Supreme Court Denies Damages for Wrongful Termination: Kanchan Udyog Ltd. vs. United Spirits Ltd. (2017)

Introduction

Date of the Judgment: June 19, 2017

Citation: [Not Available in Source]

Judges: Ranjan Gogoi, J. and Navin Sinha, J. (authored the judgment)

Can a company claim compensation for lost future profits and plant costs when a contract is terminated, especially if the company’s own financial issues contributed to the losses? The Supreme Court of India recently addressed this question in a case between Kanchan Udyog Limited and United Spirits Limited. The court examined whether the termination of a bottling agreement justified the award of damages, considering the appellant’s financial instability and failure to mitigate losses. The bench comprised Justices Ranjan Gogoi and Navin Sinha, with Justice Sinha authoring the judgment.

Case Background

Kanchan Udyog Limited (the appellant) entered into an agreement with United Spirits Limited (the respondent) to establish a bottling plant for non-alcoholic beverages in Dankuni, West Bengal. The agreement included a Project Engineering Services Agreement dated September 11, 1985, and a Bottler’s Agreement dated October 26, 1985, valid for ten years with a renewal option. The respondent was to supply the concentrate (essence) for the beverages, and the appellant would sell them in specified districts of West Bengal. The appellant obtained loans from the West Bengal Industrial Development Corporation (WBIDC) and the West Bengal State Financial Corporation to set up the plant. Commercial production began on January 1, 1987, but the respondent terminated the Bottler’s Agreement on March 16, 1988. Production ceased in May 1989, leading the appellant to file a suit for damages in 1990.

Timeline:

Course of Proceedings

The learned Single Judge initially ruled in favor of the appellant, awarding damages of Rs. 2,73,38,000 for loss of anticipated profits and Rs. 1,60,00,000 for plant installation costs, after deducting Rs. 9.05 lakhs owed by the appellant to the respondent. The total award was Rs. 4,24,33,000 with 10% interest from the date of the suit. However, the Division Bench reversed this decision on appeal, dismissing the suit.

Legal Framework

The case primarily revolves around the interpretation of the Indian Contract Act, 1872, specifically:

• Section 62 of the Indian Contract Act: Deals with the novation of contract.
  
  “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract, need not be performed.”
• Section 73 of the Indian Contract Act: Addresses compensation for loss or damage caused by breach of contract.
  
  “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”
• Section 8 of the Indian Contract Act: Deals with acceptance by performing conditions or receiving consideration.
  
  “Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.”
• Explanation to Section 73 of the Indian Contract Act: Pertains to the duty to mitigate damages.
  
  “In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.”
• Section 63 of the Indian Contract Act: Discusses the concept of waiver.
  
  “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.”

Arguments

Appellant’s Arguments (Kanchan Udyog Limited):

• Breach of Contract: The respondent unilaterally and prematurely terminated the bottler’s agreement on March 16, 1988, violating clause 26 of the agreement. The appellant never accepted the termination and did not sign any fresh agreement with M/s. Venkateswara Essence & Chemicals Pvt. Ltd. (VEC) for the supply of concentrates.

• No Novation: The appellant’s acceptance of concentrates from M/s. VEC was under compulsion, not voluntary, and does not constitute a novation of the original contract under Section 62 of the Indian Contract Act. Novation requires a tripartite agreement, which was absent here.

• Loss of Anticipated Profits: The respondent failed to provide adequate marketing support, leading to the loss of anticipated profits. The appellant relied on the respondent’s expertise and assurances, expecting reasonable profits. The claim for damages was based on the loan application (Exhibit ‘C’) submitted to WBIDC, which detailed profitability, cash flow, and sales estimations.

• Mitigation of Damages: The appellant took all reasonable steps to mitigate damages by exploring alternate uses of the plant and attempting to sell it. The appellate court erred in focusing on the success of these efforts rather than the efforts themselves. The appellant was not expected to take steps involving unreasonable expenses or risk.

• Plant Installation Costs: The bottling plant was specific to the respondent’s products and not saleable in the open market. The investment of Rs. 2.52 crores in the plant was a separate claim from the loss of anticipated profits and should be compensated.

Respondent’s Arguments (United Spirits Limited):

• No Breach: The appellant was unable to run its business due to its own reasons. The change in excise regime made it economically necessary to route concentrates through M/s. VEC. The appellant agreed to this new arrangement and received concentrates from M/s. VEC.

• Novation of Contract: The original agreement underwent a novation sub silentio under Sections 8 and 62 of the Indian Contract Act, as the appellant accepted the supply of concentrates from M/s. VEC. The conduct of the appellant indicated its acquiescence to the new arrangement.

