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Digest Indian Contract Act

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Chloro Controls (I) P. Ltd. Vs. Severn Trent Water Purification Inc.,(2013)1SCC641
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Construction & Design Services Vs. Delhi Development Authority,MANU/SC/0313/2015
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Mary Vs. State of Kerala, 2013(13)SCALE151
Pramod Buildings and Developers (P) Ltd. Vs. Shanta Chopra,(2011)4SCC741
State of Kerala Vs. M.K. Jose, MANU/SC/0869/2015
Swiss Timing Limited Vs Organising Committee, CommonwealthGames 2010, (2014)6SCC677
Zonal Manager, Central Bank of India Vs. Devi Ispat Ltd., (2010)11SCC186

Kerala State Electricity Board and ANR. Vs. Kurien E. Kalathil and ANR.[ALL SC 2018 MARCH]

KEYWORDS:- termination of contract-

c

DATE:-March 09, 2018

When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration.

SUPREME COURT OF INDIA

Kerala State Electricity Board and ANR. Vs. Kurien E. Kalathil and ANR.

[Civil Appeal Nos.3164-3165 Of 2017]

R. BANUMATHI, J.

1. These appeals have been filed against the impugned judgment dated 28.01.2009 in W.P.(C) No.31108 of 2007 and order dated 23.06.2009 in R.P.No.542 of 2009, passed by the High Court of Kerala at Ernakulum in and by which the High Court directed the appellant- Kerala State Electricity Board (KSEB) to pay an amount of Rs.12,92,29,378/- with simple interest at the rate of 9% per annum in the dispute arising out of a contract between the appellant-Board and the respondent-Contractor.

2. The dispute between the appellant-Board and the respondent-contractor had a chequered history. Brief facts which led to filing of these appeals are as follows:- Appellant-Kerala State Electricity Board (KSEB) entered into an agreement on 16.09.1981 with respondent-contractor for construction of a composite dam across Karamanthodu at Padinjarethara in connection with Banasura Sagar Scheme (Kuttiyadi Augmentation Scheme). After commencement of work, Government of Kerala issued a notification dated 30.03.1983, by which minimum wages payable to certain categories of workers employed in works mentioned in notification was revised with effect from 01.04.1983.

The respondentcontractor claimed labour escalation charges from 01.04.1983 to December, 1984. The Government of Kerala referred the matter to the industrial tribunal for adjudication of the dispute with regard to the claim of workmen employed for the construction of dam for the wage rates and other benefits fixed in the Minimum Wages Notification issued by the State Government. The industrial tribunal passed the award dated 14.10.1993 holding that the notification of Government of Kerala was applicable to workmen employed by the respondent-contractor.

3. Respondent-contractor filed O.P.No.283 of 1995 claiming an amount of Rs.6,32,84,050/- towards labour escalation charges and an amount of Rs.7,66,35,927/- being interest at the rate of 18% per annum payable under Ex.P20 in respect of various bills issued by the respondent-contractor for the period 15.01.1985 to 31.10.1994. When the said writ was pending, the appellant-Board terminated the contract 2 with respondent-contractor, which again came to be challenged before the High Court by filing O.P.No.10759 of 1997 against termination of contract and for the payment of works done (Ex.P59) by respondent contractor.

The High Court disposed of both the petitions by a common judgment dated 02.04.1998 holding that the termination of contract was arbitrary and directed the appellant-Board to pay the amount claimed by the respondent-contractor for payment of labour escalation as per Ex.P20 with interest at the rate of 18% per annum which the contractor claimed separately. The High Court also directed the appellant-Board to pay the amount claimed by the respondent-contractor under Ex.P59 towards additional work done by the respondent-contractor.

4. Being aggrieved, KSEB approached this Court by way of appeal in C.A.No.4092 of 2000 reported in Kerala State Electricity Board and Another v. Kurien E. Kalathil and Others, (2000) 6 SCC 293. In para (11) of the judgment, this Court observed that the contract between the parties is in the realm of private law and not a statutory contract and the matter could not have been agitated in the writ petition. However, having regard to the fact that the contract was of the year 1981 and that the notification for minimum wages was issued in 1983 and in the peculiar facts and circumstances, this Court did not interfere with the order of the High Court directing the payment of amount to the respondent-contractor as per Ex.P20; but reduced the rate of interest claimed under Ex.P20 from 18% per annum to 9% per annum.

So far as Ex.P59 is concerned, there was no direction by this Court. Review petition filed by the appellant-Board came to be dismissed by this Court vide order dated 07.12.2000. Appellant-Board has so far paid an amount of Rs.12,82,96,320/- under Ex.P20 which was accepted by the respondent-contractor without any demur.

5. Three years after the payment under Ex.P20, respondentcontractor filed I.A.No.6 of 2006 seeking direction of the court to make payments due under judgment of this Court, with further interest to be paid forthwith. In I.A. No.6 of 2006, this Court has passed the following order: “By virtue of the impugned judgment of the High Court, the Kerala State Electricity Board is liable to pay certain amount to the Petitioner-Contractor.

There is a dispute regarding the quantum of the amount payable. This Court, vide Judgment dated 19.7.2000, had confirmed the finding of the High Court. The Petitioner- Contractor would be at liberty to move the High Court of Kerala seeking further steps for the recovery of the amount and if there is any dispute between the petitioner-Contractor and the Electricity Board, the High Court would consider the same and issue appropriate directions within a reasonable time….”

6. Respondent-contractor filed W.P.(C) No.31108 of 2007 before the High Court seeking for a direction to the appellant-Board to release the amount as directed by the High Court and affirmed by this Court. By the impugned judgment dated 28.01.2009, the High Court allowed the writ 4 petition directing the Board to pay:

(i) Rs.4,12,58,224/- under Ex.P20 [Rs.2,29,34,559/-(principal) plus Rs.1,83,23,665/-(Interest)]; and

(ii) Rs.8,79,71,154/- [Rs.5,81,53,892/- (principal) plus Rs.2,98,17,262/- (interest)] towards the amount payable for additional work done after adding labour escalation charges and material escalation charges as per Ex.P59.

The High Court held that the total amount payable under Ex.P20 and Ex.P59 as on 31.12.2008 was Rs.12,92,29,378/- which is to be paid by the appellant-Board within three months with 9% simple interest from 01.01.2009 till date of payment. So far as the claim as to the additional work done, the High Court directed the parties to mutually discuss among themselves on disputed items in appeal. Further with the consent of the counsel for the parties, the High Court referred the matter to the sole arbitrator Justice K.A. Nayar, former Judge of the High Court of Kerala to resolve the dispute relating to items which they could not amicably resolve. The appellant-Board filed review bearing R.P. No.542 of 2009, which came to be dismissed on 23.06.2009. Being aggrieved, the appellant-Board is before us.

