1.Introduction:
The imposition of Liquidated Damages (LD) in commercial contracts stands as a crucial aspect of contractual agreements, delineating the consequences of failing to fulfill obligations within stipulated timeframes. Rooted in Section 55 of the Indian Contract Act, 1872 (ICA), the LD clause navigates through the complexities of time as the essence of contracts, extensions, and aggrieved party entitlements. However, recent legal interpretations have stirred debates, questioning whether failure to initially claim LD should irrevocably waive one’s right. This analysis probes the interplay between contractual provisions, judicial interventions, and practical implications, aiming to discern a fair and just approach towards LD enforcement in the Indian commercial landscape.
2. To or Not to impose Liquidated Damages (“LD”) in Commercial Contracts: –
To ascertain the LD in commercial contracts, we shall reiterate section 55 of the Indian Contract Act, 1872 (“ICA”)[1] which states the consequences of failure to perform obligations under the contract within the stipulated time frame. Firstly, we shall decipher whether time is the essence of the contract, and if so, How does it affect the LD clause?
There could be three potential scenarios, wherein an LD clause could be imposed. In the first scenario, where time is the essence of the contract If on merits it could be deciphered the same, the contract becomes voidable[2] at the option of the other party, In those cases, the aggrieved party shall have the right to rescind the contract and claim for LD, In the second scenario, Where time is not the essence of the contract, In those cases the aggrieved party shall have the right to claim LD but will not be entitled to rescind the contract, the third scenario, where time is the essence of contract but the other party has provided an extension of time, in those cases, the aggrieved party shall be entitled to LD at first instance, but not entitled to rescind the contract. We shall attempt to elucidate it further.
The concept of extension of contracts is stipulated under Section 63 of the ICA[3], which allows extension of time, however, to ascertain whether the LD could be imposed in such cases, we shall refer to the matter of Welpsun[4], The Hon’ble Supreme Court held in this case that in case of dispute or differences arising out of contract, which related to imposing of LD, it is essential to note that, whether LD was claimed at first instance, If yes, the aggrieved party would be entitled to LD however, if the aggrieved party fails to stipulate about the LD clause at first instance, at the time of extension, it would be deemed as if, the right to LD has been waived of and at a later stage it could not be claimed.
This leads us to the next question, how to determine if your contract is testing time as the essence of the contract or not? We shall ascertain the same shall refer to two matters which have settled the legal position Hind Constructions[5] and Arson Enterprise[6], The court held in this case that even though there is an express provision stating that time is the essence of the contract if, in the same contract, it has a clause stating about the “extension of time” then in that contract it would be deemed as if time is not the essence of the contract, and the other party shall in those cases reserve their right to LD at first instance as held in Welpsun (Supra).[7]
However, We find that the present settled position is a threat to many aggrieved parties, who have spent their money, manpower, and machinery to complete the contract, but are not able to claim LD because of the failure to reserve their right LD, we are of the opinion that it is immaterial, whether the time is the essence of the contract or not, in matters pertaining to LD, If the aggrieved party has proof of actual loss[8] he has suffered, he shall be entitled to LD, irrespective of the fact that whether he has claimed LD or not, We see this as a classic example of judicial overreach[9], the Hon’ble Courts shall restrain from interpreting the contract and shall read the contract unless there is ambiguity within the provisions of the contract itself. In India, the aggrieved party should always reserve their right to demand Liquidated Damages (LD) under the commercial contract by communicating through electronic email, letter, or any other agreed channel of contact. When drafting a commercial contract, it is crucial for the parties to be meticulous in formulating the liquidated damages (LD), time, and extension clauses. These clauses have the potential to significantly impact future events, and the court may reconsider LD matters and adjust positions if necessary. Failing to initially claim LD should not automatically forfeit one’s right to do so, as that would be unfair.
Conclusion:
In navigating the realm of commercial contracts, the imposition of Liquidated Damages (LD) emerges as a pivotal consideration, delineating consequences for contractual breaches within stipulated timeframes. Rooted in legal frameworks such as the Indian Contract Act, 1872 (ICA), and judicial interpretations, the LD clause embodies a nuanced balance between contractual precision and equitable outcomes. While recent legal precedents have grappled with the nuances of LD entitlements and waivers, it is imperative for parties to meticulously craft contracts, incorporating explicit provisions for LD claims and extensions. Moreover, the notion of judicial overreach warrants cautious deliberation, emphasizing the importance of contractual clarity and adherence to legal principles. Ultimately, the fair and just enforcement of LD in commercial contracts hinges upon a delicate equilibrium between contractual autonomy, judicial discretion, and equitable remedies for aggrieved parties.
[1] Contract Act, Sec 55.
[2] Chitransh Vijayvergia, A MINI-REFERENCER FOR THE INDIAN LAW ON DELAY AND DAMAGES IN CONSTRUCTION ARBITRATION, INDIAN JOURNAL OF ARBITRATION LAW, (1st March 2024).
[3] Contract Act, Sec 63.
[4] Welspun Specialty Solutions Limited vs ONGC, (2022) 2 SCC 382.
[5] Hind Construction Vs. State of Maharashtra, AIR1963PAT254.
[6] Arosan Enter., (1999) 9 SCC 449 (India).
[7] Ibid, See note, 2.
[8] Indian Oil Corporation v. Lloyds Steel Industries Ltd, MANU/SC/0313/2015.
[9] Time the essence of Contract, Is It? Cyril Amarchand Mangaldas, (1st March,2024). https://corporate.cyrilamarchandblogs.com/2021/12/time-is-the-essence-of-this-contract-is-it-really/.
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Author(s):-
1. Siddharth Addy – LLM Candidate, IIT Kharagpur
2. Pranav Kushwaha – LLM Candidate, IIT Kharagpur
Author Bio
