Supreme Court Upholds High Court Decision on Damages for Non-Performing Machinery: Sahakarmaharshi Bhausaheb Thorat vs. Thyssenkrupp (2025)

Introduction

Date of the Judgment: February 14, 2025

Citation: 2025 INSC 219

Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.

When a plant doesn’t perform as promised, who bears the cost? The Supreme Court of India addressed this critical question in a dispute over non-performing machinery supplied for a continuous fermentation process. The court examined the extent to which damages can be claimed when a supplied plant fails to meet the guaranteed performance standards. Justices Abhay S. Oka and Ujjal Bhuyan, delivered the judgment, upholding the High Court’s decision.

Case Background

Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd. (referred to as “the appellant”) and Thyssen Krupp Industries India Pvt. Ltd. (referred to as “the respondent”) entered into an agreement on November 17, 1992. The respondent was to design, procure, manufacture, and supply machinery and equipment for a continuous fermentation process, based on technology patented by the National Chemical Laboratory, Pune (NCL). The agreed consideration was Rs. 93,20,000/-.

A key clause in the agreement guaranteed a minimum yield of 280 liters of alcohol per metric tonne of molasses. The appellant contended that their existing yield was 245 liters per metric tonne of molasses. The machinery was to be supplied by May 15, 1993, within five and a half months from the agreement’s effective date.

The appellant claimed a delay of approximately 24 weeks in the machinery’s delivery. They further asserted that trial runs showed the yield to be significantly below the guaranteed 280 liters, with a maximum yield of 237.68 liters per metric tonne of molasses. Consequently, on October 19, 1994, the appellant issued a legal notice to the respondent, claiming Rs. 237.83 lakhs in damages.

Timeline

Course of Proceedings

The appellant filed a statement of claim before the Arbitral Tribunal, seeking damages of Rs.233.75 lakhs. The Arbitral Tribunal, on June 20, 1999, awarded Rs.159.79 lakhs to the appellant, including liquidated damages, refund of price paid, past interest, and compensation for actual loss suffered.

Both parties challenged this award under Section 30 of the Arbitration Act, 1940. The Civil Judge set aside the award on May 6, 2000, remanding it for fresh adjudication. The High Court modified this order on October 20, 2000, holding that the claim of Rs.107.54 lakhs was beyond the Arbitral Tribunal’s jurisdiction but upheld other claims.

The appellant appealed to the Supreme Court, which on May 7, 2002, set aside the High Court’s order and restored the Civil Court’s remand order, stating that the claim of Rs.107.54 lakhs and interest was arbitrable.

After the remand, the Arbitral Tribunal made a second award on November 24, 2002, accepting several claims. Again, both parties filed objections. On November 6, 2004, the Civil Court largely upheld the second award, except for the interest direction.

The respondent then appealed, and the appellant filed cross-objections. The High Court, on February 6, 2012, allowed the appeal and dismissed the cross-objections, setting aside the second award to the extent of Rs.68.15 lakhs, leading to the final appeal before the Supreme Court.

Legal Framework

Several clauses and legal provisions are central to this case:

• Clause 8 of the Agreement: Incorporated the performance guarantee, specifying that the machinery and equipment should yield a minimum of 280 liters of alcohol per ton of molasses. Specifically, sub-clause C states:
  

  “C. That the capacity and efficiency of the machinery and equipment of continuous fermentation plant shall be fulfilled after one month from the start of operation, all units work to their rated capacities and efficiencies fermentation efficiency minimum 90% yielding 280 litres of alcohol/ton of molasses (47 % F.S) and with performance specified in annexure B and D.”

• Clause 15 of the Agreement: Detailed penalties and liquidated damages for various failures, including delays in delivery and not meeting guaranteed performance standards.
• Clause 21 of the Agreement: Addressed the maintenance warranty period, stating the seller’s liability to rectify or replace defective parts. Clause 21.1 states:
  

  “21.1 For a period of twelve months from the date of commission of the continuous fermentation plant or eighteen months from the date of last supply whichever is earlier called the maintenance warranty period the seller shall remain liable to rectify / replace any parts thereof such as may be found to be defective or below the rated. Capacity under proper use and maintenance arising due to faulty design, materials, or workmanship…”

• Section 74 of the Indian Contract Act, 1872: Pertains to compensation for breach of contract where a penalty is stipulated. It allows the party suffering from the breach to receive reasonable compensation, not exceeding the amount stipulated in the contract. The section states:
  

  “74. Compensation for breach of contract where penalty stipulated for. — 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, or if the contract contains any other stipulation by way of penalty, 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 or, as the case may be, the penalty stipulated for.”

