Time as Essence in Construction Contracts: Need for a Comprehensive Relook

The issue of time as essence in construction contracts is controversial and is frequently litigated. The law on the subject is largely unsatisfactory. In a paper titled "The Law on Time as Essence in Construction Contracts: A Critique" published in Volume 8 Issue 1 of the RGNUL Financial and mercantile Law Review (here), the law on the subject is critically evaluated. The paper argues that the precedent on the issue, Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720 ("Hind Construction"), was wrongly decided and requires reconsideration. It also argues that:

• Hind Construction is no more relevant to the current times and provides incentives to inefficient contractors leading to delay in project completion; 
• Contracting parties do not appear to have circumvented the adverse effect produced by Hind Construction through the use of appropriate language in their contracts despite various decisions following the said decision; and 
• One of such reasons for the phenomena appears to be a lack of direction by courts as to what contracting language could constitute future courts to construe a contractual condition providing that time is of the essence as such.

The paper concludes by arguing that concludes by highlighting possible contractual clauses and contract management strategies that could further party intent that time is of the essence in construction contracts notwithstanding Hind Construction and later decisions following it.

Abstract of the Paper is provided below:

"The concept of time as essence in construction contracts is a controversial topic. Even though parties routinely provide in their agreements that time is of the essence, these clauses inevitably figure in construction disputes. Arbitral tribunals and courts have mostly decided such disputes holding those clauses to be of no legal effect, mainly by relying on the decision of a three-judge bench of the Hon’ble Supreme Court in Hind Construction Contractors v. State of Maharashtra. This paper argues that Hind Construction was wrongly decided, that it is not good law and that it requires reconsideration given the changing times. The paper further notes that parties do not appear to have circumvented the adverse effect of Hind Construction. Usually, in such situations, there is a change in contracting behaviour by the use of appropriate contracting language. Perhaps, this is due to the lack of direction by courts as to what appropriate language could be used in contracts to make time as the essence of the contract. This paper concludes by suggesting possible methods by which courts and arbitral tribunals could validly enforce time-as-essence clauses."

Critique of the paper is welcome as comments to this post. Readers can also write to lawbadri@gmail.com

* Image from here.

Guest Post: Are Standstill / Tolling Agreements recognised in India?

 [This is a guest post by Mr. Vigneshwar Ramasubramanian on the validity of standstill/ tolling agreements that seek to contractually deal with the law on limitation. Mr. Vigneshwar Ramasubramanian is an advocate of  the Madras High Court]

Are Standstill / Tolling Agreements recognised in India?

Earlier, the moderator of the blog argued here that parties to a dispute can be allowed to contractually agree to extend, freeze or otherwise alter the law of limitation mutually in India. In commercial law, these contracts, which intend to freeze/extend limitation periods are referred to as ‘Standstill Agreements’. The author eloquently argues through a host of foreign jurisprudence that the Limitation law is not something sacred or sacrosanct that parties should not be allowed to contract around. The author also relies on Section 25(3) of the Indian Contract to buttress his argument.

Below, I will make an attempt to first, argue that the treatment of Limitation Act by courts in India are substantially different from the treatment of the law of Limitation in foreign jurisprudence. Secondly, I will try to put forth an alternate interpretation to learned author’s reading of Section 25(3) and Section 28 of the Contract Act.

International Practice v. India

It is a common practice in Arbitrations for both parties to mutually give up their plea of limitation.But, in India, courts are bound to give effect to the provisions of the Limitation Act of its own motion. The judgment recognising ‘Standstill Agreement’ cited by the Ld. Author cannot be applied in our context. The author relies on the judgment of the England and Wales High Court (Technology and Construction Court), decision in Oxford Architects Partnership v Cheltenham Ladies College, wherein it was held:

“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”

The above interpretation would fall foul of the Indian Limitation Act on two fronts. Firstly, under the Indian Limitation Act, plea of limitation is mandatory. Even if the parties are not obliged to rely on the plea, it is the duty of the court to give effect to the Limitation Act.

Section 3(1) of the Limitation Act, 1963 reads:

“3. Bar of limitation—(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

Explaining the above provision, the Supreme Court in Manindra Land & Building Corporation Ltd. v. Bhutnath Banerjee held:

"Section 3 of the Limitation Act enjoins a Court to dismiss any suit instituted, appeal preferred and application made, after the period of limitation prescribed therefore by Schedule I irrespective of the fact whether the opponent had set up the plea of limitation or not. It is the duty of the Court not to proceed with the application if it is made beyond the period of limitation prescribed."

Therefore, there is no way a party can mutually agree to not raise a plea of limitation. Second, the parties cannot mutually agree a date from which a limitation period shall begin. The Limitation Act, 1963 itself sets the period from which the limitation period will begin in the Schedule to the Act. The only exceptions are laid down in Part III of the Limitation Act, 1963. Therefore, when there are extensive, comprehensive provisions detailing the period from which period of limitation shall run, in India, the parties cannot contract around it. Internationally though, the Limitation statutes are directive. For instance, the Singapore statute of limitation permits their court to discuss the issue of limitation only if it is expressly raised by the parties. Section 4 of the Singapore Limitation Act, 1959 reads:

“Limitation not to operate as a bar unless specially pleaded:

4.  Nothing in this Act shall operate as a bar to an action unless this Act has been expressly pleaded as a defence thereto in any case where under any written law relating to civil procedure for the time being in force such a defence is required to be so pleaded.”

Similarly, the statute of Limitation in Australia has an expression provision which recognises the right of the parties to extend or shorten a limitation period. Section 5 of the Australian Limitation Act, 2005 reads:

“45 (1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act.”

Practices of other countries, including the USA, have been laid down by the author in his article. But, their interpretations cannot be applied for the two reasons laid above. When the parties can neither mutually agree to drop the plea of limitation, nor agree a date from which a limitation period shall begin, the very purpose of a Standstill Agreement itself is extinguished.

Whether the Indian Contract Act permits circumventing the law of limitation?

The second major argument of the author is through an interpretation of Section 28 and Section 25(3) of the Indian Contract Act, 1872. Section 28 of the Indian Contract Act reads:

“28: Agreements in restraint of legal proceedings, void. Every agreement,

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights;”

The argument is that this provision merely precludes parties from limiting the time within which a claim must be made. In other words, this provision only precludes the ‘shortening’ of limitation period. If the intention of the legislature was to prevent parties to contract around or extend the limitation periods as well, it would have been manifest in this provision.

