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Gauhati High Court · body

2018 DIGILAW 1062 (GAU)

Rungta Projects Ltd. v. Union of India

2018-07-19

UJJAL BHUYAN

body2018
ORDER : 1. This order will dispose of both WP (C) Nos. 6867/2013 and 5585/2015. 2. The two writ petitions were heard on 11.7.2018 and fixed for delivery of order today 19.7.2018. 3. Heard Mr. V.K. Gupta, learned senior counsel assisted by Mr. Pandey Neeraj Rai and Mr. Amit Goyal, learned counsel for the petitioners. Also heard Mr. MZ Ahmed, learned senior counsel assisted by Mr. A.M. Dutta, learned counsel for the respondents. WP (C) No. 6867/2013 4. In this writ petition petitioner has assailed legality and validity of the notice dated 12.6.2013 issued by the General Manager, North Eastern Coalfields, Coal India Ltd. to the petitioner withholding contractual dues of Rs. 978.34 lakh and raising claim of liquidated damages to the tune of Rs. 1,247.48 lakh besides calling upon the petitioner to deposit the balance amount of Rs. 269.14 lakh. 5. Case of the petitioner is that on 23.3.2008 four contracts were granted by the respondents to it for removal of hard shale and carbonaceous shale from the Tirap East, Tirap West, Tikak OCM and Tikak East collieries of North Eastern Coalfields in Margherita in Tinsukia district. Acceptance letter dated 11.7.2008 was issued by the respondents and the same was accepted by the petitioner. Subsequently work order dated 18.8.2008 was issued for a period of three years commencing from 11.7.2008. According to petitioner they commenced their contractual work as per schedule. Petitioner on 8.7.2011 requested the respondents to extend time without imposing liquidated damages/penalty otherwise the work would come to an end on 10.7.2011 on expiry of the contractual period. General Manager, North Eastern Coalfields, on 20.7.2011 asked the petitioner to accept extension of time with certain conditions but the same was declined by the petitioner on 2.8.2011. 6. At this stage it may be mentioned that there is no dispute to the work executed by the petitioner in respect of Tirap East and Tikak West collieries, but there is dispute over the other two collieries, i.e. Tikak East and Tirap West. 7. As noted above, the offer made by the General Manager was declined by the petitioner on 2.8.2011 whereafter petitioner on 4.8.2011 requested the respondents to close the two contracts, arrange for final measurement and thereafter to clear the dues of the work done, including refund of the retention money. 8. 7. As noted above, the offer made by the General Manager was declined by the petitioner on 2.8.2011 whereafter petitioner on 4.8.2011 requested the respondents to close the two contracts, arrange for final measurement and thereafter to clear the dues of the work done, including refund of the retention money. 8. However, General Manager, the respondent No. 5, invoking clause 6.2 of the NIT issued the impugned notice dated 12.6.2013 withholding the dues of the petitioner, imposed liquidated damages and calling upon it to pay the balance of Rs. 269.14 lakh. 9. Contending that invocation of clause 6.2 of the NIT was not justified and that the impugned notice was in violation of section 74 of the Contract Act, 1872, the present writ petition was filed. 10. On 27.11.2013 notice was issued by this court and status quo as on that date was directed to be maintained by the parties; subsequently on 8.4.2014 the case was admitted for hearing. 11. Respondents have filed a counter-affidavit taking the stand that petitioner did not deploy adequate man and machinery for execution of the contract which resulted in shortfall in production and the petitioner's prayer for extension of time was also not valid, being beyond the terms of the NIT, stating that while the petitioner had successfully completed the work in Tirap East and Tikak West it failed to complete the work in Tikak East and Tirap West due to non-deployment of adequate man and machinery. Reference is made to clause 6.2 of the NIT to contend that the figures arrived at in the impugned notice is justified and clause 6.2 is also fully applicable in the facts and circumstances of the case, further submitting that the dispute raised by the petitioner arises from the contract and, therefore, the remedy under article 226 of the Constitution of India will not be the appropriate forum. Respondents, therefore, seek dismissal of the writ petition. 12. In response, petitioner has filed a rejoinder to the counter-affidavit filed by the respondents, reiterating the averments made in the writ petition. According to the petitioner, the writ petition is maintainable and petitioner is entitled to the relief sought for. WP (C) No. 5585/2015 13. In this case petitioner has assailed legality and validity of the notice dated 26.6.2015 issued by the Dy. According to the petitioner, the writ petition is maintainable and petitioner is entitled to the relief sought for. WP (C) No. 5585/2015 13. In this case petitioner has assailed legality and validity of the notice dated 26.6.2015 issued by the Dy. General Manager, Tirap Colliery, North Eastern Coalfields, Coal India Ltd. informing the petitioner about termination of contract as well as the consequential order dated 3.9.2015 of the General Manager, North Eastern Coalfields, Coal India Ltd. informing the petitioner that the security deposit and bank guarantee of the petitioner had been forfeited and that petitioner had to pay a balance of Rs. 10,79,81,803.95 as liquidated damages by invoking clause 6.3 of the NIT. 14. According to the petitioner, pursuant to notice (NIT) dated 22.8.2011 it was awarded the work for production of carbonaceous shale, removal of hard shale and transportation of coal to the sidings. The contract was made effective from 1.1.2012 and was for a period of three years meaning thereby that the contract would expire on 31.12.2014. 