for the claim, it

is important to set out clauses 4 and 8 of the said Purchase Order as

under:

“4. SCOPE OF ORDER xxx xxx xxx

iv.  Termination  of  the  bandwidth  on  STM-1  would  be done  at  the  MTNL  sites/locations  in  Delhi  (Kidwai Bhawan and Nehru Place) and Mumbai (Fountain Head & Prabha Devi) respectively as per the requirement with redundancy in last mile connectivity.  For this bandwidth termination  purpose,  optical/electrical  converter,  cable and any  other  hardware/software  etc.  required,  if  any, would be arranged by the bidder free of cost.”

xxx xxx xxx

“8. DELIVERY SCHEDULE (i)  The  physical  connectivity  for  bandwidth  should  be completed within two months from the date of place of Purchase Order.”

The TDSAT, on considering this Purchase Order, held:

“25. At  this  stage,  it  falls  for  consideration as to  what relief the petitioner is entitled to on the basis of strength of its own case. For this purpose, it is useful to note at the outset that the petitioner was required to provide the last mile connectivity as per paragraph 4(iv) of the P.O. within two months. It is also not in dispute that petitioner did  not  provide  the  required  connectivity  not  only  by

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December  2008  but  even  by  time  when  it  chose  to terminate  the  contract  on  11.01.2011.  The  defence pleaded and argued on behalf of petitioner is that it was neither  given  access  to  the  buildings/premises  of  the respondents nor the permission for affecting the last mile connectivity.  This  stand  was  sought  to  be  justified  by placing reliance on Emails written by the petitioner on 01.06.2010  which  is  more  than  a  year  after  grant  of permission by Delhi and Mumbai units around March and April 2009. On going through the communication dated 01.06.2010, it is evident that the plea that respondents did not allow entry to the petitioner into their premises in Mumbai has been raised quite belatedly and does not appear  to  be  correct  and  convincing.  Hence,  we  find petitioner’s case to be weak and unacceptable in so far as it puts the blame totally upon the respondent for its inability or failure to provide the last mile connectivity. No doubt there was some delay by the respondents at the initial  stage  but  that  alone  cannot  justify  or  absolve petitioner’s total failure.  

26. If we had reliable materials to find out the exact cost of providing the last mile connectivity at each of the two premises in Mumbai and Delhi, we would have reduced that much amount from the claim of the petitioner and allowed the rest. That would have served the interest of justice and prevented unjust enrichment of the petitioner. However,  in  absence  of  such  reliable  materials  as  to actual  costs  which  the  petitioner  has  saved  by  non- compliance with the requirements of paragraph 4(iv) of the P.O., we have looked closely at the case of both the parties and we find that at best the respondents could have  invoked  clause  16  and  more  particularly,  clause 16.2  which  provide  for  liquidated  damages  in  certain eventualities like failure to deliver the stores/services or to install and commission the project in whole or in part. The admitted default  on the part  of  the petitioner  can safely  be  treated  as  failure  or  delay  affecting  the installation/commissioning  of  a  part  of  the  project requiring last mile connectivity.  In such a case, as per

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clause  16.2(b)  of  the  Agreement  (P.O.),  liquidated damages  can  be  levied  on  the  affected  part  of  the project.  As per  clause 16.2(c),  the liquidated damages must be limited to a maximum of 12%. In the present case  the  full  amount  billed  and  receivable  by  the petitioner  for  services  rendered  is  disclosed  as Rs.2,15,25,512/-, hence, on account of limitation of 12%, the respondents could not have levied and deducted an amount  more than Rs.25,83,181/-.  Instead of  adopting this  lawful  course,  the  respondents  proceeded  to unilaterally impose rentals at their own rate of dark fibre. Such action of the respondents amounts to adjudicating a claim in its own favour without any authority for such unilateral act either under Section 70 of the Contract Act or under any of the provisions of the Contract(P.O.).  

