Departmental inquiry must before any stigmatic order: CAT

Express News Service Posted online: Wed Dec 01 2010, 04:47 hrs

Chandigarh : In a judgment with a far-reaching impact on employees serving on contract basis, the Chandigarh Bench of the Central Administrative Tribunal (CAT), headed by Justice S D Anand, has held that no contractual employee can be terminated by an order which is stigmatic in nature without holding a regular departmental inquiry. The order came on a petition filed by one Karamjit Singh, who worked as Director of Physical Education (DPE) in the Chandigarh Education Department on a contractual basis since August 2001. He was ordered to be terminated by the Education Secretary, UT Chandigarh, on July 23, 2009, on the allegation of resorting to corporal punishment to students while serving in Government Model Senior Secondary School, Sector 47, Chandigarh. Ranjivan Singh, counsel for the petitioner Karamjit Singh, argued that not only was the allegation against the petitioner - that he had resorted to corporal punishment to students on July 22, 2009 - false and baseless but no fair inquiry was held before holding the petitioner guilty. Thus, the termination of the petitioner was against the principles of natural justice, Singh contended. It was pointed out to the Bench that the termination of the petitioner was ordered despite the fact that the alleged victim students and their parents had approached the higher departmental authorities pleading the petitioner’s innocence. Setting aside the termination of the petitioner, the Bench allowed the petition filed by him whereby he claimed his reinstatement with effect from July 23, 2009, continuity of service and arrears of pay.

Amendment in GCC 2008 dt 28.01.2009

Rites Signs MoU for Integrity Pact (PIB)

RITES Ltd, a Government of India Enterprise under the Ministry of Railways entered into a Memorandum of Understanding (MOU) with Transparency International India (TII) to maintain complete transparency in major contracts and procurements. The MOU was signed by Mr.V.K.Agarwal, Managing Director (RITES) and Admiral (Retd) R.H.Tahiliani, Chairman Transparency International India in the presence of Mrs. Ranjana Kumar, Vigilance Commissioner, Central Vigilance Commission (CVC).

Integrity Pact model is being followed by the Corporates worldwide as it binds a company and its suppliers to ethical conduct in contracts and implementation of projects. CVC has recommended adoption of this pact in respect of all major procurements. The pact will be monitored by the Independent External Monitors (IEM) who will provide an in-process integrity audit and conflict resolution mechanism to address to timely confusions, complaints and communication gaps.

For RITES, business ethics is the foremost among the set of its core values which form a component of the employee evaluation and promotion criterion.

Contract Law

The Law of Contracts is the basis of business law because the bulk of transactions of the people engaged in trade, commerce and industry is based on contracts. In India, the Law of Contracts is contained in the Indian Contract Act,1872. The Act lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like, Indemnity and Guarantee; Bailment and Pledge, and Agency. The Partnership Act; the Sale of Goods Act; the Negotiable Instruments Act; the Companies Act, though technically belonging to the Law of Contracts, have been covered by separate enactments. However, the general principles of the Contract Law are the basis for all such contracts as well.

The principal features of the Law of Contract are:-

• The parties to the contract make the law for themselves.


• The Act is not exhaustive since it does not take into its purview all the relevant legislations.


• It does not override customs or usages.


• The Law of Contracts is not the whole law of agreements.

As per the Indian Contract Act,1872, a "contract" is an agreement enforceable by law. The agreements not enforceable by law are not contracts. An "agreement" means 'a promise or a set of promises' forming consideration for each other. And a promise arises when a proposal is accepted. By implication, an agreement is an accepted proposal. In other words, an agreement consists of an 'offer' and its 'acceptance'.

An "offer" is the starting point in the process of making an agreement. Every agreement begins with one party making an offer to sell something or to provide a service, etc. When one person who desires to create a legal obligation, communicates to another his willingness to do or not to do a thing, with a view to obtaining the consent of that other person towards such an act or abstinence, the person is said to be making a proposal or offer.

An agreement emerges from the acceptance of the offer. "Acceptance" is thus, the second stage of completing a contract. An acceptance is the act of manifestation by the offeree of his assent to the terms of the offer. It signifies the offeree's willingness to be bound by the terms of the proposal communicated to him. To be valid an acceptance must correspond exactly with the terms of the offer, it must be unconditional and absolute and it must be communicated to the offeror.

An "agreement" is a contract if 'it is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and is not expressly declared to be void'. The contract must be definite and its purpose should be to create a legal relationship. The parties to a contract must have the legal capacity to make it. According to the Contract Act, " Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject". Thus, minors; persons of unsound mind and Persons disqualified from contracting by any law are incompetent to contract.

Essential Elements of a Contract

Minimum two parties :- Atleast two parties are needed to enter into a contact. One party has to make an offer and other must accept it. The person who makes the 'proposal' or 'offer' is called the 'promisor' or 'offeror'. While, the person to whom the offer is made is called the 'offeree' and the person who accepts the offer is called the 'acceptor'.

Offer and acceptance :- There must be an 'offer' and an 'acceptance' to the offer, resulting into an agreement. Both offer and acceptance should be lawful.

Legal obligations :- The parties must intend to create a legal obligation.The agreement sought to be enforced should contemplate legal relations between the parties to it.