15. Petitioner made a request to the respondents to extend time vide letter dated 28.8.2014, citing various reasons and grounds. 16. Six months' time up to 30.6.2015 was granted by the respondents to the petitioner on 22.12.2014. 17. A letter dated 21.5.2015 was issued by the respondents to the petitioner alleging unsatisfactory performance stating that while 98.97 per cent of the awarded quantity of carbonaceous shale had been achieved, only 69.37 per cent of the awarded quantity of hard shale had been achieved. Therefore, explanation was sought for as to why penal action should not be taken. 18. Petitioner on 4.6.2015 submitted a detailed reply citing a number of reasons for its inability to complete the work. 19. Grievance of the petitioner is that without considering the explanation furnished by it, Dy. General Manager, respondent No. 5, had issued the termination notice dated 26.6.2015, followed by the notice dated 3.9.2015. 20. Contention of the petitioner is that termination of the extended contract was illegal and in violation of the principles of natural justice, inasmuch as the explanation given was not considered. The consequential imposition of liquidated damages is also not justified on those grounds besides being arbitrary and unreasonable. Reliance is placed on section 74 of the Contract Act, 1872 to question the imposition of liquidated damages. 21. The consequential imposition of liquidated damages is also not justified on those grounds besides being arbitrary and unreasonable. Reliance is placed on section 74 of the Contract Act, 1872 to question the imposition of liquidated damages. 21. This court on 14.9.2015 had issued notice and passed the following order: “The action of the respondents in terminating the work that had been awarded to the petitioner in respect of hiring of Heavy Earth Moving Machinery (‘HEMM’) for production of Carbonaceous Shale (‘CS’) and removal of Hard Shale (‘HS’) as well as the consequent direction for payment of the amount by way of liquidated damages in terms of clause 6.3 of the General Terms and Conditions of the NIT, is put to challenge in the present proceedings. Insofar as the order of termination dated 26.6.2015 is concerned, the primary grounds urged is that the same had been issued well before the expiry of the extended date of completion of the work in question and that too by ignoring consideration of the reply made by the petitioner on 4.6.2015 as against the Notice dated 21.5.2015 whereby unsatisfactory performance on the part of the petitioner was alleged. Mr. Gupta, learned senior counsel makes reference to the case of Gorkha Security Services vs. Government (NCT of Delhi), (2014) 9 SCC 105 to say that the said termination was done without fulfilling the requirements of the principles of natural justice, in as much as, the Notice dated 21.5.2015 was not in consonance with the requirements as indicated in paragraph 22 of the reported judgment. In so far as the direction for payment of liquidated damages is concerned, the learned senior counsel submits that the same marks a departure from the provisions under section 74 of the Contract Act which, time and again, have received interpretation of the Apex Court, particularly, in the case of Fateh Chand vs. Balkishan Dass, AIR 1963 SC 1405 , Mr. M.Z. Ahmed, learned senior counsel representing the respondents submits that this is a matter which needs to be heard at length and opportunity be afforded to respond to the writ petition. In view of the above, let Notice be issued making it returnable by six weeks. No formal notice need be issued to the respondents as they have already entered appearance through the learned senior counsel. In view of the above, let Notice be issued making it returnable by six weeks. No formal notice need be issued to the respondents as they have already entered appearance through the learned senior counsel. Petitioner to make available extra copies of the writ petition along with the annexure appended thereto to the learned counsel representing the respondents within five days. Pending return of Notice, status quo as on today shall be maintained. The status quo order would also mean that the respondent-authority shall not invoke/encash the Bank Guarantee furnished in lieu of security, if not already done. It is also made clear that the petitioner shall take steps for extending the validity of the Bank Guarantee in case the validity of the same is likely to expire shortly, if not already encashed.” 22. Respondents have filed counter-affidavit on identical lines to the one filed in WP (C) No. 6867/2013 to which petitioner has filed rejoinder-affidavit. 