Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd.

Facts

ONGC, a public-sector undertaking, contracted SAW Pipes to supply casing pipes for offshore oil exploration, deliverable by 4 November 1996. SAW's Italian steel-plate supplier could not deliver on time owing to a general strike of European steel-mill workers in September-October 1996, and SAW sought a 45-day extension. ONGC extended the time but stated liquidated damages (1 per cent of contract price per week of delay) would be charged, and deducted those amounts from payment. The arbitral tribunal, relying on Maula Bux, held ONGC had to prove actual loss, could not do so, and ordered refund; ONGC challenged the award.

Issues

• Whether an aggrieved party must prove actual loss to recover liquidated damages stipulated under Section 74.
• How Sections 73 and 74 operate where a contract drafted by experts fixes a genuine pre-estimate of damages.

Arguments

ONGC argued that, liquidated damages having been agreed by experts in clear terms, it need not prove actual loss to make the contractual deduction. SAW argued, following Maula Bux, that loss had to be established before liquidated damages could be retained, and that ONGC had proved none.

Held

The Supreme Court read Sections 73 and 74 together and made an exception to the strict position in Maula Bux. Where the contract terms are clear and unambiguous and the parties (experts in the field) have genuinely pre-estimated damages, the aggrieved party may recover that amount without leading evidence of actual loss, unless the court finds the term to be a penalty or unreasonable, or that no loss is likely. In some contracts loss is impossible to assess, and a genuine pre-estimate is then the measure of reasonable compensation. The burden lies on the party challenging the stipulation to show it is unreasonable. The arbitral award directing refund was set aside.

Ratio decidendi

Section 74 read with Section 73 permits recovery of stipulated liquidated damages, without proof of actual loss, where the term is a genuine, clear and reasonable pre-estimate by knowledgeable parties and not a penalty; the burden of showing it is unreasonable lies on the party in breach.

Significance

The leading modern Supreme Court authority on liquidated damages under Section 74. It qualified Maula Bux for commercial contracts drafted by professional bodies, recognising that insisting on proof of loss would defeat the purpose of liquidated-damages clauses. (The decision is better known for its expansive 'patent illegality' reading of public policy under Section 34 of the Arbitration Act, but on Section 74 it remains a cornerstone; later authorities such as Kailash Nath Associates v. DDA and Construction & Design Services v. DDA have continued to refine the loss-proof requirement.)

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