Payment To Contractors Shouldn't Be Delayed For Non-Availability Of Funds Once Work Is Done: Delhi HC to Civic bodies; Issues Guidelines [Read Judgment]

The Delhi High Court, on Thursday, laid down guidelines for adherence by Contractors as well as authorities while making payments to such Contractors, noting that they are made to wait endlessly for their payments on the ground of non-availability of funds.

Adherence to these guidelines, Justice Pratibha M. Singh observed, "shall ensure that the works are duly carried out as per the quality standards prescribed and there is proper record of work being done."

The Court further cautioned that once the work is carried out, the payments ought not to be delayed, "as delay in payments compromises on the availability of quality civil work for the Corporations, who take care of basic amenities for citizens such as roads, pavements, civil works, sewerage lines etc."

The Court was hearing a batch of appeals arising out of disputes between Contractors, and the North Delhi Municipal Corporation (NDMC) and the East Delhi Municipal Corporation (EDMC). The disputes primarily concerned non-payment of dues to these Contractors, despite Trial Court orders in their favor.

While analyzing the clauses of the General Conditions of Contract, the Court noted that Clause 9 of the same provided that Contractors would be paid depending upon the availability of funds. Opining that leaving no remedy for the Contractor while the authorities can delay the payment indefinitely would be "illegal and contrary to lay", the Court observed,

"It is slightly unfathomable as to how the Corporation can postpone the payment to the Contractor, indefinitely. The issuance of the tender and the work order in favour of the Contractor has to be on the pre-condition that funds are available with the Corporation. To ask the Contractor to wait endlessly for his payment is wholly arbitrary. The Corporation which hands over the works contract to the Contractor cannot say “Do the work now, I will pay when I have the money”.

Even if such a clause has been signed and accepted by the Contractor, it does not make the clause valid inasmuch as it would render a fundamental condition of contract being hit by provisions of the Indian Contract Act, 1872 (hereinafter, "Contract Act"). Every contract, to be valid, has to have consideration and the indefinite postponement of consideration would be wholly unconscionable."

The Court further referred to various provisions of the Indian Contract Act to assert that such an open-ended clause without any time limit for payment would be unreasonable and unfair, explaining, "The Corporation being an instrumentality of State, such a contract would also be opposed to public policy under Section 23 of the Contract Act. Section 46 of the Contract Act is also clear that if no time for performance of a contract is specified, it has to be performed within a reasonable time. Reading these provisions together, it is clear that an open-ended Clause which in effect says that the payment shall be made at an undetermined time in the future, subject to availability of funds, in a particular head of accounts is wholly unreasonable and such a term would also be unfair."

It then noted that the Clause provides a time limit for payment of final bills as 6 months (for tendered value of work up to Rs. 5 lakhs) and 9 months (for the tendered value of work exceeding Rs. 5 lakhs).

The Court found it "equally strange" that the non-payment was being justified on the ground of unavailability of funds, noting, "Running the Corporation is not the business of the Contractor. It is for the Corporation to manage its affairs as per the funds available with it and it cannot be a defense that the Contractor should bear the brunt of non-payment for years, of works executed by him."

It then decreed the Contractors' suits, and issued the following guidelines:

1. "1. Along with the work order, all the Clauses of the General Conditions of Contract should be attached;


2. On the award of the Work order, periodic inspections of the work being carried out should be done by the Engineer-in-Charge;


3. If possible, photographs of the works at different stages should be taken and maintained on the record;


4. Interim bills should be submitted by the Contractor – duly certifying the work which has been carried out;


5. Final bills should be submitted by the Contractor – duly certifying the work carried out along with photographs;


6. The Bill should be scrutinized by the Engineer-in-Charge, works should be recorded in the measurement book and thereafter, the bill should be passed;


7. Once the Bill is passed, the payment schedule of 6 months and 9 months should be adhered to. Delay in payments would result in Interest being levied;


8. For refunds of Security deposit and Earnest Money deposit, the Contractor should unscrupulously comply with the conditions in Clauses 17 and 45. For refunds to be made, payment of final bill need not be awaited. Once the conditions of Clauses 17 and 45 are complied with and the final bill is passed, refunds ought to be made;
   [Clause 17 says that the security deposit shall be refunded only after the expiry of one year from the date of completion of work.
   Clause 45 prohibits refund of security deposit only after the contractor produces clearance certificate from the Labour Officer.]


9. In suits relating to recovery of Contractor’s dues, all the evidence including the NIT, General Conditions of Contract, periodic inspection reports, Final bill as submitted, Final bill as passed, Measurements carried out, Photographs etc., should be produced and duly exhibited.


10. IT infrastructure ought to be created to maintain records of the work orders, inspection reports, final bills, photographs etc., digitally, as it is noticed that the trial court record does not contain all the relevant documents and in several cases, different versions of clauses are relied upon by both sides, bills are not properly understandable and there is no evidence of actual inspections or measurements having been taken. Maintenance of digital records will make it more transparent and easily accessible for the officials and for production in the Court in case of future litigation."