23. Detailed submissions made by learned counsel for the parties have been duly considered. 24. Before proceeding further it would be apposite to extract the notice dated 12.6.2013 impugned in WP (C) No. 6867/2013, which is reproduced hereunder: “Subject: Settlement of dues. Dear Sir, This refers to your letter No. RPL/NEC-CIL/12-13 dated 23.2.2013 addressed to Director (Tech), CIL, Kolkata, with regard to the above. You have been awarded production of carbonaceous shale and removal of hard shale in four patches of NEC, Tirap East, Tirap West, Tikak OCM and Tikak East vide Work Order Nos. NEC/GM/8/9/109 dated 18.8.2008, NEC/GM/8/9/110 dated 18.8.2008, NEC/GM/8/9/111 dated 18.8.2008, NEC/GM/8/9/112 dated 18.8.2008 respectively, out of which target production of Tikak OCM and Tirap East was achieved by you and there was a huge shortfall of production in Tikak East and Tirap West. The reason of withholding your payment from the bill of four patches is as under: There was a huge shortfall of production of Tikak East and Tirap West as enclosed in Annexure A&B resulting which payment of last and final bill amounting to Rs. 76.63 lakhs relating to Tikak East and Tirap West was withheld by NEC management with a view to set off the liquidate damages @ 10% on contract value, payable by you on shortfall of production of Tikak East and Tirap West. The payment of Rs. 53 lakhs relating to lead bill of Tikak is pending for approval of CIL, Kolkata. 76.63 lakhs relating to Tikak East and Tirap West was withheld by NEC management with a view to set off the liquidate damages @ 10% on contract value, payable by you on shortfall of production of Tikak East and Tirap West. The payment of Rs. 53 lakhs relating to lead bill of Tikak is pending for approval of CIL, Kolkata. A sum of Rs. 591.45 lakhs and Rs. 257.26 lakhs deducted towards security deposit and retention money from the bill of four patches, is kept with us for adjustment of liquidate damages payable by you for non-fulfillment of production target. (Annexure C). Recovery made from your running bill of ongoing contract could not be refunded for huge shortfall of production at Tikak East and Tirap West. The diesel escalation bill for drilling job could not be paid, since the NIT is silent with regard to calculation of diesel escalation of drilling job. (Annexure D). Since we are guided by NIT, the diesel escalation bill was paid as terms of the NIT. (Annexure D). Payment of other claim is not understood by us. You are requested to mention specifically non-payment of your claim. As per clause 6.2 of the NIT, failure to achieve targeted production results liquidate damages to the maximum of 10% of contract value. It is noticed that you have failed to achieve target production in both Tikak East and Tirap West, resulting which, liquidated damages to the time of Rs. 1247.48 is payable by you against our total withheld amount of Rs. 978.34 lakh. You are requested to deposit balance amount of Rs. 269.14 lakh immediately as per NIT.” 25. A perusal of this notice would reveal that as per the assessment of the respondents there was a huge shortfall in production in the Tikak East and Tirap West collieries for which the balance amount of contractual dues amounting to Rs. 978.34 lakh was withheld. In addition to this, the security deposit and the retention money were also forfeited. Invoking clause 6.2 of the NIT it was stated that liquidated damages for the shortfall in production was assessed at Rs. 1247.48 lakh and after adjusting the contractual dues withheld, the amount payable by the petitioner stood at Rs. 269.14 lakh. 26. On identical lines the termination notice dated 26.6.2015 was issued by the respondents, which is the subject-matter of challenge in WP (C) No. 5585/2015. 1247.48 lakh and after adjusting the contractual dues withheld, the amount payable by the petitioner stood at Rs. 269.14 lakh. 26. On identical lines the termination notice dated 26.6.2015 was issued by the respondents, which is the subject-matter of challenge in WP (C) No. 5585/2015. As per this notice, though extension was granted to the petitioner up to 30.6.2015, the progress of work up to the date of termination, that is 26.6.2015, was at 97.11 per cent. It was stated that 100 per cent completion could not be achieved by the petitioner due to non-deployment of adequate man and machinery which resulted in great loss to the respondents. Therefore, clause 6.2 of the NIT was invoked to terminate the contract following which the notice dated 3.9.2015 was issued as per which the security deposit and the bank guarantee of petitioner stood forfeited and after adjusting the same with the liquidated damages assessed by the respondents a figure of Rs. 10,79,81,803.50 was arrived at by the respondents to be paid by the petitioner. 