7. We have heard the learned counsel for the parties at length and perused the impugned judgment and also judgment of this Court in C.A.No.4092 of 2000 and I.A. No.6 of 2006 and other materials on record. In the facts and circumstances of the present case and since 5 public money is involved, we deem it a fit case for reappreciating the facts and the materials on record or otherwise the findings of the High Court are likely to result in excessive hardship to the appellant-Board and consequently passed on to the consumers.

8. EX.P20-CLAIM FOR LABOUR ESCALATION AND INTEREST THEREON-WHETHER ANY AMOUNT IS PAYABLE TO THE RESPONDENT:

Ex.P20 pertains to the bills from CC.14 to CC.78 towards the work done, labour escalation charges and the interest thereon. Under the impugned judgment, the High Court has directed the appellant-Board to pay Rs.4,12,58,224/- under Ex.P20 [Rs.2,29,34,559/- (principal) plus Rs.1,83,23,665/- (interest)].

The respondent-contractor claimed that even after payment of Rs.12,82,96,320/-, an amount of Rs.3,38,57,618/- is still due to be paid to him under Ex.P20 i.e. principal (Rs.2,29,34,559/-) and subsequent interest (Rs.1,09,23,059/-). According to KSEB by 10.02.2003, it has paid a total amount of Rs.12,82,96,320/- under Ex.P20 and actually made excess payment of Rs.1,74,75,247/-. Direction of the High Court to pay the amount of Rs.4,12,58,224/- under Ex.P20 has two components:-

(i) claim of the respondent-contractor payable as principal under Ex.P20-Rs.2,29,34,559/-; and

(ii) subsequent interest thereon. Dispute in the amount payable under Ex.P20 is twofold:-

(i) Mode of 6 appropriation of payments made by the Board; and

(ii) claim for subsequent interest.

9. Ex.P20-MODE OF APPROPRIATION OF PAYMENT MADE:

While claiming the charges for labour escalation, in column no.(3), the respondent-contractor has shown the value of work done under each bill and separately shown “Labour Escalation Due” on each bill by showing the method of calculation/appropriation. For proper appreciation, we may usefully refer to the claims made under the bills from CC.14 to CC.18 and then from CC.68 to CC.75 (Ex.P20), which read as under:-

 

CC No.

Month to which relates

Value of work done (R)

Mini-mum wage for the base period in the Agt.

Present wage for the corre-sponding month

Diffe-rence

For-mulae

Labour Esca-latin due

Advance received

Remarks

Con-sumer price Index number of Meppadi

Index number after deduct-ing 100 points as in Govt. Notifi-cation

D.A. at 0.06 ps per point

Basic wage of ordinary labourer

Hill allo-wance 15%

total

CC.14

12/84

265123 0.00

13.00

316

216

12.96

12.90

3.74

28.70

15.70

3.08 x 15.70 x 2651230/100

1282029.00

CC.15

1/85

& 2/85

3885356.00

13.00

316

(Ave.)

216

12.96

12.00

3.74

28.70

15.70

3.08 x15.70 x 3885356/100

1878803.00

CC.16

3/85

2520496.00

13.00

314

214

12.84

12.00

3.73

28.57

15.57

3.08 x 15.57x 2520496/100

1208719.00

CC.17

4/85

1591848.00

13.00

316

216

12.96

12.00

3.74

28.70

15.70

3.08 x 15.70 x 1591848/100

769754.00

CC.18

5/85

3782665.00

13.00

318

218

13.08

12.00

3.76

28.76

15.76

3.08 x 15.76 x 3782665/100

1836136.00

………………

CC.68

12/91

2039002.00

13.00

545

445

26.70

12.00

5.81

44.51

31.51

3.08 x 31.51 x 2039002/100

1978868.00

Ways and Means advance received on 15.1.92

3000000.00

CC.69

1/92

22212 94.00

13.00

552

452

27.12

12.00

5.81

44.99

31.99

3.08 X 31.99 X 2221294/100

2188623.00

CC.70

2/92

2502304.00

13.00

553

453

27.18

12.00

5.88

45.06

32.06

3.08 X 32.06 X 2502304/100

2470895.00

Ways and Means Advance received on 13.3.92

3000000.00

CC.71

3/92

2248500.00

13.00

552

452

27.12

12.00

5.87

44.99

31.99

3.08 X 31.99 X 2248500/100

2215429.00

CC.72

4/92

1312431.00

13.00

553

453

27.18

12.00

5.88

45.06

32.06

3.08 X 32.06 X 1312431/100

1295957.00

CC.73

5/92

2608465.00

13.00

558

458

27.48

12.00

5.92

45.40

32.40

3.08 X 32.40 X 2608465/100

2603039.00

CC.74

6/92

3573468.00

13.00

562

462

27.72

12.00

5.96

45.68

32.68

3.08 X 32.68 X 3573468/100

3596853.00

Ways and means advance received on 30.10.92

3000000.00

Adhoc Advance received on 14.1.93

2500000.00

CC.75

1/93

2088949.00

13.00

593

493

29.58

12.00

6.24

47.82

34.82

3.08 X 34.82 X 2088949/100

2240306.00

6,32,84,050.00

In the same manner, for all the bills, the respondent-contractor has calculated the “Value of work done”, “difference in wages” and “Labour Escalation Charges” on monthly basis. After so calculating the claim under all the bills, the respondent-contractor had shown the dates on which advances received in column no.(14) and deducted the advance received towards the principal and finally shown Rs.6,32,84,050/- as total amount due towards labour escalation. As seen from the above tabular column, in computation of his claims in Ex.P20, the respondentcontractor himself thus adjusted all payments received from the appellant-Board, only towards the principal and not towards interest.

10. The respondent-contractor has separately calculated the interest payable on “Labour Escalation Due” claimed under each bill at the rate of 18% i.e. Rs.7,66,35,927/-. For proper appreciation, we may usefully refer to bills from CC.14 to CC.18 and from CC.68 to CC.75 as to how the interest was calculated and claimed separately which read as under:

CC No.

Labour Esca-lation due

Less advance received

Accu-mulated Balance

Date from which due

Period

No. of days

Rate of interest

Interest Due

Remarks

From

To

CC.14

12,82,029.00

12,82,029.00

15.1.85

15.1.85

14.3.85

59

18%

37,302.00

CC.15

18,78,803.00

31,60,832.00

15.3.85

15.3.85

14.4.85

31

18%

48,322.00

CC.16

12,08,719.00

43,69,551.00

15.4.85

15.4.85

14.5.85

30

18%

64,645.00

CC.17

7,69,754.00

51,39,305.00

15.5.85

15.5.85

14.6.85

31

18%

78,568.00

CC.18

18,36,136.00

………..

