Claim under s.70 of Contract Act when parties have a binding contract: Interesting update

Claim under s.70 of Contract Act when parties have a binding contract

Supreme Court has held that claim under Section 70 of the Indian Contract Act, 1872 cannot be raised when parties have entered into a binding contract.

Brief Facts:

The impugned contract was a purchase order amongst Mahanagar Telephone Nigam Limited (“MTNL”) and Tata Communication Limited (“TCL”). The purchase order restricted liquidated damages to 12% of the purchase value in case of a breach. TCL did not fulfil its obligations under the purchase order and as a result MTNL suffered losses. Subsequently, MTNL deducted certain amounts of money from the invoices raised by TCL.

TCL initiated a suit against MTNL in the Telecom Disputes Settlement and Appellant Tribunal (“TDSAT”), arguing that the monetary amounts subtracted by MTNL were not in consonance with the monetalry amounts mentioned in the impugned purchase orders. MTNL argued stating that such sums are due under ‘quantum meruit’ (compensation ‘quantum meruit’ is awarded for work done or services rendered, when the price thereof is not fixed by a contract). TDSAT passed an order to return the ‘quantum meruit’ claim, which was beyond 12% liquidated damages, since it was separately charged by MTNL without MTNL clearly establishing that it had suffered any losses warranting the ‘quantum meruit’ claim. MTNL accordingly approached the Supreme Court to appeal the decision of the TDSAT.

Issues for consideration:

The Hon’ble Supreme Court of India (“Supreme Court”) in this judgment analyzed if commitments resembling contractual commitments may be construed as a part of contract which already contains a provision regarding the breach of its terms. The Supreme Court analyzed if a claim in ‘quantum meruit’ would be allowable in the event the concerned parties have entered into a contract.

Held:

Chapter V of the Indian Contract Act, 1872 (“ICA”) pertains to “certain relations resembling those created by contract”. The aforesaid chapter pertains to circumstances where no contract exists between parties. The chapter contains provisions regarding duties arising comparable to a contract between the parties.

Chapter VI of the ICA however pertains to remedies in the event of breach of a contract, like damages that arise due to the breach. The chapter also covers penalties and compensation.

Section 70 of the ICA is under Chapter V of the ICA. It pertains to circumstances in which a non-gratuitous act by a person leads to the formation of commitments on another party who benefits as a result of such an act. Section 70 is not dissimilar to ‘quantum meruit’.

The Supreme Court, while analyzing Section 70 of the ICA relied on its previous decisions, in which it had held that Section 70 of the ICA does not apply to cases where there exists an express contract.

The Supreme Court accordingly held that the money subtracted by MTNL was a claim of ‘quantum meruit’ and such a claim was not maintainable due to the existence of the aforesaid purchase orders. The remedy for breach of a contract is as per Section 74 of the ICA, which states that 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. The Supreme Court accordingly held that MTNL can claim only the sum stipulated in the purchase order.

Order copy- https://www.sci.gov.in/supremecourt/2018/39310/39310_2018_Judgement_27-Feb-2019.pdf

Reference-https://www.lexology.com/library/detail.aspx?g=c39230e4-f7dc-4f34-b197-71b0d625c513&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-06-11&utm_term=

https://indiacorplaw.in/2019/03/claims-quantum-meruit-vis-vis-damages-breach-contract.html