Supreme Court Holds Refund Claim Outside Contractual Remedies, Confines Damages To Contractual Stipulations

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard an appeal against a High Court judgment that had set aside parts of an arbitral award in a commercial dispute concerning supply, commissioning and guaranteed performance of a fermentation plant. The narrow issue before the Court related to whether the claimant was entitled to recover Rs. 68.15 lakhs as damages for alleged non‑performance of machinery, beyond the liquidated damages and remedies expressly provided in the contract.

The Court summarily dismissed the appeal and upheld the High Court's conclusion that the claim for Rs. 68.15 lakhs — advanced as a refund of the purchaser’s entire expenditure on the plant — was not maintainable in the face of the contract's specific remedial scheme. The judges noted that the parties had contractually stipulated liquidated damages and an express remedy under clause 21 providing for rectification or replacement at the seller's cost; the purchaser, however, had retained the plant and never availed itself of the replacement remedy. The Court stressed that damages in such a situation must be governed by the contract and relevant statutory principle. The Court, in its reasoning, observed: “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. Therefore, as 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.”

Background: The dispute arose from a November 17, 1992 agreement under which the supplier agreed to design, manufacture and supply a continuous fermentation plant with a guaranteed minimum yield of 280 litres of alcohol per metric tonne of molasses. Delivery was to be completed within five and a half months. The purchaser alleged delay and poor performance: after multiple trial runs the highest yield recorded was below guarantee and, following a memorandum of understanding providing for a further trial, the maximum yield remained unsatisfactory. The purchaser issued a legal notice seeking damages and invoked arbitration.

The arbitral tribunal issued an initial award and, after remand, made a second award that accepted several claims including liquidated damages and sums for non‑performance, awarding Rs.68.15 lakhs as damages for loss due to non‑performing machinery. Both parties challenged awards; lower courts and the High Court examined jurisdictional and evidentiary questions. The High Court set aside the portion of the award awarding Rs.68.15 lakhs, holding that the claim was based on speculative calculations and that the contractual remedies limited the purchaser’s recovery. The purchaser’s statement of claim itself stated: “Purchaser had spent Rs. 107.54 lakh on the said plant. It is absolutely clear now that it will not give required results as agreed and all the investment goes waste. The agreement does not provide any specific clause for the total failure of plant. Therefore, as per contract act, seller is liable for actual damages.” The Supreme Court observed that clause 21 expressly provided that “the seller shall remain liable to rectify / replace any parts thereof such as may be found to be defective or below the rated capacity” and that the purchaser had not sought or effected replacement under that clause. Applying Section 74 of the Indian Contract Act, the Court held that the purchaser’s claim was confined to what the contract allowed and dismissed the appeal. No additional interim directions were issued; the appeal was dismissed and the High Court judgment stood.

Case Details: Case No.: Civil Appeal No. 3194 of 2014 Case Title: SAHAKARMAHARSHI BHAUSAHEB THORAT SAHAKARI SAKHAR KARKHANA LTD. v. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. Appearances: For the Petitioner(s): Shri Vijay Hansaria, Senior Counsel For the Respondent(s): Shri Chander Uday Singh, Senior Counsel