[The Viewpoint] Discretion cannot Override Express Terms of Contract

In the matter of contracts, whether executed between two private parties or between the parties one of which is a government entity, the terms of the contract bind the parties. The status of the parties and/or their dominance, if any, has no role in the matter of enforcement and implementation of the contract clauses. It is, however, seen that when the contract is executed between the government entity on one hand and the private party on the other, government officials at time act adopting interpretation of the terms of contract, not warranted by express language use therein. In some cases, during execution of the contract, attempts are made to impose additional conditions, which are contrary to the express terms, to avoid the possibility of claims being made by the contractor on a future date. To what an extent, such exercise of power by one of the parties to the contract, is permissible has been examined by the Hon’ble Supreme Court of India in the case of State of Madhya Pradesh vs. M/s Sew Construction Ltd. Ors. decided on November 18

On November 6, 1993, the State of Madhya Pradesh (“State”) awarded the work of construction of a Masonry Dam to Sew Construction Ltd. (“Contractor”) for a total consideration of ₹1,22,81,86,600/-. The contract period was 60 months. One of the clauses in the contract, namely Clause 3.11 (A), relevant for decision on the issue read as under:

“3.11(A) The quoted rates of the contractor shall be inclusive of the leads and lifts and in no case separate payment for leads or lifts to any materials including water shall be payable. Similarly, no leads or lifts for the materials issued by the department as prescribed in the tender documents shall be payable. The contractor shall bring approved quality of materials. Different quarries are shown in Annexure C. The details shown in the Annexure C are only as a guide to the contractor but the contractor before tendering should satisfy himself regarding the quantity and quality available and all other details of Annexure C and provide for any variation in respect of leads, lifts, place and method of quarrying, type of rocks to be quarried and all such other aspects in his tendered rate. Later on any claim whatsoever shall not entertained except where any quarry is changed for circumstance beyond the control of contract under the written order of Superintending Engineer in-charge of work.”

After execution in the year 1993, the contract remained suspended for a long time and was resumed in September 2000. In terms of the contract, Contractor was to use Barua Sand quarry for excavating sand required for execution of the work. However, in October 2002 Contractor applied for alternative quarry i.e. Mahuar quarry on the ground that no sand was available in the quarry originally allotted under the contract i.e. Barua quarry. A committee appointed by the State, who examined veracity of the request of the Contractor found justification in the Contractor’s request for allotment of the alternate quarry which had stock of sand available. Accordingly, the Superintending Engineer granted permission to the Contractor to excavate sane from Mahuar quarry subject to the conditions specified in Clause 3.11(A) (it appears that the SE had addressed his letter granting permission to Executive Engineer). The Executive Engineer, in compliance, then granted permission to the Contractor vide his letter dated December 23, 2002, for collecting sand from Mahuar quarry subject to the following conditions:

“Permission to collect sand from Mahua river is hereby accorded with following conditions.

1. It is assumed as per clause 3.11A that provision in the tender rate already exist for extra expenditure due to change in lead, hence no payment for extra lead is admissible in this account, nor any claim on this subject shall be acceptable by this office.

xxx

5. No extra time, fate or payment shall be allowed for construction to this change”

Despite the aforesaid communication, the contractor for the first time raised a claim of ₹5,51,03,040/- on November 10, 2006 towards escalation for the enhanced cost incurred due to the transportation of sand from the Mahuar quarry. The aforesaid request was rejected by the State, which gave rise to the dispute between the parties. Accordingly, Contractor raised a claim under Section 7 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. By an award dated November 26, 2008 claim of the contractor was awarded in its favour along with interest to be paid @9%.

A revision petition was preferred by the State before the Hon’ble Madhya Pradesh High Court, came to be dismissed primarily on the following grounds:

(a) the claim filed by the Contractor is not barred by limitation; 

(b) the principle of res judicata is not appliable, and

(c) the Contractor is entitled to the escalation as provided in clause 3.11(A) of the contract

After examining the rival contentions advanced on behalf of parties, the Hon’ble Apex Court held that for deciding claim of escalation, construction of Clause 3.11 (A) was relevant. The Hon’ble Apex Court held that the aforesaid clauses provide that the claim for escalation will not be entertained unless there exist circumstances beyond the control of the contract and there is an order in writing of the Superintending Engineer in charge of the work. The apex court went on to hold that both conditions were satisfied inasmuch as the inspection report of the committee appointed by the State clearly indicated that the original quarry was depleted of the sand and alternative quarry was necessary for the execution of the work which proves that change of quarry was warranted by the circumstances beyond the control of the contractor. Further, the apex court noted the Superintending Engineer vide his letter dated November 12, 2002 has granted the permission to excavate sand from Mahuar quarry, which was finally conveyed to the contractor vide Executive Engineer letter dated December 23, 2002. With respect to the contention on behalf of the State that contractor accepted alternate quarry along with condition mentioned in the Executive Engineer letter dated December 23, 2002, the Apex court, while rejecting the said contention, held as under:

“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.”

On the aforesaid basis, the Hon’ble Court held that the Executive Engineer had acted beyond the scope of Clause 3.11 (A). As both the conditions mentioned in the said clause were satisfied, the Executive Engineer had no discretion to impose further conditions for claiming escalation. In the context of discretion, the Hon’ble Court held as under:

“In the context of discretion, we may reiterate this principle. 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.”

This judgment of the Hon’ble Apex Court affirms that terms of contract are supreme and must be adhere to, by the parties in the letter and spirit thereof. It is made clear that even a government authority has no privilege in the matter of execution and enforcement of contract and no fresh condition can be imposed on the other party to the contract during the course of the work at site. This judgment also reinforces that in the realm of contracts, it is the terms and conditions of the contract which must prevail and not the dominance/status of one of the parties. Therefore, in all those cases, where public interest arguments is invariably pressed into service by the government entities to support its actions, which are otherwise violative of contractual terms, this judgment would serve as a guiding and binding precedent.

Vikas Goel is a Senior Partner and Harmanbir Singh Sandhu is an Associate at Singhania & Partners LLP.