Claims in Quantum Meruit vis-à-vis Damages in Breach of Contract

[Pulkit Khare and Vaidehi Soni are 4th Year B.A., LL.B. (Hons.) students of the National University of Advanced Legal Studies, Kochi]

The Supreme Court recently in Mahanagar Telephone Nigam Ltd. (MTNL) v. Tata Communications Ltd. raised a question whether quasi-contractual obligations can be imported into a contract which already stipulates a sum for its breach. The case was brought about to answer a point of question interlinking chapters V and VI of the Indian Contract Act, 1872.

Analytical View of Chapters V and VI

An analytical view of the chapters shall give a perspective on their scope and extent. Chapter V of the Contract Act deals with “certain relations resembling those created by contract”. The chapter contains provisions that posit a situation where there is a lack of a contract amongst the parties. It focuses on an obligation arising similar to a contract between the parties. This chapter speaks of quasi-contractual obligations between the parties.

Chapter VI of the Contract Act deals with “the consequences of a breach of contract”. This chapter provides for relation between the parties which appears on the breach of an express contract agreed amongst them. This chapter speaks for remedies in cases of breach, such as damages arising due to the breach or any stipulation of penalty mutually agreed for the breach or compensation arising due to the loss by non-fulfillment of contract.

Factual Background

In the instant case, the contract was of a purchase order between MTNL and Tata. The contract limited liquidated damages to the tune of 12% of the purchase value in case of a breach. Tata failed to discharge the obligations under the contract, due to which MTNL suffered damage. MTNL, owing to its claim for damages, deducted certain sums from the bills raised by Tata.

Tata approached Telecom Disputes Settlement and Appellant Tribunal (TDSAT), seeking that the sums deducted by MTNL were deemed to be excessive than the stipulated sums under the contract. MTNL defended its stance by stating such amount to be due under quantum meruit. Nevertheless, TDSAT directed to return the quantum meruit claim retained in excess of 12% liquidated damages, since it was unilaterally charged by MTNL without any reliable evidence of losses. This prompted MTNL to approach the Supreme Court to reconsider the appreciation of its claim.

Issue

The specific issue was whether a claim in quantum meruit would be permissible in cases where the parties are governed by a contract.

Judgement Analysis

Section 70 falls under the purview of chapter V of the Contract Act.  It provides for a situation where a non-gratuitous act by a person results in forming obligations on another party receiving a benefit out of such act. The principle under section 70 is considered similar to the doctrine of restitution (quantum meruit).

In the present case, the Supreme Court, while considering import of section 70 in a contractual claim, referred to the split verdict of Moselle Solomon v. Martin & Co. where Williams J.  had held that section 70 is an independent remedy based on a different cause of action and therefore can be deemed to be an additional remedy. Whereas Jack J. held that the provision had no applicability in the case of an express contract.

However, it was later observed that the principle enunciated by Jack J. had been approved in the subsequent judicial decisions of Kanhayalal Bisandayal Bhiwapurkar (Dr.) v. Indarchandji Hamirmalji Sisodia (AIR 1947 Nag 84) and Alopi Parshad and Sons Ltd., where the High Court and the Supreme Court respectively had held that section 70 cannot be availed of by a person who relies on an express contract.

To buttress this position, reliance was also placed on the case of Mulamchand v. State of M.P. where, in dealing with a claim made under section 70 of the Contract Act, the Court went on to hold:

where a claim for compensation is made by one person against another under Section 70, it is not on the basis of any subsisting contract between the parties but on a different kind of obligation. The juristic basis of the obligation in such a case is not founded upon any contract or tort but upon a third category of law namely, quasi-contract or restitution……

(emphasis supplied)

The Supreme Court, in light of the above position, held that the amount deducted by MTNL was a claim of quantum meruit which cannot be raised due to the existence of the contract. The compensation for breach of a contract was deemed to be governed by section 74 of the Contract Act, 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 (see Kailash Nath Associates v. DDA). The Supreme Court held that MTNL can claim only the sum stipulated in the contract and any anything claimed above this sum shall be refunded accordingly.

Critical Appraisal

The status of the evolution of section 70 is, however, believed to be improperly recognized under the Indian law of contract. The judgment of MTNL, therefore, suffers from the following flaws:

Firstly, the view taken by the Court in Mulamchand had been improperly applied in subsequent cases. In that case, the Court had relied on the principle adopted by Nelson v. Larholt  where Lord Denning had observed:

…. The right here is not peculiar to equity or contract or tort, but falls naturally within the important category of cases where the court orders restitution if the justice of the case so requires.

In Mulamchand, the grant of quantum meruit was denied primarily due to improper evidence in support of the claim of unjust enrichment and not because of the existence of a contract. This was, however, improperly evaluated by the TDSAT and the Supreme Court in their judgements.

Secondly, in the instant case, the quantum of liquidated damages was assessed and levied by MTNL, which was considered to be final and not challengeable by Tata.  This had an effect of making one of the parties to the contract a judge to decide breach and assess damages of the contract. A similar position was observed in State of Karnataka v. Shree Rameshwara Rice Mills, wherein such an arrangement in a contract was held to be void, as the interest of justice and equity require adjudication to be undertaken by an independent person or a body and not by other party to the contract. Hence, the amount of unjust enrichment should have been directed to be evaluated by the TDSAT or the Court should have evaluated it after setting aside MTNL’s deduction of the excess amount.

Thirdly, no reasonable compensation in addition to liquidated damages was provided by the Supreme Court. The reasoning for such an observation was due to the absence of reliable materials in determining the actual damage caused to MTNL. However, the Court had acted in abeyance of the case of Construction and Design Services v. DDA, in which the Court itself had awarded reasonable compensation despite the evidence of the amount of loss. Therefore, the Court should have granted MTNL reasonable amounts over and above the stipulated damages.

Conclusion

In the instant case, the Supreme Court disentitled MTNL to a reasonable compensation due to lack of reliable material for determining the losses. It disregarded additional claims of quantum meruit over and above the liquidated damages which MTNL demanded to prevent unjust enrichment of Tata. Such a position taken by the Supreme Court was through an improper appraisal of the law. The position put forth by the Williams J. in the Moselle Solomon appears to be the correct position of law. Hence, this case demonstrates an opportunity missed by the Supreme Court to bring about claims in quantum meruit where parties are governed by a contract stipulating liquidated damages.

Pulkit Khare & Vaidehi Soni

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