Meghalaya HC: Breaching Party Liable For Only ‘Actual Loss’ In Coal Supply Agreement

The Meghalaya High Court recently stated that the party in breach would be responsible for compensating the other party only for the actual loss suffered, unless there was a genuine pre-estimate indicated through liquidated damages while dealing with a contractual dispute involving a coal supply agreement.

The case centered around a coal supply agreement between Coal India Limited and Cement Manufacturing Company Limited. The agreement mandated the latter to regularly lift a specific guaranteed amount of coal. However, as the private respondent failed to do so, Coal India sought compensation.

The writ court ruled in favor of the private respondents, stating that they were not liable to pay compensation since Coal India had sold the unlifted coal to another company, resulting in no loss. This led to the present appeal.

The key legal question was whether the private respondents should be held accountable for compensating Coal India for the value of the unlifted coal, particularly considering it 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.

Chief Justice Sanjib Banerjee and Justice W Deingdoh, presiding over the bench, acknowledged that compensation should not be treated as a penalty, as this would violate the Contract Act of 1872. Instead, the court held that the guaranteed amount or its value could be regarded as liquidated damages—a pre-estimated sum representing the highest amount Coal India could have received for the unlifted coal.

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

The court emphasized the importance of evidence-based calculations to determine the amount of compensation, taking into account factors such as the original price of the product, the price at which it was sold to the subsequent purchaser, and the expenses associated with the second sale.

Referring to similar breaches in international grain trade or high-sea sales of commodities, the court stated “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”.

Regarding the jurisdiction to resolve compensation disputes, the court clarified that the writ court in this case was not the appropriate forum. It highlighted the importance of pursuing the settlement mechanism provided in the relevant agreements and resorting to civil suits or arbitration if an arbitration agreement was in place.