CC.68

19,78,868.00

605,22,16 6.00

15.1.92

15.1.92

14.2.92

31

18%

9,25,243.00

Ways and Means Advance

30,00,000.00

CC.69

21,88,623.00

597,10,789.00

15.2.92

15.2.92

14.3.92

29

18%

8,53,946.00

CC.70

24,70,895.00

621,81,684.00

15.3.92

15.3.92

14.4.92

31

18%

9,50,613.00

Ways and Means Advance

30,00,000.00

CC.71

22,15,429.00

613,97,113.00

15.4.92

15.4.92

14.5.92

30

18%

9,08,341.00

CC.72

12,95,957.00

626,93,070.00

15.5.92

15.5.92

14.6.92

31

18%

9,58,431.00

CC.73

26,03,039.00

652,96,109.00

15.6.92

15.6.92

14.7.92

30

18%

9,66,025.00

CC.74

35,96,853.00

688,92,962.00

15.7.92

15.7.92

14.2.93

215

18%

73,04,541.00

Ways and Means Advance

30,00,000.00

Adhoc Advance

25,00,000.00

CC.75

22,40,306.00

656,33,268.00

15.2.93

15.2.93

14.3.93

28

18

9,06,279.00

………………..

Total interest claimed

7,66,35,927

11. Parties are governed by the terms of the contract. Clause E1.079 of the agreement dated 16.09.1981 expressly provided that the appellant would pay no interest to the respondent-contractor for delayed payment. Clause E1.079 of the agreement reads as under:-

“E1.079

No claim for delayed payment due to dispute etc.

No claim for interest or damages will be entertained by the Board with respect to any money or balance which may be lying with the Board owing to any dispute, difference or misunderstanding between the Engineer on the one hand and the contractor on the other hand or with respect to any delay on the part of the Engineerin- charge in making periodical or final payment or any respect whatsoever, and the Board shall not be liable for any interest or damages or loss to the contractor.”

Even as per respondent’s own letter No.D.W/94/090 dated 25.11.1994, the respondent-contractor has deducted the advances paid only 9 towards the principal and claimed interest. The said letter reads as under:-

“I am herewith submitting a comprehensive Statement (Claim bill), giving the details of labour escalation payable against each C.C Bill, deducting the advances paid to me which are adjustable against the dues. The net labour escalation amount payable as on 31.10.1994 works out to Rs.6,32,84,050.00, after thus deducting the advances received. The interest amount payable has also been worked out and included in the enclosed bill, separately, which comes to Rs.7,66,35,927.00. The total amount due as on 31.10.1994 is Rs.13,99,19,1977.00. This amount may be paid to me without further delay.”

Thus by his own calculation and as per his own letter dated 25.11.1994, the respondent-contractor has adjusted all payments received from the Board firstly towards the principal.

12. But when the respondent filed I.A.No.6 of 2006, the entire method of calculation was changed by showing adjustment of payments firstly towards interest and then towards principal, only to claim that in spite of payment of Rs.12,82,96,320/- by the Board, amounts are still due and payable to him. In the calculation sheet filed alongwith I.A. No.6 of 2006 while making adjustments of payment of rupees four crores (payment made to the respondent-contractor during the pendency of the earlier round of writ petition), the same was adjusted firstly against the interest and then against the principal amount. The calculation sheet filed by the respondent-contractor in I.A.No.6 of 2006 is as under:-

Principal (in Rupees)

Interest @ 9% (in Rupees)

Remarks

Balance

DR

CR

Date

Particulars

DR

CR

Balance

63284050

Principal amount of Labour Escalation upto CC 78 as per Ext. P20

Amount received from Kerala State Electricity Board is firstly adjusted Against interest and then principal amount

Interest upto CC 78 for the period upto 20.6.95

40218107

20.06.95

Amount Received Rs. 1 crore

10000000

30218107

Interest from 21.6.95 to 13.2.96

3713820

33931927

13.02.96

Amount Received Rs.1crore

10000000

23931927

Interest from 14.2.96 to 23.2.96

156043

24087970

23.02.96

Amount Received Rs.2 crores

20000000

4087970

Interest 24.2.96 to 20.3.01

28867930

32955900

56239950

7044100

20.03.01

Amount received (4 crores)

32955900

0

Out of Rs.4 crores received the interest as on this date Rs.32955900/- is wiped off and balance Rs.7044100 adjusted against principal amount

Interest 21.3.01 to 5.9.01

2343588

48583538

7656412

05.09.01

Amount received (1 crore)

2343588

0

Out of Rs.1 crore received, the interest as on this date Rs.2343588/- is wiped off and balance Rs.7656412 adjusted against principal amount

Interest from 6.9.01 to 12.10.01

443242

29026780

19556758

12.10.01

Amount received (2 crores)

443242

0

Out of Rs.2 crore received the interest as on this date Rs.443242/- is wiped off and balance Rs.19556758 adjusted against principal amount

Interest 13.2.01 to 1.6.02

1660491

23955276

5071504

01.06.02

Amount received (6731995)

1660491

0

Out of Rs.67,31,995/- received the interest as on this date Rs.1660491/- is wiped off and balance Rs.5071504/- adjusted against principal amount

Interest 2.6.02 to 17.8.02

454822

22734120

1221156

17.08.02

Amount received (1675978)

454822

0

Out of Rs.16,75,978/- received the interest as on this date Rs.454822/- is wiped off and balance Rs.1221156/- adjusted against principal amount

Interest 18.8.02 to 10.2.2003

992204

13837977

8896143

10.02.03

Amount received (9888347)

992204

0

Out of Rs.98,88,347/- received, the interest as on this date Rs.992204/- is wiped off and balance Rs.8896143/- adjusted against principal amount

Interest from 11.2.03 to 31.5.05

2866168

2866168

81716415

13. Pursuant to the directions of the High Court and after disposal of C.A.No.4092 of 2000, the appellant-Board made a total payment of Rs.12,82,96,320/-. Since the respondent-contractor changed the method of adjustment i.e. by adjusting the payment firstly towards interest and then towards principal, even after payment of Rs.12,82,96,320/-, according to him Rs.3,38,57,618/- was still due to him. The said calculation shown in I.A.No.6 of 2006, reads as under:-

Ext.P20 (LABOUR ESCALATION)

Labour escalation claimed in CC Bill 14 to 78

(Ref.Ext.P20)

63284050

Labour escalation claimed in CC Bill 79 to 85

(Schedule 3)

9096582

Total

72380632

Total interest upto 31.05.2005 @ 9% (81716415 + 8056891)

(Schedule 2 & 3)

89773306

Total Amount due as on 31.5.2005

162153938

Less: Amounts received from K.S.E. Board on various dates (adjusted firstly against interest and then principal amount)

(Schedule 6)

128296320

Balance amount due as on 31.5.2005

(Schedule 5)

33857618

Principal amount

22934559

Interest

10923059

33857618

This manner of appropriation, firstly towards the interest is in clear violation of the directions given by this Court to make payment under Ex.P20 and the method of adjustment which the respondent-contractor himself adopted in Ex.P20. In the original Ex.P20, when respondent-contractor himself has expressly adjusted all payments made by the appellant towards principal and not towards interest, the respondent-contractor cannot turn round and change the method of calculation by showing the adjustment of payments made first against the interest and then towards the principal. This important aspect of change in the method of adjustment/appropriation was lost sight by the High Court and the direction of the High Court to make further payment of Rs.4,12,58,224/- under Ex.P20 is not sustainable.