There is no doubt that an agreement for a longer period of limitation than the law allows, does not lie within the scope of this section. In fact, seeking a longer period of limitation keeps the right to sue subsisting even after the period of limitation. There is absolutely no restriction imposed on the right to sue. However, such an agreement will be void under Section 23 of the Indian Contract Act as tending to defeat the provisions of the Limitation Act. The devil, i.e., Section 3 of the Limitation Act, clearly provides that every suit instituted after the period of limitation prescribed (by the Act) shall be dismissed, although limitation has not been set up as a defence. Therefore, a Tolling or a Standstill agreement cannot escape the clutches of Section 23 of the Indian Contract Act. The Ld. Author’s stand that the intention of the legislature is to merely preclude parties from limiting the period of limitation alone stands on feeble ground. Section 45 of the Australian Limitation Act seen above clearly permits parties to agree & shorten the period of limitation. Similar position is manifest in other jurisprudences as well. Therefore, a stand that parties cannot limit the time, but may be permitted to extend the period of limitation, does not seem accurate. Especially in light of Section 3 and the Schedule attached to the Limitation Act, 1963.

The author goes on to say that Section 25(3) of the Indian Contract Act, 1872 is an important example of a provision by which parties can agree that one of them would pay a time-barred debt. In other words, Section 25(3) allows parties to contract around the law of limitation. Section 25(3) of the Limitation Act reads as:

“25. Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law. An agreement made without consideration is void, unless;

(3) It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.”

To invoke the provisions of Section 25(3), the most important condition is that there has to be a debt expressly acknowledged which the creditor but for the period of limitation, might have enforced. The key herein is existence of a debt and express acknowledgement of the same. The concept of a Standstill Agreement though, stands on an entirely different footing.

Standstill Agreements enable the parties to focus on the pre-action protocol requirements without worrying about limitation. Parties to a dispute may choose to enter into a standstill agreement where they are approaching the expiry of the limitation period, but the claimant is not yet ready to issue its claim (because, for example, the parties are in negotiations which, if successful, would prevent a claim from needing to be issued at all).  Parties usually quantify the debt through evidences etc., and ascertain the liability of the debtor in this period. When the debt is ascertained and acknowledged, there is no question of limitation at all. Section 18 of the Limitation Act expressly provides that the period of limitation begins from acknowledgment of such liability in writing. But, a standstill agreement, is entered into to prevent the claimant’s expiry of the right to sue. Therefore, one cannot interpret Section 25(3) to contract around the law of limitation either.

Conclusion

Shortening the period of limitation is expressly barred under Section 28 of the Contract Act and extending limitation is impermissible upon an interpretation of the Indian Limitation Act. Most advanced jurisdictions have a limitation period of Six (6) years whereas here, for most claims, the period is Three (3) years only. Over this, we have not recognised Standstill/Tolling agreements as well which, as seen earlier, is an internationally recognised practice. This has led to considerable scepticism for parties, especially those across the border to negotiate in good faith with their Indian counterparts, reducing the scope for out of court settlements in International Disputes. In this context, it is paramount that the legislature carves out an exception for Standstill Agreements under the Limitation Act, or, we receive some judicial guidance on the validity of such agreements.

No Injunction/ Interim Measure Against Infrastructure Projects: Calcutta HC Decides

Golden Edge Engineering Private Limited vs. Bharat Heavy Electricals Limited (18.06.2020 - CALHC) : MANU/WB/0558/2020 is an important decision under the Specific Relief (Amendment) Act, 2018. Petitioner was the contractor of the Owner, BHEL in respect of an Infrastructure Project as defined in Explanation to Section 21A r/w Schedule to the Specific Relief Act, 1963 (as amended) (SRA).

The Petitioner (Contractor), in an agreement entered into in 2017, contended that BHEL had delayed in providing the frontage for the work and in making payments. The Contractor also relied on the lockdown due to Covid19 to argue that delay in performance was beyond the control of the Contractor. The Contractor argued that despite assurances of completion, BHEL had gone ahead with floating a tender for performance of the remaining works that the Contractor was yet to complete. Consequently, the Contractor prayed for an injunction restraining BHEL from withdrawing the work from the Contractor and awarding it through a new tender to some other person.

The court rejected the said contentions on several grounds, some of which are provided below:

• BHEL allowed time to the Contractor to complete the work after the lockdown period but the after the lifting of restrictions, it cannot be said that there has been uncertainty as the availability of manpower. In reality, there has been no migration of workers from the State of Jharkhand, which is the state where the project is located.
• The Contractor could not adhere to the schedule even before the Covid19 pandemic. 
• The prayer granted in the petition was barred by the SRA, as amended. in terms of Sections 41(ha) and 20A. 
• There is no provision in the Tender/ Contract specifically restricting BHEL from proceeding on risk and cost.
• Even if there is a legal injury to the Contractor, the same can be adequately compensated in terms of money. 
• Balance of convenience is in favour of BHEL. As a PSU, if it is prevented from engaging a new contractor in case the existing Contractor is unable to perform, it will lead to a situation where BHEL will be stuck with the non-performing Contractor and substantial time will be wasted and project will come to a standstill in the event BHEL is unable to go ahead with the new tender. 

Comments

Para 42 of the judgment is interesting and important, for it seeks to examine the issues at stake if an injunction is passed. It deserves noting, as it is, in the judgment:

"42. So, the balance of convenience is entirely in favour of the Respondent as a Public Sector Undertaking engaged in power generation ought not to be prevented from engaging a new contractor if the existing contractor is unable to provide the requisite standard of work as the documents on record clearly show that ample opportunities have been provided and are being provided by the respondent to the petitioner to complete their outstanding work as per requisite standards but instead of utilising the same the petitioner intends to secure a monopoly and ensure the Respondent is stuck with the Petitioner in whatever performance and/or quality of work they offer. It is stated and submitted that the entire project has been severely lagging behind the requisite standards and the Respondent's employer i.e. the National Thermal Power Corporation has been constantly reprimanding the Respondent because of the cascading effect the Petitioner's under performance has been having on the entire project. A lot of time will be wasted and the project will come to a standstill in the event the Respondent is unable to go ahead with the New Tender and have a candidate ready to replace the Petitioner in the event of the failure to complete the work as such new tender would have to be conducted post the Petitioners failure."

There are three interesting points in the decision:

• In respect of infrastructure projects, courts will not grant stay in view of the statutory mandate pursuant to the amendments to the SRA.
• Covid19 cannot be used as an excuse in respect of infrastructure projects especially where the Contractor is unable to perform the contract expeditiously;
• Tendering processes in respect of risk and cost contracting can be commenced even before termination, and would not be a ground for granting injunction.  