27. Before proceeding further it would be apposite to extract clauses 6.2 and 6.3 of the NIT, which are reproduced hereunder: “6.2 If the contractors fails to maintain the required progress in terms of the agreed time and progress chart or to complete the work and clear the site on or before the contract or extended date of completion, he shall without prejudice to any other right or remedy available under the law to the company on account of such breach, pay as compensation/ Liquidated Damaged @ half per cent (1/2%) of the contract price per week of delay. The aggregate of such compensation/compensations shall not exceed 10 per cent of the total value as shown in the contract. This will also apply to items or group of items for which separate period of completion has been specified. The amount of compensation may be adjusted or set off against any sum payable to the contractor under this or any other contract with the company. 6.3 In the event of such termination of the contract as described in clauses 6.2.2 or 6.2.3 or both, the company, shall be entitled to recover L.D. up to ten per cent of the contract value and forfeit the security deposit made by the contractor besides getting the work completed by other means at the risk and cost of the contractor.” 28. A careful examination of the clause 6.2 of the NIT would reveal that if the contractor fails to maintain the required progress in terms of the agreed timeline or fails to complete the work and clear the site on or before expiry of the contract period or the extended date of completion, he shall, without prejudice to any other right or remedy available under the law to the company on account of such breach, pay compensation/liquidated damages at the rate of 1/2 per cent of the contract price per week of delay though the aggregate of such compensation shall not exceed 10 per cent of the total value shown in the contract. The amount of compensation may be adjusted or set off against any sum payable to the contractor either under the contract in question or under any other contract with the company. Clause 6.2 can be invoked in a situation where the contractor fails to maintain the required progress as per the timeline or fails to complete the work and clear the site on or before expiry of the contract. 29. In the first case, out of the four collieries petitioner had extracted the required amount from two collieries, Tirap East and Tikak OCM. Insofar Tikak East and Tirap West are concerned the notice dated 12.6.2013 is silent on the quantity that had remained un-extracted and embedded in the earth. The contract was terminated on the date of expiry of the contract. To that extent there was no delay by the petitioner in continuing with the contract work beyond expiry of the contract period in which case compensation/liquidated damages at the rate of 1/2 per cent of the contract price per week of delay would be attracted. Therefore, invoking clause 6.2 by respondents appears to be questionable. 30. Similar is the position in the second ease. Here, before expiry of the extended period on 30.6.2015 the contract was terminated on 26.6.2015 when the percentage of achievement by the petitioner as per assessment of the respondents themselves was at 97.11. The letter dated 26.6.2015 also does not disclose whether respondents had considered the explanation of the petitioner submitted on 4.6.2015. There was no continuation of work beyond the contract period so to attract liquidated damages at the rate of Vi per cent of the contract price per week of delay. The letter dated 26.6.2015 also does not disclose whether respondents had considered the explanation of the petitioner submitted on 4.6.2015. There was no continuation of work beyond the contract period so to attract liquidated damages at the rate of Vi per cent of the contract price per week of delay. Therefore, here also invocation of clause 6.2 appears to be questionable. If that be so, calculation of liquidated damages as per clause 6.3 of the NIT conveyed to the petitioner vide notice dated 3.9.2015 would also not be justified. 31. Section 73 of the Contract Act, 1872 provides for compensation for loss or damage caused by breach of contract. In sum and substance this provision says that when a contract has been broken the party who suffers by such breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to him thereby. As per the second part of section 73, such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. 32. Section 74 of the Contract Act, 1872 deals with compensation for breach of contract where penalty is stipulated for. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or, as the case may be, the penalty stipulated for. 33. Sections 73 and 74 of the Contract Act, 1872 have been the subject-matter of several landmark decisions of the Supreme Court, one of the earliest being in the case of Fateh Chand vs. Balkishan Dass, AIR 1963 SC 1405 . Supreme Court, referring to section 74 of the Contract Act, 1872, held that the measure of damages in case of breach of a stipulation by way of penalty is by section 74 reasonable compensation not exceeding the penalty stipulated for. Supreme Court, referring to section 74 of the Contract Act, 1872, held that the measure of damages in case of breach of a stipulation by way of penalty is by section 74 reasonable compensation not exceeding the penalty stipulated for. While reiterating that compensation has to be reasonable which has to be awarded or determined according to settled principles, Supreme Court held that award of compensation cannot be justified when in consequence of the breach no legal injury at all had resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things or which the parties knew when they made the contract to be likely to result from the breach. 