xxx   xxx   xxx

28.  As a result of aforesaid discussion, the claim of the petitioner  is  allowed  but  in  part  only.  The  principal amount which the respondent must refund or pay back to the petitioner would be Rs.1,10,57,268 – Rs.25,83,181= Rs.84,74,087/-. Petitioner has also claimed an amount of Rs.66,33,414/-  by  way  of  interest  from  the  date  the amounts  became  due  and  upto  15.07.2012.  It  has calculated this amount by applying a rate of 18%. The calculations are in  Annexure P-14 which discloses the dates  when  the  short  payments  were  made  after deductions. We are not persuaded to allow interest @ 18% in absence of any such stipulation in the Agreement (P.O.).  Hence,  while  allowing  the  principal  amount  of Rs.84,74,087/-  in  favour  of  the  petitioner,  we  direct payment of interest at the rate of 9% from the date the amounts  became  due  upto  the  date  of  this judgment/order.”  

2. Having  heard  the  learned  counsel  for  both  sides,  one  neat

question arises before this Court, which is, whether, when parties are

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governed by contract, a claim in quantum meruit under Section 70 of

the Indian Contract Act, 1872 [“Contract Act”] would be permissible.

Section 70 of the Contract Act reads as under:

“70.  Obligation  of  person  enjoying  benefit  of  non- gratuitous act.—Where a person lawfully does anything for  another  person,  or  delivers  anything  to  him,  not intending to do so gratuitously,  and such other person enjoys the benefit  thereof,  the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.”

This Section occurs in Chapter V of the Contract Act, which chapter is

headed,  “of  certain relations resembling those created by contract”.

There are five sections that  are contained in  this  Chapter.  Each of

them  is  posited  on  the  fact  that  there  is,  in  fact,  no  contractual

relationship  between  the  parties  claiming  under  this  Chapter.  For

example, under Section 68, if  a person incapable of entering into a

contract is supplied necessaries by another person, then the person

who has furnished such supplies becomes entitled to be reimbursed

from  the  property  of  the  person  so  incapable  of  entering  into  the

contract. Section 69 also deals with a case where a person has no

contractual relationship with the other person mentioned therein, but

who is interested in the payment of money which the other person is

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bound by law to pay, and who, therefore, pays it  on behalf of such

person. Such person is entitled to be reimbursed by the other person.

Under Section 71, again, the finder of goods spoken of is a person

who  is  fastened  with  the  responsibility  of  a  bailee  as  there  is  no

contractual  relationship between the finder of  goods and the goods

which belong to another person. Equally, under Section 72, a person to

whom  money  has  been  paid  or  anything  delivered  by  mistake  or

coercion must repay or return it, or else, such person would be unjustly

enriched. Here again, there is no contractual relationship between the

parties. It is in this setting that Section 70 occurs.   

3. An early judgment reported as  Moselle Solomon v. Martin &

Co., ILR (1935) 62 Cal 612 resulted in a split verdict between the two

judges on the point  of  whether  Section 70 of  the Contract  Act  can

apply  when  there  is,  in  fact,  a  contract  between  the  parties.  Lort-

Williams, J. held:

“There remains to be decided the question whether the second defendant is liable under section 70 of the Indian Contract Act and to what extent. The remedy provided by this section is not dependent upon the law relating to the liabilities  of  principal  and  agent.  It  is  an  independent remedy, which is based upon a different cause of action, namely,  upon  whether  a  person  has  lawfully  done anything for another or has delivered anything to him not

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intending to do so gratuitously,  and such other person has enjoyed the  benefit  thereof.  If  so,  he  must  either make compensation in respect of, or restore the thing so done or delivered.”