Lawful consideration:- A contract is basically a bargain between two parties, each receiving 'something' of value or benefit to them. This 'something' is described in law as 'consideration'. Consideration is an essential element of a valid contract. It is the price for which the promise of the other is bought. A contract without consideration is void. The consideration may be in the form of money, services rendered, goods exchanged or a sacrifice which is of value to the other party. This consideration may be past, present or future, but it must be lawful.

Competent parties:- The parties making the contract must be legally competent in the sense that each must be of the age of majority, of a sound mind, and not expressly disqualified from contracting. An agreement by incompetent parties shall be a legal nullity.

Free consent:- The contracting parties must give their consent freely. 'Consent' means that the parties must agree about the subject matter of the agreement in the same sense and at the same time. Consent is said to be free if it is not induced by coercion, undue influence, fraud,misrepresentation or mistake. The absence of free consent would affect the legal enforceability of a contract.

Lawful object:- The object of the agreement must be lawful. An agreement is unlawful, if it is:- (i) illegal (ii) immoral (iii) fraudulent (iv) of a nature that, if permitted, it would defeat the provisions of any law (v) causes injury to the person or property of another (vi) opposed to public policy.

Not expressly declared void:- An agreement expressly declared to be void under the Contract Act or under any other law, is not enforceable and is, thus, not a contract. The Contract Act declares void certain types of agreements such as those in restraint of marriage, or trade, or legal proceedings as well as wagering agreements.

Certainity and possibility of performance:- The terms of a contract must not be vague or uncertain. If an agreement is vague and its meaning cannot be ascertained, it cannot be enforced. Also,the terms of a contract must be such as are capable of performance. An agreement to do an impossible act is void and is not enforceable by law.

Legal formalities:- Generally, a contract may be oral or in writing. However, certain contracts are required to be in writing and may even require registration. Therefore, where law requires an agreement to be put in writing or be registered, the same must be complied with. For instance, the Indian Trusts Act requires the creation of a trust to be reduced to writing.

Breach of Contract

The remedies available to the aggrieved party, in case of breach of contract by the other party are:-

• Suit for rescission of the contract :- Rescission is the revocation of a contract. When a contract is broken by one party, the other party may sue for rescission and refuse further performance. In such a case, the aggrieved party is absolved of all its obligations under the contract.


• Suit for damages:- the party who is injured by the breach of a contract may bring an action for damages. Damage is the monetary compensation allowed by the court to the aggrieved party for the loss or injury suffered by him as the result of breach by the other party.


• Suit for injunction:- An injunction is an order of the court requiring a person to refrain from doing some act which has been the subject matter of contract. The power to grant injunction is discretionary and it may be granted temporarily or for an indefinite period.


• Suit upon 'Quantum Meruit' :- The term "quantum meruit" means, 'as much as is merited' or 'as much as earned'. A suit of quantum meruit is a claim for the value of the material used or supplied under a contract that has become void on account of breach by the other party. When a contract becomes void, any person who has received any advantages under such contract is bound to restore it, to the person from whom he received it.


• Suit for specific performance:- When the loss suffered by breach of contract cannot be compensated by damages or where there are no standards to ascertain the quantum of damages, the aggrieved party may approach the Court for the grant of a decree for specific performance of the contract. Specific performance is granted when:-
  
  
  • Money is an adequate remedy
  
  
  • It will be inequitable to either party
  
  
  • The contract is of a personal nature
  
  
  • the court cannot supervise its execution

Bidding not an end in itself: Allow single bid projects

Government is considering a proposal to permit single-bid road projects to go through. Earlier, the railways had thought of seeking Central

Vigilance Commission (CVC) protection before awarding diesel and electric engine manufacturing projects to sole bidders, but eventually decided to do it in-house.

Clearly, these instances indicate the process of awarding projects seems to have become more important than getting the project started quickly. The basic idea behind competitive bidding for any project is to give an opportunity to everyone and, through a market mechanism, obtain the least cost solution.

Clearly, to the extent there is an open bidding the first purpose of giving an opportunity to everyone has been served. If only one bidder chooses to participate in such a bidding, then so be it. The second issue is more important. In a single-bidder situation, the lack of competition would mean the quoted price may not be the best from the perspective of the one inviting the bids or awarding the project.

In such an event, there are two choices, both entailing some costs. One, the entire process can be aborted and bids called again. There is direct calculable costs of this action, escalation in project cost through delay and the loss of opportunity; there is a also the lesser cost of the bid process itself. As opposed to this, if the project is awarded to the sole bidder, the only cost is the possibility of a better price discovery, if there were more bidders. However, there is no way of knowing if in a multiple bid situation the price discovered would have been lower.

Therefore, it makes sense to award a project even if there is only a single bidder. However, the government must make an internal assessment of costs or tariff, depending on the nature of the project, and set a sort of reserve price. If the single bid betters the reserve price then the projects should be awarded.

