MAHANAGAR TELEPHONE NIGAM LTD. versus TATA COMMUNICATIONS LTD.

[2019] 4 S.C.R. 885

MAHANAGAR TELEPHONE NIGAM LTD.

TATA COMMUNICATIONS LTD.

(Civil Appeal No.1766 of 2019)

FEBRUARY 27, 2019

[R. F. NARIMAN AND VINEET SARAN, JJ.]

Contract Act, 1872 – ss. 74and 70 – Compensation for breachof contract where penalty stipulated for – Claim in quantum meruitu/s. 70 when parties governed by contract – Permissibility of –Purchase Order wherein respondent was to provide last mileconnectivity at two places of the appellant and levy of liquidateddamages were to be limited to maximum of 12% – Bills raised bythe respondent for the services rendered amounting toRs. 2,15,25,512/- – On account of limitation of 12%, the appellantscould not have levied and deducted an amount more thanRs. 25,83,181/-, however, the appellant proceeded to unilaterallyimpose rentals at their own rate of dark fibre – Appellant adjustedthe amount from dues payable to the respondent by deduction fromthe bill raised by the respondent – Respondent filed petition beforethe tribunal against the appellant for recovery of Rs.1,10,57,268/-plus interest thereon – Tribunal held that the principal amount to bepaid back to the respondent by the appellant would beRs.84,74,087/- with 9% interest thereon after deductingRs.25,83,181/- (12% liquidated damages) from Rs. 1,10,57,268/- –On appeal, held: Instant case is covered by s. 74 – Tribunal rightlyheld that maximum of 12% can be levied as liquidated damagesunder the contract, which would amount to Rs. 25 lakh – Since thisclause governs the relations between the parties, contractuallyspeaking higher figure, cannot be awarded as liquidated damages,which is to be considered as final – Appellant can claim only thissum – Thus, the order of the tribunal upheld – Telecom RegulatoryAuthority of India Act, 1997.

Dismissing the appeal, the Court

HELD: 1.1 Section 70 occurs in Chapter V of the ContractAct, which chapter is headed, “of certain relations resembling

Athose created by contract”. There are five sections that arecontained in this Chapter. Each of them is posited on the fact thatthere is, in fact, no contractual relationship between the partiesclaiming under this Chapter. For example, under Section 68, if aperson incapable of entering into contract is suppliednecessaries by another person, then the person who has furnishedBsuch supplies becomes entitled to be reimbursed from theproperty of the person so incapable of entering into the contract.Section 69 also deals with case where person has no contractualrelationship with the other person mentioned therein, but who isinterested in the payment of money which the other person isCbound by law to pay, and who, therefore, pays it on behalf of suchperson. Such person is entitled to be reimbursed by the otherperson. Under Section 71, again, the finder of goods spoken of isa person who is fastened with the responsibility of bailee asthere is no contractual relationship between the finder of goods

and the goods which belong to another person. Equally, underDSection 72, person to whom money has been paid or anythingdelivered by mistake or coercion must repay or return it, or else,such person would be unjustly enriched. Here again, there is nocontractual relationship between the parties. It is in this settingthat Section 70 occurs. [Para 2] [890-F-H; 891-A-B]

E1.2 The instant case is really covered by Section 74 of theContract Act, which occurs in Chapter VI, which is headed, “ofthe consequences of breach of contract”. [Para 10] [895-B]

1.3 The impugned judgment of TDSAT rightly held that amaximum of 12% can be levied as liquidated damages under theFcontract, which sum would amount to sum of INR 25 lakh. Sincethis clause governs the relations between the parties, obviously,a higher figure, contractually speaking, cannot be awarded asliquidated damages, which are to be considered as final and notchallengeable by the supplier. This being the case, the appellantGcan claim only this sum. Anything claimed above this sum wouldhave to be refunded to the respondent. The impugned judgmentof the TDSAT is upheld. [Paras 13, 14] [897-G-H; 898-A-B]

MAHANAGAR TELEPHONE NIGAM LTD. v.TATA COMMUNICATIONS LTD.

