Supreme Court Upholds Fixed Compensation Clause in Managing Agency Dispute, Dismisses Rs. 28 Lakh Claim

Bench clarifies substantial question of law, emphasizing liquidated damages clause excludes additional profit-based claims

In a significant judgment delivered on May 5, 1962, the Supreme Court of India dismissed the appeal filed by Sir Chunilal V. Mehta and Sons Ltd., against Century Spinning and Manufacturing Co. Ltd., thereby upholding the fixed compensation clause in a managing agency agreement and rejecting a claim for damages based on profit shares. The verdict, delivered by a five-judge bench headed by Chief Justice B.P. Sinha, not only settled the dispute between the parties but also clarified the meaning and application of "substantial question of law" under Article 133(1)(a) of the Constitution and Section 110 of the Civil Procedure Code.

The case arose out of the termination of a managing agency agreement dated June 15, 1933, originally between Chunilal Mehta and Co., and the respondent company. The agreement was subsequently assigned to the appellant company. The respondent terminated the agreement in April 1951, leading the appellant to sue for damages amounting to nearly Rs. 28.26 lakhs for wrongful termination.

The legal crux centered on the interpretation of Clause 14 of the managing agency agreement, which specified the compensation payable in case of premature termination. The clause stated that the managing agents would receive liquidated damages equalling the aggregate monthly salary of not less than Rs. 6,000 for the remainder of the term. The appellant contended that this clause should be read in conjunction with Clause 10, entitling them to remuneration amounting to 10% of the gross profits of the company, thus claiming a much higher sum.

The Supreme Court clarified that when parties expressly stipulate liquidated damages, as in Clause 14, they exclude the right to claim additional unascertained damages under general contract law principles, specifically under Sections 73 and 74 of the Indian Contract Act, 1872. The Court held that the phrase "not less than Rs. 6,000" was intended only to emphasize the minimum compensation payable and did not incorporate the profit-based remuneration clause.

Regarding the legal procedural aspect, the Court examined the criteria for granting a certificate under Article 133(1)(a) for appeal to the Supreme Court. It overruled the Bombay High Court’s narrow interpretation and adopted a balanced test: a "substantial question of law" must either be of general public importance or directly and substantially affect the rights of the parties, especially if the question is open, unsettled, or calls for alternative views. The Court found that the interpretation of the managing agency agreement raised such a substantial question of law but, on merits, upheld the lower courts’ ruling denying the appellant’s claim beyond the liquidated damages.

The Court emphasized that the managing agents’ right to claim 10% of profits was an additional remuneration right, distinct from the fixed salary considered for liquidated damages. The decision underscored that the existence of an express compensation clause excludes claims for damages under general law for breach of contract.

The Supreme Court’s judgment thus provides critical guidance on contract interpretation, the enforceability of liquidated damages clauses, and the procedural threshold for appeals involving substantial questions of law. It reinforces the principle that contractual parties can agree on fixed damages to avoid protracted litigation over unascertained damages.

The appeal was dismissed with costs, confirming the appellant’s entitlement to compensation limited to the fixed monthly sum of Rs. 6,000 for the unexpired period of the managing agency term.

Statutory provisions

Constitution of India, Article 133(1)(a), Article 136; Civil Procedure Code, 1908, Sections 100, 110; Indian Contract Act, 1872, Sections 73, 74

Chunilal V. Mehta and sons Ltd. v. Century. Spinning and Manufacturing Co. Ltd., (SC) : Law Finder Doc Id # 111531