34. This position was reiterated in Maula Bux vs. Union of India, (1969) 2 SCC 554 . It was emphasized that where loss in terms of the money can be determined the party claiming compensation must prove the loss suffered by him. 35. In JG Engineers (P) Ltd. vs. Union of India, (2011) 5 SCC 758 , Supreme Court went one step ahead and held that the question whether the other party to the contract had committed breach of contract cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. This question can only be decided by an adjudicatory forum. 36. This court while issuing notice in the second case had taken note of the decision rendered by the Supreme Court in Gorkha Security Services vs. Government (NCT of Delhi), (2014) 9 SCC 105 on the point that termination of contract cannot be done without complying with the principles of natural justice. Paragraph 22 of Gorkha Security Services (supra) is extracted hereunder: “22. The High Court has simply stated that the purpose of show cause notice is primarily to enable the noticee to meet the grounds on which the action is proposed against him. No doubt, the High Court is justified to this extent. However, it is equally important to mention as to what would be the consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. No doubt, the High Court is justified to this extent. However, it is equally important to mention as to what would be the consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, we are of the opinion that in order to fulfil the requirements of principles of natural justice, a show cause notice should meet the following two requirements, viz. (i) The material/grounds to be stated which according to the department necessitates an action. (ii) Particular penalty/action which is proposed to be taken. It is this second requirement which the High Court has failed to omit. We may hasten to add that even if it is not specifically mentioned in the show cause notice but it can clearly and safely be discerned from the reading thereof, that would be sufficient to meet this requirement.” 37. Supreme Court in Kailash Nath Associates vs. Delhi Development Authority, (2015) 4 SCC 136 , surveyed the entire legal position pertaining to the specific provisions of sections 73 and 74 of the Contract Act, 1872 and summed up the law on compensation for breach of contract under section 74 as under: “On a conspectus of the above authorities, the law on compensation for breach of contract under section 74 can be stated to be as follows: 43.1 Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation 43.2 Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found, inter alia, in section 73 of the Contract Act. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation 43.2 Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found, inter alia, in section 73 of the Contract Act. 43.3 Since section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section. 43.4 The section applies whether a person is a plaintiff or a defendant in a suit. 43.5 The sum spoken of may already be paid or be payable in future. 43.6 The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. 43.7 Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, section 74 would have no application.” 38. As for invocation of section 74 as held by the Supreme Court in Kailash Nath (supra) damage or loss caused to one of the parties to the contract is a sine qua non for applicability of this section. Insofar the present case is concerned, all that happened is that certain quantity of coal has remained embedded in the earth which could not be extricated by the petitioner or certain quantity of coal could not be transported to the siding from the colliery. This quantity of coal has remained in the custody of the respondents. Therefore, it would not be correct to say that for the inability of the petitioner, for whatever reason, to complete the extraction or the transportation within the contractual period or the extended contractual period, loss or damage was suffered by the respondents and the same in any case was not quantified. Therefore, to my mind, not only invocation of clause 6.2 of the NIT was not justified, invocation of section 74 of the Contract Act, 1872 was also not justified. Therefore, to my mind, not only invocation of clause 6.2 of the NIT was not justified, invocation of section 74 of the Contract Act, 1872 was also not justified. Of course, respondents would be entitled to make necessary deduction from the bills submitted by the petitioner for the quantum of coal covered by the contract and which has remained un-extracted or un-transported to the siding but imposition of liquidated damages with forfeiture of security deposit and bank guarantee certainly is not justified. 39. In consequence, the notices dated 12.6.2013, 26.6.2015 and 3.9.2015 are set aside. 40. Respondents are directed to settle the outstanding dues of the petitioner after making necessary adjustment as discussed above within a period of eight weeks from the date of receiving a certified copy of this order. 41. Both writ petitions are allowed to the extent indicated above. 42. No costs.