When Parties Have Agreed to a Fixed Compensation, Courts Cannot Rewrite the Contract to Award Additional Damages: Supreme Court

In a decisive ruling Supreme Court of India dismissed the appeal filed by Sahakarmaharshi Bhausaheb Thorat Sahakari Sakhar Karkhana Ltd., rejecting its claim for ₹68.15 lakhs in damages against Thyssen Krupp Industries India Pvt. Ltd. for an allegedly defective fermentation plant. The Court ruled that since the contract explicitly provided for liquidated damages, the appellant could not claim additional compensation.

Justice Abhay S. Oka and Justice Ujjal Bhuyan upheld the Bombay High Court’s ruling, which had reversed an arbitration award that granted damages beyond the contractual limit. The Supreme Court made it clear that “when parties agree on liquidated damages, no additional claim can be entertained, even if actual losses are higher.”

The Dispute Over Performance Guarantees and Liquidated Damages
The case arose from an agreement executed on November 17, 1992, between the sugar factory and Thyssen Krupp Industries India Pvt. Ltd. for the design, procurement, and supply of machinery for a continuous fermentation plant. The plant was supposed to guarantee a minimum yield of 280 liters of alcohol per metric tonne of molasses, but the appellant claimed that even after five trial runs, the highest yield was only 237.68 liters per metric tonne.

The factory alleged that there was a 24-week delay in delivery, and the machinery was non-performing, causing substantial financial losses. The contract included a liquidated damages clause, under which the supplier agreed to pay a pre-fixed compensation in case of non-performance. However, the factory demanded additional compensation of ₹68.15 lakhs for loss suffered due to non-performing machinery and equipment, arguing that the plant was completely unusable.

Supreme Court’s Observations: “Liquidated Damages Cap the Liability”
Dismissing the appeal, the Supreme Court emphasized that the contract explicitly prescribed liquidated damages, and once such a clause exists, additional compensation beyond the agreed amount cannot be claimed.

The Court categorically stated, “When the parties to a contract have agreed on a pre-determined measure of damages, such a clause must be honored. Courts cannot rewrite contracts to award more than what has been contractually agreed upon.”

The Supreme Court cited Section 74 of the Indian Contract Act, 1872, which provides that if a contract specifies an amount payable for a breach, the claimant is entitled only to that amount, even if the actual loss is greater. The Court reiterated that “a claim for ₹68.15 lakhs in addition to the agreed liquidated damages is legally untenable.”

“The Appellant Chose Not to Invoke Clause 21, Hence Cannot Now Claim Additional Damages”

The contract contained a maintenance warranty clause (Clause 21), which allowed the appellant to demand rectification or replacement of defective machinery at the supplier’s cost. However, the Supreme Court noted that the appellant never exercised this right and instead retained the machinery while seeking full compensation.

The Court observed, “If the appellant truly believed the machinery was unusable, they should have exercised their right under Clause 21 to demand a replacement. Having chosen not to do so, they cannot now seek a refund of the entire investment as if the contract had failed completely.”

The Court ruled that the claim for ₹68.15 lakhs was essentially an attempt to recover the entire cost of the plant, which was not permissible under the contract’s terms.

“Arbitral Tribunal Cannot Grant Compensation Beyond the Contract”

The Supreme Court also upheld the Bombay High Court’s decision that the arbitral tribunal had exceeded its jurisdiction by granting damages that were not contemplated in the contract. The Court stated, “Arbitration is a mechanism for enforcing contractual terms, not rewriting them. The tribunal cannot go beyond what has been agreed by the parties.”

Reaffirming the principle of contractual sanctity, the Supreme Court held, “The High Court rightly ruled that the claim for ₹68.15 lakhs was speculative, as the contract already provided for liquidated damages, and no additional compensation was legally justified.”

Appeal Dismissed, No Additional Compensation Allowed

Concluding the judgment, the Supreme Court dismissed the sugar factory’s appeal, holding that the claim for ₹68.15 lakhs was not maintainable under the contract. The Court ruled, “The appeal stands dismissed. The appellant has already received compensation as per the liquidated damages clause, and no additional amount can be awarded.”

The Court emphasized the need to uphold contractual agreements and made it clear that “business certainty demands that contracts be enforced as written. Courts and arbitral tribunals must respect pre-agreed compensation clauses and cannot award damages beyond what the parties have mutually agreed upon.”

Supreme Court Strengthens Contractual Finality in Commercial Disputes

This judgment is a significant precedent for commercial contracts and arbitration, reinforcing that liquidated damages serve as the final measure of compensation. The Supreme Court has sent a strong message that courts will not entertain claims beyond what is explicitly agreed upon in a contract.

By upholding contractual certainty and preventing excessive damages, the Supreme Court has strengthened business confidence in the enforceability of contractual terms, ensuring that parties adhere to pre-negotiated compensation mechanisms.

The ruling also underscores that when a party fails to invoke contractual remedies, it cannot later claim compensation for alleged non-performance, reinforcing the importance of timely enforcement of contractual rights.

Date of Decision: February 14, 2025