Moselle Solomon v. Martin & Co.ILR (1935) 62 Cal612;Kanhayalal Bisandayal Bhiwapurkar (Dr.) v.Indarchandji Hamirmalji SisodiaAIR 1947 Nag 84;Alopi Parshad and Sons Ltd. v. Union of India[1960] 2 SCR 793;Mulamchand v. State of M.P.[1968]3 SCR 214;Orissa Industrial InfrastructureDevelopment Corpn. v. Mesco Kalinga Steel Ltd.(2017)5 SCC 86; Kailash Nath Associates v. DDA(2015) 4SCC 136 : [2015] 1 SCR 627 – referred to

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No.1766 of2019.

From the Judgment and Order dated 25.06.2018 of the TelecomDisputes Settlement and Appellate Tribunal, New Delhi in TP No.465 of2012.

Sumit Chander, Shagufa Salim, Ms. Garima Prashad, Advs. forthe Appellant.

Ms. Dharitry Phookan, Adv. for the Respondent.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. The present appeal arises out of disputeunder the Telecom Regulatory Authority of India Act, 1997. The reliefsought through petition before the Telecom Disputes Settlement andAppellate Tribunal, New Delhi [“TDSAT”] by the respondent, TataCommunication Ltd. against the appellant, Mahanagar Telephone NigamLtd., is for recovery of sum of INR 1,10,57,268/- plus interest thereon.The question that arose between the parties is whether the appellant

888SUPREME COURT REPORTS

Awas justified in adjusting this amount from the dues payable to therespondent by deduction from the bills raised by the respondent. Sincethe Purchase Order dated 01.10.2008 forms the basis for the claim, it isimportant to set out clauses 4 and 8 of the said Purchase Order asunder:

B“4.SCOPE OF ORDER

xxx xxx xxx

iv. Termination of the bandwidth on STM-1 would be done at theMTNL sites/locations in Delhi (Kidwai Bhawan and Nehru Place)and Mumbai (Fountain Head & Prabha Devi) respectively as perthe requirement with redundancy in last mile connectivity. Forthis bandwidth termination purpose, optical/electrical converter,cable and any other hardware/software etc. required, if any, wouldbe arranged by the bidder free of cost.”

xxx xxx xxx

“8. DELIVERY SCHEDULE

(i) The physical connectivity for bandwidth should be completedwithin two months from the date of place of Purchase Order.”

The TDSAT, on considering this Purchase Order, held:

“25. At this stage, it falls for consideration as to what relief thepetitioner is entitled to on the basis of strength of its own case.For this purpose, it is useful to note at the outset that the petitionerwas required to provide the last mile connectivity as per paragraph4(iv) of the P.O. within two months. It is also not in dispute thatpetitioner did not provide the required connectivity not only byDecember 2008 but even by time when it chose to terminate thecontract on 11.01.2011. The defence pleaded and argued on behalfof petitioner is that it was neither given access to the buildings/premises of the respondents nor the permission for affecting thelast mile connectivity. This stand was sought to be justified byplacing reliance on Emails written by the petitioner on 01.06.2010which is more than year after grant of permission by Delhi andMumbai units around March and April 2009. On going throughthe communication dated 01.06.2010, it is evident that the pleathat respondents did not allow entry to the petitioner into their

premises in Mumbai has been raised quite belatedly and does notappear to be correct and convincing. Hence, we find petitioner’scase to be weak and unacceptable in so far as it puts the blametotally upon the respondent for its inability or failure to provide thelast mile connectivity. No doubt there was some delay by therespondents at the initial stage but that alone cannot justify orabsolve petitioner’s total failure.

