Claim For An Agreed Sum Vis-À-Vis A Claim For Damages

Apart from damages, if the contract so provides, an injured party canbring an action for a sum of money promised under the contract for refusal /failure of the other party. The contract can either provide for payment ofmoney in return for performance of specified obligation. For e.g. A promises topay B the price of 10 shirts to be delivered by B. B can sue for the price of10 shirts supplied to A, if A refuses / fails to pay. This is similar to a suitfor price under Section 55 of the Sale of Goods Act, 1930.

In another instance the contract may provide for payment of a sumof money on happening of a contingency including refusal of a party to perform primaryobligations under the contract. This way, it becomes an alternative promise oran alternative manner of performance of the contract. For e.g. A promises B to deliver a certain quantity ofgoods manufactured by it. Further, A promises that if it fails to deliver thestipulated quantity, it shall pay a sum of Rs.10,000/- to B.

On a prima facie reading the clause seem similar to a clauseproviding for payment of damages on breach, however the law recognises subtledifferences between the two. A clause providing for payment of a sum of money isa promise by a party to perform the contract by way of such payment. It is amanner of performance of the contract and not a consequence of breach. Theparty undertakes to make the payment at the time of execution of the contract. Theamount, however, may become payable in future on performance of promise by theother side or on happening of a contingency.

Further, as soon as the event contemplated under the contractoccurs the ascertained sum of money becomes payable as a debt where as a claimfor damages entitles a party to a mere right to sue and damages become payableonly after they are adjudicated by a court / tribunal.

The distinction between a claim for ascertained sum of money anddamages is also recognised by leading treatises namely, Chitty on Contract andHalsbury's Laws of England. The present article seeks to elaborate on such distinctionand highlight the pre-requisites necessary for a successful action for agreedsum of money.

In Niko Resources Limited v Gujarat State PetroleumCorporation Ltd.,^[1] the Bombay High Court dealtwith a claim for ascertained sum of money under the contract as distinguishedfrom a claim for damages. Briefly the facts were that Niko had promised toprovide a particular quantity of gas to GSPC and on failure to make a one-timepayment equivalent to 5 times the prices of the shortfall quantity of gas. Nikofailed to supply the gas and GSPC brought an action to claim the one-timepayment before the arbitral tribunal. The claim was allowed by the arbitraltribunal.

In a challenge under Section 34 of the Arbitration &Conciliation Act, 1996 Niko had contended that the clause was essentially aclause for damages and the one-time payment stipulated therein was penalty. Itcontended that GSPC could not claim the entire amount which is disproportionateto the losses caused to it.

Based on the provisions of the contract, the court held that theclaim for one-time payment was not a claim for damages and did not arise frombreach of contract. It was a claim by virtue of the contract itself. Thus, theprinciples of Section 74 of the Indian Contract Act, 1872 will not apply. TheCourt upheld the Arbitral Award and held Niko to its promise to make the one-timepayment on its failure to provide gas as promised. The relevant observations ofthe Court are as follows:

"34...Inthis scenario, Niko had acknowledged the fact that it may be liable to paycompensation to GSPC and this compensationhas not been contemplated as having the quality of liquidated damages.

35.The one-time payment claimed by GSPC certainlycould not have been damages since I am in agreement with the submissionmade on behalf of GSPC that the one-time payment in contemplation and inaccordance with a stated formula is oneof the modes of paying compensation upon Niko's inability to provide theshortfall gas."

Further distinguishing between a claim for payment of a sum ofmoney and damages the court observed as follows:

"54...TheLaw of Contract draws a clear distinction between a claim for an agreed sum anda claim for damages for breach of contract. The claimant need not prove loss where a claim is for payment of anagreed sum and remoteness of damages and mitigation of loss are irrelevant insuch situations. In the instant case, the formula is meant to providefor such payment…There is no question of any further proof of loss caused."

The court in this case also observed that a party has an option toeither treat the refusal / failure of the other party as breach and sue fordamages, or it may sue to recover any debt due to him, which has arisen fromexecution of its part of the contract. If a party treats the contract assubsisting and claims a sum of money as promised to it on happening of acontingency, the amount is payable as "debt" due to it and not as damages.

Similarly, in Indiabulls Properties P. Ltd. v. TreasureWorld Developers P. Ltd.,^[2] the Bombay High Court dealt with alock-in period clause in a leave and license agreement. The court held that theterm providing for rent for balance lock-in period is a clause providing for apromised sum to be payable if the lessee vacates the premises before expiry ofthe lock-in period. Relevant observations of the court are as follows:

"59. I am unable to see how Claim 3, for licence fees for the remainder ofthe lock-in period, couched in the manner it is in the contract, can be said tobe one for damages of any kind. Treasure World's liability…arises underclause 13.2: should Treasure World, despitethe interdiction of clause 3.2,terminate after that lock-in period commences but before it ends, it incurs animmediate liability to pay for the remainder of the 36 months term. This is adebt. It is payable eo instanti; debitum in praesenti and solvendum inpraesenti."

