Supreme Court Clarifies Applicability of Quantum Meruit under Section 70 of the Contract Act: Mahanagar Telephone Nigam Ltd. vs. Tata Communications Ltd. (27 February 2019)

Date of the Judgment: 27 February 2019

Citation: [Not Available in Source]

Judges: R.F. Nariman, J., Vineet Saran, J.

Can a party claim compensation for services rendered under a contract using the principle of quantum meruit, which is usually applied when there is no contract? This question was addressed by the Supreme Court of India in the case of Mahanagar Telephone Nigam Ltd. vs. Tata Communications Ltd. The core issue revolved around whether Mahanagar Telephone Nigam Ltd. (MTNL) could deduct certain amounts from the payments due to Tata Communications Ltd. (TCL) for services rendered. The Supreme Court, in this judgment, clarified the scope of Section 70 of the Indian Contract Act, 1872, emphasizing that quantum meruit cannot be applied when a contract exists between the parties. The judgment was delivered by a bench of Justices R.F. Nariman and Vineet Saran.

Case Background

Mahanagar Telephone Nigam Ltd. (MTNL) and Tata Communications Ltd. (TCL) entered into a Purchase Order dated 01.10.2008, where TCL was to provide bandwidth services to MTNL. According to the Purchase Order, TCL was responsible for terminating the bandwidth at MTNL’s sites in Delhi and Mumbai, including providing the necessary hardware and software at no additional cost. The physical connectivity was to be completed within two months from the date of the Purchase Order. A dispute arose when MTNL adjusted a sum of INR 1,10,57,268 from the dues payable to TCL, claiming that TCL failed to provide the required last-mile connectivity. TCL disputed this deduction and sought recovery of the amount along with interest.

Timeline:

Course of Proceedings

The matter was initially brought before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT). TCL sought recovery of INR 1,10,57,268 along with interest. The TDSAT noted that TCL failed to provide the last-mile connectivity within the stipulated two months and even by the time they terminated the contract on 11.01.2011. TCL argued that they were not given access to MTNL’s premises and were not granted permission for the last-mile connectivity. The TDSAT found TCL’s case weak, noting that the issue of access to the Mumbai premises was raised belatedly. The TDSAT determined that MTNL could have invoked clause 16 of the Purchase Order, which provides for liquidated damages for failure to deliver services. The TDSAT calculated the liquidated damages to be a maximum of 12% of the billed amount, which was INR 25,83,181. Thus, the TDSAT directed MTNL to refund INR 84,74,087 (INR 1,10,57,268 – INR 25,83,181) along with interest at 9% per annum.

Legal Framework

The core legal issue revolves around Section 70 of the Indian Contract Act, 1872, which deals with obligations of a person enjoying the benefit of a non-gratuitous act. Section 70 states:

“70. Obligation of person enjoying benefit of non-gratuitous act.— Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.”

This section falls under Chapter V of the Contract Act, titled “Of certain relations resembling those created by contract.” The other sections in this chapter, such as Sections 68, 69, 71, and 72, also deal with situations where there is no contractual relationship between the parties. Section 68 deals with necessaries supplied to a person incapable of contracting, Section 69 deals with payment by an interested person, Section 71 deals with the responsibility of a finder of goods, and Section 72 deals with payments made by mistake or coercion. The court also considered Section 73 of the Contract Act, which distinguishes between compensation for breach of contract and compensation for obligations resembling those created by contract. Additionally, Section 74 of the Contract Act, which deals with compensation for breach of contract where a penalty is stipulated, was also considered.

Arguments

The primary argument before the Supreme Court was whether a claim under Section 70 of the Indian Contract Act, 1872, could be made when a contract already existed between the parties.

Arguments by Mahanagar Telephone Nigam Ltd. (Appellant):

• MTNL argued that they were justified in deducting the amount from TCL’s bills because TCL failed to provide the last-mile connectivity as per the purchase order.
• MTNL contended that they were entitled to compensation for the services not rendered by TCL.
• MTNL relied on the principle of quantum meruit, arguing that they should not have to pay for services they did not receive, even though a contract existed.

Arguments by Tata Communications Ltd. (Respondent):

• TCL argued that MTNL was not justified in making the deductions.
• TCL contended that they were entitled to the full payment for the services they had provided, and that MTNL’s deductions were unlawful.
• TCL argued that MTNL could only claim liquidated damages as per the contract, which was capped at 12%.