26.If we had reliable materials to find out the exact cost of providingthe last mile connectivity at each of the two premises in Mumbaiand Delhi, we would have reduced that much amount from theclaim of the petitioner and allowed the rest. That would haveserved the interest of justice and prevented unjust enrichment ofthe petitioner. However, in absence of such reliable materials asto actual costs which the petitioner has saved by non-compliancewith the requirements of paragraph 4(iv) of the P.O., we havelooked closely at the case of both the parties and we find that atbest the respondents could have invoked clause 16 and moreparticularly, clause 16.2 which provide for liquidated damages incertain eventualities like failure to deliver the stores/services or toinstall and commission the project in whole or in part. The admitteddefault on the part of the petitioner can safely be treated as failureor delay affecting the installation/commissioning of part of theproject requiring last mile connectivity. In such case, as perclause 16.2(b) of the Agreement (P.O.), liquidated damages canbe levied on the affected part of the project. As per clause 16.2(c),the liquidated damages must be limited to maximum of 12%. Inthe present case the full amount billed and receivable by thepetitioner for services rendered is disclosed as Rs.2,15,25,512/-,hence, on account of limitation of 12%, the respondents could nothave levied and deducted an amount more than Rs.25,83,181/-.Instead of adopting this lawful course, the respondents proceededto unilaterally impose rentals at their own rate of dark fibre. Suchaction of the respondents amounts to adjudicating claim in itsown favour without any authority for such unilateral act eitherunder Section 70 of the Contract Act or under any of the provisionsof the Contract(P.O.).

xxx xxx xxx

A28.As result of aforesaid discussion, the claim of the petitioneris allowed but in part only. The principal amount which therespondent must refund or pay back to the petitioner would beRs.1,10,57,268 – Rs.25,83,181= Rs.84,74,087/-. Petitioner has alsoclaimed an amount of Rs.66,33,414/- by way of interest from thedate the amounts became due and upto 15.07.2012. It hasBcalculated this amount by applying rate of 18%. The calculationsare in Annexure P-14 which discloses the dates when the shortpayments were made after deductions. We are not persuaded toallow interest @ 18% in absence of any such stipulation in theAgreement (P.O.). Hence, while allowing the principal amount ofCRs.84,74,087/- in favour of the petitioner, we direct payment ofinterest at the rate of 9% from the date the amounts became dueupto the date of this judgment/order.”

2. Having heard the learned counsel for both sides, one neatquestion arises before this Court, which is, whether, when parties areDgoverned by contract, claim in quantum meruit under Section 70 ofthe Indian Contract Act, 1872[“Contract Act”] would be permissible.Section 70 of the Contract Act reads as under:

“70. Obligation of person enjoying benefit of non-gratuitousact.—Where person lawfully does anything for another person,Eor delivers anything to him, not intending to do so gratuitously, andsuch other person enjoys the benefit thereof, the latter is bound tomake compensation to the former in respect of, or to restore, thething so done or delivered.”

This Section occurs in Chapter V of the Contract Act, whichFchapter is headed, “of certain relations resembling those created bycontract”. There are five sections that are contained in this Chapter.Each of them is posited on the fact that there is, in fact, no contractualrelationship between the parties claiming under this Chapter. For example,under Section 68, if person incapable of entering into contract issupplied necessaries by another person, then the person who has furnishedGsuch supplies becomes entitled to be reimbursed from the property ofthe person so incapable of entering into the contract. Section 69 alsodeals with case where person has no contractual relationship withthe other person mentioned therein, but who is interested in the paymentof money which the other person is bound by law to pay, and who,

therefore, pays it on behalf of such person. Such person is entitled to bereimbursed by the other person. Under Section 71, again, the finder ofgoods spoken of is person who is fastened with the responsibility of abailee as there is no contractual relationship between the finder of goodsand the goods which belong to another person. Equally, under Section72, person to whom money has been paid or anything delivered bymistake or coercion must repay or return it, or else, such person wouldbe unjustly enriched. Here again, there is no contractual relationshipbetween the parties. It is in this setting that Section 70 occurs.

