1 December 2021
INTRODUCTION
Negotiated, as also standard format contracts, are rife with clauses proclaiming time is of the essence. Parties are usually rest assured after spelling this out, hoping (nay assured) that such words employed would by themselves be adequate to enforce rights through a Court or an arbitral process. Sadly, mere words are usually never enough.
The Supreme Court, in the recent judgement of Welspun Specialty Solution Limited vs. Oil and Natural Gas Corporation Ltd.[i], has reiterated the principles basis which Courts are required to construe whether time is of the essence of a contract. The Court held that a collective reading of the entire contract and its surrounding circumstances is imperative to come to such a conclusion. Merely having an explicit clause in the contract may not be sufficient to make time the essence of it. The Court also held that the availability of extension procedures to fulfil obligations under a contract, along with consequent imposition of liquidated damages, are good indicators to hold that time is not of the essence.
FACTUAL BACKGROUND
Oil and Natural Gas Corporation Ltd. (Respondent) floated a global tender for the purchase of steel casing pipes. Remi Metals Gujarat Ltd., now known as Welspun Specialty Solution Limited (Appellant), was the successful bidder.
Accordingly, Purchase Orders (POs) were issued by the Respondent to the Appellant. The POs specifically stipulated that time and date of delivery were the essence of the POs. The POs also provided the Respondent with the right to accept delayed delivery, without prejudice to its right to recover liquidated damages and/ or waive in writing its right to recover liquidated damages. During the contract period, there were certain delays on the part of the Appellant and various extensions were granted by the Respondent, expressly waiving liquidated damages for the first two extensions, and deducting liquidated damages for the remaining extensions granted to the Appellant. Accordingly, the Respondent deducted a sizable amount towards liquidated damages from various bills submitted by the Appellant. The Appellant approached the Arbitral Tribunal inter alia disputing these deductions made by the Respondent.
The Arbitral Tribunal, while rejecting the Respondent’s claim for liquidated damages, held that time was not of the essence of the contract and that liquidated damages therefore could not be granted. The Arbitral Tribunal awarded the actual damages suffered by the Respondent, based upon the evidence adduced.
Aggrieved, the Respondent challenged the Award by filing a Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), before the District Court. The District Court’s order, substantially upholding the Award, but with a modification in the costs of arbitration, was challenged by both the parties before the High Court of Uttarakhand under Section 37 of the Arbitration Act. The High Court of Uttarakhand allowed the Appeal filed by the Respondent and dismissed the Appeal filed by the Appellant. Aggrieved by the order of the High Court of Uttarakhand, Review Petitions were filed. The Special Leave Petitions in this case were preferred against the orders passed in the said Review Petitions.
ARGUMENTS BY THE PARTIES
On behalf of the Appellant, it was inter alia argued that:
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The view taken by the Arbitral Tribunal was reasonable, plausible and can be sustained.
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Time was not the essence of the contract, as the contract provided for extension of time as well as for liquidated damages.
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Once the Respondent waived the liquidated damages in the first two extensions, they could not have claimed liquidated damages for further extensions.
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The Court should not interfere or set aside awards in a casual manner. While doing so, the Court should come to a clear understanding that the award was patently illegal. Reliance was placed on the case of Associate Builders Delhi Development Authority[ii].
On behalf of the Respondent, it was inter alia argued that:
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The imposition of liquidated damages has already been upheld under similar circumstances. Reliance was placed on the judgment delivered in the case of ONGC Ltd. Saw Pipes Ltd.[iii]
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The Award cannot be sustained. In a contract having a provision for liquidated damages, unliquidated damages cannot be given.
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A bare reading of the contract makes it clear that time was of the essence, which was also signified in every extension given.
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The Award interprets the contractual clauses in a manner which is not reasonable and plausible.
FINDINGS AND OBSERVATIONS OF THE COURT
The Hon’ble Court observed that time was not the essence of the contract between the parties in the present case. The Court concurred with the Arbitral Tribunal’s conclusion that the existence of an extension clause has diluted the Appellant’s case that time was of the essence of the contract and upheld the Award as being based upon the contractual conditions and conduct of the parties, which was in accordance with the rules of contractual interpretation.
The Court further held that the damages provided for under the terms of the POs could be read as damages based upon actual tangible loss provable by evidence, instead of pre-estimated loss, as reasonably concluded by the Arbitral Tribunal, relying upon the second paragraph of Section 55 of the Indian Contract Act, 1872 (Contract Act).
The Court further upheld the Arbitral Tribunal’s distinction of the facts of the present case from Saw Pipes (supra), stating that the extension of time given thereunder was subject to recovery of agreed stipulated damages. However, in the present case, since the Respondent had waived recovery of liquidated damages twice, subsequent extensions could not be coupled with liquidated damages, unless a clear intention flowed from the contract.
Additionally, the Court also observed that:
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Subject to the nature of the contract, the promisor is bound to complete the obligation by the date for completion stated in the contract[iv].
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The same is subject to an exception that the promisee is not entitled to liquidated damages, if by the promisee’s own act/ omission, the promisor was prevented from completing the work by the completion date[v].
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It must be culled out from the reading of the entire contract, as well as the surrounding circumstances as to whether time is of the essence in a contract, and merely having an explicit clause to this effect, may not be sufficient.