All the three points made above are significant in the current context. The court, rightly, analysed the importance of not passing stay orders on infrastructure projects. The judgment seems to be in line with the recent legislative mandate and seeks to balance competing interests and further the general principle of specific relief: injunctions will not be passed when damages would be adequate remedy.

However, the ultimate conclusion that: "I am of the opinion that the petitioner would be left with a claim for equitable compensation as there would be no significant prejudice to the petitioner in the event of refusal to grant interim injunction at this stage." is not entirely clear. Was the court indicating that the Petitioner/ Contractor could pursue the remedy of seeking compensation but that no prejudice would be caused to the Contractor if its prayer was refused.

[full disclosure: Till early last year, this blawgger was an employee of BHEL. However, this blawgger was in no way connected to the case or the subject-contract.]

Stereotyping & Setting Aside Arbitral Awards: Why East Asia was Correctly Decided

Why are cliches a problem? They are an issue because they amount to stereotyping. What is a stereotype? It is regarded as an over-generalised belief about something. In India, there is an over-generalised beliefs that arbitral awards should not be set aside at all. That is not correct. 

"Nonsense" A decision with scant regard for contract or law cannot pass off as an arbitral award. [Note that the word "nonsense" is being used here to signify how rude and bad it looks. A pleading drafted by a foreign law firm used the term "nonsense" on a contention by the other side. What happened to courtesy? But then, for some, whatever foreign law firms, especially of the first world, do is gospel truth and good to emulate!- another stereotype. Litigation or arbitration is not a fish market with disputing parties hurling choicest of abuses against each other. One has to show grace and courtesy in submissions.]

Almost a decade back, while discussing the case of Sumitomo Heavy Industries v ONGC, we had argued in this blog as follows:

"Though the SC's decision seems to be reasonable, it is sad that the court did not consider the law on the liability of a contractual party to bear increase in costs due to change of law during the currency of the contract. This is the problem with arbitration. The courts are forced to rule on whether the award was perverse or not rather than consider what should actually be the law on the issue. The main issue is taken outside the realm of the court. Essentially what the court has stated here is that Article 17.3 could either be narrowly construed like the Division Bench wanted it to be or broadly constructed as was done by the arbitrator. But what is the true law?" (emphasised)

In the same year, we did another post titled "Norm Creation (ADR) and Arbitration" (2010). A summary of the post is important to understand the context of this post and is as under:

• The judiciary performs the important function of amplificiation of law. Amplification of law refers to the judiciary’s functions of filling the gaps that the statute leaves, making law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into consideration the latest developments (such as those of technology, etc).
• This function of amplification of law does not take place in private arbitration for a few reasons. One reason is that there are no incentives for the arbitral tribunal to produce precedents as there exists difficulty in establishing property rights over them.
• The second problem with private arbitration is that the absence of review on merits of the award may lead to the production of inconsistent decisions on the same question of law leading to uncertainty of law. This would mean that parties would never predict outcomes of disputes and this would discourage settlement of disputes. The law in such a situation will be indeterminate and inaccurate.

Interestingly, many reputed commentators on arbitration law have highlighted the above aspects. In a lecture titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration", Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales (2016)  highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts. The lecture merits reading.

In short, arbitration law's limited error correction function creates a potentially uncertain position in law. An award would not be set aside if two plausible views in the case as to contract interpretation are possible. But what is the correct interpretation? In a jurisdiction like India where law as applied to facts is nascent, especially in the context of contract law, courts perform an important function of amplification of law and making the law more certain. This is the reason why a sort of balance is maintained in purely domestic arbitrations by retaining the ground of patent illegality in Section 34(2A). This function is important. In the past, the Supreme Court has donned the role of error corrector and decided on the correctness of arbitral awards. See, for instance, National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). (see this post)

Image from here

The decision in SEAMEC v OIL (2020) has to be seen in the same light. A contention similar to the one made in the arbitral award and upheld: that increase in diesel prices is a change in law is most common in construction arbitrations. Those practising on that side of commercial law would vouch that a Contractor- Claimant is sure to bring a claim on this count if there is an escalation or a change of law or a force majeure clause. Although not a construction arbitration, in this case, the Claimant brought about a similar contention. There seems to be no Supreme Court decision directly on whether such increases in diesel prices amount to force majeure or change of law or entitle the Contractor for escalation. See, for instance, Lift and Shift India Pvt. Ltd. vs. Central Warehousing Corporation (06.03.2017 - DELHC) : MANU/DE/0543/2017. [See also, The State of Bihar vs. Hardeo Singh (11.02.2019 - PATNAHC) : MANU/BH/0174/2019, Atlanta Limited and Ors. vs. Executive Engineer, Road Development and Ors. (04.05.2018 - BOMHC) : MANU/MH/1148/2018.]

Given the importance of the issue, the Supreme Court took the correct approach in settling the law once and for all. [Note that the law applied by the Supreme Court was the one prior to the 2015 amendments]. Although the court did not expressly state so, the effect of the court's judgment settles this vexatious issue. That the SC decided on an area which was uncertain is clear from the outcomes of the proceedings before the tribunal (which held that increase in price of diesel amounted to change of law for which the Contractor could claim compensation) and the High Court (where it was held otherwise). The High Court had also committed the error of conflating the basis of change of law clause with the force majeure clause, which the Supreme Court corrected.

The SC held that fluctuations in price of certain items which a prudent contractor would have to take into consideration while bidding cannot be brought within the scope of the change of law clause unless specific language pointed out to such an inclusion (Para 30) and that the "liberal" construction afforded by the Tribunal to Clause 23 to hold that change in the price of diesel was a change in law was incorrect.

The law is now certain. No more can unscrupulous persons bring about a claim for increase in diesel prices under the change of law clause. Had this clarity not been there, what would have happened? In almost every dispute under works contracts with a change of law or a general escalation clause (which does not encompass increase in diesel prices), Contractors would have brought about a claim on account of increase in diesel prices. The marginal cost of defending an additional claim and of deciding an additional claim would be incurred by the parties. Imagine if such costs are incurred in several arbitrations arising out of works contracts all over India. It could potentially run to crores of rupees. Now, because to the clarity afforded by the Supreme Court, an unscrupulous Contractor or an advocate would think twice before making a claim on account of change in diesel prices. Even if made, the Tribunal would (and is obligated to) award costs on the other side for such bogus claims.

