Class Exercise: Liquidated Damages
Facts: ONGC has entered into a contract with Saw Pipes for procuring casing pipes. Saw Pipes
was not in a position to deliver the casing pipes on time. The steel material supplier to Saw
Pipes was affected by Steel Mill strikes in Europe. Hence Saw Pipes could not provide the
casing pipe on time to ONGC and requested extension of time of contract. Saw Pipes requested
for an extension of 45 days time for execution of the order in view of the reasons beyond its
control. By a letter, the time for delivery of the pipes was extended by ONGC with a specific
statement that the amount equivalent to liquidated damages for delay in supply of pipes as per
the contract would be recovered from the Saw Pipes. Saw Pipes was against the recovery of
liquidated damages.
Dispute reached the Supreme Court of India. Saw Pipes was trying to argue that unless the
exact monetary loss could be determined, the damages cannot be claimed. ONGC contended
that once a pre-determined liquidated damages clause is agreed upon, the exact monetary loss
need not be proved. The relevant clause of contract is provided below:
11. Failure and Termination Clause/Liquidated Damages:Time and date of delivery shall be essence of the contract. If the contractor fails to deliver the
stores, or any installment thereof within the period fixed for such delivery in the schedule or at
any time repudiates the contract before the expiry of such period, the purchaser may, without
prejudice to any other right or remedy, available to him to recover damages for breach of the
contract:(a) Recovery from the contractor as agreed liquidated damages are not by way of penalty, a
sum equivalent to 1% (one percent) of the contract price of the whole unit per week for such
delay or part thereof (this is an agreed, genuine pre- estimate of damages duly agreed by the
parties) which the contractor has failed to deliver within the period fixed for delivery in the
schedule, where delivery thereof is accepted after expiry of the aforesaid period. It may be
noted that such recovery of liquidated damages may be upto 10% of the contract price of whole
unit of stores which the contractor has failed to deliver within the period fixed for delivery, or
(e) It may further be noted that clause (a) provides for recovery of liquidated damages on the
cost of contract price of delayed supplies (whole unit) at the rate of 1% of the contract price of
the whole unit per week for such delay or part thereof upto a ceiling of 10% of the contract
price of delayed supplies (whole unit). Liquidated damages for delay in supplies thus accrued
will be recovered by the paying authorities of the purchaser specified in the supply order, from
the bill for payment of the cost of material submitted by the contractor or his foreign principals
in accordance with the terms of supply order or otherwise.
(f) Notwithstanding anything stated above, equipment and materials will be deemed to have
been delivered only when all its components, parts are also delivered. If certain components
are not delivered in time the equipment and material will be considered as delayed until such
time all the missing parts are also delivered.”
Questions
1) What is damages and liquidated damages in a contract?
2) Can the damages be pre-determined in a contract? Is this possible in a government contract?
Yes + Yes
3) Can ONGC claim the LD amount for delay in the supply of the casing pipe? Is Saw Pipes argument
valid?
No clarity of force majeure
Not able to prove that saw mills were able to exhaust other alternatives
Class Exercise: Force Majeure
Adani Power and Tata Power wants to increase electricity charges of consumers, stating that they have
additional financial burden due to a force majeure event. This is in relation with the Power Purchase
Agreements entered into by Adani Power and Tata Power with power distributors. The sudden change
in the coal price, especially coal in Indonesia, from where Tata Power and Adani Power are procuring
coal is reason for the claim of the force majeure event
Analyze this event based on the following media report:
SC sets aside compensatory tariff to
Tata Power, Adani Power
Krishnadas Rajagopal
NEW DELHI: , APRIL 11, 2017 20:12 IST
A view of the Supreme Court of India. | Photo Credit: R.V. Moorthy
Court ordered the CERC to go into the matter afresh and
determine what relief should be granted to the power
generators.
The Supreme Court on Tuesday set aside an Appellate Electricity Tribunal
decision allowing power generator giants Adani Power and Tata Power to
charge compensatory tariff from their consumers spread across States
including Gujarat and Haryana.
The tribunal, in a judgment on April 7 last year, permitted the companies
to hike the tariff after Indonesia — where they source coal from to power
their plants — decided in 2010 to align its coal export prices to
international market prices instead of what they have been charging for the
past 40 years.
The companies had argued that the increased coal prices was a ‘force
majeure’ event (an unforeseen situation) provided for in the power
purchase agreements (PPAs) entered into between them and distributors.
The tribunal had then remanded the case to the Central Electricity
Regulation Commission to find out the impact of the ‘force majeure’ event
to grant compensatory tariff. On December 6, 2016, the Commission had
arrived at a certain determination as to compensatory tariff to be granted
on account of force majeure.
Setting aside all past orders of the tribunal and the commission, a Bench of
Justices P.C. Ghose and Rohinton Nariman held that a change in
Indonesian coal export regulations does not measure up to be a force
majeure event for which the consumers have to compensate for.
“The fundamental basis of the PPAs remains unaltered. Nowhere do the
PPAs state that coal is to be procured only from Indonesia at a particular
price. In fact, it is clear on a reading of the PPA as a whole that the price
payable for the supply of coal is entirely for the person who sets up the
power plant to bear. It is clear that an unexpected rise in the price of coal
will not absolve the generating companies from performing their part of
the contract for the very good reason that when they submitted their bids,
this was a risk they knowingly took,” Justice Nariman, who wrote the
verdict, held in a 65-page judgment.
The court held that “changes in the cost of fuel, or the agreement
becoming onerous to perform, are not treated as force majeure events
under the PPA itself”.
The court further held that force majeure clause cannot be claimed for
change in foreign laws, but only for Indian laws.
The court ordered the Central Electricity Regulatory Commission to go
into the matter afresh and determine what relief should be granted to the
power generators.
http://www.thehindu.com/news/national/sc-sets-aside-compensatory-tariff-to-tata-power-adanipower/article17928722.ece
Pertinent Legal Aspect of Business issues to be explored:
1) What is force majeure event in a contract? Can increase of coal price in Indonesia be
considered as a force majeure event?
2) Should ‘change of law/policy’ be considered as force majeure event? Provide reason from the
angle of a business manager
3) How will you draft a suitable force majeure clause for your organisation?