[Coal Supply Agreement] Meghalaya High Court Says Party In Breach Of Contract Liable To Compensate Only 'Actual Loss'

In relation to a contractual dispute arising out of a coal supply agreement, the Meghalaya High Court held that party in breach would be liable to compensate the other party only to the extent of the loss suffered by such other party, unless there is a genuine pre-estimate indicated by way of liquidated damages.

The case involved a coal supply agreement between Coal India Limited, and Cement Manufacturing Company Limited. The agreement stipulated that the latter would lift a certain guaranteed amount of coal periodically. However, since the private respondent failed to do so, Coal India (appellant herein) sought compensation.

The writ court ruled in favour of the private respondents, holding that they were not liable to pay compensation because Coal India sold the unlifted coal to another company and thus had not suffered any loss. Hence this appeal.

The primary legal question before the court was whether the private respondents should be held liable for compensating Coal India for the value of the coal that remained unlifted, especially considering that the coal had been sold to a subsequent purchaser. The private respondents argued that compensation should only cover the actual loss suffered by the aggrieved party, without allowing them to profit from the breach.

The bench of Chief Justice Sanjib Banerjee and Justice W Deingdoh acknowledged the general principle that compensation cannot be treated as a penalty, as this would be prohibited by the Contract Act, 1872. Instead, the court held that the guaranteed amount or its value can be considered as liquidated damages—a pre-estimated sum representing the highest amount the appellant could have received for the unlifted coal.

However, the court also recognized that if the unlifted coal had been subsequently sold, the amount realized from the sale should be deducted from the compensation claim. Nevertheless, the appellant would be entitled to reimbursement for any additional costs incurred in conducting the second sale, the bench reasoned.

The court stressed the need for evidence-based calculations to determine the quantum of compensation, considering factors such as the original price of the product, the price at which it was sold to the subsequent purchaser, and the costs associated with the second sale.

Drawing attention to the frequent occurrence of similar contractual breaches in international grain trade or high-sea sales of commodities, the court said,

“In such a scenario, as per the law in force in this country, notwithstanding any agreement between such parties, the party in breach would be liable to compensate the other party only to the extent of the loss suffered by such other party, unless there is a genuine pre-estimate indicated by way of liquidated damages”.

Deliberating further on the matter the court clarified that the writ court, in this case, was not the appropriate forum for resolving contentious issues related to compensation. The court emphasized that the settlement mechanism provided in the relevant agreements should be pursued, failing which the parties should resort to a civil suit or arbitration if there was an arbitration agreement.

Case Title: The Chairman, Coal India Limited & ors vs Star Cement Limited

Citation: 2023 LiveLaw (Meg) 22

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