Thus, it is submitted that the SC had rightly set aside the arbitral award. We found many write-ups on the decision, especially from law firms, simply parroting that the SC was not correct in setting aside the arbitral award or similar cliches. There should be deference to the arbitral process but that deference is only for the purpose of facilitating commercial dispute resolution. Such deference cannot be at the cost of certainty in law. Legal certainty affords clear direction to future course of conduct. 

Parties should expend their money on value creation rather than bickering on such issues merely because one party wants to "take a chance" to see if the tribunal can award the claim and because the (uncertain) law allows her to do so. 

Default Rules (Finally!) Enters into Indian Jurisprudence: SC Decides on Unreasoned Arbitral Awards

In this blog, we have been writing about the concept of default rules for the past decade. In many posts, we have lamented the absence of this useful concept in analysing various provision in Indian Contract Law. Finally, a recent three judge Bench of the Supreme Court in Dyna Technologies v. Cromption Greaves (SC: 2019) has expressly recognised the concept of default rules. The Supreme Court stated:

"29. Similar to the position under the Model Law, India also adopts a default rule to provide for reasons unless the parties agree otherwise. As with most countries like England, America and Model Law, Indian law recognizes enforcement of the reasonless award if it has been so agreed between the parties.
30. There is no gainsaying that arbitration proceedings are not per se comparable to judicial proceedings before the Court. A party under Indian Arbitration Law can opt for an arbitration before any person, even those who do not have prior legal experience as well. In this regard, we need to understand that the intention of the legislature to provide for a default rule, should be given rational meaning in light of commercial wisdom inherent in the choice of arbitration." 

With the introduction of the concept, hopefully there will be more clarity on the classification of various contract law rules as default and mandatory. 

The case dealt with the issue relating to the interpretation of Section 31(3) of the 1996 Act, which provided: "(3) The arbitral award shall state the reasons upon which it is based, unless- (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30.” (Section 31(3) has remained unamended since enactment of the 1996 Act.)

The Supreme Court held that the requirement of reasons in Section 31(3) meant that the reasoning should be intelligible and adequate. The court also held that in addition to intelligibility and adequacy, a reasoned award should be proper. However, the court took pains to clarify that propriety or pervasity in the reasoning of the award should be judged "strictly on the grounds provided in Section 34".

On intelligibility, the court held that if the award suffers from unintelligibility, it is "equivalent of providing no reasons at all". 

On adequacy, the court stated that the validity of the award should be tested on the touchstone of "degree of particularity of reasoning having regard to the nature of issues" that the tribunal had to decide. The court was not in favour of any precise formulation of the concept of "degree of particularity" but clarified that even if "there were gaps in the reasoning for the conclusions reached by the Tribunal, the Court needs to have regard to the documents submitted by the parties and the contentions" so as to ensure that "awards with inadequate reasons are not set aside in a casual and cavalier manner".

Distinguishing between the tests for setting aside the award suffering from inadequacy of reasoning and unintelligibility, the court held that unlike inadequacy in reasoning, even "ordinarily unintelligible awards" could be set aside, the only restriction being where parties agree that no reasoning is required. 

These aspects have been dealt with in Paras 35 and 36 of the court's decision.

The court also provided guidance on how an award suffering from the aforesaid infirmities could be dealt with. The court stated that Section 34(4) can be used in cases where there is "complete pervasity in reasoning" (by which the award could be challenged under Section 34) so as to cure the defects (Para 38). Even so, the court did not want to apply the said provision on facts considering that it had taken 25 years for the adjudication of the dispute. On facts, the Supreme Court set aside the award for want of reasons. 

It is also to be noted that Section 34(4) can be used when there is a request from a party [See, Kinnari Mullick and Ors. vs. Ghanshyam Das Damani (20.04.2017 - SC) : MANU/SC/0514/2017]. The SC did not take the said decision into consideration. It should not be taken that the decision of the SC in the case under discussion in any away deviates from the requirements under Section 34(4) as clarified in Kinnari Mullick, where another three Judge Bench of the SC held:

"In any case, the limited discretion available to the Court Under Section 34(4) can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings. It is crystal clear that the Court cannot exercise this limited power of deferring the proceedings before it suo moto. Moreover, before formally setting aside the award, if the party to the arbitration proceedings fails to request the Court to defer the proceedings pending before it, then it is not open to the party to move an application Under Section 34(4) of the Act. For, consequent to disposal of the main proceedings Under Section 34 of the Act by the Court, it would become functus officio. In other words, the limited remedy available Under Section 34(4) is required to be invoked by the party to the arbitral proceedings before the award is set aside by the Court."

Can Parties Give Up Limitation by Consent?

Assume a hypothetical scenario: Claimant invokes arbitration and makes a claim. The Respondent contends that the claim is barred by limitation and makes a counter-claim. The Claimant replies to the counter-claim by putting forth the defence that counter-claim is also time-barred. When the arbitrator is to frame issues, both parties give up their respective defences of limitation. The tribunal allows the claim but dismisses the counter-claim on merits. 

The Respondent challenges the award under Section 34(2)(b)(ii) arguing that the award is against the fundamental policy of Indian law since the tribunal has awarded a time barred debt to the Claimant. The Respondent contends that limitation cannot be given up by consent of the parties and limitation law cannot be contract around. In other words, the Respondent's contention is that the law of limitation consists of mandatory rules and not default rules, which could be contracted around. 

Whether parties can contract around the law of limitation? Whether the Respondent was correct in so arguing in the Section 34 petition is the subject-matter of this post.

Unlike most other cases on limitation, this is a rare case where both the parties gave up the issue of limitation in the arbitral proceedings. In India, the question as to whether parties can enter into an agreement or a consensus regarding giving up defences regarding limitation before or after the cause of action has arisen has never been dealt with in detail considering the international practices. There are one or two old decisions (pre-1950) which question the validity of agreements to give up the plea of limitation. Some commentaries also state that agreements which extend limitation periods fall foul of Section 23 of the Indian Contract Act, 1872 (regarding unlawful objects and consideration). It is the endeavour of this post to argue that such views do not take into account provisions such as Section 25(3) of the Indian Contract Act, 1872 which expressly permit such agreements and also are in discordance with the current realities of international commercial law and best international practices.  

At the threshold, it is important to explore whether there is scope for contracting around or agreeing to extend, limit, or otherwise alter the Law of Limitation through contract. 

The Basis of the Law of Limitation and Contracting it Around

The law of limitation is based on public policy as encapsulated in the legal maxim- interest reipublicae ut sit finis litium (it is for the general welfare that a period be put to litigation). [See, for instance, Popat and Kotecha Property vs. State Bank of India Staff Association (29.08.2005- SC): MANU/SC/0516/2005, Para 8]. 