14. IN THE FACTS OF THE PRESENT CASE WHETHER THE RESPONDENT-CONTRACTOR IS JUSTIFIED IN APPROPRIATION OF PAYMENT FIRSTLY TOWARDS INTEREST: Learned counsel for the respondent-contractor submitted that in the case of a debt due with interest, the normal rule is that any payment made by the debtor, in the first instance, to be adjusted towards satisfaction of interest and only thereafter to the principal. In support of his contention, learned counsel placed reliance upon Meghraj and Others v. Mst. Bayabai and Others (1969) 2 SCC 274 and Industrial Credit and Development Syndicate now called I.C.D.S. Ltd. v. Smithaben H. Patel (Smt.) and Others (1999) 3 SCC 80.

15. In I.C.D.S.’s case, while considering how the payments made by the judgment-debtor are to be adjusted, in para (14), it was held as under:

14. In view of what has been noticed hereinabove, we hold that the general rule of appropriation of payments towards a decretal amount is that such an amount is to be adjusted firstly, strictly in accordance with the directions contained in the decree and in the absence of such direction, adjustments be made firstly in payment of interest and costs and thereafter in payment of the principal amount. Such a principle is, however, subject to one exception, i.e., that the parties may agree to the adjustment of the payment in any other manner despite the decree.

As and when such an agreement is pleaded, the onus of proving is always upon the person pleading the agreement contrary to the general rule or the terms of the decree schedule. The provisions of Sections 59 to 61 of the Contract Act are applicable in cases where a debtor owes several distinct debts to one person and do not deal with cases in which the principal and interest are due on a single debt.” [Underlining added]

16. In Mathunni Mathai v. Hindustan Organic Chemicals Ltd. and Ors., (1995) 4 SCC 26, it has been held that Order XXI Rule 1 CPC as amended in 1976 is applicable in executing the award made under the Land Acquisition Act. In Mathunni Mathai’s case, it was indicated that if the decretal amount is deposited by the judgment-debtor pursuant to the order of the Court and the judgment-debtor has not given notice of such deposit to the decree holder and also does not specify the manner in which the amount should be appropriated, then the decree holder will be entitled to appropriate the amount deposited by the judgment-debtor firstly towards interest and other expenses and the decree holder is not bound to adjust the same towards the principal.

In Prem Nath Kapur and Anr. v. National Fertilizers Corporation of India Ltd. and Others, (1996) 2 SCC 71; the decision in Mathunni Mathai’s case has been expressly overruled by a three Judges Bench of the Supreme Court on the finding that Order XXI Rule 1 CPC cannot be extended to the execution of an award made under the Land Acquisition Act on the score of its inconsistency with the provisions of Land Acquisition Act.

17. The view taken in Prem Nath Kapur’s case was approved as a correct view in Gurpreet Singh v. Union of India (2006) 8 SCC 457. Though the question posed for consideration before the Constitution Bench in Gurpreet Singh’s case was whether the view taken in Prem 14 Nath Kapur’s case is correct and whether the rule of “different stages of appropriation” set out in Prem Nath Kapur’s case was required to be restated on the scheme of the Land Acquisition Act, the Constitution Bench specifically dealt with Order XXI Rules 1, 2, 4 and 5 CPC and clarified the position. After referring to the relevant portion of the decision in Gurpreet Singh’s case, in Bharat Heavy Electricals Ltd. v. R.S. Avtar Singh and Company (2013) 1 SCC 243, this Court summarized the principles emerging as under:

“31. From what has been stated in the said decision, the following principles emerge:

31.1. The general rule of appropriation towards a decretal amount was that such an amount was to be adjusted strictly in accordance with the directions contained in the decree and in the absence of such directions adjustments be made firstly towards payment of interest and costs and thereafter towards payment of the principal amount subject, of course, to any agreement between the parties.

31.2. The legislative intent in enacting sub-rules (4) and (5) is a clear pointer that interest should cease to run on the deposit made by the judgment-debtor and notice given or on the amount being tendered outside the court in the manner provided in Order 21 Rule 1(1)(b).

31.3. If the payment made by the judgment-debtor falls short of the decreed amount, the decree-holder will be entitled to apply the general rule of appropriation by appropriating the amount deposited towards the interest, then towards costs and finally towards the principal amount due under the decree.

31.4. Thereafter, no further interest would run on the sum appropriated towards the principal. In other words if a part of the principal amount has been paid along with interest due thereon as on the date of issuance of notice of deposit interest on that part of the principal sum will cease to run thereafter.

31.5. In cases where there is a shortfall in deposit of the principal amount, the decree-holder would be entitled to adjust interest and costs first and the balance towards the principal and beyond that the decree-holder cannot seek to reopen the entire transaction and proceed to recalculate the interest on the whole of the principal amount and seek for reappropriation.”

[Underlining added]

18. As held in Constitution Bench judgment in Gurpreet Singh’s case followed in BHEL’s case, if there is a direction in the decree as to the mode of appropriation of payment, then appropriation of any payment made by the judgment-debtor has to be strictly in accordance with the direction contained in the decree. If there is no such direction in the decree, then the general principle is that where a judgment-debtor makes payment without making any indication as to how the payment is to be adjusted, it is the option of the creditor to make adjustment firstly towards the interest and then towards the principal.

But if the judgment debtor has indicated the manner in which the appropriation is to be made, then the creditor has no choice to apply the payment in a different manner. The general principle of mode of appropriation firstly in payment of interest and thereafter in payment of principal amount is subject to the exception i.e. the parties may agree to the adjustment of the payment in any other manner despite the decree.

19. In C.A.No.4092 of 2000, this Court directed payment as per Ex.P20. As held in Gurpreet Singh’s case, the payment is to be appropriated strictly in accordance with the directions contained in the decree. In C.A.No.4092 of 2000, since this Court directed the payment 16 as per Ex.P20 and therefore, the appropriation/adjustment of payment has to be made strictly as stated in Ex.P20. When the direction of the court is to make payment as per Ex.P20, the respondent-contractor cannot turn round and say that the amount received by him will be adjusted towards the interest first and then towards the principal.

