Let’s start with the moral of this tale before we get into the story itself: there’s only so much that contractual provisions can do.
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For starters, India’s slowly gearing towards the ‘less is more’ approach when it comes to contracts (emphasis on slowly) and more importantly, the conduct of parties has begun to become increasingly more critical to the judicial process of determining the actual contours of what is the quintessentially complex contractual relationship. True to his word of keeping judicial pronouncements succinct, India’s Chief Justice has notably provided us with a crisp twenty-nine-page judgment, but to reiterate, sometimes, less is more, and there’s a lot to glean from this deceptively simple ruling that not-so-clearly has a lot of nuanced contributing factors.
Our story begins with a set of purchase orders agreed upon between two parties (let’s call them the Procurer and the Supplier) in 1995 for a supply of seamless steel casing pipes, commonly used in the transport of oil and natural gas – is this relevant? Yes, it is. Firstly, let’s be clear on the fact that standardised purchase order templates are, in fact, contracts. Secondly, the fact that we’re speaking of the ‘construction industry’ here becomes an important element in the process of affirming the conclusion that “generally, under construction contracts, time is not the essence” (the Arbitral Tribunal’s words, not mine, or even the Supreme Court’s).
Back to our story, the Procurer’s purchase orders all followed the same standardised form, which must have at the time seemed watertight since it all but threw the contractual equivalent of the kitchen sink in at the time of drafting. For one, the language specified that time was the essence of the contract; two, it provided that even delayed deliveries if accepted would not preclude the Procurer from enforcing its remedy to seek liquidated damages; three, any extensions provided by the Procurer would not waive its rights in general to recover such damages unless explicitly given in writing. Simply put, and all these facts are relevant:
- The Procurer utilised a template for the purchase order documentation, as still is the business practice, and didn’t really allow the Supplier to negotiate its terms;
- The Procurer specified that time was of the essence to the contract, meaning that a breach of set timelines would in effect be a breach of the contract itself (it would surprise you to know that many lawyers do not actually know this, with such language being constantly and mindlessly regurgitated with every iteration of standardised templates);
- In the backdrop of point 2 above, whoever drafted the standardised documentation also saw fit to cover a situation when delayed deliveries were accepted, in effect signalling that time could possibly not be of the essence depending on the Procurer’s discretion – in which case, ‘liquidated’, or a predetermined quantum of damages could be imposed on the Supplier without having to prove actual loss by way of evidence; and
- In addition to and without prejudice to all of the above possibilities of permissible chronal modifications, the Procurer could also provide timeline extensions to the Supplier.
The Calm Before the Storm
Back to our story (again), the Procurer started off by giving the Supplier two extensions per purchase order, eventually resorting to imposing liquidated damages on the latter for subsequent extensions, as it theoretically could as per the contracts. Theoretically. In fulfilment of pretty much every lawyer’s dirty fantasy of signing off on a contract while knowing that enforceability isn’t actually probable or even possible, the day came when the Supplier took the route of arbitration proceedings to make its case of only having to pay actual damages based on evidenced loss suffered by the Procurer as opposed to the liquidated damages set out in the contract(s). The Arbitral Tribunal ruled in favour of the Supplier, the Procurer appealed this decision by taking it up with a District Court and subsequently the High Court of Uttarakhand which ruled in favour of the Procurer, and finally, the Supplier appealed that decision by taking it up with the Supreme Court of India, which is how it landed on the Supreme Court’s desk.
Now I don’t know whether you have heard, but the conventional Indian judicial system is increasingly becoming more respectful of arbitration proceedings and outcomes (even if held outside the country by way of ‘emergency’ proceedings, if you’ve been following the Amazon-Future tug-of-war with Reliance regrettably in the middle), and the Supreme Court kept this in mind while briefly setting out the limited circumstances when arbitral awards can be challenged in the first place – after trashing the oft-abused argument of ‘public policy’, the Supreme Court proceeded to evaluate whether the arbitral award in favour of the Supplier evinced patent illegality for it to get involved in the first place, answering this question in the negative and reinstating the original decision of the Arbitral Tribunal favourable to the Supplier due to multiple reasonings of the Arbitral Tribunal’s which the Supreme Court found no reason to interfere with, of which the following two are of specific practical import to us:
- The existence of an extension procedure and the imposition of liquidated damages were good indicators that time was, in fact, not the essence of the contract; and
- The setting aside of liquidated damages in lieu of damages accrued on an actual loss basis could be sustained in view of the waiver of liquidated damages on the first two extension occasions for each purchase order and the absence of precise language allowing for the reimposition of liquidated damages thereafter.
Additional Reasoning and Takeaways From the Ruling
In addition to the above, the Supreme Court also took note of and seemingly agreed with the earlier mentioned observation of the Arbitral Tribunal with respect to the nature of the ‘construction industry’ (and its accepted tardiness?) and also made a critical determination in favour of upholding the Arbitral Tribunal’s interpretation of the contracts to actually allow for only actual damages on the basis of, without explicitly saying so, the principle of contra proferentem that favours the party with lesser bargaining power to documentation in the event of any ambiguity; given that the Procurer used a standard form of contract, the Supreme Court held that a reasonable interpretation against the Procurer could be utilised, furthering the argument against awarding liquidated damages, a positional tendency that’s quickly becoming the norm.
Could the absurdly popular yet paradoxically oxymoronic ‘no contra proferentem’ clause have helped in this case? Perhaps better drafted language on how extensions could be given but the right to liquidated damages could be resorted to again so as to avoid any ambiguity and application of the contra proferentem principle? Better yet, would the outcome of this decision be any different had it taken place in, say, the software industry? These are questions that yet remain unanswered but nevertheless give us insights on how to better draft our contracts while directly confirming at least one thing: time isn’t of the essence only because you say it is, and as a favourite author of mine used to put it, “words are wind” sometimes.
The author is the Managing Partner at Bridge Legal India. This document does in no way constitute legal advice and neither Bridge Legal India nor its constituents shall be liable in the event of reliance upon the same.