However, merely because the law is based on public policy does not mean that there is no scope for contracting about or, even, around it. The most common example of the law allowing such contracting about or around the law of limitation is the enforceability of agreements to pay the whole or a part of debt that was enforceable but for the law of limitation [See, Section 25(3)]. Other examples of such agreements include standstill agreements and agreements extending the period of limitation. International practice suggests that such agreements are routinely enforceable in the commercial world. Let us first look at the international practice on this point. 

Standstill Agreements and Tolling Agreements- International Practice

Standstill Agreements in the context of the law of limitation operate to suspend time, that is, they preserve or freeze both sides' positions so that, at the end of the agreement, they are both in the same position in relation to limitation as they were when they entered into the agreement. Such agreements have been regarded as enforceable under English Law. 

In Oxford Architects Partnership v Cheltenham Ladies College, [2006] EWHC 3156 (TCC), the England and Wales High Court (TCC) held:

“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”

{See also, Russell & Anor v Stone (t/a PSP Consultants) & Ors [2017] EWHC 1555 (TCC)}

The said case suggests that English law is not averse to an agreement, which provides even for extension of limitation period since the argument regarding whether the agreement had actually extended the time was considered and rejected not on the basis of whether law allows it but on the basis of construction of contract (see, Paras 46 to 56 of Russell v Stone). 

These agreements are called as Tolling Agreements in USA and are also enforceable. For instance, the New York General Obligations Law Section 17-103 - Agreements waiving the statute of limitation provides:

“1. A promise to waive, to extend, or not to plead the statute of limitation applicable to an action arising out of a contract express or implied in fact or in law, if made after the accrual of the cause of action and made, either with or without consideration, in a writing signed by the promisor or his agent is effective, according to its terms, to prevent interposition of the defense of the statute of limitation in an action or proceeding commenced within the time that would be applicable if the cause of action had arisen at the date of the promise, or within such shorter time as may be provided in the promise.

2. A promise to waive, to extend, or not to plead the statute of limitation may be enforced as provided in this section by the person to whom the promise is made or for whose benefit it is expressed to be made or by any person who, after the making of the promise, succeeds or is subrogated to the interest of either of them.

3. A promise to waive, to extend, or not to plead the statute of limitation has no effect to extend the time limited by statute for commencement of an action or proceeding for any greater time or in any other manner than that provided in this section, or unless made as provided in this section.” 

Such agreements have been recognized as valid by various courts in USA such as in Department of Labor v. Preston, et al (US Court of Appeals 11th Circuit, No. 17-10833 dt. 12.10.2017)

In the Australian context, the Limitation Act, 2005 as applicable to Western Australia allows agreements to extend or restrict time periods. Section 45 reads: 

“(1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act. 

(2) Despite subsection (1), a provision in, or condition of, an agreement is of no effect if it purports to — 

(a) exclude the operation of section 33, 36 or 38; or (b) extinguish (rather than bar) a right or title in relation to an action in a manner that would be inconsistent with a provision of Part 5.”

Therefore, international practice suggests that clauses that contract around limitation period are not invalid, except in certain limited extents. 

Agreements regarding Limitation Periods in India 

Section 3 of the Limitation Act, 1963 does not deal expressly with consequences of agreements which contract around or alter the law of the limitation or the limitation periods prescribed in the said law. Section 3(1) reads: “Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

Section 28 expressly bars agreements that limits the time within which a party may enforce its rights. The relevant portion of Section 28 provides: “Every agreement- (b)… which limits the time within which he may thus enforce his rights… is void to that extent.” 

But for this provision, there is no statutory provision that bars other types of contractual clauses regarding limitation, such as clauses extending the period of limitation or even reviving them. Section 28 was amended in 1997 to bring about the above quoted provision. It would be correct to argue that by consciously using the phrase "limits the time", the legislature barred only agreements limiting and not expanding the time period for limitation. Had the legislature intended to bar agreements expending the time period, it would have consciously used the phrase "expands or limits" or its variant. 

Section 25(3) of the Indian Contract Act, 1872 is an important example of a provision by which parties can agree that one of them would pay a time-barred debt. In other words, it allows parties to contract around the law of limitation. Even Sections 18 and 19 refer to unilateral acts and not agreements or consensuses. 

Mutual Giving up of the Plea of Limitation

It is true that the settled law is that even if a party does not raise a plea of limitation, the court, by virtue of Section 3 has to look into the question of limitation. However, Section 3 of the Limitation Act, 1963 neither bars nor allows an agreement or a consensus between the parties to give up a defence of limitation altogether. In other words, Section 3 as well as the Limitation Act, 1963 is silent on whether parties can expressly give up the defence of limitation or not. 

In such a case, it is not that the court or the arbitral tribunal does not look into the question at all. It is a situation where the court or the arbitral tribunal does look into the question but the parties state that they were willing to give up the defence of limitation thereby leaving the tribunal to deal with the issues relating to merits. In other words, the court or the tribunal deals complies with its duty under Section 3 but because of the parties’ mutual act of giving up, the court or the tribunal goes to the other questions. 

Such an agreement or a consensus is no different from any other agreement or a consensus to give up any other defence in a suit or an arbitral proceeding. [See, for instance, Gopalakrishna Pillai v. K.M. Mani (1984) 2 SCC 83]. 

While there are umpteen case laws on whether a party has waived the defence of limitation or not, there seem to be no case law on whether parties mutually give up the plea of limitation. 

It is well-settled law that when the law of limitation is set up as a defence it cannot be extended to cases that are not strictly within its enactment. As early as in 1898, a Full Bench of the Calcutta High Court held in Poorno Chunder Ghose and Ors. v. Sassoon and Ors. (04.02.1898 - CALHC) : MANU/WB/0060/1898: 

“Reading the language of Section 13---a section be it remembered in a Limitation Act, the provisions of which must be construed strictly, and which, when set up as a defence, must nit be extended to cases which are not strictly within the enactment, whilst exceptions or an exemption from its operation are to be construed liberally...” 

Therefore, when Section 3 does not have the effect of covering cases where the court or the tribunal looks into the issue of limitation but the parties mutually give up the same, there is no question of going back on such mutual agreement or consensus. Such agreements are enforceable unless expressly prohibited by law more so in the case of arbitrations where the arbitral tribunals are creates of contract have to act within the confines of the agreement between the parties.