In the current environment when investment sentiment is extremely poor, the priority should be to facilitate projects and not get too caught up in procedures. The bid documents should provide for the possibility of projects going to a single bidder and the CVC would do well to ensure that such awards do not become controversial.
Courtesy: Economic Times

Exchange Rate Variation (ERV)

In case of a contract involving substantial import content(s) and having a long delivery period (exceeding one year from the date of contract), an appropriate Foreign Exchange Variation clause may be formulated by the Purchase Organization in consultation with its Finance Wing, as needed, and incorporated in the Tender Enquiry Document. In that clause, the tenderers are to be asked to indicate import content(s) and the currency(ies) used for calculating the value of import content(s) in their total quoted price, which (i.e. the total quoted price) will be in Indian Rupees. The tenderers may be asked to indicate the Base Exchange Rate for each such foreign currency used for converting the FE content into Indian Rupees and the extent of foreign exchange rate variation risk they are willing to bear. To work out the variation due to changes (if any) in the exchange rate(s), the base date for this purpose will be the due date of opening of tenders/seven days prior to the due date of opening of tenders …….. (the purchase organization is to decide and adopt a particular suitable date). The variation may be allowed between the above base date and the date of remittance to the foreign principal/mid-point of manufacture of the foreign component/….. (the purchase organization is to choose the appropriate date). The applicable exchange rates as above will be according to the TT Selling Rates of Exchange as quoted by authorized Exchange Bankers approved by the Reserve Bank of India on the dates in question. No variation in price in this regard will be allowed if the variation in the rate of exchange remains within the limit of plus/minus ……. percent. (The purchase organization is to decide the figure). Any increase or decrease in the Customs Duty by reason of the variation in the rate of exchange in terms of the contract will be to the buyer’s account. In case Delivery period is refixed/ extended, ERV will not be admissible, if this is due to default of the supplier. The purchase organization may formulate an appropriate ERV clause on similar lines as above in consultation with their Finance Wing.” The following documents should be furnished by the supplier for claiming ERV:
(a) A bill of ERV claim enclosing working sheet
(b) Banker’s Certificate/debit advice detailing F.E. paid, date of remittance and exchange rate
(c) Copies of import order placed on supplier
(d) Invoice of supplier for the relevant import order

Performance Security

To ensure due performance of the contract, Performance Security is to be obtained from the successful bidder awarded the contract. Performance Security is to be obtained from every successful bidder irrespective of its registration status etc. Performance Security should be for an amount of five to ten per cent. of the value of the contract. Performance Security may be furnished in the form of an Account payee Demand Draft, Fixed Deposit Receipt from a Commercial bank or Bank Guarantee from a Commercial bank in an acceptable form safeguarding the purchaser’s interest in all respects. Performance Security is to be furnished by a specified date (generally 21 days after notification of the award) and it should remain valid for a period of 60 days beyond the date of completion of all contractual obligations of the supplier, including warranty obligations.
Submission of Performance Security is not necessary for a contract value upto Rs.1 lakh.
Forfeiture of Performance Security
Performance security is to be forfeited and credited to the purchase organization in the event of a breach of contract by the supplier, in terms of the relevant contract.
Refund of Performance Security
Performance Security should be refunded to the supplier without any interest, whatsoever, after it duly performs and completes the contract in all respects but not later than 60 days of completion of all such obligations under the contract.
Verification of the Bank Guarantees
Bank Guarantees submitted by the tenderers / suppliers as EMD / Performance Security need to be immediately verified from the issuing Bank before acceptance.

Laws relating to Arbitration & Conciliation (both Domestic & International)

The Arbitration and Conciliation Act, 1996 is the prime legislation relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and also to define the law relating to conciliation and for matters connected therewith or incidental thereto. It repealed the three statutory provisions for arbitration:- (i) the Arbitration Act, 1940; (ii) the Arbitration (Protocol and Convention) Act, 1937; and (iii) the Foreign Awards (Recognition and Enforcement) Act, 1961.

Domestic Arbitration is defined as an alternative dispute resolution mechanism in which the parties get their disputes settled through the intervention of a third person and without having recourse to the court of law. It is a mode in which the dispute is referred to a nominated person who decides the issue in a quasi-judicial manner after hearing both sides. Generally, the disputing parties refer their case to an arbitral tribunal and the decision arrived at by the tribunal is known as an 'award'.

While, the term 'international commercial arbitration' means "an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in India and where at least one of the parties is:- (i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or (iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country".

The major provisions relating to Arbitration in the Act are:-

* The parties to a present dispute may make an agreement called as the 'arbitration agreement' that instead of going to the court, they shall refer the dispute to arbitration. The parties to the agreement may refer to arbitration, a dispute:-

o Which has arisen or which may arise between them,
o In respect of a defined legal relationship, whether contractual or not.

