ImagineX Builders Limited (ImagineX) is a company engaged in developing sustainable greenhouse residential and commercial premises. It wanted to do the outdoor lighting for a new project through solar power. For this, it commissioned Future Forward Energy Limited (FFEL) to develop the complete system, including procuring and installing solar panels on the rooftop, installing batteries and switches, and complete wiring for the system. A fully functional outdoor lighting was to be handed over to ImagineX.

The entire value of the contract was Rs. 5 Crore. The contract provided a date by which the completed functional outdoor lighting was to be handed over to ImagineX.

FFEL delayed handing over of the completed outdoor lighting by 25 days. FFEL raised an invoice for the contract value, which ImagineX paid. The contract had the following clause on damages:

Clause 8: For a delay in handing over a completed functional outdoor lighting, FFEL will be liable to pay a penalty at the rate of 0.5% per day of delay of the contract value.

ImagineX claimed damages for the 25 days of delay in handing over of the outdoor lighting according to the clause. FFEL counters the claim. It contends that the clause uses the word ‘penalty’, declaring the intention of ImagineX to penalise FFEL. Thus, the clause is a penalty and should be declared non-binding. Is clause 8 penal?

Question

ImagineX Builders Limited (ImagineX) is a company engaged in developing sustainable greenhouse residential and commercial premises. It wanted to do the outdoor lighting for a new project through solar power. For this, it commissioned Future Forward Energy Limited (FFEL) to develop the complete system, including procuring and installing solar panels on the rooftop, installing batteries and switches, and complete wiring for the system. A fully functional outdoor lighting was to be handed over to ImagineX.  
   
 The entire value of the contract was Rs. 5 Crore. The contract provided a date by which the completed functional outdoor lighting was to be handed over to ImagineX.  
   
 FFEL delayed handing over of the completed outdoor lighting by 25 days. FFEL raised an invoice for the contract value, which ImagineX paid. The contract had the following clause on damages: 
   
 Clause 8:  For a delay in handing over a completed functional outdoor lighting, FFEL will be liable to pay a penalty at the rate of 0.5% per day of delay of the contract value. 
   
 ImagineX claimed damages for the 25 days of delay in handing over of the outdoor lighting according to the clause. FFEL counters the claim. It contends that the clause uses the word ‘penalty’, declaring the intention of ImagineX to penalise FFEL. Thus, the clause is a penalty and should be declared non-binding. Is clause 8 penal?

Answer

In a liquidated damages clause, use of the words is not determinative. But the clause is not a liquidated clause. It is a penalty clause as it stipulates a penalty for a delay.

Answer

The words have to be given an objective and not subjective meaning. The Clause declares itself to be a ‘penalty’. Thus, the term would be taken as penal and ImagineX would not be awarded the amount.

Answer

A liquidated damages clause has to be very precisely worded. Unless it declares that it is a genuine amount and introduced to cover the actual losses likely to arise, it is taken to be punitive. As the clause does not use these words, it is penal and ImagineX would not be awarded the amount.

Answer

In a liquidated damages clause, the substance of the clause matters than the words used. What matters is whether the amount is a reasonable amount likely to flow from the delay.

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