Jharkhand High Court: Issue Of Liquidated Damages Would Arise If The Contract Is Terminated Due To A Breach Of Its Terms And Conditions

Jharkhand High Court: Issue Of Liquidated Damages Would Arise If The Contract Is Terminated Due To A Breach Of Its Terms And Conditions

The Jharkhand High Court has affirmed that the issue of liquidated damages arises primarily in cases where a contract is terminated due to a breach of its terms and conditions. Additionally, if the termination of the contract is found to be unlawful, it may lead to several repercussions, including the imposition of liquidated damages or the initiation of certificate proceedings to reclaim the relevant amount.

The Petitioner M/s Aditya and Rashmi Construction Pvt. Ltd., took part in a tender process initiated by the Respondent authorities for constructing a bridge.

After being awarded the contract, the petitioner was given a timeframe of 13 months to complete the construction. However, the petitioner faced delays due to the non-acquisition of land and the non-payment of compensation for acquired land, which prevented the commencement of construction even after receiving the work order.

Despite making repeated requests and representations to the relevant authorities to resolve the land acquisition issue and facilitate the commencement of construction, no action was taken. As a result, the petitioner sought contract closure and requested a refund of security deposits.

Following the petitioner’s application, an extension of time was granted; however, the petitioner was later issued a show cause notice concerning the potential termination of the contract and blacklisting. Despite the petitioner’s response to the notice, the contract was ultimately terminated. Moreover, the authorities sought to recover an amount of Rs. 1,04,33,493/- from the petitioner, alleging fundamental breach, negligence, and slow progress in the assigned work. Subsequently, the petitioner filed a writ petition.

The petitioner argued that the termination of the contract was not in accordance with the principles of natural justice. Although the petitioner responded to the show cause notice, no opportunity for a personal hearing was afforded before the termination.

Additionally, it was argued that any delays in the project were not intentional but rather resulted from the sluggishness of the respondent authorities in acquiring the required land for the construction of the bridge.

The petitioner also highlighted various correspondences from Respondent No. 1, suggesting a high-handed approach to terminating the contract and pursuing damages without proper adjudication on the quantum of damages.

The respondent cited clause 49 of the SBD Agreement, which stipulates 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.

The High Court observed that the respondent authorities’ account regarding the land acquisition, especially the unresolved issue of compensating landholders, supported the petitioner’s position regarding the obstacle that prompted the petitioner’s request for contract termination and refund of the security deposit. The court stressed that the acquisition of land without compensating the landholders would inevitably disrupt the construction process.

The court additionally noted that it appeared the petitioner filed a request for a contract extension at the prompting of the authorities, only for the termination process to be initiated shortly thereafter.

The court emphasized that the circumstances of the case indicated arbitrary action by the authorities in terminating the contract without providing closure or refunding the security deposit. Instead, they demanded Rs. 1,04,33,493/- as liquidated damages.

The court affirmed that its power of review is limited and can only intervene if the exercise is found to be arbitrary and unreasonable. In the present case, the facts reveal arbitrary action by the authorities in neither closing the contract nor refunding the security deposit but instead 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 a breach of the terms and conditions. When the termination of the contract itself is held to be unlawful, the consequences that follow, including the imposition of liquidated damages or the initiation of certificate proceedings for recovery of the amount in question, as in the present case, automatically cease to exist, the court added.

The court concluded that the petitioner’s repeated attempts to address the issues with the authorities went unanswered. As a result, when the authorities failed to fulfill their contractual obligations, the termination of the contract dated 17.05.2014, could not be upheld and was thus quashed. With these considerations, the court allowed the Writ Petition.