(at page 619)

On the other hand, Jack, J. held:

“As  regards  the  appeal,  it  is  clear  that  the  second defendant cannot be held liable under section 70 of the Contract  Act,  in as much as this is a case of contract and, where there is an express contract, section 70 has no application, as shown by the heading of Chapter V of the Act, in which the section finds a place. It is headed “Of  Certain  Relations  Resembling  Those  Created  by Contract”, evidently excluding relations actually created by  contract,  as  in  this  case.  The  Contract  Act  is, however, not exhaustive.”

(at page 623)

4. In Kanhayalal Bisandayal Bhiwapurkar (Dr.) v. Indarchandji

Hamirmalji Sisodia, AIR 1947 Nag 84, a learned Single Judge of the

High Court  was dealing with  an  application  by  an eye-specialist  of

repute who wished to recover an amount of INR 188/- as the price of

professional work, i.e., getting a cataract removed in accordance with

an agreement with one Mt. Laxmibai and her son-in-law, Mohan Lal,

by  which  agreement,  the  said  operation  was  to  be  performed.  An

appeal to Sections 68 and 70 of the Contract Act was turned down in

the following terms:

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“10. In the course of the argument, an appeal was made to the principles underlying Ss. 68 and 70, Contract Act, for making the husband liable. Indeed S. 68, deals with the  supply  of  necessaries  but  that  is  in  respect  of  a person incapable of entering into a contract or “any one whom he is legally bound to support”, i.e. the dependent of  a  person incompetent  to  contract.  Indarchandji  was not  incompetent  to  contract  and  this  section  is inapplicable to him. As to S. 70, it must be observed that this section cannot be availed of by a person who relies on an express contract as the plaintiff  alleged to have entered into with Mt. Laxmibai in this case. The husband never entered into the picture when the plaintiff settled the terms with her. Nor is there anything to show how the husband received any benefit.  It  is  only  actual  benefit which will famish a ground of action. If the wife had been cured  of  her  ailment  completely,  perhaps  that circumstance might be material; but there is no evidence on the point.”

5. In  Alopi Parshad and Sons Ltd. v. Union of India, (1960) 2

SCR 793, this Court dealt with an arbitration award which,  inter alia,

awarded certain amount on the basis of  quantum meruit.  In setting

aside the Award on the ground of error apparent on the face of the

record, this Court held:

“…… Ghee having been supplied by the Agents under the terms of the contract, the right of the Agents was to receive remuneration under the terms of that contract. It is difficult to appreciate the argument advanced by Mr. Chatterjee  that  the  Agents  were  entitled  to  claim remuneration  at  rates  substantially  different  from  the terms  stipulated,  on  the  basis  of quantum  meruit. Compensation quantum meruit is awarded for work done

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or services rendered, when the price thereof is not fixed by  a  contract.  For  work  done  or  services  rendered pursuant  to  the  terms  of  a  contract, compensation quantum meruit cannot be awarded where the  contract  provides  for  the  consideration  payable  in that  behalf. Quantum  meruit  is but  reasonable compensation awarded on  implication of  a  contract  to remunerate,  and  an  express  stipulation  governing  the relations between the parties under a contract, cannot be displaced  by  assuming  that  the  stipulation  is  not reasonable……”

(at page 809)

6. In Mulamchand v. State of M.P., (1968) 3 SCR 214, this Court

held that the provisions of Section 175(3) of the Government of India

Act are mandatory in character and based on public policy.   Therefore,

the formalities that are stipulated when contracts are entered into on

behalf  of  the  Government  cannot  be  waived  or  dispensed  with.  In

dealing with a claim made under Section 70 of the Contract Act, this

Court then went on to hold:

“……  In  other  words,  if  the  conditions  imposed  by Section 70 of the Indian Contract Act are satisfied then the  provisions  of  that  section  can  be  invoked  by  the aggrieved party to the void contract. The first condition is that a person should lawfully do something for another person or deliver something to him; the second condition is that doing the said thing or delivering the said thing he must  not  intend  to  act  gratuitously;  and  the  third condition is that the other person for whom something is done or to whom something is delivered must enjoy the benefit thereof. If these conditions are satisfied, Section