20. An ‘Appropriation of money’ is the indication of an intention that money should be applied in a particular way. In the present case, the statement of respondent-contractor himself and other circumstances clearly indicate that payment ought to be adjusted only towards the principal amount. As discussed earlier, in Ex.P20 the respondent contractor himself has shown the labour escalation due as principal amount and interest thereon separately and has given the credit of the advances made by the Board firstly towards the principal and claimed the balanced amount of the principal. At this juncture, we may usefully recapitulate respondent’s own letter to the appellant-Board dated 25.11.1994 extracted in para (11) above where the respondent contractor himself has stated that he has deducted the advances from the principal amount claimed under “Labour Escalation Charges” and “interest” are shown separately.

21. By his own statement, the respondent-contractor has firstly appropriated the advances towards the labour escalation due i.e. the principal amount. The respondent-contractor is not justified in changing the method of calculation and claim appropriation of the payments firstly towards the interest and then towards the principal amount. The claim of the respondent-contractor for a further sum of Rs.2,29,34,559/- with interest under Ex.P20 cannot be sustained and the direction of the High Court to pay the same is liable to be set aside.

22. WHETHER RESPONDENT-CONTRACTOR IS ENTITLED TO SUBSEQUENT INTEREST ON THE AMOUNT CLAIMED IN EX.P20: Insofar as Ex.P20, in O.P. No.283 of 1995, the High Court granted the following relief:-

“…We, therefore, grant prayer (b) as prayed for and issue a writ of mandamus directing the second respondent to pay the petitioner interest at 18% on the amount shown in the statement, Ext.P20….” In O.P. No.283 of 1995, the respondent-contractor in prayer (b), prayed for issuance of writ of mandamus directing the appellant-Board to pay the amount shown in the statement Ex.P20 together with interest thereon within a time to be fixed by this Court. Ex.P20 relates to “Labour Escalation Charges” and “Interest” thereon claimed separately. As seen from prayer (b) in O.P. No.283 of 1995, there was no prayer for 18 future interest; also, there was no direction by the High Court for payment of subsequent interest.

23. In the appeal before this Court in C.A. No.4092 of 2000, this Court observed that disputes among such contractual or commercial activities of a statutory body should not have been agitated in the writ court. However, since the labour escalation notification for minimum wages was issued way back in 1983, this Court directed the amount as shown in Ex.P20 to be paid to the respondent-contractor with interest at the rate reduced from 18% to 9% p.a. This Court held as under:

“15. The High Court has directed the Board to pay to the contractor the amounts shown in the statement Ext. P-20 along with interest @ 18% per annum. Having considered the totality of the circumstances, we feel that it would be just and proper to award interest @ 9% per annum instead of 18%. In the statement Ext. P-20, the contractor has calculated interest @ 18% per annum. The interest amount would now be calculated at 9% instead of 18% per annum. The impugned judgment of the High Court is modified accordingly.” The above order of this Court directs payment by the appellant Board only of the amount shown in Ex.P20 with reduced interest at 9% p.a. There is no direction by this Court to pay subsequent interest on Ex.P20.

24. Under sub-section (2) of Section 34 CPC, where a decree is silent as to payment of further interest on the principal sum, it shall be deemed to have been refused. Section 34(2) CPC reads as under:-

34. Interest.

(1) …..

(2) Where such a decree is silent with respect to the payment of further interest on such aggregate sum as aforesaid from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefore shall not lie. In the present case, since there is no direction for future interest, in view of sub-section (2) of Section 34 CPC, it must be deemed that the court has refused such interest. The respondent-contractor cannot claim further interest on the amount payable under Ex.P20 beyond the date of judgment of the High Court (02.04.1998) and in any event not beyond the date of judgment of this Court (19.07.2000).

25. The respondent-contractor himself has understood the order of this Court in CA No.4092 of 2000 that there was no direction for payment of further interest on the amount payable under Ex.P20. In I.A. No.6 of 2006, the respondent-contractor specifically prayed for payment of further interest to the appellant forthwith [prayer (i) in I.A. No. 6 of 2006] which was not granted by this Court in its order dated 24.09.2000 while disposing of I.A. No.6 of 2006. The appellant-Board has paid a total amount of Rs.12,82,96,320/- and according to the Board, it has overpaid the respondent-contractor an excess amount of Rs.1,74,75,247/-. In the absence of any direction in the underlying order of the High Court and order of this Court in C.A. No.4092 of 2000 20 to pay subsequent interest, the respondent-contractor is not entitled to claim subsequent interest on the amount payable under Ex.P20. The direction of the High Court to pay subsequent interest of Rs.1,83,23,665/- under Ex.P20, is not sustainable.

26. The impugned judgment of the High Court directing the appellant- Board to pay Rs.4,12,58,224/- in Ex.P20 [Rs.2,29,34,559/- (principal) plus Rs.1,83,23,665/- (subsequent interest)] under Ex.P20, is set aside.

27. Claim under Ex.P59 for the additional work and subsequent interest: So far as Ex.P59 is concerned, it is towards additional work done – material escalation and labour escalation. So far as Ex.P59 is concerned, in the earlier round of litigation in O.P.No.283 of 1995, in para (26) of its judgment, the High Court held as under:

“26. The Board shall also pay to the petitioner the bills raised by him for the work done till date including labour escalation payment etc. etc. as ordered in O.P. No.283 of 1995…..”

28. Contention of the respondent-contractor is that in C.A. No.4092 of 2000, since this Court did not make any observation regarding respondent’s claim made under Ex.P59, the order of the High Court directing payment under Ex.P59 has become final and the amount claimed thereon in Ex.P59 has to be paid to the respondent-contractor. While disposing of the appeal in C.A. No.4092 of 2000, this Court, of course, did not make any observation regarding Ex.P59. But 21 respondent’s claim under Ex.P59 for additional work done has to be examined in the context of this Court’s observation that

“….The disputes relating to interpretation of the terms and conditions of such a contract could not have been agitated in a petition under Article 226 of the Constitution of India…” and “…..Whether any amount is due and if so, how much and refusal of the appellant to pay it is justified or not, are not the matters which could have been agitated and decided in a writ petition…..”. Having said so, this Court proceeded to direct the appellant to pay the amount as claimed under Ex.P20.