Conclusion

To conclude, there is no law which expressly bars parties from agreeing for increase in the time period given in the law of limitation. Limitation law is not something sacred or sacrosanct that parties should not be allowed to contract around by mutually giving it up or by agreeing for freezing or extension of limitation periods. International practice is in that direction. However, in the light of Section 28, agreements which limit the time period for limitation purposes are invalid. 

[Full disclosure: The subject-matter of this post is a question to be decided by the Madras High Court in a pending case. The author of this post was an employee till recently with one of the parties to the case.] 

Retrospective Operation of the Specific Relief (Amendment) Act, 2018

As stated in several previous posts in this blog, the Specific Relief (Amendment) Act, 2018 (“2018 Act”) brings several substantive changes in the Specific Relief Act, 1963 (“1963 Act”) thereby drastically altering contract remedies. Given that these amendments were brought into force from 01.10.2018, questions are likely to arise as to the retrospective operation of various provisions.

Bengaluru City Civil Court Decides

One of the first decisions on this issue is from the XII Additional City Civil Court, Bengaluru in OS No. 5395/2011 (Somashekar v. Lt. Col. Appu Ramanand Sharma (Retd.). The suit is for specific performance of an agreement to sell an immovable property and has been pending from 2011. When the matter was at the stage of arguments, the Plaintiff argued that the amendments to the 1963 Act have done away with the discretion of courts to order specific performance and that if the agreement is proved, the court is obligated to order specific performance.

The court rejected the contention of the plaintiff on this issue and held that the 2018 Amendment was not retrospective. The court relied on Section 1(2) of the 2018 Amendment, which provided:

"It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision."

On the basis of the above provision, the court concluded that the amendment was given a prospective effect. While the reasoning is not completely in accord with the legal provisions, the court was correct in rejecting the contentions of the Plaintiff on retrospectivity because the cause of action arose prior to the suit in 2011.

While the decision does not have any precedential value, this is perhaps one of the earliest decisions on the issue.

Whether the 2018 Act is Retrospective?

On the question of retrospectivity of the 2018 Act, readers would do well to have a look at this blog post on the subject. This post puts forth the following points:

• The 2018 Act does not contain any savings clause or a transitory provision.
• The 2018 Act is in the nature of substantive law since it provides for substantive changes in the law of remedies.
• Remedial statutes are prospective.
• In view of Section 6 of the General Clauses Act, 1897, the rights and obligations accrued prior to the bringing into force of 2018 Act (01.10.2018) would stand undisturbed by the 2018 Act.
• The 2018 Act would be applicable to all breaches and disputes subsequent to bringing into its force.
• This is irrespective of whether the contract was concluded before the 2018 Act came into force.

Thus, any breach (or cause of action) that arose on or after 01.10.2018 would be governed by the 2018 Act. This is even if the contract was signed before 01.10.2018.

Whether Absence of a Savings Provision or Transitory Clause is a Lacuna?

It is suggested in the aforesaid post that there is no savings provision or transitory clause and a similar absence has caused several problems in the context of the Arbitration and Conciliation (Amendment) Act, 2015. The analogy of the problems regarding retrospectivity, a subject well-discussed in this blog, with that of the 2018 Act is misconceived. While the arbitration amendments were both procedural and non-procedural, the amendments in the 2018 Act are substantive in nature, as the above blog states. Therefore, there is no reason why such a provision should be there. Such savings provisions are not common when an amending statute amends substantive law (as it is known), unless specific reasons warrant otherwise.

Liquidated Damages under Indian Contract Law between 1872 & 1899

On 29 September 2018, we did a brief article review of S. Swaminathan’s erudite paper in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018). This post is in respect of one of the topics addressed in the paper.

An important argument in the paper is that the 1899 amendment brought in the dichotomy of liquidated damages-penalty into the Indian Contract Act, 1872, before which such a dichotomy never existed. Although this view is more or less correct, it appears from a perusal of the decisions rendered prior to 1899 that the judges ended up judicially incorporating the dichotomy in their decisions. 

Section 74 as it Stood Originally

The original Section 74 was substituted by Section 4 of the Act VI of 1899. Para 1 of Section 74 as it originally stood read as below (Para 2 did not undergo any substantial amendment):

“Title to compensation for breach of contract in which a sum is named as payable in case of breach- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named.”

One of the chief aims of the original Section 74 was to do away with courts inquiring as to whether the amount named is liquidated damages or a penalty. Swaminathan argues that this did not happen primarily owing to the amendments in 1899 which introduced the dichotomy:

“Just how did the exact opposite of what the drafters had envisaged come to be the state of the law and this, after they had been so careful about wanting to avoid the troublesome liquidated damages-penalty dichotomy?… The single most important contributing factor in bringing this about, it will be hypothesized, was an ambiguity unwittingly introduced by an amendment to section 74 in 1899 by a select committee headed by the ace draftsman Mackenzie Chalmers… However, the effect of the introduction of the word ‘penalty’ in the provision in sharp contrast to the neologisms used by the original provision was to prove troublesome. It was to create the misleading (and unintended) impression that the English concept of ‘penalty’ was being sought to be introduced into Indian law. Once penalty was in, liquidated damages was but not even a step away.”

“Controversy Surrounding “Sum is Named in the Contract”

The author also acknowledges that the way in which the original Section was drafted did not help matters and referred to the more controversial issue then regarding whether clauses providing for increased interest on account of default could be covered under the original Section 74:

"The phrase ‘sum named in the contract’ ostensibly meant that the provision applied only to in solido sums, thus leaving out stipulations for variations of interest, acceleration clauses which affected payment schedules rather than sums, and payments in specie. This ambiguity led to a great divergence of opinion among Indian courts on the applicability of section 74 to such clauses. A good fraction of the litigation on section 74 involved such stipulations.”

This is correct. A perusal of the decisions between 1872 and 1899 reveal this aspect. There were divergent views of various High Courts on the question as to whether the original section applied even to a stipulation that could be categorized penalty although the amount of penalty was not “named” in the contract. See, for instance, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, where the Calcutta High Court held:

“We are of opinion that the contract to pay interest at 10 per cent, per mensem, if the principal sum of Rs. 400 were not paid on September 6th, the duo date of the promissory note, is not in the nature of a penalty… In such a provision there is nothing in the nature of a penalty more than there is in a provision, that the promissory note shall bear interest from the day of its date. The case seems to us to differ wholly from that class of cases in which a certain sum is agreed to be paid on a breach of contract, and therefore Section 74 of the Contract Act (IX of 1872) does not apply.”