• No Causation: The termination of the contract was not the primary cause of the loss of anticipated profits. The appellant’s inability to manage its finances and lack of brand acceptance were the main reasons for the failure of the business. The appellant failed to prove the documents (Exhibit ‘F1’ and ‘W1’) on which it based its claim for loss of profitability.

• Failure to Mitigate Losses: The appellant failed to take steps to mitigate its losses. It did not utilize the plant for bottling by others, avail concentrates from M/s. VEC, or sell the plant immediately after closure. The appellant’s claim for loss of expected profitability was based on a loan application, which was speculative and not a basis for claiming damages.

• Double Claim: The appellant cannot claim both reliance loss (investment in plant) and expectation loss (anticipated profits) simultaneously. If no profit was likely, awarding reliance loss would be a windfall for the appellant.

[TABLE] of Submissions by Parties:

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the termination of the bottler’s agreement by the respondent was a breach of contract.
2. Whether there was a novation of the original contract when the appellant started receiving concentrates from M/s. VEC.
3. Whether the appellant was entitled to claim damages for loss of anticipated profits.
4. Whether the appellant took adequate steps to mitigate its losses.
5. Whether the appellant can claim both reliance loss and expectation loss simultaneously.

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:

Cases:

• Wellesley Partners LLP v. Withers LLP, (2015) EWCA Civ 1146: Discussed the principle that a contract breaker is liable for damages resulting from the breach, provided a reasonable person would have foreseen such damage.
  
  Ratio: A contract breaker is liable for damages that were reasonably foreseeable at the time of contract formation.
• M. Lachia Shetty & Sons Ltd. vs. Coffee Board, Bangalore, (1980) 4 SCC 636: Dealt with the duty to mitigate losses.
  
  Ratio: The party claiming damages must take reasonable steps to mitigate their losses.
• McDermott International Inc vs. Burn Standard Co. Ltd. & Ors., (2006) 11 SCC 181: Discussed the concept of novation of contract sub silentio.
  
  Ratio: Novation of a contract can occur through the conduct of parties, even if not formally documented.
• Galoo Ltd. & Ors. vs. Bright Grahame Murray & Anr., (1994) 1 WLR 1360: Addressed the principle of causation in contract law.
  
  Ratio: The breach of contract must be the substantial cause of the loss, not just an opportunity for the loss to occur.
• M/s. Murlidhar Chiranjilal vs. M/s. Harishchandra Dwarkadas & Anr., (1962) 1 SCR 653: Discussed the duty to mitigate losses.
  
  Ratio: The party claiming damages must take reasonable steps to mitigate their losses.
• Payzu v. Saunders, (1919) 2 KB 581: Discussed the duty to mitigate losses.
  
  Ratio: The party claiming damages must take reasonable steps to mitigate their losses.
• Cullinane vs. British Rema Manufacturing Co. Ltd., (1954) 1 QB 292: Addressed the issue of claiming both reliance and expectation losses.
  
  Ratio: A party cannot claim both reliance and expectation losses as it would lead to double compensation.
• C&P Haulage vs. Middleton, (1983) 3 All ER 94: Discussed the principle that the law of contract compensates for damages resulting from breach, not for making a bad bargain.
  
  Ratio: Damages are awarded to compensate for the consequences of a breach, not for the consequences of entering into a contract.
• BSNL vs. BPL Mobile Cellular Ltd., (2008) 13 SCC 597: Discussed the concept of acceptance of new rates or periods either expressly or sub silentio.
  
  Ratio: Parties can be bound by new terms if they accept them either expressly or by conduct.
• P. Dasa Muni Reddy vs. P. Appa Rao, (1974) 2 SCC 725: Discussed the concept of waiver.
  
  Ratio: Waiver is the intentional relinquishment of a known right or advantage.
• Waman Shriniwas Kini vs. Ratilal Bhagwandas & Co., 1959 Supp (2) SCR 21: Discussed that waiver can be deduced from acquiescence.
  
  Ratio: Waiver can be implied from conduct or acquiescence.

Legal Provisions:

• Section 62 of the Indian Contract Act, 1872: Deals with novation of contract.
• Section 73 of the Indian Contract Act, 1872: Addresses compensation for loss or damage caused by breach of contract.
• Section 8 of the Indian Contract Act, 1872: Deals with acceptance by performing conditions or receiving consideration.
• Explanation to Section 73 of the Indian Contract Act, 1872: Pertains to the duty to mitigate damages.
• Section 63 of the Indian Contract Act, 1872: Discusses the concept of waiver.