3. An early judgment reported as Moselle Solomon v. Martin& Co., ILR (1935) 62 Cal 612 resulted in split verdict between thetwo judges on the point of whether Section 70 of the Contract Act canapply when there is, in fact, contract between the parties. Lort-Williams,J. held:

“There remains to be decided the question whether the seconddefendant is liable under section 70 of the Indian Contract Actand to what extent. The remedy provided by this section is notdependent upon the law relating to the liabilities of principal andagent. It is an independent remedy, which is based upon differentcause of action, namely, upon whether person has lawfully doneanything for another or has delivered anything to him not intendingto do so gratuitously, and such other person has enjoyed the benefitthereof. If so, he must either make compensation in respect of, orrestore the thing so done or delivered.”

(at page 619)

On the other hand, Jack, J. held:

“As regards the appeal, it is clear that the second defendant cannotbe held liable under section 70 of the Contract Act, in as much asthis is case of contract and, where there is an express contract,section 70 has no application, as shown by the heading of ChapterV of the Act, in which the section finds place. It is headed “OfCertain Relations Resembling Those Created by Contract”,evidently excluding relations actually created by contract, as inthis case. The Contract Act is, however, not exhaustive.”

(at page 623)

A4.In Kanhayalal Bisandayal Bhiwapurkar (Dr.) v.Indarchandji Hamirmalji Sisodia, AIR 1947 Nag 84,a learned SingleJudge of the High Court was dealing with an application by an eye-specialist of repute who wished to recover an amount of INR 188/- asthe price of professional work, i.e., getting cataract removed inaccordance with an agreement with one Mt. Laxmibai and her son-in-Blaw, Mohan Lal, by which agreement, the said operation was to beperformed. An appeal to Sections 68 and 70 of the Contract Act wasturned down in the following terms:

“10. In the course of the argument, an appeal was made to theprinciples underlying Ss. 68 and 70, Contract Act, for making theChusband liable. Indeed S. 68, deals with the supply of necessariesbut that is in respect of person incapable of entering into acontract or “any one whom he is legally bound to support”, i.e.the dependent of person incompetent to contract. Indarchandjiwas not incompetent to contract and this section is inapplicable toDhim. As to S. 70, it must be observed that this section cannot beavailed of by person who relies on an express contract as theplaintiff alleged to have entered into with Mt. Laxmibai in thiscase. The husband never entered into the picture when the plaintiffsettled the terms with her. Nor is there anything to show how thehusband received any benefit. It is only actual benefit which willEfamish ground of action. If the wife had been cured of herailment completely, perhaps that circumstance might be material;but there is no evidence on the point.”

5. In Alopi Parshad and Sons Ltd. v. Union of India, (1960) 2FSCR 793, this Court dealt with an arbitration award which, inter alia,awarded certain amount on the basis of quantum meruit. In settingaside the Award on the ground of error apparent on the face of therecord, this Court held:

“…… Ghee having been supplied by the Agents under the termsof the contract, the right of the Agents was to receive remunerationGunder the terms of that contract. It is difficult to appreciate theargument advanced by Mr. Chatterjee that the Agents were entitledto claim remuneration at rates substantially different from the termsstipulated, on the basis of quantum meruit. Compensationquantum meruit is awarded for work done or services rendered,

when the price thereof is not fixed by contract. For work doneor services rendered pursuant to the terms of contract,compensation quantum meruit cannot be awarded where thecontract provides for the consideration payable in that behalf.Quantum meruit is but reasonable compensation awarded onimplication of contract to remunerate, and an express stipulationgoverning the relations between the parties under contract, cannotbe displaced by assuming that the stipulation is notreasonable……”

(at page 809)

6. In Mulamchand v. State of M.P.,(1968) 3 SCR 214, this Courtheld that the provisions of Section 175(3) of the Government of IndiaAct are mandatory in character and based on public policy. Therefore,the formalities that are stipulated when contracts are entered into onbehalf of the Government cannot be waived or dispensed with. In dealingwith claim made under Section 70 of the Contract Act, this Court thenwent on to hold:

“…… In other words, if the conditions imposed by Section 70 ofthe Indian Contract Act are satisfied then the provisions of thatsection can be invoked by the aggrieved party to the void contract.The first condition is that person should lawfully do somethingfor another person or deliver something to him; the second conditionis that doing the said thing or delivering the said thing he must notintend to act gratuitously; and the third condition is that the otherperson for whom something is done or to whom something isdelivered must enjoy the benefit thereof. If these conditions aresatisfied, Section 70 imposes upon the latter person the liability tomake compensation to the former in respect of, or to restore, thething so done or delivered. The important point to notice is that ina case falling under Section 70 the person doing something foranother or delivering something to another cannot sue for thespecific performance of the contract, nor ask for damages for thebreach of the contract, for the simple reason that there is nocontract between him and the other person for whom he doessomething or to whom he delivers something. So where claimfor compensation is made by one person against another underSection 70, it is not on the basis of any subsisting contract between

EFG

the parties but on different kind of obligation. The juristic basisof the obligation in such case is not founded upon any contractor tort but upon third category of law, namely, quasi-contract orrestitution……”

(at pp. 221-222)

7. This judgment has been recently referred to and followed inOrissa Industrial Infrastructure Development Corpn. v. MescoKalinga Steel Ltd., (2017) 5 SCC 86 at paragraph 21.

8. Indeed, the aforesaid position in law is made clearer by Section73 of the Contract Act. Section 73 reads as follows:

“73. Compensation for loss or damage caused by breach ofcontract.— When contract has been broken, the party whosuffers by such breach is entitled to receive, from the party whohas broken the contract, compensation for any loss or damagecaused to him thereby, which naturally arose in the usual courseDof things from such breach, or which the parties knew, when theymade the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote andindirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligationEresembling those created by contract.—When an obligationresembling those created by contract has been incurred and hasnot been discharged, any person injured by the failure to dischargeit is entitled to receive the same compensation from the party indefault, as if such person had contracted to discharge it and hadFbroken his contract.

Explanation.—In estimating the loss or damage arisingfrom breach of contract, the means which existed of remedyingthe inconvenience caused by the non-performance of the contractmust be taken into account.”

9. This Section makes it clear that damages arising out of breachof contract is treated separately from damages resulting from obligationsresembling those created by contract. When contract has been broken,damages are recoverable under paragraph 1 of Section 73.When,

however, claim for damages arises from obligations resembling thosecreated by contract, this would be covered by paragraph 3 of Section73.

10. Indeed, the present case is really covered by Section 74 of theContract Act, which occurs in Chapter VI, which is headed, “of theconsequences of breach of contract”. Section 74 states:

“74. Compensation for breach of contract where penaltystipulated for.— When contract has been broken, if sum isnamed in the contract as the amount to be paid in case of suchbreach, or if the contract contains any other stipulation by way ofpenalty, the party complaining of the breach is entitled, whetheror not actual damage or loss is proved to have been caused thereby,to receive from the party who has broken the contract reasonablecompensation not exceeding the amount so named or, as the casemay be, the penalty stipulated for.

Explanation.—A stipulation for increased interest from thedate of default may be stipulation by way of penalty.

Exception.—When any person enters into any bail-bond,recognizance or other instrument of the same nature, or, underthe provisions of any law, or under the orders of the CentralGovernment or of any State Government, gives any bond for theperformance of any public duty or act in which the public areinterested, he shall be liable, upon breach of any condition of anysuch instrument, to pay the whole sum mentioned therein.

Explanation.—A person who enters into contract withGovernment does not necessarily thereby undertake any publicduty, or promise to do an act in which the public are interested.”

