State Ignored Its Own Obligations, Unilaterally Penalised Contractor Overlooking Difficulties Faced In Completing Canal Construction: Rajasthan HC
The Rajasthan High Court set aside a commercial court's order passed against a company whose contract for constructing a canal was terminated by the State for allegedly not completing the work. In doing so the high court noted that the commercial court's order was erroneous and based on assumptions as it did not consider the non-performance of the Employer's obligation which went to the "root...
The Rajasthan High Court set aside a commercial court's order passed against a company whose contract for constructing a canal was terminated by the State for allegedly not completing the work.
In doing so the high court noted that the commercial court's order was erroneous and based on assumptions as it did not consider the non-performance of the Employer's obligation which went to the "root of the matter".
The court also observed that the contractor had demonstrated before the commercial court the difficulties faced in executing the work and this could not have been ignored on a specious plea that the possession of land was given to the contractor. The court thus underscored that "termination of contract during subsistence of period of completion of work was illegal" and that the employer unilaterally imposed penalty on the contractor of over Rs 25 Lakh.
A division bench of Justice Shree Chandrashekhar and Justice Madan Gopal Vyas further underscored that in administrative proceedings, strict rules of evidence were not applicable, but the general rules of fairness, justice and good conscience had to be followed, and a commonsensical approach needed to be adopted. It was further opined to be well settled that even in contractual matters, the Employer was under an obligation to act fairly and comply with Article 14 of the Constitution.
"The action taken by the Employer vide letters dated 5th July 2006, 12th July 2006 and 21st October 2007 are punitive actions which could not have been resorted to on mere assumption of a hypothetical situation without any supportive evidence. Even the principles of preponderance of probability does not give leverage to an authority to create a hypothesis by its own imagination without any evidence...On the claim made by the appellant-firm on account of loss of profit, the Commercial Court completely shut its eyes to the documents laid in evidence by the appellant-firm...In our opinion, the termination of contract during subsistence of the period for completion of the work was illegal. The letter dated 5th July 2006 records that the appellant-firm was able to complete the work to the tune of Rs.47,07,236.00/- but without referring to the reasons put forth by the appellant-firm simply records the appellant-firm did not take any effort to complete the work...The Commercial Court was required to bestow its consideration to non-performance of its obligation by the Employer which goes to the root of the matter...The various documents laid in evidence by the appellant-firm demonstrating protest by the agriculturist and difficulties faced by it in execution of subject works could not have been ignored on a specious plea that the possession of land was given to the appellant-firm," the court added.
The court observed that the July 5 2006 letter records that the appellant-firm was able to complete the work to the tune of Rs.47,07,236.00, but without referring to the reasons put forth by the appellant-firm it simply records the appellant-firm did not take any effort to complete the work. The court said that the July 12, 2006 was also a unilateral decision of the Employer and it simply refers to the provisions of the contract and determines the quantum of damages to be recovered from the appellant-firm.
Background
The Appellant contractor was awarded the Canal Work at the Amrapura projects by the State in December 2004 which had to be completed in December 2005. Despite certain extensions, the work could not be completed within the stipulated timeline. Consequently, a penalty was imposed on the appellant under the contract and the contract was terminated.
It was the case of the appellants before the Commercial Court that there were serious defaults and non-performance of obligations by the State owing to which the work could not progress at the desired pace, and no heed was paid by the State to these issues.
The appellant also claimed losses under various heads, including loss of profits, loss on account of idle man-power and machinery for a few months etc. These claims were rejected by the empowered standing committee by its order dated December 7, 2012. The commercial court rejected the contractor's plea in 2019 after observing that the appellant-firm was given an opportunity of hearing and that is the reason it had the knowledge about the said decision.
Findings
After hearing the contentions and perusing material on record, the high court highlighted that decision of the empowered standing committee was a unilateral one that only recorded the stand of the employer and a cryptic conclusion of the claims of the appellant not being tenable and thus rejected, without providing any reason.
"After having gone through the materials on record, we observe that the Commercial Court proceeded in the matter on such assumptions and presumptions that cannot have any foundation in law. The decision of the Commercial Court on issue no.2 is clearly erroneous. Even if it is accepted that any representative of the appellant-firm, which is referred to as contractor in the decision dated 07th December 2012, was present during the hearing before the Committee, a glance at the said decision would reveal that as regards the stand of the appellant firm not even a word has been recorded in the said order. Any administrative order which ensures civil consequence to a party must be taken after a proper consideration of stand taken by the rival parties. The decision of the Empowered Standing Committee dated 07th December 2012 is a unilateral order which only records the stand of the Employer and a cryptic conclusion of the Committee that the claims of the claimants are not tenable and, therefore, rejected".
The Court also said that even though the State had the power under the contract to impose penalty and resort to punitive measures, such power could not justify the unilateral decision of the State without considering the defence raised by the appellant.
“There should have been some meaningful consideration of the defence raised rather than to ritually reject them and proceed to take drastic measures against the appellant-firm. There cannot be a golden scale but the administrative authority is obliged in law to weigh whether the defence version is a probable one, keeping in mind the rule of preponderance of probability...In a commercial world, it does not satisfy the reason that a contractor would submit bid and take a contract only to incur penalty and pay compensation to the Employer for so called delay on its part to complete the work under contract. This is really beyond any comprehension that a contractor who was able to complete more than 50 percent of the work would leave the work midway and invite imposition of penalty and compensation etc. to the Employer. In our opinion, there was fundamental breach of the contract inasmuch as the Employer could not perform its essential obligations under the contract. In a situation like the present one, the written terms of contract for recovery of penalty, damages etc. cannot be enforced against the appellant-firm".
In this light, the Court held that the Commercial Court proceeded in the matter merely based on assumptions that could not have any foundation in law.
“In an administrative proceeding while strict rules of evidence are not applicable the general rules of fairness, justice and good conscience must be followed and a commonsensical approach should be adopted. This is also well settled that even in the contractual matters the Employer shall be under an obligation to act fairly and comply with the basic requirements of Article 14 of the Constitution of India,” it said.
Finally, the Court stated that the preponderance of probability regarding existence of a fact needed to be examined based on stand of parties and supporting material, and not merely based on employer's stand which itself was the adjudicator.
Accordingly, the decision of the commercial court was set aside, the suit was decreed and contractor was held entitled to its claims.
Title: M/s Mewar Associates v the State of Rajasthan & Ors.
Citation: 2025 LiveLaw (Raj) 99
