Case Note & Summary
The Supreme Court dismissed appeals by the Union of India against orders of the Delhi High Court granting interim injunctions restraining the Union from recovering its claim for damages by appropriating amounts due to the respondent contractor under other contracts. The dispute arose from a contract for supply of foam compound, governed by the General Conditions of Contract in Standard Form D.G.S.&D. 68. Clause 18 of those conditions provided for recovery of sums due by appropriating security deposit and other sums due to the contractor. The Union claimed damages for breach under clause 14 and sought to recover them from pending bills of the respondent. The respondent filed an application under Section 20 of the Arbitration Act, 1940, and the disputes were referred to arbitration. During pendency, the respondent applied for interim injunction, which the High Court granted, holding that clause 18 did not authorise recovery unless the claim was admitted or adjudicated. The main legal issues were whether the High Court had power under Section 41(b) of the Arbitration Act to grant such an injunction, and whether clause 18 permitted recovery of unliquidated damages. The Court held that Section 41(b) empowered the court to issue interim injunctions in relation to arbitration proceedings, but such orders could not in substance direct payment of other sums. However, the injunction in this case merely restrained appropriation and did not compel payment, so it was within power. On interpretation of clause 18, the Court held that the heading 'Recovery of sums due' and the context indicated that the clause applied only to sums presently due and payable. A claim for unliquidated damages, even if stipulated as liquidated under clause 14, did not give rise to a debt until liability was adjudicated and damages assessed; therefore, it was not a sum presently due and payable. The Court relied on Kesoram Industries v. Commissioner of Wealth Tax and other precedents to conclude that a claim for damages for breach of contract is not an actionable claim or debt until adjudicated. Consequently, the Union had no right under clause 18 to appropriate amounts towards its unadjudicated damages claim, and the High Court's injunction was upheld. The appeals were dismissed.
Headnote
A) Arbitration - Interim Injunction - Scope of Section 41(b) of Arbitration Act, 1940 - Court's power to grant interim injunction in relation to arbitration proceedings - Indian Arbitration Act, 1940, Section 41(b) read with Second Schedule - The High Court can issue interim injunction for the purpose of and in relation to arbitration proceedings, but such injunction cannot in substance amount to a direction to pay amounts due under other contracts. In the present case, the order did not direct payment but only restrained appropriation of amounts towards unadjudicated damages claim, and was therefore within power. Held that the interim injunction was validly granted under Section 41(b) (Paras not mentioned). B) Contract Interpretation - Recovery of Sums Due - Interpretation of Clause 18 of Standard Form Contract D.G.S.&D. 68 - Meaning of 'any claim for the payment of a sum of money arises out of or under the contract' - Indian Contract Act, 1872 (general principles of interpretation) - The clause must be read as a whole in light of its heading 'Recovery of sums due' and context; it applies only to sums presently due and payable, not to unliquidated damages. The clause merely provides an additional mode of recovery and does not authorise recovery of sums not presently payable or disputed as to liability or quantum. Held that the appellant had no right under clause 18 to appropriate amounts towards its unadjudicated damages claim (Paras not mentioned). C) Contract Law - Liquidated and Unliquidated Damages - Nature of Claim for Liquidated Damages under Clause 14 - Indian Contract Act, 1872, Section 74 - Under Indian law, even where damages are stipulated as liquidated, the party complaining of breach can recover only reasonable compensation, the stipulated amount being merely the outside limit; the claim stands on the same footing as unliquidated damages. A claim for unliquidated damages does not give rise to a debt until liability is adjudicated and damages assessed by an adjudicatory authority. Held that the appellant's claim for damages was not a claim for a sum presently due and payable within clause 18 (Paras not mentioned). D) Arbitration - Interim Injunction - Restraining Recovery of Damages from Pending Bills - Application of Section 41(b) of Arbitration Act, 1940 to clause 18 recovery - Indian Arbitration Act, 1940, Section 41(b); Indian Contract Act, 1872, Section 74 - The claim for damages formed the subject matter of arbitration proceedings, and the High Court's injunction only prevented the appellant from satisfying that claim by appropriating other sums due to the respondent. The appellant could still refuse to pay such sums if it had a valid defence, and the respondent's remedy would be to seek appropriate forum. Held that the High Court was justified in granting the interim injunction (Paras not mentioned).
Issue of Consideration
Whether the High Court had power under Section 41(b) of the Arbitration Act, 1940 to grant an interim injunction restraining the appellant from recovering its claim for damages by appropriating amounts due to the respondent under other contracts; Whether clause 18 of the General Conditions of Contract permitted recovery of unliquidated damages by appropriation of other sums due; Whether a claim for liquidated damages under clause 14 constitutes a claim for a sum presently due and payable
Final Decision
Appeals dismissed. The Supreme Court upheld the High Court's interim injunction, holding that clause 18 of the General Conditions of Contract did not authorise the appellant to recover unliquidated damages by appropriating other sums due to the respondent, as such a claim did not give rise to a debt until adjudicated. The injunction was within the power of the court under Section 41(b) of the Arbitration Act, 1940.
Law Points
- Interim injunction under Section 41(b) of Arbitration Act
- 1940 can be granted to protect subject matter of arbitration
- Clause 18 of Standard Form Contract D.G.S.&D. 68 applies only to sums presently due and payable
- Claim for unliquidated damages does not give rise to a debt until liability is adjudicated and damages assessed
- Stipulated liquidated damages under Section 74 of Indian Contract Act
- 1872 are only an outside limit and claim stands on same footing as unliquidated damages
- Heading and context of a clause guide its interpretation