[TABLE] of Authorities Considered by the Court:

Judgment

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

How each authority was viewed by the Court?

• Wellesley Partners LLP v. Withers LLP, (2015) EWCA Civ 1146: The Court acknowledged the principle of foreseeability of damages but also noted that the specific circumstances of a contract can alter this expectation.
• M. Lachia Shetty & Sons Ltd. vs. Coffee Board, Bangalore, (1980) 4 SCC 636: The Court applied this principle to highlight the appellant’s failure to take reasonable steps to mitigate losses.
• McDermott International Inc vs. Burn Standard Co. Ltd. & Ors., (2006) 11 SCC 181: The Court relied on this case to support the concept of novation sub silentio, stating that a contract can be modified by the conduct of the parties.
• Galoo Ltd. & Ors. vs. Bright Grahame Murray & Anr., (1994) 1 WLR 1360: The Court used this case to emphasize the importance of causation, stating that the breach of contract must be the substantial cause of the loss.
• M/s. Murlidhar Chiranjilal vs. M/s. Harishchandra Dwarkadas & Anr., (1962) 1 SCR 653: The Court applied this principle to highlight the appellant’s failure to take reasonable steps to mitigate losses.
• Payzu v. Saunders, (1919) 2 KB 581: The Court applied this principle to highlight the appellant’s failure to take reasonable steps to mitigate losses.
• Cullinane vs. British Rema Manufacturing Co. Ltd., (1954) 1 QB 292: The Court used this case to support its decision that a party cannot claim both reliance and expectation losses.
• C&P Haulage vs. Middleton, (1983) 3 All ER 94: The Court relied on this case to emphasize that the law of contract compensates for damages resulting from a breach, not for making a bad bargain.
• BSNL vs. BPL Mobile Cellular Ltd., (2008) 13 SCC 597: The Court used this case to support the concept of acceptance of new terms sub silentio.
• P. Dasa Muni Reddy vs. P. Appa Rao, (1974) 2 SCC 725: The Court applied this principle to the facts of the case to determine that the appellant had waived its rights by its conduct.
• Waman Shriniwas Kini vs. Ratilal Bhagwandas & Co., 1959 Supp (2) SCR 21: The Court used this case to support that waiver can be deduced from acquiescence.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the appellant’s financial instability, operational deficiencies, and failure to mitigate losses. The court emphasized that the breach of contract by the respondent was not the primary cause of the appellant’s losses. Instead, the appellant’s own inability to manage its finances, lack of brand acceptance, and failure to take reasonable steps to minimize damages were the key factors that weighed in the court’s decision.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Final Decision

The Supreme Court dismissed the appeal filed by Kanchan Udyog Limited. The court upheld the decision of the Division Bench of the High Court, which had reversed the Single Judge’s decree and dismissed the suit for damages. The court found that the appellant was not entitled to claim damages for loss of anticipated profits or plant installation costs due to its own financial issues, failure to mitigate losses, and the novation of the original contract.

Flowchart of the Legal Process

Key Takeaways

• Financial Stability: A party’s financial health and operational capabilities play a crucial role in determining the outcome of a breach of contract claim. The court emphasized that the appellant’s own financial issues and operational deficiencies were the primary reasons for its business failure, not the termination of the contract.
• Mitigation of Losses: Parties have a legal obligation to take reasonable steps to mitigate their losses when a contract is breached. Failure to do so can significantly reduce or eliminate the damages that can be claimed. The court highlighted that the appellant failed to take reasonable steps to mitigate its losses, such as utilizing the plant for bottling by others or selling it promptly.
• Novation of Contract: The conduct of parties can lead to a novation of the original contract, even if not explicitly documented. Acceptance of new terms or arrangements can imply a change in the original agreement. The court found that the appellant’s acceptance of concentrates from M/s. VEC constituted a novation of the original agreement.
• Causation: The breach of contract must be the substantial cause of the loss for damages to be awarded. The court found that the termination of the contract was not the primary cause of the appellant’s losses.
• Double Counting: A party cannot claim both reliance loss (expenses incurred in preparation for the contract) and expectation loss (anticipated profits) simultaneously. The court held that awarding both would amount to double counting and would provide a windfall to the appellant.
• Waiver: Waiver can be deduced from acquiescence. The Court held that the appellant had waived its rights by its conduct.
• Bad Bargain: The law of contract compensates for damages resulting from breach, not for making a bad bargain. The Court highlighted that the appellant had entered into a bad bargain and the law cannot compensate for the same.