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DAMAGES IN

EPC CONTRACTS

5th Annual Senior Management Forum, MumbaiApril 26, 2012

William Vivian JohnPartnerLuthra & Luthra Law Offices

© Luthra & Luthra Law Offices

Clauses in EPC contracts

Indian Contract Act, 1872Sections 73, 74

Case Law PrinciplesIndian & English

Back to the Contract…

TOPICS

Contract Law Professor: “How would you go give someone an orange?”

Student: “Here’s an orange.”

Professor: “No! No! Think like a lawyer!”

Student: “Okay, then I’d say:

“I hereby give and convey to you all and singular, my estate and interests, rights, claim, title, claim and advantages of and in, said orange, together with all its rind, juice, pulp, and seeds, and all rights and advantages…”

“…with full power to bite, cut, freeze and otherwise eat, the same, or give the same away with and without the pulp, juice, rind and seeds, notwithstanding anything to the contrary herein before or hereinafter or in any deed, or deeds, instruments of any nature or kind whatsoever…”

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Liquidated DamagesIf the Contractor [fails to do x], he shall pay, Owner by way of liquidated damages and not by way of penalty, [amount].

The Contractor acknowledges that the liquidated damages are reasonable and a genuine pre-estimate of the loss and damage that will be suffered by the Owner.

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CONTRACT CLAUSES


Limitation of LiabilityThe aggregate liability of the Contractor shall not exceed a sum equal to the Contract Price, except for [exceptions]

Neither party shall be liable to the other for any indirect, remote, special, or consequential damages provided, such limitation shall not apply to [carve- outs]

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CONTRACT CLAUSES


Section 73. Provides for: compensation for loss or damage caused which

(a) naturally arose in the usual course of things, or

(b) which the parties knew to be a likely result, when they made the contract.

No compensation for remote and indirect loss or damage.

Expln - In estimating loss or damage means which existed of remedying the inconvenience caused by non-performance must be taken into account.

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INDIAN CONTRACT ACT


A. Compensation

● Restitution not Penalty

“Pecuniary difference between the existing state of plaintiff and that which it would have been had the contract been performed.”[Subbarama Sastri AIR 1987 SC 1257]

● Easier said than done

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DAMAGES - PRINCIPLES


B. General v. Special● naturally arose, usual course (General damages)● parties knew to be likely (Special damages)

[Special circumstances, whether the party knew or not]

[Hadley v. Baxendale 1854]

Why? You need to know how far you will fall. Parties should have opportunity to price risk while contracting

C. Loss of Profit? [State of Kerala v. Bhaskaran AIR 1985 Ker 49] Loss of profit can be ‘reasonable forseeable consequence’

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D. Caused: Actual Loss● No loss, no compensation. Can’t bluff !

[Asiatic Steam Navigation AIR 1941 Sind 146]● ‘no evidence of damages’ v. ‘difficulty in

assessing damages’

Plaintiff to prove his case but the court cannot decline to estimate damage. Must look at all facts and circumstances to get to a measure.

E. Duty to Mitigate● means to remedy the inconvenience’

[Murlidhar Chironjilal AIR 1963 SC 332]

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Section 74. When the contract contains a sum named to be paid in case of breach…

…or any other stipulation by way of penalty then,

…whether or not actual damage or loss is proved,

…plaintiff is entitled to reasonable compensation not exceeding the sum named or penalty stipulated

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INDIAN CONTRACT ACT


A. Reasonable Compensation not Exceeding..

[Fateh Chand AIR 1963 SC1405]

B. Whether or not Actual Damages are Proved..

[Maula Bux AIR 1970 SC 1955]● Does not mean damages have not ‘occurred’● Applies where damages are difficult to assess● Where loss can be determined, party must lead

evidence for loss

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LIQUIDATED DAMAGES - PRINCIPLES


C. Genuine Pre-estimate of Loss

[ONGC v. Saw Pipes AIR 2003 SC 2629]

D. Burden of Proof● Party claiming compensation has to prove loss

[Maula Bux]● But if it is a genuine pre-estimate of loss, the

other party has to prove that it is not ‘reasonable compensation’ [ONGC]

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E. Earnest Money● Nominal amount of being ‘earnest’ to complete

the contract● If reasonable, can be forfeited● If not reasonable, treated under S.74

F. Time is of the Essence v. Liquidated Damages● S. 55 Contract Act

[Hind Construction Contractors (1979) 2 SCC 70]

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Liquidated DamagesWording is important

[However, wording is not everything]

Specific breach

Limitation of Liability

Consequential damages – specify

Is it enforceable?

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BACK TO THE CONTRACT


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THANK YOU!


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