Question Of Liquidated Damages Would Arise Only When The Contract Is Terminated On Account Of Breach Of The Terms And Conditions Of The Contract: Jharkhand High Court

The Jharkhand High Court has ruled that the matter of liquidated damages comes into play specifically when a contract is terminated due to a breach of its terms and conditions, and moreover, if the termination of the contract itself is deemed unlawful, various consequences may ensue, such as the potential imposition of liquidated damages or the initiation of a certificate proceeding to recover the relevant amount.

M/s Aditya and Rashmi Construction Pvt. Ltd., hereinafter referred to as "the Petitioner," participated in a tender process initiated by the Respondent authorities for the construction of a High-Level Bridge.

Upon being awarded the contract, the Petitioner was allotted a time frame of 13 months for the completion of the construction. However, the Petitioner encountered delays due to the non-acquisition of land and non-payment of compensation for acquired land, which hindered the commencement of construction even after receiving the work order.

Despite repeated requests and representations to the relevant authorities to resolve the land acquisition issue and facilitate the start of construction, no action was taken. Consequently, the Petitioner sought contract closure and refund of security deposits.

Although an extension of time was granted upon the Petitioner's application, the Petitioner was later served with a show cause notice regarding the potential termination of the contract and blacklisting. The Petitioner responded to the notice, but ultimately, the contract was terminated. Additionally, the authorities sought to recover an amount of Rs. 1,04,33,493/- from the Petitioner, citing fundamental breach, negligence, and slow progress in the assigned work. Subsequently, a writ petition was filed by the Petitioner.

Contentions of the Petitioner:

The Petitioner contended that the termination of the contract lacked adherence to principles of natural justice. Despite providing a response to the show cause notice, no opportunity for a personal hearing was granted prior to termination.

Furthermore, it was argued that any delays in the project were not deliberate but stemmed from the sluggishness of the respondent authorities in acquiring the necessary land for the bridge construction.

The Petitioner also pointed to various correspondences from Respondent no. 1, indicating a high-handed approach in terminating the contract and pursuing damages without proper adjudication on the quantum of damages.

Contentions of the Respondent

The Respondent cited clause 49 of the SBD Agreement, which outlines the contractor's obligation to compensate the employer for liquidated damages in cases of project delays or material breaches of the agreement.

Moreover, the Respondent argued against attributing project failure solely to the respondent authorities, emphasizing that the lack of land acquisition during a specific period cannot solely be deemed their fault.

Observations of the court

The High Court noted that the version presented by the respondent authorities concerning the land acquisition, particularly the portion of land under acquisition, actually bolstered the petitioner's stance regarding the impediment that ultimately led to the petitioner's request for contract closure and reimbursement of the security deposit. The court emphasized that the mere acquisition of land without compensating the landholders would inevitably disrupt the construction process.

The court further observed that it seemed the petitioner filed an application for a contract extension at the authorities' behest, initiating the contract termination process shortly thereafter.

The court asserted that it was evident that the facts of the case pointed to arbitrary action by the authorities in terminating the contract without closure or refunding the security deposit, instead demanding Rs. 1,04,33,493/- as liquidated damages.

The court affirmed, "It is no doubt true that this Court has a limited power of review and can do so only when the entire exercise is found to be arbitrary and unreasonable which from the facts of the present case does reveal an arbitrary action on the part of the concerned authorities in neither closing the contract nor refunding the security deposit but straightaway terminating the contract and subsequently demanding an amount of Rs. 1,04,33,493/- towards liquidated damages."

Citing precedent from judgments such as State of Karnataka versus Shree Rameshwara Rice Mills, J.G. Engineers Private Limited versus Union of India and Another, and Inox Air Products Limited versus Steel Authority of India Limited, the court emphasized that the determination of whether either party breached the contract terms must be adjudicated by a Court or Tribunal, and cannot be unilaterally decided by one party.

"Even otherwise the question of liquidated damages would arise only when the contract is terminated on account of breach of the terms and conditions of the contract and when the termination of the contract itself is held to be bad in law the consequences which follow which may include liquidated damages or initiation of a certificate proceeding for recovery of the amount in question as in the present case automatically ceases to exist,” the court added.

The court concluded that the circumstances repeatedly brought to the attention of the authorities by the petitioner did not elicit a response. Consequently, when the authorities failed to fulfill their contractual obligations, the termination of the contract dated 17.05.2014, as indicated in Letter No. 574/Sahibganj dated 17.05.2014 issued by respondent no. 4, could not be upheld and was thus quashed.

With these considerations, the court allowed the Writ Petition.

Appearance:

For the Petitioner : Mr. Siddharth Singh, Advocate Mr. Raunak Sahay, Advocate Ms. Ahana Bhardwaj, Advocate

For the Respondents : Mr. Nehru Mahto, A.C. to G.P.-IV

Case No.: W.P.(C) No. 2924 of 2014

Case Title: M/s Aditya and Rashmi Construction Pvt. Ltd. vs The State of Jharkhand and Ors

LL Citation: 2024 LiveLaw (Jha) 42

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