The core issue revolves around a 1992 agreement for the supply of machinery to improve alcohol production, which failed to meet guaranteed performance levels, leading to claims of damages for delay and underperformance. The document meticulously traces the litigation’s complex history through multiple arbitrations, civil court judgments, and High Court rulings. Ultimately, the Supreme Court reviews the High Court’s decision regarding a specific claim of Rs. 68.15 lakhs for loss due to non-performing machinery, examining the applicability of contractual clauses related to liquidated damages and warranty. The Supreme Court upholds the High Court’s finding that this particular claim was not supported by the agreement’s terms, particularly in light of Section 74 of the Indian Contract Act, 1872.
Arbitration Act, 1940, Section 30 – Indian Contract Act, 1872, Section 74 – Arbitration award – Challenge as to – Performance guarantee – Claim for liquidated damages – Compensation for breach of contract where penalty stipulated for – High Court set aside the second award to the extent of a claim of Rs.68.15 lakhs – It was held that this claim was based on speculative and imaginary calculations – As regards the claim of Rs.2.09 lakhs and Rs.18.64 lakhs, the High Court recorded that the respondent has accepted the liability – Clause 21.1 provided that on the failure of the respondent to replace the defective or underrated equipment within a reasonable time, the appellant had the option to replace the same at the respondent’s cost – Under clause 21, it was provided that the responsibility of the seller for rectification/replacement shall extend to the actual cost of rectification/replacement of defective items of the continuous fermentation plant and machinery – Claim made before the Arbitral Tribunal by the appellant shows that the claim for the sum of Rs.107.54 lakhs was not based on clause 21 of the agreement – It is not the appellant’s case that the respondent was called upon to replace the plant and machinery, and as the respondent failed to do so within a reasonable time, the appellant replaced the plant and machinery by themselves – The claim was on account of a refund of the amount spent by the appellant on the plant – There is a clause for liquidated damages under which a claim was allowed by the Arbitral Tribunal, which the respondent accepted – Option under clause 21 of the agreement was not availed by the appellant – The agreement provided for liquidated damages in clause 15 on account of non-performance of the guarantees set out in clause 8 – Assuming that the entire plant and machinery was a failure or scrap, the appellant had the right to replace the same and claim the cost from the respondent – However, that was not done by the appellant – The appellant got liquidated damages as provided in the agreement on account of breaches committed by the respondent – The claim for damages of the appellant will remain confined to what is expressly provided under the Agreement in view of Section 74 of the Contract Act – The appellant retained the plant and machinery and did not take the benefit of clause 21 – Held that rightly held by the High Court, the appellant was not entitled to the claim of Rs.68.15 lakhs as it was claimed in the statement of claim as the refund of the amount spent by the appellant on the acquisition of plant and machinery – Find absolutely no error in the view taken by the High Court, and accordingly, the appeal liable to be dismissed.
(Para 23 to 30)
Sahakarmaharshi Bhausaheb Thorat … V. Thyssen Krupp Industries India P.Ltd
Supreme Court: 2025 INSC 219: (DoJ 14-02-2025)
