Reasonable Compensation | In some contracts, it would be impossible for the court to assess the compensation arising from the breach..... Do you agree? Give reasons.

Question: Reasonable Compensation | In some contracts, it would be impossible for the court to assess the compensation arising from the breach and if the compensation contemplated is not by way of a penalty or unreasonable, the court can award the same if it is a genuine pre-estimate by the parties as to the measure of reasonable compensation. Do you agree? Give reasons. [DJS 2008]

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Answer

The statement of the present case at hand has been borrowed from the landmark case of Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd [AIR 2003 SC 2629]

For the purpose of the construction of contracts, the intention of the parties is to be gathered from the words they have used and there is no intention independent of that meaning.

It cannot be disputed that for the construction of the contract, it is settled law that the intention of the parties is to be gathered from the words used in the agreement. If words are unambiguous and are used after a full understanding of their meaning by experts, it would be difficult to gather their intention differently from the language used in the agreement.

If upon a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in the law that prevents them from setting up that term.

Further, in construing a contract, the Court must look at the words used in the contract unless they are such that one may suspect that they do not convey the intention correctly. If the words are clear, there is very little the court can do about it.

Therefore, when parties have expressly agreed that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way of penalty duly agreed by the parties, there was no justifiable reason for the court to arrive at a conclusion that still the purchaser should prove the loss suffered by it because of delay in supply of goods.

In the case of Indian Oil Corporation v. Lloyds Steel Industries Ltd [2007 (4) ARBLR 84 Delhi], the court held that:

“…The guiding principle is ‘reasonable compensation’. In order to see what would be the reasonable compensation in a given case, the Court can adjudge the said compensation in that case. For this purpose, as held in Fateh Chand (supra) it is the duty of the Court to award compensation according to settled principles.

Settled principles warrant not to award compensation where no loss is suffered, as one cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove the actual extent of the loss or damage.”

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.

Thus, it is the nature of the Liquidated Damages clause that needs to be considered, that is, whether it’s a genuine pre-estimate of loss occurred on breach of contract or whether it is in the form of penalty and deterrent in nature.

Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
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8. Law of Contract Mains Questions Series Part-VIII
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