Thus, all matters of civil nature whether they relate to present or future disputes may form the subject matter of reference. Even disputes such as infringement of intellectual property rights shall also be covered.
* Although no formal document is prescribed, an arbitration agreement/clause must be in writing. If the arbitration agreement/clause is contained in a document, the document must be signed by the concerned parties. Besides, the agreement may be established by:- (i) an exchange of letters, telex, telegram or other means of telecommunications; or (ii) an exchange of statements of claims and defence in which the agreement is alleged by one party and is not denied by the other.
* The disputes that cannot be referred to arbitration are:-
o Insolvency proceedings.
o Lunancy proceedings.
o Proceedings for appointment of a guardian to a minor.
o Question of genuineness or otherwise of a will or matter relating to issue of a probate.
o Matter of criminal nature.
o Matters concerning public charitable trusts.
o Disputes arising from and founded on an illegal contract.
* The agreement mandatorily requires the appointment of an arbitrator. An arbitrator is a person appointed, with or without mutual consent of the contending parties, for the purpose of investigation and settlement of a difference or dispute referred to him. The arbitral tribunal may be constituted by one or more arbitrators. The parties are free to fix the number of arbitrators by agreement. Accordingly, the reference may be made either to a single arbitrator or a panel of odd number (i.e. 3,5,7 etc) of arbitrators. If there is no agreement, the reference shall be made to a sole arbitrator.
* Unless otherwise agreed by the parties, an arbitrator may be of any nationality. In case of an international commercial arbitration, where the parties belong to different nationalities, the Chief Justice of india may appoint an arbitrator of a nationality other than that of the parties.
* The parties are free to agree on a procedure for appointing the arbitrator or arbitrators. If there is such an agreement, the appointment has to be made in accordance with it. The agreement may provide for the number of arbitrators, qualifications of arbitrator, procedure of appointment, procedure of challenging the appointment, termination of appointment, procedure to be followed by arbitrators, place of arbitration, language, etc.
* The duties of the Arbitral Tribunal are:- (i) to act independently and impartially and treat the parties equally; (ii) to give each party full opportunity to present his case.
* The parties may agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings. In the absence of such agreement, the arbitral tribunal may conduct the proceedings in the manner it considers appropriate and shall be empowered to determine the admissibility, relevance, materiality and weight of any evidence. The tribunal shall decide whether to hold oral hearings for presentation of evidence or for oral argument, or whether to conduct the proceedings on the basis of documents and other materials.
* An arbitral award shall be made in writing and shall be signed by the members of the arbitral tribunal. The award shall state its date and place of arbitration. The arbitral award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or in case of award on a settlement between the parties. A signed copy of the award shall be delivered to each party.
* An arbitral award is itself enforceable as a decree of the court, normally after three months from the date on which it was received by the parties, provided no application for setting aside the award is made or if it is made the same has been rejected. The arbitral award shall be final and binding on the parties and persons claiming under them respectively.
* The arbitral proceedings shall be terminated when:-
o The final arbitral award is made,
o The claimant withdraws his claim, and the respondent does not object to it,
o The parties agree on the termination,
o The continuation of proceedings has for any other reason become unnecessary or impossible.

The Arbitration and Conciliation Act provides statutory recognition to conciliation as a distinct mode of dispute settlement. Conciliation is defined as the process of amicable settlement of disputes by the parties with the assistance of a conciliator. It differs from arbitration in the sense that in arbitration the award is the decision of the third party or the arbitral tribunal, while in the case of conciliation the decision is of the parties which is arrived at with the mediation of the conciliator.

The major provisions relating to Conciliation in the Act are:-

* A party initiating the conciliation shall send a written notice to the other party, briefly identifying the subject of the dispute and inviting it for conciliation. The conciliation proceedings shall commence on acceptance of invitation by the other party. If the party initiating conciliation does not receive a reply within 30 days from the date the invitation was sent or within the specified period, it may opt to treat this as a rejection and inform the same to the other party. If it rejects the invitation, there can be no conciliation proceeding.
* Unless otherwise agreed there shall be one conciliator. The parties may however, agree that there shall be two or three conciliators, who shall act jointly. The sole conciliator shall be appointed by mutual consent of the parties. In case of two conciliators, each party may appoint one conciliator. In case of three conciliators, each party may appoint one conciliator and the third conciliator may be appointed by mutual agreement of the parties who shall act as the presiding conciliator. However, the parties may agree that a conciliator shall be appointed or recommended by an institution or a person.
* Each party shall submit to the conciliator a brief written statement describing the general nature of the dispute and the points at issue. A copy of the same shall be sent to the other party. The conciliator may require of each party to send a detailed statement supported by documents and other evidence, a copy whereof shall be sent to the other party also. Any factual information concerning the dispute received by the conciliator from a party, shall be disclosed to the other party to allow it an opportunity to present any explanation, except however, when a party gives any information subject to a condition that should be kept confidential.
* The parties involved shall co-operate with the conciliator in good faith, comply with requests for submitting written materials, providing evidence and attending meetings. A party may submit to the conciliator suggestions for the settlement of the dispute.
* The functions of a Conciliator are:-
o To assist the parties in an independent and impartial manner, to reach an amicable settlement of their dispute.
o To be guided by principles of objectivity, fairness and justice.
o To give consideration to rights and obligations of the parties, trade usages, circumstances surrounding the dispute and any previous business practice between the parties.
o To conduct the conciliation proceedings in an appropriate manner, taking into account the circumstances of the case and wishes of the parties.
o To make proposals for a settlement of the dispute.
o Not to act as an arbitrator or as a representative of a party in any arbitral or judicial proceeding in respect of the same dispute, unless otherwise agreed by the parties.
o Not to act as a witness in any arbitral or judicial proceedings.
* If it appears to the conciliator that a settlement is possible, he shall formulate the terms of a possible settlement and submit them to the parties for their observations. The conciliator shall then reformulate the possible settlement in the light of observations received from the parties. If the parties reach on a settlement, they may draw up and sign a written settlement agreement with the assistance of the conciliator. The conciliator shall authenticate the settlement agreement and furnish a copy thereof to each of the parties. The settlement agreement shall be final and binding on the parties and shall have the same effect as of an arbitral award.
* The conciliation proceedings shall be terminated when:-
o A settlement agreement is signed by the parties,
o A written declaration is made by the conciliators after consultation with the parties, that further efforts at conciliation are no longer justified,
o A written declaration is made by the conciliator, after the deposits required in relation to costs of the proceedings are not received from the parties, that the proceedings are terminated,
o A written declaration is made by the parties to the conciliator, that the conciliation proceedings are terminated,
o A written declaration is sent by a party to the other party and the conciliator, that the conciliation proceedings are terminated.