29. Be that as it may, so far as Ex.P59 is concerned, the contractor has made a claim of Rs.5,55,62,597/- towards additional work including departmental materials and the Board has disputed the claim made by the respondent-contractor in I.A.No.6 of 2006 and pleaded that the total work done by the contractor was only for Rs.1,55,65,817/- including cost of departmental materials. The relevant portion of the counter affidavit filed by the Board in I.A.No.6 of 2006 reads as under:-

“56. As per Ext.P59, the contractor had demanded an amount of Rs.5,55,62,597/- including departmental materials and excluding tender excess, material escalation and labour escalation. Out of this, 23 items were wrongly claimed in Ext.P59 by the contractor and the same was withdrawn by the contractor in his next bill. ie CC 86 bill submitted to the Board. The amount for the above 23 items wrongly claimed would come to Rs.49,40,251/-. So the net amount claimed by the contractor would come to Rs.5,06,22,346/-. Whereas, the total work done by the contractor was Rs.1,55,65,817/- including cost of departmental materials and 22 excluding tender excess, Material escalation and labour escalation. A detailed statement on each items claimed by the contractor in Exhibit P59 and the claim admitted by the Board and their remarks is appended.”

30. Taking us through the counter filed by the appellant in W.P.(C) No.31108 of 2007, learned senior counsel for the respondent-contractor submitted that the claim of the respondent-contractor in Ex.P59 on various items was not disputed by the appellant in its counter filed in WP(C) No.31108 of 2007. This contention does not merit acceptance. As pointed out above, the claim of the respondent-contractor on each one of the items in Ex.P59, the appellant-Board has filed a detailed reply in I.A.No.6 of 2006 disputing the claim on each of the items claimed by the respondent-contractor.

It is in this context, this Court has disposed of I.A. No.6 of 2006 observing that there is dispute regarding the quantum of the amount payable and giving liberty to the respondent contractor to move to the High Court. It is seen from the impugned judgment that the High Court has also taken note of the counter filed by the appellant-Board in I.A.No.6 of 2006 in which the appellant-Board disputed each one of the items in Ex.P59 and also referred to the same in its order and the same reads as under:

“9. …..If we accept the statement of the Board in paragraph 56 of the counter filed before the Supreme Court, the net amount exclusive of the tender excess, material escalation and labour escalation can only be Rs.5,06,22,346/-. …..The contention of the Board that out of the above amount, only Rs.1,55,65,817/- is 23 payable cannot prima facie be accepted, as the measurement was taken by the Board after ten years of the judgment (Ext.P1)….”

31. The High Court proceeded to observe that the contention of the appellant that only Rs.1,55,65,817/- is payable under Ex.P59 cannot prima facie be accepted as the measurement was taken by the Board after ten years of the judgment (Ex.P1); whereas the contractor’s claims were made then and there by the contractor on actual measurement. After so referring to the dispute between the parties, the High Court observed that there is dispute with regard to the actual measurements of certain additional works as well as the contractual rates, the same has to be factually verified and calculations are to be made and that the matter has to be discussed with the parties. The High Court directed the appellant-Board to pay Rs.8,79,71,154/-[Rs.5,81,53,892/- (principal) plus Rs.2,98,17,262/- (interest)]. The split-up figure of principal amount of Rs.5,81,53,892/- is as under:-

Claim in Ex.P59 admitted by the Board

1,55,65,817

Material Escalation 98% of Ex.P59

1,52,54,501

Labour Escalation at 173.60% of Ex.P59

2,70,22,258

Tender Excess at 2% of Ex.P59

3,11,316

5,81,53,892

32. The High Court ordered single uniform rate for labour escalation at 173.60% and material escalation at 98% of Ex.P59. The contention of the appellant-Board is that the direction of the High Court to pay at uniform rate of 98% and 173.60%, is contradictory to the terms of the agreement and as per own calculation of the respondent-contractor. According to the Board, material escalation and labour escalation are to be calculated on a monthly basis as claimed by the respondentcontractor in other bills. In Ex.P20, the respondent-contractor himself calculated labour escalation on monthly basis and has not followed his own prior example.

The High Court did not keep in view the respondent’s own method of calculation of labour escalation on monthly basis and erred in allowing labour escalation and material escalation at single uniform rate of 173.60% and 98% respectively and the direction of the High Court to pay Rs.5,81,53,892/- is not sustainable. Since appellant has admitted the amount of Rs.1,55,65,817/- as payable under Ex.P59, the same is payable with labour escalation and material escalation calculated on monthly basis.

33. The High Court has directed the appellant to pay subsequent interest of Rs.2,98,17,262/- on the amount directed to be paid under Ex.P59. As discussed earlier, there was no direction either by the High Court or by this Court to pay future interest qua Ex.P20. In the earlier 25 round of litigation, the High Court only directed the appellant to pay the amount as ordered in Ex.P20. In view of the express provision of subsection (2) of Section 34 CPC, no future interest is payable under Ex.P59. The direction of the High Court to pay future interest of Rs.2,98,17,262/- on the claims made under Ex.P59 is not sustainable and is liable to be set aside.

34. REFERENCE TO ARBITRATION: After pointing out the disputed claims of additional work (Ex.P59) and on the oral consent of the counsel for the appellant, the High Court has referred the parties to arbitration appointing Justice K.A. Nayar as the arbitrator. Arbitrator/ Tribunal is a creature of the contract between the parties. There was no arbitration agreement between the parties. The question falling for consideration is whether the High Court was right in referring the parties to arbitration on the oral consent given by the counsel without written instruction from the party.

35. Jurisdictional pre-condition for reference to arbitration under Section 7 of the Arbitration and Conciliation Act is that the parties should seek a reference or submission to arbitration. So far as reference of a dispute to arbitration under Section 89 CPC, the same can be done only when parties agree for settlement of their dispute through arbitration in contradistinction to other methods of alternative dispute resolution mechanism stipulated in Section 89 CPC. Insofar reference of the parties to arbitration, oral consent given by the counsel without a written memo of instructions does not fulfill the requirement under Section 89 CPC. Since referring the parties to arbitration has serious consequences of taking them away from the stream of civil courts and subject them to the rigour of arbitration proceedings, in the absence of arbitration agreement, the court can refer them to arbitration only with written consent of parties either by way of joint memo or joint application; more so, when government or statutory body like the appellant-Board is involved.