The innovativeness of the argument by MTNL was to claim that they should not have to pay for services they did not receive even if there was a contract, by applying the principle of quantum meruit.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

1. Whether, when parties are governed by contract, a claim in quantum meruit under Section 70 of the Indian Contract Act, 1872, would be permissible.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the decision of the TDSAT and dismissed the appeal filed by MTNL. The Court held that when a contract exists between parties, a claim for quantum meruit under Section 70 of the Indian Contract Act, 1872 is not permissible. The Court emphasized that the rights and obligations of the parties are governed by the terms of the contract.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Moselle Solomon v. Martin & Co., ILR (1935) 62 Cal 612: The Court discussed the split verdict in this case, noting the differing views on the applicability of Section 70 when a contract exists.
• Kanhayalal Bisandayal Bhiwapurkar (Dr.) v. Indarchandji Hamirmalji Sisodia, AIR 1947 Nag 84: The Court noted that this case supported the view that Section 70 cannot be used when an express contract exists.
• Alopi Parshad and Sons Ltd. v. Union of India, (1960) 2 SCR 793: The Court followed this case, which held that compensation quantum meruit cannot be awarded where the contract provides for the consideration payable.
• Mulamchand v. State of M.P., (1968) 3 SCR 214: The Court followed this case, which clarified the conditions for invoking Section 70.
• Orissa Industrial Infrastructure Development Corpn. v. Mesco Kalinga Steel Ltd., (2017) 5 SCC 86: The Court referred to this case, which reiterated the principles laid down in Mulamchand v. State of M.P.
• Kailash Nath Associates v. DDA, (2015) 4 SCC 136: The Court followed this case, which laid down the principles for compensation for breach of contract under Section 74 of the Contract Act.

The Court emphasized that clause 16 of the purchase order governed the relations between the parties. It specifically stated that a maximum of 12% could be levied as liquidated damages under the contract.

The Court stated:

“As has been correctly held by the impugned judgment, a maximum of 12% can be levied as liquidated damages under the contract, which sum would amount to a sum of INR 25 lakh. Since this clause governs the relations between the parties, obviously, a higher figure, contractually speaking, cannot be awarded as liquidated damages, which are to be considered as final and not challengeable by the supplier.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that contractual obligations must be upheld. The Court emphasized that when a contract exists, the parties are bound by its terms, and any claims for compensation must fall within the framework of the contract. The Court also focused on the fact that the contract itself provided for liquidated damages, which limited the amount that could be claimed by MTNL.

Fact:Law

Logical Reasoning

Key Takeaways

• Quantum Meruit Not Applicable: A claim for compensation based on quantum meruit under Section 70 of the Indian Contract Act, 1872, is not permissible when a valid contract exists between the parties.
• Contractual Terms Prevail: The rights and obligations of parties are governed by the terms of their contract.
• Liquidated Damages: If a contract specifies liquidated damages for breach, the amount of damages is limited to the stipulated amount.
• Unilateral Deductions: Parties cannot unilaterally impose deductions beyond what is provided for in the contract.

Directions

The Supreme Court upheld the TDSAT’s order, directing MTNL to refund the excess amount deducted from TCL, along with interest at 9% per annum.

Development of Law

The ratio decidendi of this case is that when a contract exists between parties, a claim for compensation under Section 70 of the Indian Contract Act, 1872, based on quantum meruit, is not permissible. This judgment reinforces the principle that contractual terms must be upheld, and parties cannot seek remedies outside the scope of their agreement. This clarifies the previous position of law by limiting the applicability of Section 70 to situations where no contract exists, thus providing more certainty in contract law.

Conclusion

In conclusion, the Supreme Court’s judgment in Mahanagar Telephone Nigam Ltd. vs. Tata Communications Ltd. clarified that the principle of quantum meruit cannot be applied when a contract exists between the parties. The court upheld the TDSAT’s decision, emphasizing that contractual obligations must be adhered to, and parties cannot unilaterally impose deductions beyond what is stipulated in the contract. This judgment reinforces the importance of honoring contractual terms and provides a clear understanding of the scope of Section 70 of the Indian Contract Act, 1872.