'Foreign Award' has been defined to mean "an award on differences between persons arising out of legal relationships, whether contractual or not and considered as commercial under the law in force in India, and made in pursuance of an agreement in writing for arbitration to be governed either by the New York Convention or by the Geneva Convention, in the territory of a notified foreign State". Some of the provisions of the Act relating to foreign award are:-

* Where a commercial dispute covered by an arbitration agreement to which either of the Convention apply, arises before a judicial authority in India, it shall at the request of the party be referred to arbitration.
* The party applying for the enforcement of a foreign award shall produce the original award or a duly authenticated copy thereof, the original arbitration agreement or a certified copy thereof, and evidence to prove that the award is a foreign award.
* If the court is satisfied that the foreign award is enforceable, the award shall be deemed to be a decree of the court. An appeal shall lie against the order of the court refusing to refer the parties to arbitration or refusing to enforce a foreign award.
* Any foreign award which is enforceable under the Act, shall be binding and may be relied upon by the parties by way of defence, set off or otherwise in any legal proceedings in India.

Liquidated Damages - Applicability and Enforceablity

Liquidated Damages - Applicability and Enforceablity

P. C. Markanda*

INTRODUCTION

In all building and engineering contracts, it is invariably provided that the subject work shall be completed within the stated time. In order to ensure that the objective is achieved, the parties agree between themselves that a certain percentage of the amount of the whole work shall be completed at different defined stages. It is also provided that default in achieving the target by the contractor at any of the defined stages would attract action by the employer in terms of the liquidated damages clause contained in the contract.

The contracts generally provide that the contractor at 1/4 th, 1/2 and 3/4th stages of the work shall achieve defined progress. If at one-fourth stage, the contractor fails to give progress as agreed, the employer can levy liquidated damages, after observing the requisite formalities, or can, alternatively, call upon the contractor to make up the progress in a period to be given in the notice, failing which a right can be reserved by the employer to levy liquidated damages. Similar action can be initiated after the expiry of half or three-fourth of the stipulated period.

The purpose of inserting liquidated damages clause is only to ensure that the contractor shall execute the work with due diligence and in a workmanlike manner and strive to complete the whole work as given in the contract within the stipulated time. It must be remembered that the stipulation with regard to liquidated damages is not at all aimed to provide revenue to the employer. It is thus, desirable that recourse to imposition of liquidated damages should be taken only in extreme cases. It must be understood that by realising the amount of liquidated damages, the employer is not only reducing the working capacity of the contractor but is also running the risk of bringing the work to a complete halt. Many legal and financial complications can and do arise consequently. There may be an injunction from the Courts restraining the employer from proceeding with the work further pending' decision of the case. In addition, the risk of additional financial burden due to efflux of time has also to be borne in mind by the employer.

In many cases the time fixed by the contract ceases to be applicable on account of some act or default of the employer or his architect or engineer. A provision is, therefore, generally inserted in order to avoid such acts or defaults destroying the right to liquidated damages, by which the architect or engineer is empowered to grant an extension of time on the happening of certain specified events, and the contractor is bound, when such an extension of time has been properly granted to complete within the extended time. This has the effect of substituting for the time fixed by the contract a new date from which the liquidated damages are to run. Such a new date can only be substituted for the original time, under such a power, where the extension is given under the circumstances and on the happening of the events expressly provided by the contract. (1)

MERE USE OF WORDS "LIQUIDATED DAMAGES" AND "PENALTY"' IN A CLAUSE NOT TO BE DECISIVE

The question that arises is as to what is meant by liquidated damages, and secondly, whether or not the stipulation in the contract is in fact for penalty or liquidated damages. Under Common Law, a genuine pre-estimate of damages by mutual agreement was regarded as a stipulation for liquidated damages, a stipulation in contract in ierrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation

The use of the term penalty or liquidated damages by itself is not decisive, even what is described as liquidated damages could turn out to be penalty on the face of given case. The essence of penalty is a sum paid as in terroem while the essence of liquidated damages is a genuine covenanted pre-estimate of damages. A penal stipulation cannot be enforced. Liquidated damages must be the result of a genuine pre-estimate of damages and they do not include a sum fixed in terrorem. The question Is one of construction of a contract to be judged as at the tim c it was made, and mere description as penalty or liquidated damages though relevant is not binding.

The Indian Legislature has sought to cut across the web of rules and presumptions under the EngIish Common Law by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty. (3)

Sometimes it becomes difficult to make out whether the sum named in a clause is a penalty or liquidated damages. In such a case, the Court must take into consideration the intention of the parties, as evidenced by their language and the circumstances of the case. (4)

Mere use of the word "penalty" in a liquidated damages clause would not make the stipulation penal. If the sum named is not in terrorem it would be regarded as liquidated damages despite the fact that it had been given the name "penalty" in the contract.