Arguments

Appellant’s Arguments (Sahakarmaharshi Bhausaheb Thorat):

• The appeal was confined to the rejection of Rs. 68.15 lakhs, which were damages claimed for losses suffered due to the non-performance of machinery and equipment.
• Even under the Arbitration Act, 1940, the scope of interference by the Civil Court was limited. Reliance was placed on Madnani Construction Corporation (P) Ltd. v. Union of India & Ors. [(2010) 1 SCC 549].
• Clauses 15.2 and 15.3 of the contract were applicable when the plant supplied or commissioned yielded below the minimum guarantee of 280 liters per metric tonne.
• The respondent never disputed the non-commissioning of the plant but stated that the machinery and equipment supplied were complete without any defect or fault as per the rated capacities mentioned in the parameters.
• The claim of liquidated damages and breach of warranty were separate and independent claims and were rightly granted by the Arbitral Tribunal.

Respondent’s Arguments (Thyssenkrupp):

• The High Court correctly recorded the finding on the issue of the appellant’s entitlement to the sum of Rs. 68.15 lakhs.
• Section 74 of the Indian Contract Act, 1872, clarifies that if a contract contains a clause stipulating liquidated damages, the party complaining of the breach can receive a sum not exceeding the mentioned amount.
• In view of Clause 21 of the agreement, the appellant’s claim that they were unable to use the machinery cannot be accepted.
• The High Court had already concluded the issue of the grant of the claim of Rs. 107.54 lakhs in the earlier round.
• The appellant did not call upon the respondent to replace the machinery, and it was not claimed that the appellant had replaced the machinery at the respondent’s cost.
• The agreement does not provide any specific clause for the total failure of the plant; therefore, as per the Contract Act, the seller is liable for the actual damages.
• What was claimed by the appellant in the correspondence was a refund of the price, and the applicability of Section 59 of the Sale of Goods Act for a refund of the price or by way of damages is contrary to the express terms of the agreement.
• The liability of the respondent was restricted to Rs. 18.64 lakhs as damages.

Innovativeness of the argument: The appellant argued that the liquidated damages and breach of warranty were separate claims, while the respondent focused on limiting liability based on the contract terms and the appellant’s failure to utilize clause 21 for replacement of machinery.

Summary of Submissions

Issues Framed by the Supreme Court

1. Whether the High Court erred in setting aside the award of the Arbitral Tribunal to the extent of Rs. 68.15 lakhs being damages for loss suffered due to non-performing machinery and equipment.

Treatment of the Issue by the Court

Authorities

• Madnani Construction Corporation (P) Ltd. v. Union of India & Ors. [(2010) 1 SCC 549] (Supreme Court of India): Relied upon by the appellant to argue that the scope of interference by the Civil Court was limited under the Arbitration Act, 1940.
• Section 74 of the Indian Contract Act, 1872: Considered by the court to determine the extent of compensation for breach of contract when a penalty is stipulated.
• Clause 8 of the Agreement: The court considered sub-clause C of clause 8, which contains performance guarantees.
• Clause 15 of the Agreement: The court considered clause 15 regarding penalties /liquidated damages.
• Clause 21 of the Agreement: The court considered clause 21 regarding the maintenance warranty period.

Judgment

How each authority was viewed by the Court:

• Madnani Construction Corporation (P) Ltd. v. Union of India & Ors. [(2010) 1 SCC 549]: The case was cited by the appellant to argue that the scope of interference by the Civil Court was limited. However, the Supreme Court did not explicitly comment on the applicability of this case in its final judgment, focusing instead on the specific clauses of the agreement and Section 74 of the Contract Act.
• Section 74 of the Indian Contract Act, 1872: The Court used this section to emphasize that the claim for damages would remain confined to what is expressly provided under the Agreement. Since the appellant got liquidated damages as provided in the agreement, the court held that additional claims were not permissible under this section.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the specific terms of the agreement between the parties and the application of Section 74 of the Indian Contract Act. The Court emphasized that the appellant was seeking a refund of the amount spent on the plant rather than claiming damages for breach of warranty or exercising their right to replace the machinery under Clause 21 of the agreement. The Court also noted that the appellant had already received liquidated damages as provided in the agreement, further limiting their ability to claim additional compensation.

The court’s reasoning was heavily based on the legal interpretation of the contract terms and the applicable law, with a lesser emphasis on the factual aspects of the case.

Logical Reasoning

Key Takeaways

• Contractual Terms are Paramount: The specific terms of a contract, especially those related to performance guarantees and remedies for breach, will be strictly interpreted by the courts.
• Limited Damages: When a contract provides for liquidated damages, the party claiming breach is generally limited to the compensation expressly provided in the agreement.
• Importance of Exercising Options: If a contract provides specific options or remedies, such as the right to replace defective equipment at the seller’s cost, the party must exercise those options to claim additional damages.

Development of Law

Ratio Decidendi: The Supreme Court reiterated that when a contract includes specific clauses for liquidated damages and provides options for remedies, the party claiming breach is generally limited to the compensation and remedies expressly stated in the agreement. Failure to exercise available options can further limit the ability to claim additional damages.

Conclusion

The Supreme Court upheld the High Court’s decision, dismissing the appeal. The court found no error in the High Court’s view that the appellant was not entitled to the claim of Rs.68.15 lakhs, as it was claimed as a refund of the amount spent on the acquisition of the plant and machinery, and the appellant had already received liquidated damages as per the agreement.