36. Emphasizing that under Section 89 CPC, referring the parties to arbitration could be made only when the parties agree for settlement of the dispute through arbitration by a joint application or a joint affidavit before the court, in Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. (2010) 8 SCC 24, this Court held as under:-

“33. Even if there was no pre-existing arbitration agreement, the parties to the suit can agree for arbitration when the choice of ADR processes is offered to them by the court under Section 89 of the Code. Such agreement can be by means of a joint memo or joint application or a joint affidavit before the court, or by record of the agreement by the court in the order-sheet signed by the parties. Once there is such an agreement in writing signed by parties, the matter can be referred to arbitration under Section 89 of the Code; and on such reference, the provisions of the AC Act will apply to the arbitration, 27 and as noticed in Salem Bar Bar Association, T.N. v. Union of India (I) (2003) 1 SCC 49, the case will go outside the stream of the court permanently and will not come back to the court.” [Underlining added] The same view was reiterated in Shailesh Dhairyawan v. Mohan Balkrishna Lulla, (2016) 3 SCC 619 which is as under:-

“28. It has been noticed by this Court in some earlier judgments+ that Section 89 CPC is not very happily worded. Be that as it may, Section 89 provides for alternate methods of dispute resolution i.e. those methods which are alternate to the court and are outside the adjudicatory function of the court. One of them with which we are concerned is the settlement of dispute through arbitration. Insofar as reference of dispute to arbitration is concerned, it has been interpreted by this Court that resort to arbitration in a pending suit by the orders of the court would be only when parties agree for settlement of their dispute through arbitration, in contradistinction to the Alternate Dispute Resolution mechanism (for short “ADR”) through the process of mediation where the Judge has the discretion to send the parties for mediation, without even obtaining the consent of the parties. Thus, reference to arbitration is by means of agreement between the parties. It is not in dispute that there was an agreement between the parties for reference of dispute to the arbitration and it was so referred.”

[Underlining added]

37. The learned senior counsel for respondent-contractor placed reliance upon Byram Pestonji Gariwala v. Union Bank of India and Ors., (1992) 1 SCC 31 to contend that the counsel has the implied authority to consent for arbitration on behalf of a party. In Byram Pestonji Gariwala case, this Court made it clear that the counsel should not act on implied authority unless there is exigency of circumstances demanding immediate adjustment of suit by agreement or compromise 28 and the signature of the party cannot be obtained without undue delay. In para (37) of Byram Pestonji Gariwala case, it was held as under:-

“37. We may, however, hasten to add that it will be prudent for counsel not to act on implied authority except when warranted by the exigency of circumstances demanding immediate adjustment of suit by agreement or compromise and the signature of the party cannot be obtained without undue delay. In these days of easier and quicker communication, such contingency may seldom arise. A wise and careful counsel will no doubt arm himself in advance with the necessary authority expressed in writing to meet all such contingencies in order that neither his authority nor integrity is ever doubted. This essential precaution will safeguard the personal reputation of counsel as well as uphold the prestige and dignity of the legal profession.”

38. In a subsequent decision in the context of examining the compromise under Order XXIII Rule 3 CPC, in Banwari Lal v. Chando Devi (Smt) (Through LRs.) and Anr. (1993) 1 SCC 581, this Court has observed that the case of Byram Pestonji Gariwala had ignored the law laid down in Gurpreet Singh v. Chatur Bhuj Goel (1988) 1 SCC 270 and held that when parties enter into a compromise, the court must insist upon the parties that the compromise be reduced into writing. In para (10) in Banwari Lal case, it was held as under:- “

10. …….. The order on face of it purported to dismiss the suit of the plaintiff on basis of the terms and conditions mentioned in the petition of compromise. As such, the validity of that order has to be judged treating it to be an order deemed to have been passed in purported exercise of the power conferred on the Court by Rule 3 of Order 23 of the Code. The learned Subordinate Judge should not have accepted the said petition of compromise even if he had no knowledge of the fraud alleged to have been practised on the appellant by his counsel, because admittedly the 29 petition of compromise had not been signed either by the respondent or his counsel. This fact should have been discovered by the Court. In the case of Gurpreet Singh v. Chatur Bhuj Goel (1988) 1 SC 207 it has been said: (SCC p. 276, para 10)

“Under Rule 3 as it now stands, when a claim in suit has been adjusted wholly or in part by any lawful agreement or compromise, the compromise must be in writing and signed by the parties and there must be a completed agreement between them. To constitute an adjustment, the agreement or compromise must itself be capable of being embodied in a decree. When the parties enter into a compromise during the hearing of a suit or appeal, there is no reason why the requirement that the compromise should be reduced in writing in the form of an instrument signed by the parties should be dispensed with. The court must therefore insist upon the parties to reduce the terms into writing.”

39. Referring the parties to arbitration has serious civil consequences. Once the parties are referred to arbitration, the proceedings will be in accordance with the provisions of Arbitration and Conciliation Act and the matter will go outside the stream of the civil court. Under Section 19 of Arbitration and Conciliation Act, the arbitral tribunal shall not be bound by the Code of Civil Procedure and the Indian Evidence Act. Once the award is passed, the award shall be set aside only under limited grounds. Hence, referring the parties to arbitration has serious civil consequences procedurally and substantively. When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration.

40. The impugned order referring the parties to arbitration, in any event, inter alia, cannot be sustained on other grounds also. While referring the parties to arbitration, the impugned judgment has, inter alia, made many observations affecting crucial areas of disputes namely:-

(i) check measurements for the works done – “measurements taken by the Board after ten years of judgment; whereas the claims made by the contractor then and there on actual measurement”;

(ii) percentage of labour escalation ordered by the High Court @ 173.60% is contradictory to the prior method of calculation adopted by the respondent-contractor in the labour escalation; and

(iii) materials escalation @ 98%. These observations in the impugned judgment would seriously prejudice the rights of the appellant-Board in pursuing the matter before the Arbitral Tribunal.

41. Contention of the respondent-contractor is that the appellant- Board has not raised the issue of absence of arbitration agreement before the Tribunal and the jurisdiction of the Arbitral Tribunal. Since the appellant-Board has challenged the impugned order before this Court in the matter pending for consideration, the appellant-Board could not have raised the issue of lack of jurisdiction before the Arbitral Tribunal and the contention of the respondent-contractor does not merit acceptance.

42. The arbitrator has passed the award dated 30.09.2012 for Rs.19,98,05,805.72 with interest @ 9% p.a. which was subsequently corrected on 29.10.2012 as Rs.21,55,34,430.55 with interest @ 9% p.a. The appeal preferred by the appellant under Section 34 of the Act was dismissed by the District Judge, Thiruvananthapuram vide order dated 23.12.2015. The appeal preferred by the appellant under Section 37 of the Arbitration and Conciliation Act (Arbitration Appeal No.Z-47 of 2013) was transferred to this Court. While directing the appellant-Board to pay rupees five crores to the respondent-contractor on furnishing undertaking vide order dated 20.02.2017, this Court directed Arbitration Appeal No.Z-47 of 2013 to be sent back to the High Court. Since the impugned judgment of the High Court is set aside, the award passed by the Arbitrator is liable to be set aside and consequently the Arbitration Appeal No.Z-47 of 2013 pending before the Kerala High Court shall stand allowed.

43. IN EXERCISE OF JURISDICTION UNDER ARTICLE 136 OF THE CONSTITUTION OF INDIA-WHETHER THIS COURT CAN INTERFERE:

Learned senior counsel for the respondent-contractor urged that in exercise of jurisdiction under Article 136 of the Constitution of India, the Supreme Court normally does not reappreciate the evidence and findings of fact unless there is miscarriage of justice or manifest 32 illegality. In support of his contention, learned senior counsel placed reliance upon Taherakhatoon (D) by LRs. v. Salambin Mohammad (1999) 2 SCC 635.

