1988 PLP 1555 (CLC)

(Sd.) Saleem Akhtar Judge The arbitrator consequently entered upon the reference and gave the award on 22‑1‑1986 whereby he held that the deduction of Rs.1,08,000 as liquidated damages was neither legal nor justifiable and the respondents should refund the amount to the petitioner with interest at the current State Bank rate with annual rest from the date of deduction to the date of payment. The facts giving rise to this dispute are, that Karachi Shipyard and Engineering Works Limited had given a contract to Messrs International Civil Engineering on 11‑12‑1979 for construction of Canteen and Latrine blocks. This work was to be completed within 6 months. The Canteen Block was completed on 15‑1‑1981 while the Latrine block was completed in September, 1981. In Schedule of the contract clause 8 provided as under:‑ (8) Liquidated damages in 0.1% of the value of the work case of non‑completion subject to amaximum of 10$ of of the works within the the value of the works. stipulated time. The value of the works was about 18 lacs. Since the contract was completed after more than 6 months Karachi Shipyard and Engineering Works Limited deducted the amount of Rs.1,08,000 from the dues of the plaintiff as liquidated damages at the rate of 10$ of the value of the work. From the order of this Court, dated 31‑3‑1986 it is quite clear that the only point that was referred to the Arbitrator was 'whether the respondents have illegally deducted the amount of Rs.1,08,000 as liquidated damages'. The order made it absolutely clear that no other dispute was to be referred as agreed by the parties, to the arbitrator. Mr. Makhdoom Ali Khan who appeared for the defendants contended that the Arbitrator had very clearly held in his award that the contract work was not completed within the period of 6 months fixed therein. He has also held that the plaintiff was also responsible for the delay in completion of the contract and as such could not be relieved from the liability for compensation. However, in spite of these clear findings the Arbitrator has held that the defendant was not entitled. to recover the amount of Rs.1,08,000 as liquidated damages which was a mistake apparent on the face of the award and the award should therefore, be set aside. The argument of Mr. Makhdoom Ali Khan does not appear to be tenable. Section 74 of the Contract Act is quite clear on this point. It reads as under:‑ "

74. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for." This section is at variance from the English law on the subject. Under the common law a genuine pre‑estimate of damages agreed upon by the parties is regarded as liquidated damages. But a stipulation in a contract in terrorem is a penalty. In the case of liquidated damages the contract is binding upon the parties. In the case of penalty however the Court refuses to enforce it and awards to the aggrieved party reasonable compensation. While section 74 of the Contract Act eliminates this distinction, it has enacted a uniform principle that in either case, the Court has to award reasonable compensation, not exceeding the amount as named in the contract. In the case of Mohammad Karimuddin v Kanza Food Industries Ltd., Karachi reported P L D 1982 Kar. 590, a Single Judge of this Court had considered this aspect and in the light of the decisions of the Supreme Court viz. P L D 1969 SC 80 West Pakistan v. Messrs Mistry Patel and Co. and W P I.D.C. v. Aziz Qureshi P L D 1970 SC 222 held as follows:‑-- "I venture to say that the difference which exists under the English law between liquidated damages and a penalty is not recognized by section 74 of the Contract Act and, therefore, irrespective of the fact whether the amount as mentioned in the agreement is a penalty, or liquidated damages, a part complaining of the breach is entitled to recover damages whether or not actual damages have been suffered by it subject to the maximum limit of such damages which will be the amount so mentioned in the agreement Therefore, merely because a specific sum by way of liquidated damages is mentioned as payable in the event of a breach in the agreement is not a sufficient ground for the Court to grant the same to the party complaining of the breach as this amount only represents the maximum limit of damages which may be recovered by such party in the event of a breach. In spite of mention of a specific sum in an agreement to be paid as damages to a party in the event of a breach by the other the Court still has to hold that such amount would normally arise as damages to such a party in the case of a breach by the other. Therefore, in cases, where the party complaining of the breach, in fact, suffered no damages at all and on the contrary gained some advantage in spite of the breach or where the Court finds that the sum mentioned as damages in the agreement in case of breach, is such that it could not reasonably arise from such breach, the Court may refuse to grant the same. In the present case, therefore, before the defendants could successfully forfeit the sum of Rs.2,50,000 under clause k16) of the agreement or claim its adjustment by way of damages arising from the breach on the part of plaintiffs, it must be shown that this amount would reasonably arise as damages to the defendant in the case of non‑performance of the condition in the agreement relating to sanction letter of German loan by the plaintiffs." From the perusal of the award it appears that the arbitrator has only propounded the proposition of law that the defendants cannot himself deduct the amount of liquidated damages even though shown in the contract but should have approached the Court or any other forum for determining the reasonable compensation which he was entitled g to recover. He was not entitled to assess it unilaterally. His having arbitrarily fixed and deducted the liquidated damages was illegal. This view of law expressed by the learned arbitrator appears to bpi correct and has the support of section 74 of the Contract Act. Then there is the question of interest which has been awarded by the arbitrator which requires to be considered. In my view interest at the State Bank rate with annual rest appears to be exhorbitent. I, therefore, while confirming the award reduce the rate of interest to 6$ per annum recoverable from the date of the decree to the date of recovery of the amount. The defendant shall be at liberty to get reasonable compensation determined by the Court or an other forum and to recover the same, if it is not otherwise barred. M.Y.H./I‑49/K Order accordingly.