The division judge bench of the Jharkhand High Court held that the question of liquidated damages would arise only when the contract is terminated on account of breach of the terms and conditions of the contract and when the termination of the contract itself is held to be bad in law the consequences which follow which may include liquidated damages or initiation of a certificate proceeding for recovery of the amount in question.
Brief facts
The factual matrix of the case is that the Petitioner participated in the tender process issued by the Respondent authorities for the construction of a High-Level Bridge. The Petitioner was awarded the contract for the same and a time of 13 months was given for the competition of the said construction. It is the case of the Petitioner that the land was not acquired and compensation was not paid for the land that was acquired, and as a result, the work got delayed even after the work order was assigned. As a result, the petitioner represented the relevant authorities to remove the obstacle so that construction could start as soon as possible. Even though the authorities were frequently urged to make provisions that would facilitate the beginning of the Bridge construction, the same was not done. Then, the Petitioner communicated for the closure of the contract and refund of the security deposits. The Petitioner filed an application for the extension of the time and the same was granted, thereafter, the Petitioner was served with a show cause notice as to why the contract be not terminated and the Petitioner be blacklisted. The Petitioner submitted a reply for the same, however, the contract was terminated and an amount of Rs. 1,04,33,493/- has been sought to be recovered on the ground of fundamental breach, negligence, and slow progress in the work allotted to the petitioner. Therefore, the present writ petition.
Contentions of the Petitioner
The Petitioner submitted that the termination of the contract was in gross violation of the principles of natural justice, even though the reply to the show cause notice was given, no personal hearing was given prior to such termination. It was furthermore submitted that the Petitioner didn’t deliberately delay the work, however, it was due to the lethargic attitude of the respondent authorities in not acquiring the land on which the Bridge was to be built. Also, the reliance was made on various letters issued by the Respondent no. 1which indicates the imperious nature in which the respondent authorities have acted in terminating the contract and initiating a certificate case for realization of the damages which was unilateral and there was no adjudication prior to coming to such conclusion with respect to the quantum of damages fixed by the respondent authorities.
Contentions of the Respondent
The Respondent submitted that clause 49 of the SBD Agreement addresses the contractor's duty to reimburse the employer for liquidated damages in the event that the work is not completed by the scheduled completion date or if the contractor materially breaches the terms of the agreement. It was furthermore submitted that it cannot be inferred that the respondent authorities were to blame for the project's failure just because only a small portion of the land was not purchased during the pertinent period.
Observations of the court
The Hon’ble Court observed that the respondent authorities' version regarding the acquisition of the land and a portion of the land being under acquisition would actually strengthen the petitioner's position with regard to the obstacle that ultimately compelled the petitioner to request closure of the contract and reimbursement of the security deposit. This is because the mere acquisition of the land without providing compensation to the landholders would inevitably cause disruption in the construction process.
It was furthermore observed that it appears that the petitioner filed an application for a contract extension at the authorities' request, and that application was received within a few weeks, marking the beginning of the contract termination procedure. The facts of this case clearly show that the concerned authorities acted arbitrarily in terminating the contract without closing it or returning the security deposit, but rather in demanding an amount of Rs. 1,04,33,493/-for liquidated damages. It is true that this Court has a limited power of review and can only do so when the entire exercise is found to be arbitrary and unreasonable.
The court relied upon the judgments titled State of Karnataka versus Shree Rameshwara Rice Mills. Thirthahalli, J.G. Engineers Private Limited versus Union of India and Another, and Inox Air Products Limited versus Steel Authority of India Limited.
The court noted that the liquidated damages would only be an issue if the contract was terminated due to a breach of its terms and conditions. If the contract's termination is deemed illegal, there may be further legal repercussions, such as liquidated damages or the need to start a certificate proceeding to recover the relevant amount.
Based on these considerations, the court was of the view that the question of termination of the contract cannot be sustained.
The decision of the court
With the above direction, the court allowed the Writ Petition.
Case Title: M/s Aditya and Rashmi Construction Pvt. Ltd Vs The State of Jharkhand
Coram: Hon’ble Mr. Justice Rongon Mukhopadhyay, and Hon’ble Mr. Justice Deepak Roshan
Case No.: W.P.(C) No. 2924 of 2014
Advocates for the Petitioner: Mr. Siddharth Singh, Advocate Mr. Raunak Sahay, Advocate Ms. Ahana Bhardwaj, Advocate
Advocate for the Respondent: Mr. Nehru Mahto, A.C. to G.P.-IV
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