The Hon’ble Supreme Court expounded that when it comes to contracts, the rights and duties of the parties subsist or perish as per the terms of the contract itself. Unless expressly stated in the contract, there is no discretion in contractual matters, even if one of the parties is a governmental authority as such discretion would be outside the scope and ambit of the contract.
Brief Facts:
Respondent No.1 was selected as a successful bidder for the construction of the Masonry Dam for which the tender was issued by the State. Subsequently, both parties entered into a contract in 1993, according to which a period of 60 months was stipulated for the completion of the project.
The work was suspended and resumed in 2000. During the construction work, Respondent No. 1 had asked for an alternate quarry in 2002 but the Executive Engineer refused, and his decision was affirmed by the Superintending Engineer. Therefore, the matter was referred to Arbitration by Respondent No.1.
During the pendency of the Arbitration proceedings, Respondent No.1 renewed his request for the alternate quarry in 2002. For this, a committee of 2 Executive Engineers and one Sub-Divisional Officer conducted an inspection of the original and the alternate quarry. As per the report, there was no sand in the original quarry and so, the request of Respondent No.1 was declared to be justified following which the conditional permission for an alternate quarry was granted by the Superintending Engineer.
Thereafter, Respondent No. 1 demanded an escalation in money because of the cost incurred due to the transportation of the sand from the quarry and this demand was rejected by the Superintending Engineer. It was due to this rejection, that Respondent No.1 sought a resolution of the dispute through statutory arbitration.
The Arbitral Tribunal rendered an award in favour of the Respondent No.1. Against this, the State filed a revision petition which was dismissed by the High Court of Madhya Pradesh mainly because the High Court observed that the claims of the Contractor were not barred by limitation, res judicata was not applicable and that Respondent No.1 was entitled to the escalation as per the terms of the Contract.
Hence, the present appeal has been preferred against the judgment of the Madhya Pradesh High Court.
Contentions of the State:
It was argued that Res Judicata will apply to the present proceedings because of the first arbitral award issued in 2007 vide which the claims were rejected. It was contended that Respondent No.1 had protested after a lapse of 4 years for escalation. Therefore, Respondent No.1 should not be permitted to raise this issue now. Lastly, it was argued that the request for arbitration was barred by limitation as per the contractual terms because the claim was made in 2007.
Contentions of the Respondent No. 1:
It was argued that the claim for escalation is justified as the Respondent had to travel an extra distance to execute the contract as sand is an essential ingredient for the execution of the contract. Respondent No.1 incurred extra costs due to the distance and it affected the profitability of the Respondent. It was contended that res judicata will not apply as the former arbitral award dealt with the first part of the clause whereas the present proceedings relate to a later period.
Observations of the Court:
Concerning the contention of Respondent No.1 that the former arbitral award dealt with the first part of the clause, the Court noted that this contention would lead to the bifurcation of the contracts into two parts and the same is not permissible. The contract is a solitary agreement that is discharged as a single obligation and therefore, rights and obligations cannot be read separately.
Hence, this contention was rejected.
For the claim of escalation, the Supreme Court observed that the determination of the claim for escalation depends on the clause in the contract. The inspection report laid down that the demand for an alternate quarry is justified and the circumstances were outside the control of the Respondent. Therefore, the claim for escalation is justified as the conditions of the clause in the contract are fulfilled.
As for the proceedings being barred by res judicata, the Bench pointed out that the former arbitral award was rejected because there was no factual basis that justified the need for alternate quarry and there was no circumstance proved that was beyond the control of Respondent. Also, the Superintending Engineer later issued a letter stating that the need for an alternate quarry was justified. These factors create a difference between the first arbitral award and the present proceedings which is why res judicata will not be applicable.
Concerning the issue of escalation, the Apex Court interpreted the clause in the said contract and opined that the conditions as per the clause were fulfilled and hence, a right to seek escalation arose as per the clause. When the stipulated conditions as per the clause are satisfied, then the Executive Engineer does not have any jurisdiction to impose any further conditions for claiming escalation. By imposing other conditions, the Executive Engineer acted beyond the scope of the contract.
The Top Court expounded that it is within the terms of the contracts itself that the rights and duties of the parties subsist or perish. There is no discretion in the hands of the parties, even if one of the parties is a governmental authority. The Supreme Court further opined that in contractual matters, there is no place for discretion unless it is specifically incorporated in the contract.
The decision of the Court:
Based on the above-mentioned reasons, the Hon’ble Supreme Court justified the award vide which escalation was granted and accordingly, dismissed the appeal.
Case Title: The State of Madhya Pradesh v. M/S Sew Construction Limited & Ors.
Citation: 2022 Latest Caselaw 910 SC
Coram: Hon’ble Mr. Justice Pamidighantam Sri Narasimha, Hon’ble Mr. Justice A.S. Bopanna
Case No.: Civil Appeal No. 8571/2022
Advocates for Appellant: Adv. Sunny Choudhary
Advocates for Respondent: Adv. Sandeep Singh
Read Judgment @LatestLaws.com
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