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70 imposes upon the latter person the liability to make compensation to the former in respect of, or to restore, the thing so done or delivered.  The important  point  to notice  is  that  in  a  case  falling  under  Section  70  the person  doing  something  for  another  or  delivering something  to  another  cannot  sue  for  the  specific performance of the contract, nor ask for damages for the breach of the contract, for the simple reason that there is no contract between him and the other person for whom he does something or to whom he delivers something. So  where  a  claim  for  compensation  is  made  by  one person against another under Section 70, it is not on the basis of any subsisting contract between the parties but on a different kind of obligation. The juristic basis of the obligation  in  such  a  case  is  not  founded  upon  any contract or tort but upon a third category of law, namely, quasi-contract or restitution……”

(at pp. 221-222)

7. This judgment  has been recently  referred to and followed in

Orissa  Industrial  Infrastructure  Development  Corpn.  v.  Mesco

Kalinga Steel Ltd., (2017) 5 SCC 86 at paragraph 21.    

8. Indeed, the aforesaid position in law is made clearer by Section

73 of the Contract Act. Section 73 reads as follows:

“73.  Compensation  for  loss  or  damage  caused  by breach  of  contract.— When  a  contract  has  been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation  for  any  loss  or  damage  caused  to  him thereby,  which  naturally  arose  in  the  usual  course  of things  from  such  breach,  or  which  the  parties  knew,

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when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for  failure  to  discharge obligation resembling  those  created  by  contract.—When  an obligation  resembling  those  created  by  contract  has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such  person  had  contracted  to  discharge  it  and  had broken his contract.

Explanation.—In estimating the loss or damage arising from a breach of contract, the means which existed of remedying  the  inconvenience  caused  by  the  non- performance of the contract must be taken into account.”

9. This  Section  makes  it  clear  that  damages  arising  out  of  a

breach of contract is treated separately from damages resulting from

obligations resembling those created by contract. When a contract has

been broken, damages are recoverable under paragraph 1 of Section

73.  When,  however,  a  claim  for  damages  arises  from  obligations

resembling  those  created  by  contract,  this  would  be  covered  by

paragraph 3 of Section 73.

10. Indeed, the present case is really covered by Section 74 of the

Contract  Act,  which occurs in  Chapter  VI,  which is  headed,  “of  the

consequences of breach of contract”. Section 74 states: 11

“74.  Compensation  for  breach  of  contract  where penalty  stipulated  for.— 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,  or  if  the  contract contains  any  other  stipulation  by  way  of  penalty,  the party complaining of the breach is entitled,  whether or not  actual  damage  or  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 or, as the case may be, the penalty stipulated for.

Explanation.—A stipulation for increased interest from the  date  of  default  may  be  a  stipulation  by  way  of penalty.

Exception.—When any  person  enters  into  any  bail- bond,  recognizance  or  other  instrument  of  the  same nature, or, under the provisions of any law, or under the orders  of  the Central  Government  or  of  any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of any condition of any such instrument, to pay the whole sum mentioned therein.

Explanation.—A person  who  enters  into  a  contract with Government does not necessarily thereby undertake any public  duty,  or  promise to do an act  in  which the public are interested.”

11. In Kailash Nath Associates v. DDA,  (2015) 4 SCC 136, after

considering the case law on Section 74, this Court held:

“43. On a conspectus of the above authorities, the law on compensation for  breach of  contract  under  Section 74 can be stated to be as follows:

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43.1. Where a sum is named in a contract as a liquidated amount  payable  by  way  of  damages,  the  party complaining  of  a  breach  can  receive  as  reasonable compensation  such  liquidated  amount  only  if  it  is  a genuine pre-estimate of damages fixed by both parties and found to be such by the court. In other cases, where a sum is  named in a contract  as a liquidated amount payable  by  way  of  damages,  only  reasonable compensation  can  be  awarded  not  exceeding  the amount so stated. Similarly, in cases where the amount fixed  is  in  the  nature  of  penalty,  only  reasonable compensation can be awarded not exceeding the penalty so  stated.  In  both  cases,  the  liquidated  amount  or penalty is the upper limit beyond which the court cannot grant reasonable compensation. 43.2. Reasonable  compensation  will  be  fixed  on  well- known  principles  that  are  applicable  to  the  law  of contract, which are to be found inter alia in Section 73 of the Contract Act. 43.3. Since Section 74 awards reasonable compensation for  damage  or  loss  caused  by  a  breach  of  contract, damage  or  loss  caused  is  a  sine  qua  non  for  the applicability of the section. 43.4. The section applies whether a person is a plaintiff or a defendant in a suit. 43.5. The  sum spoken  of  may  already  be  paid  or  be payable in future.

43.6. The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof  is  not  dispensed with.  It  is  only  in  cases where damage or loss is difficult or impossible to prove that the liquidated amount  named in  the contract,  if  a  genuine pre-estimate of damage or loss, can be awarded.”

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12. In the present case, clauses 16.2 to 16.4 are relevant, and are

set out as under:

“16.2 (a) FOR DELIVERY OF STORES:

Should  the  supplier  fail  to  deliver  the store/services  or  any  consignment  thereof within  the  period  prescribed  for  delivery,  the purchaser shall be entitled to recover 0.5% of the value of the delayed supply for each week of delay or  part thereof for a period up to 10 (TEN) weeks and thereafter at the rate of 0.7% of  the  value  of  the  delayed  supply  for  each week of delay or part thereof for another TEN weeks of delay. In the case of package supply where  the  delayed  portion  of  the  supply materially  hampers  installation  and commissioning  of  the  systems,  L/D  charges shall  be levied as above on the total value of the concerned package of the Purchase Order. However, when supply is made within 21 days of  QA  clearance  in  the  extended  delivery period,  the  consignee  may  accept  the  stores and in such cases the LD shall be levied upto the date of QA clearance.   

16.2 (b) FOR INSTALLATION & COMMISSIONING

Should  the  supplier  fail  to  install  and commission  the  project  within  the  stipulated time the purchaser shall be entitled to recover 0.5%  of  the  value  of  the  purchase  order  for each week of delay or part thereof for a period upto 10 (TEN) weeks and thereafter @ 0.7% of the value of purchase order for each week of delay  or  part  thereof  for  another  10  (TEN) weeks  of  delay.   In  cases,  where  the  delay affects installation/commissioning of part of the

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project and part of the equipment is already in commercial use, then in such cases, LD shall be levied on the affected part of the project.  

16.2 (c). The Liquidated Damages, as per Clause 16.2 (a) and 16.2 (b) above shall be limited to a maximum of 12%, even in case the DP extension is given beyond 20 weeks.

16.3. Provisions contained in Clause 16.2(a) shall not be applicable  for  durations  (periods)  which  attract  L.D. against clause 16.2(b) above.

16.4. Quantum  of  liquidated  damages  assessed  and levied  by  the  purchaser  shall  be  final  and  not challengeable by the supplier.”

13. As  has  been  correctly  held  by  the  impugned  judgment,  a

maximum of  12% can  be  levied  as  liquidated  damages  under  the

contract, which sum would amount to a sum of INR 25 lakh. Since this

clause governs the relations between the parties, obviously, a higher

figure,  contractually  speaking,  cannot  be  awarded  as  liquidated

damages, which are to be considered as final and not challengeable

by the supplier. This being the case, the appellant can claim only this

sum. Anything claimed above this sum would have to be refunded to

the respondent.

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14. In this view of the matter, we uphold the impugned judgment of

the TDSAT and dismiss the present appeal.    

…………………………..J. (R.F. NARIMAN)

.…………………………..J. (VINEET SARAN)

New Delhi; February 27, 2019.

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