11. In Kailash Nath Associates v. DDA, (2015) 4 SCC 136,after considering the case law on Section 74, this Court held:

“43. On conspectus of the above authorities, the law oncompensation for breach of contract under Section 74 can bestated to be as follows:

43.1. Where sum is named in contract as liquidated amountpayable by way of damages, the party complaining of breach

Acan receive as reasonable compensation such liquidated amountonly if it is genuine pre-estimate of damages fixed by both partiesand found to be such by the court. In other cases, where sum isnamed in contract as liquidated amount payable by way ofdamages, only reasonable compensation can be awarded notexceeding the amount so stated. Similarly, in cases where theBamount fixed is in the nature of penalty, only reasonablecompensation can be awarded not exceeding the penalty so stated.In both cases, the liquidated amount or penalty is the upper limitbeyond which the court cannot grant reasonable compensation.

43.2. Reasonable compensation will be fixed on well-knownprinciples that are applicable to the law of contract, which are tobe found inter alia in Section 73 of the Contract Act.

43.3. Since Section 74 awards reasonable compensation fordamage or loss caused by breach of contract, damage or losscaused is sine qua non for the applicability of the section.

43.4. The section applies whether person is plaintiff or adefendant in suit.

43.5. The sum spoken of may already be paid or be payable infuture.

43.6. The expression “whether or not actual damage or loss isproved to have been caused thereby” means that where it ispossible to prove actual damage or loss, such proof is not dispensedwith. It is only in cases where damage or loss is difficult orimpossible to prove that the liquidated amount named in theFcontract, if genuine pre-estimate of damage or loss, can beawarded.”

12. In the present case, clauses 16.2 to 16.4 are relevant, and areset out as under:

“16.2 (a)FOR DELIVERY OFSTORES:

Should the supplier fail to deliver the store/services or anyconsignment thereof within the period prescribed for delivery,the purchaser shall be entitled to recover 0.5% of the value ofthe delayed supply for each week of delay or part thereof for

period up to 10 (TEN) weeks and thereafter at the rate of0.7% of the value of the delayed supply for each week ofdelay or part thereof for another TEN weeks of delay. In thecase of package supply where the delayed portion of the supplymaterially hampers installation and commissioning of thesystems, L/D charges shall be levied as above on the totalvalue of the concerned package of the Purchase Order.However, when supply is made within 21 days of QA clearancein the extended delivery period, the consignee may accept thestores and in such cases the LD shall be levied upto the dateof QA clearance.

16.2 (b)FOR INSTALLATION & COMMISSIONING

Should the supplier fail to install and commission the projectwithin the stipulated time the purchaser shall be entitled torecover 0.5% of the value of the purchase order for each weekof delay or part thereof for period upto 10 (TEN) weeks andthereafter @ 0.7% of the value of purchase order for eachweek of delay or part thereof for another 10 (TEN) weeks ofdelay. In cases, where the delay affects installation/commissioning of part of the project and part of the equipmentis already in commercial use, then in such cases, LD shall belevied on the affected part of the project.

16.2 (c).The Liquidated Damages, as per Clause 16.2(a) and16.2(b) above shall be limited to maximum of 12%, even in casethe DP extension is given beyond 20 weeks.

16.3. Provisions contained in Clause 16.2(a) shall not be applicablefor durations (periods) which attract L.D. against clause 16.2(b)above.

16.4. Quantum of liquidated damages assessed and levied by thepurchaser shall be final and not challengeable by the supplier.”

13. As has been correctly held by the impugned judgment, amaximum of 12% can be levied as liquidated damages under the contract,which sum would amount to sum of INR 25 lakh. Since this clausegoverns the relations between the parties, obviously, higher figure,contractually speaking, cannot be awarded as liquidated damages, which

Aare to be considered as final and not challengeable by the supplier. Thisbeing the case, the appellant can claim only this sum. Anything claimedabove this sum would have to be refunded to the respondent.

14. In this view of the matter, we uphold the impugned judgmentof the TDSAT and dismiss the present appeal.

Nidhi Jain

Appeal dismissed.