A Full Bench of the Calcutta High Court upheld this view about twenty two years later in Deno Nath Santh v. Nibaran Chandra Chuckerbutty and Ors. MANU/WB/0158/1899 by holding that “this is not a sum named in the contract as the amount to be paid in case of such breach, and Section 74 does not apply.” There were equally a good number of cases where the fine distinctions between such clauses were made and contra view was upheld. See, for instance H. Mackintosh v. C. Crow and Anr. (1883) ILR 9 Cal 689 and a decision of the Full Bench of the Calcutta High Court in  Kala Chand Kyal v. Shib Chunder Roy I.L.R. 19 Cal. 392 (FB): MANU/WB/0013/1892.  It must also be noted that in cases where the courts held that Section 74 were not applicable, the debtor did not stand unprotected and could raise defences available to him in equity. See, for instance, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, Mackintosh v. Wingrove (1879) ILR 4 Cal 137 and Ram Prasad And Ors. v. Lalli (20 July 1886) (1887) ILR 9 All 74. Nevertheless, considering the decision of the Full Bench in Deno Nath (above), we are not sure the remedy was efficacious.

Now, coming back to Swaminathan’s article, the author argues: “Unsure about the applicability of this provision to such cases, Indian courts increasingly began to fall back on the English law to decide these cases.” The author seems to suggest from this argument that owing to the controversy regarding whether enhanced interest clauses were “sum named in the contract”, English law were relied on to decide those cases. The author’s argument that courts relied on English legal principles were the principles of equity. 

If the author's argument that the dichotomy was brought back into Indian law post 1899, in an ideal scenario, courts would never have referred to the dichotomy or decided the cases without referring to the “liquidated damages” and “penalty” nomenclatures. However, as we would see in the remaining portions of this post, the dichotomy never ceased to haunt Indian law post-1872.

Decisions Construing the Original Section 74 Pre-1899

In one of the earliest cases decided after the Indian Contract Act, 1872, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, the Calcutta High Court had to decide whether the clause was hit by Section 74. The Calcutta High Court held: “We are of opinion that the contract to pay interest at 10 per cent, per mensem, if the principal sum of Rs. 400 were not paid on September 6th, the duo date of the promissory note, is not in the nature of a penalty… The case seems to us to differ wholly from that class of cases in which a certain sum is agreed to be paid on a breach of contract, and therefore Section 74 of the Contract Act (IX of 1872) does not apply.” (emphasis supplied).  Notice above the use of “penalty” while referring to Section 74.

There are several other judgements which are in line with the above. Some of them are cited below along with the relevant observations of the court:

H. Mackintosh v. C. Crow and Anr. (1883) ILR 9 Cal 689: MANU/WB/0037/1883: “This section, it will be observed, does away with the distinction between a penalty and liquidated damages and this must be borne in mind in dealing with cases decided before the Contract Act, many of which turned upon this distinction. Under this section, whether a sum would formerly have been held a penalty or liquidated damages, if it be named in the contract as the amount to be paid in case of breach, it is to be treated, much as a penalty was before, as the maximum limit of damages.” Now, if the stipulated sum was to be treated as a penalty, it should be so determined and what followed was to import the test in English law. See, also Sungut Lal vs. Baijnath Roy and Anr. (17.06.1886 - CALHC) (1886) ILR 13 Cal 164: MANU/WB/0146/1886, where the dichotomy seems to have been used although the court recognised that Section 74 did away with it. Sundar Lal v Banke Behari (28.06.1893 - ALLHC) : MANU/UP/0058/1893 also imported the dichotomy although the Full Bench of the High Court held that the clause involved was not one to which Section 74 applied. Similar is the decision of Ram Prasad And Ors. v. Lalli (20 July 1886) (1887) ILR 9 All 74 where although the Allahabad High Court held that Section 74 did not apply nevertheless recognised the concept of penalty

See also, Dilbar Sarkar vs. Joysri Kurmi and A.M. Dunne and Ors. (12.08.1898 - CALHC) : MANU/WB/0261/1898 (“Undoubtedly, sec. 74 of the Contract Act has clone (sic done) away with the distinction between a penalty and liquidated damages and although, generally speaking, the distinction between these two classes of damages is fine, yet it is desirable to bear in mind that in some cases there is a broad distinction, In this case undoubtedly the sum agreed upon by way of damages was agreed upon as a penalty.”

It could thus be observed that importation of the dichotomy into Indian jurisprudence was not a phenomenon merely attributable to the 1899 amendment. As these cases, and many more, go to show, notwithstanding the doing away of the distinction, the dichotomy never went away. The implications of this inference may have an impact on the villainous portrayal by the authorof the 1899 amendment as having brought back the dichotomy. The 1899 amendment at the most normalized the importation of the dichotomy, which never went away, except in a miniscule number of cases.

Cases Decided on the Basis of the Original Section 74 Without Importation of the English principles

On the other side of the spectrum is the interesting case of Nait Ram vs. Shib Dat and Ors. (15.12.1882 - ALLHC) : MANU/UP/0103/1882. The suit was for the recovery of the principal amount of Rs. 200 issued under bond to the defendant and for Rs. 400 towards liquidated damages for breach of the bond. The plaintiff did not lead any evidence towards loss and the munsiff’s court applied Section 74 and declared the amount claimed towards LD as excessive thereby considerably reducing the claim towards liquidated damages. On appeal, the appellate court termed the decision regarding assessment of liquidated damages as erroneous and held Rs. 100 as LD to be reasonable.

On further appeal, the Division Bench of the Allahabad High Court recognised the legislative intent behind enactment of Section 74: to eliminate the LD-penalty dichotomy: “The section appears to have been introduced to obviate the difficulties which exist in distinguishing liquidated damages, from penalty under the English Law and the effect of it is, that the Court are not bound to award the entire amount of damages agreed upon by the parties in anticipation of the breach of contract. The only restriction is that the Court cannot decree damages exceeding amount previously agreed upon by the parties.”

On how reasonableness has to be determined, the court held: “The discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation though of course the expression "reasonable compensation" used in the section necessarily implies that the discretion so vested must be exercised with care, caution, and on sound principal (sic principles).”

On how the discretion has to be exercised, the court’s decision deserves summarizing:

• Damages should be commensurate with the injury sustained.

• It should be assessed with the view to restoring the advantage to the plaintiff that he might have received if the contract had been performed.

• Where it is impossible to arrive at the exact damages, courts award the amount named, and nothing more.

Thereafter, the court held that this was not a case where it was impossible to arrive at the damages. On the assessment of damages, the court basically repeated the manner in which damages would be proved in a claim for general damages under Section 73. 