ANALYSIS AND CONCLUSION
Section 55 of the Contract Act deals with failure to perform a contract within the agreed time. In the event, time is of the essence, failure to perform an obligation within the stipulated time renders the contract voidable at the option of the innocent party. In such cases, the innocent party is entitled to either (a) terminate performance of the contract; and (b) claim damages from the breaching party on the basis that it has committed a fundamental breach of the contract. However, instead of avoiding the contract, if the innocent party accepts belated performance of the contract, it cannot claim compensation for any loss occasioned by non-performance of the contract at the agreed time, unless at the time of such acceptance, it gives notice to the breaching party of its intention to do so[vi].
However, the second paragraph of Section 55 provides for a situation where the parties do not intend time to be of the essence of the contract. In such cases, the contract is not voidable, but the innocent party is entitled to compensation for the loss occasioned, without the requirement of service of any notice upon the breaching party[vii]. Therefore, in order to substantiate a claim for damages and/ or lawful or unlawful termination of the contract, it is necessary to first adjudicate upon whether time was the essence of the contract.
In the present case, the Court has reiterated the law settled by it in Hind Construction Contractors vs. State of Maharashtra[viii], wherein it had held that whether or not time is the essence of the contract is essentially a question of the intention of the parties, to be gathered from the terms of the contract. In contracts providing for an explicit clause in this regard, such a stipulation will have to be read along with other provisions of the contract, which may upon construction exclude any inference that time being of the essence was fundamental to the contract. The Court also observed that the presence of clauses in the contract providing for extension of time in certain contingencies or for payment of fine/ penalty for delay may be the cause to repel an argument that time was of the essence or fundamental to the contract.
Extension of Time
In the event a contract provides for extension of time, generally timely performance of the contract may not be termed to be fundamental thereto. In order to signify time as the essence of the contract, there must be a specific and immoveable date within which the extended performance of the obligation has to be affected, failing which it may be held that the parties themselves by their conduct have waived the original terms of the contract, more particularly in respect to time being the essence of the contract. The extension, if there be any, should and ought to be categorical in nature rather than being vague or on the anvil of presumptions[ix].
For instance, the Bombay High Court in the case of Oil & Natural Gas Corporation Limited vs. M/s. Soconord OCTG[x] upheld an arbitral award, holding time as the essence of the contract, despite the existence of extension of time clause as well as the provision for compensation for delays under the contract, in light of the fact that the extended performance date was specifically agreed upon between the parties with a mutual understanding that the same was material/ fundamental to the contract.
Imposition of Damages
Under Section 55 of the Contract Act, the innocent party is nevertheless entitled to compensation for the loss caused by the breaching party by failure to perform within time. However, in the scenario wherein time is of the essence and the innocent party accepts belated performance, damages shall be payable only upon notice[xi]. In such cases, there must be a clear and discernible stand on behalf of either of the parties that any extension granted and/or accepted is without prejudice to the claim of actual damages/ liquidated damages, as the case may be, instead of awaiting the end of the contract to lodge any such claim[xii].
The Contract Act, under Sections 73 and 74 thereof, deals with the law of damages in India. Section 73 provides for actual damages suffered by a party in the usual course of things, upon a proof of breach, as also the extent of the loss suffered. Section 74, dealing with liquidated damages is an exception to Section 73, wherein the requirement of proof of loss has been dispensed with.[xiii] Section 74 applies wherein a sum has been specified in the contract as damages, which is a genuine pre-estimate of the loss agreed between the parties.[xiv]
All the claims for damages must satisfy the conditions stipulated under Section 73, i.e., burden of proof of breach of the contract (delayed performance) and proof of loss accrued as a result thereof.
Considering the above, it may be concluded that in each case, it is necessary to ascertain the intention of the parties from all the relevant provisions of the contract, their conduct and the surrounding circumstances. There exists no straight jacket formula to gauge as to whether time is the essence of a contract and certainly an explicit clause to this effect is not, in itself, sufficient.
Lastly but pertinently, the present case is yet another example of the Court’s pro-arbitration approach, wherein basis the principal of minimal court inference in a challenge to an award under Section 34 of the Arbitration Act, it refused to interfere with the Award. The Court has reiterated the settled legal principal that the arbitral awards should not be interfered with in a casual manner, unless the perversity of the award goes to the root of the matter without there being a possibility of an alternative interpretation, which may sustain the arbitral award.[xv]
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[i] 2021 SCC OnLine SC 1053
[ii] Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49
[iii] (2003) 5 SCC 705
[iv] Percy Bilton Ltd. v Greater London Council, [1982] 1 WLR 794
[v] Holme v Guppy, (1838) 3 M&W 387
[vi] General Manager, Northern Railway and Another v Sarvesh Chopra, (2002) 4 SCC 45
[vii] McDermott International Inc. v Burn Standard Co. Ltd. and Others, (2006) 11 SCC 181
[viii] (1979) 2 SCC 70
[ix] Arosan Enterprises Ltd. v Union of India, (1999) 9 SCC 449
[x] 2014 SCC OnLine Bom 1277
[xi] Mascon Multiservices & Consultants Pvt. Ltd. v Bharat Oman Refineries Ltd., 2014 SCC OnLine Bom 4832
[xii] State of Gujarat v Kothari and Associates, (2016) 14 SCC 761
[xiii] Supra 3
[xiv] Ibid.
[xv] Dyna Technologies Pvt. Ltd. v Crompton Greaves Ltd., (2019) 20 SCC 1
