Kanchan Udyog Limited vs United Spirits Limited

The appellant’s suit, C.S. No.839 of 1990, for damages and wrongful termination of contract, was decreed by the learned Single Judge on 02.12.1999. It has been reversed in appeal preferred by the respondent, on 14.01.2005 in APD No.14 of 2000, and the suit dismissed.

2. The appellant entered into an agreement with the respondent for establishment of a non-alcoholic beverages bottling plant at Dankuni, West Bengal, and sale under the respondent’s trade mark, 'Thrill', 'Rush', 'Sprint', and 'McDowell’s Sparkling Soda.' The respondent provided technical consultancy for establishment of the plant, incorporated in the Project Engineering Services Agreement dated 11.09.1985. A Bottler’s agreement dated 26.10.1985 was separately executed, valid for ten years with a renewal option, containing the respective rights and obligations of the parties, along with a Marketing agreement. The concentrate (Essence), for preparation of the non-alcoholic beverage, was to be supplied by the respondent. The beverage was to be sold in specified districts of West Bengal, as provided for in the marketing 2 agreement.

3. The appellant, on 15.12.1985 applied for loan, Exhibit ‘C’, to the West Bengal Industrial Development Corporation (hereinafter referred to as 'the WBIDC') for establishment of the bottling plant at an estimated cost of Rs.226.80 lakhs. In accordance with procedures, it was processed by the West Bengal Consultancy Organisation Ltd. (hereinafter referred to as 'WEBCON'), which independently prepared a techno-economic feasibility report, ‘Exhibit F1’. Loan was then advanced to the appellant by the WBIDC, and the West Bengal State Financial Corporation. Commercial production commenced on 01.01.1987. The bottler’s agreement was terminated by the respondent on 16.03.1988. Commercial production at the plant ceased in May, 1989, and the suit was instituted by the appellant in 1990. The learned Single Judge decreed the Suit, awarding damages for Rs.2,73,38,000/- towards loss of anticipated profits, and a sum of Rs.1,60,00,000/- towards costs for installation of the plant, after deducting Rs.9.05 lakhs payable by the appellant to the respondent as consultancy charges. The respondent was held liable to pay to the appellant a sum of Rs.4,24,33,000/- with interest @ 10% from the date of suit till payment. The Division Bench in appeal reversed the decree, and dismissed the Suit.

4. Sri Paras Kuhad, learned senior counsel appearing for the appellant, submitted that the bottler’s agreement valid for ten years, was terminated unilaterally and prematurely by the respondent on 16.03.1988, contrary to 3 clause 26 of the agreement. The appellant had never denied performance of its obligations under the agreement. The appellant had not signed and returned the termination letter, in acceptance, as reiterated by the respondent on 25.07.1988. The appellant did not sign any fresh agreement with M/s. Venkateswara Essence & Chemicals Pvt. Ltd. (hereinafter referred to as ‘VEC’) for supply of concentrates by it, in lieu of the respondent. The acceptance of concentrates by the appellant directly from M/s. VEC for a short time span, under clause 5 of the agreement, cannot be construed either as novation of the original contract under Section 62 of the Indian Contract Act (hereinafter referred to as ‘the Act’), or acquiescence to any new arrangement by substitution of a new contract. It was an act done under compulsion, and not voluntarily. A novation of contract, can take place only by mutual consent in a tripartite arrangement. In absence of any fresh tripartite agreement executed between the parties, it is futile to contend novation. The respondent also continued to deal with the appellant under the original agreement, even while it sought to persuade the appellant to sign the fresh agreement.

5. The respondent was the domain expert. Relying on its assurance, the appellant had made a business investment. A reasonable profit was, therefore, naturally expected. The loss of anticipated profits was due to the failure of the respondent to provide adequate aggressive marketing and advertisement support under the bottler’s agreement, in an extremely competitive market. The assumption of the respondents that there existed a market for their brand 4 products 'Thrill', 'Rush', 'Sprint', was totally misconceived, believing in which the appellant had made the investment. A party committing breach of contract, was liable for such damages as are estimated as not unlikely to result from the breach, at the time of making of the contract. The appellate court erred in relying upon future events, to hold that the appellant could not be foreseen to earn profits. Any temporary difficulties that the appellant may have had in its own operations, were not insurmountable, and could have easily been overcome, if the respondent had facilitated smooth running of the business and earning of profits thereby. The claim for damage was required to be assessed by a broad estimation, taking into consideration all significant factors, evaluating the chances for earning profit, and not determination of actual profitability. Reliance was placed on Wellesley Partners LLP v. Withers LLP, (2015) EWCA Civ 1146.

9. Sri Jaideep Gupta, learned senior counsel appearing for the respondent, referring to clause 7 of the bottler’s agreement, submitted that it was not a business partnership agreement. The appellant was unable to run its business for more than one reason, attributable to it alone. The change in excise regime dated 22.09.1987, made it an economic compulsion to route concentrates through M/s. VEC to avoid higher excise duty, which in turn would affect the price and saleability of the product, ultimately to the detriment of the appellant itself. At the Bangalore meeting, twelve out of fourteen bottlers, agreed for the new arrangement. The appellant also started to place orders and received concentrates directly from M/s. VEC from April 1988 but abruptly stopped doing so in May, 1989. The claim for damages was raised belatedly only thereafter by filing the suit in 1990, and after the appellant had shut down the plant because of its own inability to run the business. There had been no breach by the respondent. The original agreement underwent a novation sub silentio, in the facts of the case, under Sections 8 and 62 of the Act, even if it had not been formally reduced to writing. Reliance was placed on McDermott International Inc vs. Burn Standard Co. Ltd. & Ors., (2006) 11 SCC 181. Alternately, if the supply of concentrates was accepted by the appellant from M/s. VEC in view of clause 5 of the bottler’s agreement, there had not been any termination of the contract by the respondent. The appellant had further acquiesced to the new arrangement for supply of concentrates, and by its conduct had waived the claimed legal rights under the bottler’s agreement. 8