Where in a contract for electric lighting installation it was provided that the work should be "completed in all respects on or before 26 November, 1898, subject to a penalty of 15 pounds per day, and the Plant by 10 December, subject to a penalty of 3 pounds per day the work remains unfinished to the satisfaction of the authorities or the Engineer, it was held that although the word penalty was used, the amounts accrued owing to the default of the contractor were, in fact, liquidated damages. (5)

On the other hand, if the sum named in the agreement is its lerrorem but has been stipulated to be liquidated damages in the contract, it will not be given effect to by the Courts since, in fact, it is in the nature of penalty.

Where the employer determined the contract on account of alleged breaches by the contractor, and clause 30 of the contract provided that in the event ofthe determination for breach, "all implements of the contractor used in the carrying out of the contract and all materials provided by him.... shall become the sole and absolute property of the employer and shall be considered as unaseertained damages for breach of contract", it was held that the clause was a penalty clause and not a liquidated damages clause.(6)

DISTINCTION BETWEEN LIQUIDATED DAMAGES AND PENALTY

Sometimes there is a very thin line dividing provisions relating to liquidated damages and penalt,.. A distinction as to whether the stipulation is one by way of liquidated damages or penalty has been summed up by the House of Lords in Dunlop Pnumatic. Tyre Co. Ltd. Vs New Garage and Molor Company Ltd. (7) as follows:

A. The parties who use the expression `penalty' or liquidated `damages' may prima facie mean what they say, yet the expressions are not conclusive.

B. The essence of a penalty is a payment of money in terrorem of an offending party; the essence of liquidated damages is a genuine pre-estimate of damayes.

C. The question whether a sum is a penalty or liquidated damages is a matter of construction of the particular contract, to be judged at the time of its and not at the time of its breach.

D. To assist in this task of construction, various tests have been suggested, which if applicable to the case under construction may prove helpful or even conclusive. Some such tests are -

i) the sum stipulated shall be a penalty if it is extravagant and unconscionable in amount in comparison with greatest loss that could conceivably be proved to follow from breach.

ii) it would be a penalty if breach consists only in not paying sum of money and sum stipulated is greater than sum which ought to have been paid;

iii) presumption (but no more) that it is a penalty when single sum made payable by way of compensation, or occurrence of one or more or all of such events, which may occasion serious damage or trifling damage, on the other hand; and

iv) no obstacle to sum stipulated being a genuine pre-estimate of damage that consequences of breach are such as to make precise pre-estimation almost impossible. On the contrary, that is the situation when probably the pre-estimated damage was true bargain between parties.

A building contract contained a proviso that in case the contract should not in all things be duly performed by the contractors they should pay 1000 pounds as liquidated damages. Held, this was a penalty and not liquidated damages. (8)

If in making a provision for breach of contract, the promisee stipulates that the promisor on the breach only, shall pay such compensation as the Court would deem reasonable in the circumstances of the case, then there is no penalty and the stipulation is not penal. But, if on the other hand, the Court, after a proper consideration of the facts of the case, come to the conclusion that the stipulation was put in not by way of reasonable compensation to the promisee but in order that by reason of its burdensome or oppressive character it may operate i . Pi terrorem over the promisor so as to drive him to fulfill the contract, then such a stipulation is by way of penalty. (9)

The parties to a contract may at the time of entering into it provide, that in case of breach the party in default is to pay to the other a sum certain provided in, or ascertainable from, the contract. This sum may be either liquidated damages, in which case it is not to be interfered with by the Court, or a penalty, which covers the loss if proved but does not assess it. If it is a sum which can be regarded as a genuine pre-estimate by the parties of the loss which they contemplated would flow from the breach, it is liquidated damages. If, on the other hand, the sum does not attempt to assess the loss, but is imposed as security for the due performance of the contract, it is a penalty. Liquidated damages, therefore, are pactional damages agreed to between the parties. Therefore, the essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted, pre-estimate of damage. (10)

WHEN LIQUIDATED DAMAGES TREATED AS COMPENSATION FOR DELAY

In certain cases, the Courts have treated the liquidated damages as compensation for delay caused by the contractor in completing the work. By way of illustration, reference may be made to the two cases which are as under:

(A) The erectors of a silk reducing plant covenanted to pay 20 pounds a week- for every week exceeding eighteen weeks occupied in the erection of the plant. The, period was greatly exceeded, and the silk company contended that this sum was a penalty and that they were entitled to much larger sum as unliquidated damages. Held, the sum of 20 pounds a week was intended by the parties to be the agreed measure of damages as the erectors had declined to be responsible for delay and the sum was provided in place of no compensation and was not a pre-estimate of actual damages, but was an agreed amount to go towards compensation for delay.(11)