Another similar decision is that of Brahmaputra Tea Co. Ld. v. E. Scarth (MANU/WB/0175/1885 : (1885) ILR 11 Cal 545). The defendant entered into an agreement with the plaintiff to serve as an assistant tea planter for a salary. Clause 8 of the agreement named a sum as damages in case of breach of the agreement. The plaintiff initiated a suit to recover, inter alia¸ the named sum from the defendant as per clause 8 of the agreement. The plaintiff did not lead any evidence in the trial on the actual loss suffered and merely relied on the amount named in clause 8 of the agreement. However, the trial court held that the plaintiff was entitled to an amount that was far lesser than the amount stipulated in the agreement. On appeal, a two judge Bench of the Calcutta High Court consisting of McDonell and Macpherson, JJ was of the view that it was not necessary for the plaintiff to prove damages or loss. The Bench was of the opinion that the trial court erred in reducing the amount of compensation. It held:

“…the agreement by the defendant himself, so he knew full well what he was doing and what risk he was incurring, and, so far as we can see, there was no reasonable or sufficient ground for his act. No doubt the Court has a discretion to fix what it considers reasonable compensation; but when the parties have already agreed among themselves as to what the penalty should be, we think the Court should not, in fixing the compensation, wholly ignore the amount agreed on, unless this is, on its face, wholly unreasonable with reference to the position of the parties and the breach provided against.”

The court felt that the Liquidated Damages named in the agreement was not “wholly unreasonable” and must have been agreed between the parties after taking into consideration to all the circumstances attending the consequences of breach. However, the court doubted if the amount named in the agreement could be considered as reasonable “in the absence of any proof to the contrary”. Consequently, the court exercised its discretion in the matter and awarded a sum which was approximately half-way between the amount specified in the judgement of the trial court and the amount named in the agreement.

Thus, it would seem that even from the beginning, courts were grappling with the inconsistency in the text of the statute: on the one hand, the plaintiff was not required to prove the actual loss caused by the breach and, on the other, the court could grant only reasonable compensation for which it had to allow the parties to lead evidence on the reasonableness of the amount named in the contract. A way of resolving it was to simply suggest, like Nait Ram that damages should be proved akin to a claim under Section 73. Another way was to award damages in the absence of proof as a fraction (or percentage) of the amount in the contract as it happened in Brahmaputra Tea Co. in 1885 (see above) and in Construction and Design Services vs. Delhi Development Authority MANU/SC/0099/2015, one hundred and thirty years later.

Closing Remarks

In the light of Cavendish Square, is it not the time to move on and bring about a more nuanced and predictable model of determination of Liquidated Damages? The reasonableness standard does not offer certainty and inevitably allows promisors to challenge the imposition in courts regularly.  

Critique of the Specific Relief (Amendment) Act, 2018

Over at Obiter Dicta, the respected Dr. Nilima Bhadbhade, one of the foremost experts in India on Contract and Specific Relief law, has penned a comprehensive critique on the Specific Relief (Amendment) Act, 2018. The post by Dr. Bhadbhade primarily argues that the amendment was a case of hurried legislation and was a comprehensive deviation from the Expert Committee Report. The post notes that the Ministry of Law & Justice did not publish the report but the same was made available through the RTI Act. This was probably a reference to our post making the Report public pursuant to an RTI application by us.

We had several posts in this blog (here, here, here and here) and elsewhere critiquing one particular aspect: the way in which the amendment affected the balance maintained by contract law between the interests of the victim of the breach and the perpetrator of breach. The post by Dr. Bhadbhade confirms the validity of the criticisms made, and coming from a person with immense expertise and who was a part of the Expert Committee, the Government should take it seriously to explore the option of amending the amendment to ensure that legitimate criticisms of the Act are addressed. 

Article Review: Shivprasad Swaminathan's De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

Shivprasad Swaminathan's latest article in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018) presents an interesting read and is an article which every Indian lawyer- practitioner, judge or academician- should read, Good articles on Contract Law from an Indian perspective are rare and the paper provides deep insights on the subject. 

Ask any lawyer about what are essentially required to be established in a court to be entitled for liquidated damages and he is likely to scratch his head or mislead you. If you file a claim in a court (or an arbitral tribunal) for liquidated damages and furnish some evidence, you can only hope to god on whether the court will award you the said amount.  So the claimant ends up furnishing the best evidence he has, "whether or not actual damage or loss is proved to have been caused".

The key takeaways of the article are listed out below:

• The article provides a much-required drafting history of Section 74
• It also discusses the objective of Section 74- to no more get into the LD-penalty dichotomy and how the dichotomy was introduced through the 1899 amendments. 
• The article notes how the supposedly "landmark" decisions on LD repeatedly brought the dichotomy into S. 74 when it was not warranted at all.
• "Reasonable" was a "trouser word": its determination was by establishing unreasonableness. 
• The article also analyses the relatively recent judgement Kailash Nath v DDA and how the Supreme Court tried to construe Section 74 to mitigate the uncertainty brought about by the dichotomy. 

The author argues that a "trichotomy" was introduced in Kailash Nath- liquidated damages, other liquidated amounts and penalty in place of the standard dichotomy (See, Part II of the article). This blawgger is not sure if RF Nariman, J did that in the case.  We'll quote the relevant portion of the judgement from which the author seeks to draw this inference:

"Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.

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

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

The Section applies whether a person is a plaintiff or a defendant in a suit.

The sum spoken of may already be paid or be payable in future.

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."

Kailash Nath nowhere uses the phrase "other liquidated amounts". It appears that "liquidated amounts" referred to above is qualified by "payable by way of damages". Nariman's decision is that if the above said liquidated amount payable by way of damages is found by the court to be a genuine pre-estimate of damages fixed by both parties, then the said amount is reasonable compensation but if it is not a genuine pre-estimate of damages fixed by both parties, it is a penalty for which only reasonable compensation could be awarded. In sum, there seems to be no trichotomy.

Nevertheless, this is just a minor issue with the paper that's a brilliant read. The author admirably concludes that the Act has deviated from the drafter's design, which originally could accommodate the test of legitimate interests of the promisee in assessing reasonableness (and enforcement of) the LD clause. The test is currently in vogue post-Cavendish Square. The author argues that the Section as originally drafted without the dichotomy could accommodate the legitimate interest test "[b]ut it was not to be". Now that Canvedish is the law in the common law world, it is time for us to exorcise the dichotomy and embark on reforming the law.