Judgment sc-2010-15-705-761

,7($8»( )SUPREME COURT REPORT~ (~010] 15 (ADDL.) S.C.R A he also gets more business at the rates below the competitive. rates. Same is the position in case of masking of international calls as local calls. In this connection, it is important to note that when an international call(s) lands on the local POI of the UASL, the latter knows from the display mechanism at his end, (like B the subscriber at his end) that call bears the international CLI and that is the reason for masking. Otherwise one needs no masking of the CLI. In both the cases i.e. under clauses 6.4.6(a) and 6.4.6(b) the same economic and financial consequences flows and that is the reason why clause 6.4.6 c provides for reasonable pre-estimate of damage. There is one more reason. It is not possible to trace each such unauthorized call, particularly its nature, as to from which place it originated and if it was possible the cost of tracing such call(s) may be much more than actual damage, if ascertainable, and therefore, 0 a "rough and ready measure" is provided in clause 6.4.6 which measure is a reasonable pre-estimate of damage.

(iv) Whether clause 6.4.6 represents penalty or pre-estimate of reasonable compensation for the loss? E

17Copy pinpoint17. According to Chitty on Contracts "whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. The question to be always asked is whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss". (See para 26-126 of Chitty on Contracts, 30th edition) The fact that damage is difficult to assess with precision strengthens the presumption that a sum agreed between the parties represents a genuine attempt to estimate it and to overcome the difficulties of proof at the trial. According to the Law of Contract by G.H. Treitel (10th edition), a clause is penal if it provides for "a payment stipulated as in terrorem of the offending party to force him to perform the

B.S.N.L. v. RELIANCE COMMUNICATION LTD. 759

[S.H. KAPADIA, CJI.] contract. If, on the other hand, the clause is an attempt to estimate in advance the loss which ~ill result from the breach;- it is a liquidated damages clause. The question whether a' clause is penal or pre-estimate of damages depends on its construction and on the surrounding circumstances at the time of entering into the contract". Lastly, the fact that a sum of money is payable on breach of contract is described by the contract as "penalty" or "liquidated damages" is relevant but not decisive as to categorization.

18Copy pinpoint18. Applying the above tests to facts of this case, we find that the Interconnect Agreement in question should be view,ed · C in the context of the regulatqry regime. In this case •. we are concerned with telecom as ~ service. This is the most important circumstance to be considered as one of the main surrounding circumstances to the lntercqnnect Aqreement. Under the Interconnect Agreement, the lJASL is obliged to maintain the D integrity of its exchange/POI. It is important to note that each service provider, including BSNL, is a market player/ stakeholder. Each UASL is entitled to a level playing field.The nature of the call, be it local or national or internation~I. as indicated by corresponding CLI, is the basis for the lev{of IUC E (including ADC). If by wrong routing of calls or by masking the cost of providing services is reduced, the concerned operc'!tor gets an undue advantage not only in the Indian market over other competing operators but also in the international market. Billing is one of the most vital aspects of this case. With F technology, an international call could fall on the local POI but then the concerned operator is responsible for the identity of · the call. In the case of calls which are correctly routed, the display screen with the subscriber clearly indicates whether the call bears international or local/national CU. Similarly, when the G Gateway Bypass Scam takes place and the international call(s) lands on the local POI which is not forwarded to the specified trunk group/POI, there is not only bypassing of International Gateway/ POI and National POI but also evasiqn of duty to maintain billing records in detail at ea~h POis. H

760 SUPREME COURT REPORTS (201oj c15 (ADDL.) S.C.R.

19Copy pinpoint19. All this results in payment of IUC at a lower rate. All this leads to reduced cost for the defaulting UASL which. provides not only increase in its profit but also gives it an advantage in international market vis-a-vis other competitors (including BSNL) because the defaultlng UASL can easily price B its product in the international market at a lower rate and in that sense loss is caused to BSNL. Similarly, as stated above, masking takes place as international CLI can easily be identified even when an international call lands on the local POI of the UASL, hence, the defaulting UASL resorts to masking. c Hence, an international call coming from the masked number alone cannot be taken into account. Thus, in our view, clauses 6.4.6(a) and 6.4.6(b) provide for pre-estimate of damages. It is so al~o for one more reason. The clause, as stated above, restric¢ the higher IUC rate made applicable for ca111 only for last tv,t,0 preceding months and not for last three years or the 0 longer period. These time lines is an indicia showing that clause 6.4.6 is not penal but a pre-estimate of reasonable compensation for the loss foreseen at the time of entering into the agreement. Lastly, it may be noted that liquidated damages serve the useful purpose of avoiding litigation and promoting commercial certainty and, therefore, the court should not be astute to categorize as penalties the clauses described as liquidated damages. This principle is relevant to regulatory regimes. It is important to bear in mind that while categorizing damages as"penal" or "liquidated damages", one must keep in mind the concept of pricing of these contracts and the level playing field provided to the operators because it is on costing and pricing that the loss to BSNL is measured and, therefore, all calls during the relevant period have to be seen. [See Communications Law in India by Vikram Raghavan at page G 639]. Since clause 6.4.6 represents pre-estimate of reasonable compensation, Section 74 of the Contract Act is not violated. Thus, it is not necessary to discuss various judgments of this Court under Section 74.of the Contract Act.

,,B.S.N.L. v. RELIANCE COMMUNICATION LTD. 761' [S.H. KAPADIA, CJI.] Conclusion A

20Copy pinpoint20. We need to clarify that in this case our judgment is restricted only to the interpretation of cl?use 6.4.6 of the Interconnect Agreement read with the Addenda. As st_ated above, we have held that clause 6.4.6 represents pre-estimate 8 of reasonable compensation for the loss suffered by BSNL. Thus, we set aside the impugned judgment and remit the matter to TDSAT to decide the matter de novo in accordance with the law laid down hereinabove. However, we need to highlight one aspect. In the letter dated 13th October, 2004 addressed by BSNL to Reliance, it has been alleged that the calls have .C landed at the POis of M/s. Reliance lnfocomm. l:ttL at Karellbaug, Panigate, Alkapuri, Makarpura, Padra, Dab~oi and Miyagam exchanges in Vadodara SSA. The .said· letter highlights one more important aspect. It is allegecf4h·at the number 2813041000 was an unallocated number with Reliance D during the relevant period. This aspect needs to be examined by TDSAT on facts.

21Copy pinpoint21. Accordingly, the civil appeal is allowed with no order as to costs.

N.J. Appeal allowed.