'Discretion' Has No Place In Contractual Matters Unless It Is Expressely Incorporated In Contract : Supreme Court

The Supreme Court observed that discretion has no place in contractual matters unless the parties have expressly incorporated it as a part of the contract.

"The rights and duties of the parties to the contract subsist or perish in terms of the contract itself. Even if a party to the contract is a governmental authority, there is no place for discretion vested in the officers administering the contract.", the bench of Justices AS Bopanna and PS Narasimha observed while dismissing an appeal filed by the State of Madhya Pradesh.

The State had approached the Apex Court against the decision of the High Court of Madhya Pradesh in an Arbitration Revision under Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983 whereby the award of the Arbitral Tribunal was upheld. In this case, the Arbitrator accepted the claim raised by the Contractor and awarded an amount of Rs. 5,51,03,040/- with 9% interest in favour of the Contractor. In this contract, there was a clause 3.11(A) under which if a circumstance beyond the control of the Contractor exists and the Superintending Engineer, in charge of work grants a written order to the effect, a right to seek escalation arises. The issue was whether when the two conditions provided under clause 3.11 (A) were satisfied, there was no discretion left with the Executive Engineer to impose any further conditions for claiming escalation. 

The court observed that the role of the Executive Engineer was only to forward the decision of the Superintending Engineer and enable the Contractor to raise a claim for escalation and has thus acted beyond the scope of the contract.

In this context, the bench made the following observations on 'discretion':

A contractual clause which provides for the finality of rates quoted by the Contractor and disallows any future claims for escalation is conclusive and binding on the parties. If the clause debarring future claims permits escalation subject to certain conditions, no claim is admissible if the conditions are not satisfied. However, if the conditions are satisfied, the Contractor will have a right to claim escalation. This is a contractual right. The right originates and subsists by virtue of the contract itself. It is the duty of the Court, while interpreting the contract to decipher the true and correct meaning the parties intended and enforce the rights arising out of the contract. Officers administering the contract will not have any discretion whatsoever to admit or deny escalation after the conditions specified in a contract are satisfied.

The rights and duties of the parties to the contract subsist or perish in terms of the contract itself. Even if a party to the contract is a governmental authority, there is no place for discretion vested in the officers administering the contract. Discretion, a principle within the province of administrative law, has no place in contractual matters unless, of course, the parties have expressly incorporated it as a part of the contract. It is the bounden duty of the court while interpreting the terms of the contracts, to reject the exercise of any such discretion that is entirely outside the realm of the contract.

Observing thus, the bench dismissed the appeal.

Case details

State of Madhya Pradesh vs SEW Construction Limited | 2022 LiveLaw (SC) 977 | CA 8571/2022 | 18 Nov 2022 | Justices AS Bopanna and PS Narasimha

For Petitioner(s) Mr. Saurabh Mishra, AAG Mr. Abhinav Shrivastava, Adv. Mr. Sunny Choudhary, AOR

For Respondent(s) Dr. Menaka Guruswamy, Sr. Adv. Mr. D.Bharat Kumar, Adv. Mr. Aman Shukla, Adv. Mr. Yash S. Vijay, Adv. Mr. Siddhartha Sinha, Adv. Mr. Utkarsh Pratap, Adv. Mr. M. Chandrakanth Reddy, Adv. Mr. Sandeep Singh, AOR

Headnotes

Interpretation of Contract - The rights and duties of the parties to the contract subsist or perish in terms of the contract itself. Even if a party to the contract is a governmental authority, there is no place for discretion vested in the officers administering the contract. Discretion, a principle within the province of administrative law, has no place in contractual matters unless, of course, the parties have expressly incorporated it as a part of the contract. It is the bounden duty of the court while interpreting the terms of the contracts, to reject the exercise of any such discretion that is entirely outside the realm of the contract. (Para 22-24)

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