10. The termination of the contract was not the causation or dominant cause for loss of anticipated profits. Reliance was placed on Galoo Ltd. & Ors. vs. Bright Grahame Murray & Anr., (1994) 1 WLR 1360. The appellant rested its claim for loss of expected profitability before the High Court on Exhibit ‘F1’ and ‘W1’, but failed to prove both the documents in accordance with law. In the present appeal, for the first time, it was now being claimed on the basis of Exhibit ‘C’. Annexure ‘M’ to the plaint, the claimed loss of profitability is only a reproduction of Exhibit ‘C’. The latter has already been the subject of independent consideration in Exhibit ‘F1’ the WEBCON report. The appellant failed to prove that Exhibit ‘C’ was prepared jointly with Mr. Baisya. There was absolutely no material to demonstrate any real or substantial chance for earning profit by the appellant. Profit projections made in a loan application for viability of a project to avail finance, are mere speculative assumptions and cannot be a yardstick to claim loss of anticipated profits. The appellant also failed to take steps to mitigate its losses under Section 73 of the Act for ‘remedying the inconvenience caused’ by the breach either by utilisation of the plant for bottling by others, availing concentrates from M/s. VEC or selling the plant immediately after closure in May, 1989 to fetch a higher rate, but did so belatedly in 1996. Reliance was placed on M/s. Murlidhar Chiranjilal vs. M/s. Harishchandra Dwarkadas & Anr., (1962) 1 SCR 653 and Payzu v. Saunders, (1919) 2 KB 581.

12. We have considered the submissions. The learned Single Judge referring to Section 73 of the Act, on basis of the averments made in the plaint, allowed the claim for loss of anticipated profits relying upon Exhibit ‘F1’, the WEBCON report, and Exhibit ‘W1’, the report prepared by Dr. R.K. Baisya, holding that the respondent having committed breach of the agreement, was obliged to put the appellant in the same position by grant of compensation, as the appellant would have been if the contract had been performed. The appellant was also entitled to cost of the plant, as it was useless for any other purpose. The appellant was unable to mitigate its damages as the product did not find 10 acceptability, and the efforts of the parties to persuade Pepsi and Coca Cola to utilise the bottling plant, also came to naught. The appellant was awarded Rs.2,73,38,000/- towards loss of anticipated profits for ten years and a sum of sum of Rs.1.60 lakhs towards the cost of plant, being the price it fetched in the auction sale to Cadbury-fry by the West Bengal Financial Corporation. A negative finding was returned in one line, on the issue if the suit was barred by waiver and acquiescence, without any discussion.

14. Contrary to the claim of the appellant, that the plant would be a profitable enterprise in the second year of its operation ending March, 1988, the appellant itself acknowledged in its letter dated 09.05.1988, that the appellant would make losses in the next six years upto 1992-93, requesting for supplies of concentrates on credit for five years. The business of the appellant failed to take off due to lack of business acumen, its inability to manage its own finances, and failure to deploy manpower distribution in accordance with its own projections in the loan application submitted by it to the WBIDC. The respondent had provided sufficient advertising and marketing support to the appellant, and its expenditure for the same was far in excess of that made by the appellant, whose bank account reflected severe lack of financial resources, leading to its inability to make payments to its bottle suppliers, for the concentrates, consultancy fees etc.

15. In the bottlers conference on 15.10.1987 at Bangalore, consequent to the new excise regime, twelve out of fourteen bottlers had agreed to the new arrangement for supply of concentrates by M/s VEC, instead of the respondent. The appellant also placed orders on M/s VEC, and received supplies of concentrates directly from March, 1988 till January, 1989 even while it continued to avail marketing services from the respondent also. Thus business 12 relations continued between the parties even after termination of the bottler’s agreement.

30. In view of the conclusion, that the appellant was not entitled to any expectation loss towards anticipated profits, for reasons discussed, any grant of 23 reliance loss would tantamount to giving a benefit to it for what was essentially its own lapses. There are no allegations of any deficiency in the plant. Contrary to its claim of Rs.2.52 crores towards cost of the plant, the learned Single Judge awarded Rs.1.60 crores without any discussion for the basis of the same. Though the appellant had preferred a cross appeal, it did not press the same.

31. The aforesaid discussion leads to the inevitable conclusion that the appellant had failed to establish its claim that the breach by the respondent was the cause for loss of anticipated profits, that the profitability projection in its loan application was a reasonable basis for award of damages towards loss of anticipated profits. The appellant had failed to abide by its own obligations under Exhibit ‘C’ and lacked adequate infrastructure, finances and manpower to run its business. It also failed to take reasonable steps to mitigate its losses. The appeal lacks merit and is dismissed.

………………………………….J. (Ranjan Gogoi) ……….………………………..J. (Navin Sinha) New Delhi, June 19, 2017 1 ITEM NO.4 COURT NO.2 SECTION XVI S U P R E M E C O U R T O F I N D I A RECORD OF PROCEEDINGS CIVIL APPEAL NO.1168/2007 KANCHAN UDYOG LIMITED APPELLANT (S) VERSUS UNITED SPIRITS LIMITED RESPONDENT(S) Date : 19/06/2017 This appeal was called on for pronouncement of judgment today.

judgment of the Bench comprising Hon'ble Mr. Justice Ranjan Gogoi and His Lordship The appeal is dismissed in terms of the signed reportable judgment.