(B) Where a contractor entered into a contract with the Government for supply of materials before a specified date for the repair and construction of roads and the parties were aware that the construction work was a matter of extreme urgency and was to be completed with the help of materials to be supplied by the contractor before the specified date, otherwise the construction work would be held up and the Government would suffer loss and damages and also the parties knew before hand that if the contract would not be performed to its completion, it would not be possible for the Government to lead evidence of actual loss and accordingly they assessed such loss on the basis of certain percentage of value of contract and where there was sufficient evidence to prove inlegal injury suffered by the Government by reason of the breach of the contract and also to show that if any other contractor had been employed at that stage, the Government would have suffered certain loss and damage thereby the amount assessed and mentioned in the contract cannot be said to have been assessed by way of penalty but was a genuine pre-estimate of the loss which was to be suffered by the Government in case of failure on the part of the contractor to deliver the materials before the due date mentioned in the contract. Hence, the amount mentioned in the contract would be payable as liquidated damages. (12)

DAMAGES NOT PAYABLE WHEN LIQUIDATED DAMAGES LEVIED

The parties when entering into a contract presuppose that the employer shall not commit any breach of conditions of contract and shall under all circumstances give effect to the stipulations contained in the contract. This is probably the only reason why the contract does not provide a yardstick for measuring damages which the contractor suffers like the manner it is so provided in case of liquidated damages. Thus, the only remedy available to the contractor in case of breach of contract by the employer is to submit his claim for damages to the arbitrator if the contract provides for arbitration in case of disputes between the parties but if there be no arbitration clause, then to file a civil suit. The question whether the employer in addition to the amount stated in the liquidated damages clause, is entitled to damages has been answered in Sir Chunilal V. Mehta and Sons Ltd. Vs Century Spinning and Manufacturing Co. Lid. (13) in the following terms:

"Where the parties name in a contract reduced to writing a sum of money to be paid as liquidated damages they must be deemed to exclude the right to claim an unascertained sum of money as damages. The right to claim liquidated damages is enforceable under section 74 of the Contract Act and where such a right is found to exist no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they at the same time intended to allow the party who has suffered by the breach to give a go by to the sum specified and claim instead a sum of money which was not ascertainable or ascertainable at the date of the breach."

The effect of section 74 of the Indian Contract Act is that a party cannot get the full amount mentioned in the contract as a matter of absolute right or as a matter of course. But if the party proves that he has suffered damage to the extent of the full amount or that the Court considers, even without any proof that the full amount is a reasonable compensation which can be awarded under the circumstances, the Court can award the full amount. One thing is however certain, that.the party is entitled to get some amount, not exceeding the sum named, which the Court considers as reasonable compensation, whether any actual loss or damage is proved to have been suffered by him. (14)

SITUATIONS WHERE LIQUIDATED DAMAGES CANNOT BE REALISED

Realisation of liquidated damges from the contractor is not a matter of course There may be circumstances when the employer loses the right to recover the same from the contractor.

Liquidated damages cease to be payable where the employer has waived the right to insist upon them. e.g. where he has failed to deduct or retain them in cases where it is imperative on his part under the contract to do so.(15)

Where the liquidated damages are stipulated for at so much per day or per week. there must be a definite date from which they are to run. If no such date is fixed by the contract, or if by the operation of intervening circumstances the date fixed by the contract has ceased to be operative and there is no provision in the contract by which another date can be substituted, all rights to recover the sum stipulated for as liquidated damages have gone.(16)

A contractor was delayed and failed to complete the contract on time, partly because of his fault and partly because the employer was late in the delivery of certain fixtures in the building. The employer sued the contractor under a liquidated damages clause for a per diem payment of each day's work overdue. Held, the failure of the employer to deliver precluded him from relying on the penalty clause, notwithstanding that the contractor may have been overdue in any event, in the absence of evidence that the contract could have been completed in time by a special effort on the part of the contractor.(17)

When the contractor had not finished the work by the date fixed in the agreement and the State allowed him to continue and complete it and final bill was prepared without imposing any penalty in terms of contract soon after the contractor's failure to complete by fixed date or rescinding the contract or getting work completed by other contractor, the State was not entitled to compensation as it must be deemed to have waived its right to fix it and recover the same from the contractor.(18)

When a clause in the agreement provides that compensation shall be deducted from time to time as the delay would occur during the progress of the work, non-levy of the same by the Chief Engineer would amount to waiver of his right to fix the compensation and to recover the same from the contractor.(19)

There are many ways in which completion of the works within the contract time may be prevented by the act or default of the employer, as, for instance, by ordering extras.' by not providing the site at the appropriate time; by failure to supply drawings when required by the contractor, or by failing to supply materials which the employer has agreed to provide. Where the effect of extras being ordered by the employer is to cause delay to the contractor, it is clear that, in the absence of special stipulations in the contract, the date fixed for completion is made inapplicable and the contractor is relieved from his liability to pay liquidated damages for delay.(20)

Where a clause in a contract provided for imposition of penalty if work was not done with due diligence, and the delay occurred due to failure of the department in supplying the stipulated material in time which had been duly intimated from time to time, and even the request of the contractor for grant of extension of time had not been rejected by the department, it was held that imposition of penalty. for delay. cannot be justified.(21)

LIQUIDATED DAMAGES RECOVERABLE ONLY WHEN LEGAL INJURY SUFFERED

The question whether the employer can recover the amount specified in the contract by way of iquidated damages without proving that there had been "legal injury" has been answered in some decided case. In Fateh Chand Vs Balkishan Das (22), the Supreme Court of India has held that Section 74 of the Indian Contract Act undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage". however it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things. or which the parties knew when they made the contract, to be likely to result from the breach.