Distinguished from Indiabulls are two Delhi High Court decisionsin ManjuBagai v. Magpie Retail Ltd.,^[3]and TowerVision India P. Ltd. v. Procall P. Ltd.,^[4]wherein the court denied admission of winding up petition because the amountpayable for balance lock-in period was not debt but liquidated damages andrequires adjudication. The Bombay High Court distinguished the said casesholding that the relevant clauses therein were worded in the nature of aliquidated damages clause and not for an ascertained sum of money.

Apart from factual distinction between the cases before Delhi HighCourt and Bombay High Court, it is important to note here that in ManjuBagai and Tower vision the claim was presented as one for liquidateddamages. Therefore, the Delhi High Court did not have occasion to consider thequestion that whether the clauses therein provided payment of liquidateddamages or ascertained sum of money. Accordingly, in line with the existingjurisprudence (namely Union of India v. Raman IronFoundry^[5]),the court held that such damages did not constitute 'debt'.

Therefore, based on the aforesaid discussion, a claim for anagreed sum under the contract differs from a claim for damages in followingways:

i. An action for damages presupposes breach of the contract by aparty. Whereas a party can seek performance of the promise to pay a sum ofmoney only if it treats the contract as subsisting. Once a party treats thecontract as broken, the available remedy is to claim damages.

ii. Damages are subject to a finding by the court on the breachcommitted by the defendant and become payable as debt only on account of a fiatof the court. Where in a claim for ascertained sum of money the obligation topay exists eo instant, and the moneyis claimed as a "debt" due from the other party.

3. A party claiming an ascertained sum of money under the contract is essentially seeking performance of terms of the contract. Therefore, it need not prove losses as one has to in a claim for damages. A mere refusal or failure of the defendant to perform the promise entitles the plaintiff to claim the sum of money.
4. Other rules governing award of damages namely, rules of mitigation, remoteness, foreseeability, causation are not applicable in a claim for agreed sum of money.

Further, a probable defence that can be taken against the claimfor an agreed sum of money is that whether the promise to pay the agreed sum ofmoney is without any consideration. For e.g. in Niko Resources, theone-time payment equivalent to five times the prices of gas to be supplied wascontended to be disproportionate. Similarly, payment for balance of lock-inperiod is essentially payment of rent without rendering of any services in thebalance lock-in period. Therefore, the question also arises whether the courtcan look into proportionality of the sum ascertained to be paid and whether thedoctrine of penalty as applicable in cases of liquidated damages can be madeapplicable in claims for ascertained sum of money. The answer, however, has tobe balanced with the aspects of certainty and binding nature of the contractsin commercial transactions. It should be seen that a party is normally held tothe bargain it has made and should not be usually allowed to resile from it.

In India Bulls the Bombay High Court answered one such argument byTreasure World in the following words:

"A party solemnly binds itself to a three yearlicence term for premises. The licensor agrees, in exchange, not to increasethe licence fee for that duration. The agreement is, clearly, that the licensee will pay the licensor theagreed monthly licence fee for three years. To allow the licensee not only theoption of a premature exit, but also to allow it to slither out of itsfinancial liability, and, correspondingly, to drive the licensor to a protractedcivil proceeding in which it needs prove nothing is clearly unjust. A defencethat attempts this is not one that is bona fide or substantial. Defences ofthis stripe evidence commercial and corporate perfidy; they can never beallowed to constitute a bona fide or substantial defence.

Thus, on failure of a party to perform its obligations under thecontract, payment of money by way of damages is not the only remedy. If thecontract so provides the injured party can successfully bring an action forascertained sum of money that does not suffer from the rigors of a claim fordamages. However, a successful action for a claim of an ascertained sum ofmoney depends on whether:

(a) the clause provides forpayment of money in return of specified obligation / as an alternate mode ofperformance of the contract OR it provides a remedy on breach of the contract;

(b) the contract providesfor payment of the sum of money at the time of execution even though thepayment is contingent on happening of an event;

(c) at the time of bringingthe action, the obligation to pay is existing, i.e. eo instanti, even though the quantum of amount payable requiresascertainment by some mechanical process or by the taking of accounts. (Iron& Hardware (India) Co. vs Firm Shamlal & Bros.^[6])

(d) the conduct of theplaintiff and pleadings supports the claim for sum of money as debt i.e.whether the plaintiff has put an end to the contract and has sued for damagesfor the breach OR has kept the contract as subsisting and sued for the debt dueto him.

The author is an Advocate practising in the Supreme Court and HighCourt of Delhi. Views are personal.