High Court of Aryavarta to Decide Key Contract Issues in Kalinga-Nilachala Supply Dispute

The Commercial Division of the High Court of Aryavarta at Kalingapuram is set to adjudicate a complex commercial dispute between Kalinga Foods Limited and Nilachala Agro Processors Limited, centering on force majeure, liquidated damages, and post-termination restraint of trade. The case arises from an exclusive supply agreement for a critical modified starch used in Kalinga's flagship snack product, CrispO.

The Dispute at a Glance

Kalinga Foods, a leading packaged snack manufacturer, entered into a five-year exclusive supply and manufacturing agreement with Nilachala Agro on 1 April 2022. Nilachala agreed to supply its proprietary product, AgroStarch-7, exclusively to Kalinga and not to supply any functionally equivalent starch to Kalinga's competitors. The agreement included detailed provisions on minimum quantities, delivery schedules, force majeure, liquidated damages, and a post-termination restraint clause.

Trouble began in November 2025 when the State Pollution Control Board suspended the Consent to Operate of the Common Effluent Treatment Plant serving Nilachala's Unit-I, which was the only facility equipped to produce AgroStarch-7. The shutdown lasted approximately fourteen weeks, from 12 November 2025 to 20 February 2026. Nilachala invoked force majeure but did so twenty-two days after the triggering event, well beyond the seven-day notice period stipulated in Clause 9.3 of the agreement.

Kalinga disputed the force majeure claim on two grounds: the late notice and Nilachala's alleged failure to mitigate by exploring production at its other facility, Unit-II. During the shutdown, Nilachala produced a two-tonne trial batch of AgroStarch-7 at Unit-II for Konark Snacks, a competitor of Kalinga, which Kalinga argues demonstrates that mitigation was possible. Nilachala countered that retooling Unit-II would have required ₹4 crore and ten weeks, which was commercially unreasonable for a temporary disruption.

Liquidated Damages: Penalty or Genuine Pre-estimate?

The delayed consignments were valued at ₹70 crore. Under Clause 11, liquidated damages were set at 2% of the value per week of delay, capped at 20%, leading to a claimed sum of ₹14 crore. However, Kalinga's actual additional procurement costs from an alternate vendor totaled only ₹2.1 crore, and its buffer stock prevented any lost sales or customer penalties. Nilachala contends that the stipulated sum is a penalty and that Kalinga is entitled only to reasonable compensation under Section 74 of the Indian Contract Act, 1872.

The Post-Termination Restraint Clause

After Kalinga terminated the agreement on 10 March 2026, citing material breach, Nilachala entered into a new exclusive supply agreement with Konark Snacks on 15 April 2026. Kalinga seeks to enforce Clause 14, which restrains Nilachala for 24 months from supplying AgroStarch-7 to any competitor in the extruded or fried snack food business. Nilachala argues the clause is void as an unreasonable restraint of trade under Section 27 of the Indian Contract Act.

Issues Before the Court

The court has framed three key issues for determination:

1. Force Majeure Defense: Whether Nilachala is entitled to the benefit of Clause 9, considering the late notice and its obligation to mitigate.
2. Liquidated Damages: Whether the sum stipulated under Clause 11 is a genuine pre-estimate or a penalty, and what compensation, if any, Kalinga is entitled to.
3. Restraint of Trade: Whether Clause 14 is enforceable or void under Section 27 of the Indian Contract Act.

The case presents significant questions of commercial law, particularly the interplay between contractual force majeure provisions, the penalty doctrine, and post-termination restrictions. The court's ruling will have implications for supply agreements across industries.

The matter is listed for hearing, with both sides having filed their pleadings. The legal community awaits the court's interpretation of these critical contract law principles.