Section 74 of the Indian Contract Act, 1872 does not dispense with the basic condition of the breach resulting in any loss or damae which can be called "legal injury". The party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of "legal injury" having been sustained on account of such breach. The words in Section 74 "whether or not actual damage Or loss is proved to have been caused thereby" have been employed to underscore the departure deliberately made by the Indian Legislature from the complicated principles of English Common Law and also to emphasize that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. Thus, Section 74 deliberately states that what is to be awarded is a reasonable compensation. In a case where the party complaining has not suftered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him, for there is nothing to recompensate, satisfy or make amends. Therefore, he will not be entitled to compensation.(23)

Where the Chief Engineer has very categorically stated that on account of the delay on the part of the contractor in completing the work, there occasioned, in fact, no loss to the Government. compensation cannot be granted by the Courts even if a sum is named in the contract as payable in the event of breach of contract.(24)

In Michel Habib Raji Ayoub Vs Sheikh Suleman EI Taji Forouqui (25), it was observed as under:

"Agreed liquidated damages, if to be enforced must be the result of a genuine pre-estimate of damages' to use the illuminating phrase of LORD DUNREDIN. They do not include a sum fixed in terrorem covering breaches of contract of many varying degrees of importance the possible damages from which bear no relation to the fixed sum, which obviously have at no time been estimated by the contracting parties. It seems right therefore to conclude that now when the code is applied to contracts `damages' will be taken to mean actual damages, and the article will only apply to an agreement which represent a genuine pre-estimate of damages'. Where there is such an agreed sum `no more and no less' can be awarded. But if the Court applying well-known rules has to conclude that the sum agreed was a penalty, whatever it may be called in the agreement, then the penal stipulation shall not be enforced."

SECURITY DEPOSIT CANNOT BE FORFEITED WHEN LIQUIDATED DAMAGES LEVIED

The question whether security deposit of the contractor can also be forfeited when the employer has already exercised its right of recovering liquidated damages has been answered by the Courts in India. Some of the cases relating to this aspect of the matter are as under:

Where on failure of contractor to complete the work within time, the Government in accordance with conditions of contract debited the contractor with actual cost which was spent in getting unfinished work done and forfeited the security amount also, it was held that as the Government did not suffer any damage in consequence of default, it was not entitled to forfeit security deposit inasmuch as forfeiture of security deposit, would amount to imposition of penalty.(26)

The party to the contact taking a security deposit from the other party to ensure due performance of the contract is not entitled to forfeit the security deposit on the ground of default, when no loss is caused to him in consequence of such default.(27)

When in a works contract, the contractor undertook to complete the work within 3 months and on default to forgo the deposit and the building having been completed late without any loss to the department, it was held that the department could not forfeit the deposit and at best could claim reasonable compensation.(28)

A provision in the contract between the contractor and the government cast a duty on the contractor to finish the work within the specified time and if he failed to do so, the Divisional Engineer was given a discretion to cancel the contract and employee some other person to execute the remaining portion thereof The Division Engineer could also recover from the contractor any extra cost that such proceeding might entail or he might allow the contractor to complete the work chasing for each day for the work unfinished by him a penalty. The contractor not having completed the work within the stipulated time, the Government cancelled the contract. The government did not give the work to any other person nor did it allow the contractor to complete it. No notice was given to the contractor before the cancellation of the contract. The government, however, forfeited the earnest money and the security deposit which were deposited by the contractor, on the condition that the amount would be returned to the contractor upon completion of the work It was held that thought the government was entitled to cancel the contract, it had not followed the formalities laid down in the stipulations of the contract and therefore would not be entittled to forefeit the earnest moneyh and further security deposit (29).

Where in a contract between the State government and the contractor. power had been conferred upon the Executive Engineer to grant extension from time to time and for levying and recovering penalty/compensation from the contractor at specified rates for the unfinished work after expiry of the fixed date, it was held that on rescission of, such contract by Government without fixing any further period was illegal and State Government committed a breach of contract and consequently the security deposit of the contractor could not be forfeited.(30)

To justify forfeiture of advance deposit being part of price as "earnest", the terms of contract should be sufficiently explicit and made known to the party making the deposit. Thus, where the contents of the reply submitted by the receiver in the Court were not sutricient to hold that 1/4 th advance deposit of bid money was by way of earnest and as a guarantee for fulfillment of other terms of the contract so as to justify its forfeiture on the alleged breach on the part of the highest bidder, then in the absence of proof of any loss to the auctioning authority the advance deposited by the auction-purchaser could not be forfeited by the receiver as "eamest".(31)

CONCLUSION

Invocation of liquidated damages clause should be taken recourse to by the employer only in such cases where there can be no two opinions that the contractor does not have the capacity to do the work- nor he will be able to complete the work within a reasonable time after the time stated in the contract expires. Any action taken in a hurry would land the employer in problem. Some amount of restraint in proceeding against the contractor must be exercised. The contractor may have genuine problems which he could not have foreseen with reasonable diligence at the time of entering into contract. If the employer takes into consideration the fact that it does not pay the contractor to delay execution of work, then he has to investigate as to why delay is occurring. The employer must endevour to find solutions rather that saying that it is not his headache, since the aimed objective of the employer is to get the work completed rather than enter into any legal or financial complications.
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