44. In exercise of jurisdiction under Article 136 of the Constitution of India, this Court does not normally reappreciate the evidence and findings of fact; but where the findings of the High Court are perverse or the findings are likely to result in excessive hardship, the Supreme Court would not decline to interfere merely on the ground that findings in question are findings of fact. After referring to various judgments on the scope in exercise of power under Article 136 of the Constitution of India, in Mahesh Dattatray Thirthkar v. State of Maharashtra (2009) 11 SCC 141, this Court in para (35) summarized the principles as under:-

“35. From a close examination of the principles laid down by this Court in the aforesaid series of decisions as referred to hereinabove on the question of exercising power to interfere with findings of fact by this Court under Article 136 of the Constitution, the following principles, therefore, emerge:

  • The powers of this Court under Article 136 of the Constitution of India are very wide.
  • It is open to this Court to interfere with the findings of fact given by the High Court if the High Court has acted perversely or otherwise improperly.
  • When the evidence adduced by the parties in support of their respective cases fell short of reliability and acceptability and as such it is highly unsafe and improper to act upon it.
  • The appreciation of evidence and finding is vitiated by any error of law of procedure or found contrary to the principles of natural justice, errors of record and misreading of the evidence, or where the conclusions of 33 the High Court are manifestly perverse and unsupportable from the evidence on record.
  • The appreciation of evidence and finding results in serious miscarriage of justice or manifest illegality .
  • Where findings of subordinate courts are shown to be perverse or based on no evidence or irrelevant evidence or there are material irregularities affecting the said findings or where the court feels that justice has failed and the findings are likely to result in unduly excessive hardship.
  • When the High Court has redetermined a fact in issue in a civil appeal, and erred in drawing inferences based on presumptions.
  • The judgment was not a proper judgment of reversal.”

[Underlining added]

45. In the present case, for a contract of Rs.7.76 crores under original PAC amount and revised PAC amount of Rs.10.40 crores, the appellant- Board has so far paid Rs.56.58 crores and additionally rupees five crores by order of this Court dated 20.02.2017. As discussed above, the findings of the High Court are perverse causing loss to the statutory body like the appellant-Board, this Court would not decline to interfere merely on the ground that the findings in question are findings of fact. If the judgment of the High Court is to be sustained, the Board would have to make a total payment of about Rs.100 crores, causing huge loss to the appellant which would ultimately be passed on to the consumers and the impugned judgment is liable to be set aside.

46. While we set aside the impugned judgment, what is the order/direction to be passed is the point falling for consideration. As discussed earlier, under Ex.P20, the appellant-Board has made excess payment of Rs.1,74,75,247/-. By order dated 20.02.2017, this Court directed the appellant to pay a sum of rupees five crores subject to furnishing of undertaking by respondent-contractor. As per Ex.P59, the respondent-contractor claimed Rs.5,55,62,597/- for the work done; material escalation and labour escalation charges claimed additionally. The admitted amount under Ex.P59 was only Rs.1,55,65,817/-.

As discussed earlier, the amount claimed under Ex.P59 also will not carry subsequent interest. Material escalation and labour escalation charges additionally claimed are to be calculated only on monthly basis. Since an amount of Rs.6,74,75,247/- (Rs.1,74,75,247/- plus Rs.5,00,00,000/-) has been paid to the respondent-contractor, it is directed that the same be treated as full quit of all the claims under Ex.P59 including tender excess, material and labour escalation charges.

47. Conclusion:- In the result, the impugned judgment of the High Court is set aside and these appeals are allowed with the following observations and directions:-

(i) As held in Gurpreet Singh’s case, the payment is to be appropriated strictly in accordance with the directions 35 contained in the decree. In C.A.No.4092 of 2000, this Court directed the payment as per Ex.P20. In Ex.P20, the respondent-contractor himself has shown the labour escalation due as the principal amount and interest thereon separately and has given the credit of the advances made by the appellant-Board firstly towards the principal and claimed the balance amount. The respondent-contractor is not right in changing the method of calculation by appropriation of the payments firstly towards the interest and then towards the principal amount. The direction of the High Court to pay a further sum of Rs.2,29,34,559/- under Ex.P20 is set aside;

(ii) In the absence of direction in the underlying judgment of the High Court and judgment of this Court in C.A. No.4092 of 2000 to pay subsequent interest, in view of sub-section (2) of Section 34 CPC, the respondent-contractor is not entitled to claim subsequent interest on the amount payable under Ex.P20. The direction of the High Court to pay subsequent interest of Rs.1,83,23,665/- under Ex.P20 is set aside;

(iii) The High Court’s direction to pay labour escalation and material escalation at single uniform rate of 173.60% and 98% respectively for the bills towards additional work and to pay Rs.5,81,53,892/- under Ex.P59 to the respondent is set aside. In view of the express provision of sub-section (2) of Section 34 CPC, no future interest is payable under Ex.P59. The direction of the High Court to pay future interest of Rs.2,98,17,262/- on the claims made under Ex.P59 is set aside;

(iv) When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration. Hence, the award dated 29.10.2012 passed by the arbitrator Justice K.A. Nayar is set aside and the Arbitration Appeal No.Z-47 of 2013 filed by the appellant- Board pending before the High Court of Kerala is allowed;

(v) The amount of Rs.1,74,75,247/- paid under Ex.P20 which is in excess of the claim under Ex.P20 and the amount of rupees five crores paid to the respondent-contractor vide order of this Court dated 20.02.2017 be treated as payment under Ex.P59 for additional work including tender excess, material escalation and labour escalation charges and in full quit of all claims under Ex.P59;

(vi) Parties to bear their respective costs.

J. [RANJAN GOGOI]

J. [R. BANUMATHI]

New Delhi;

March 09, 2018

M/s. Inox Wind Ltd. Vs. M/s. Thermocables Ltd [SC 2018 January]

KEYWORDS:-APPOINTMENT OF ARBITRATOR-STANDARD FORM OF CONTRACT-

Capture

DATE:-January 05, 2018-

  • Though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause.
  • The purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause.

ACTS:-Section 11 (6) of the Arbitration and Conciliation Act, 1996

HISTORY: The Appellant,  issued a notice dated 30.10.2014 proposing the name of a sole arbitrator in terms of the Standard Terms and Conditions. In the absence of any response, the Appellant moved the High Court of Judicature at Allahabad by filing an application under Section 11 (6) of the Act.

SUPREME COURT OF INDIA

M/s. Inox Wind Ltd. Vs. M/s. Thermocables Ltd.

[Civil Appeal No. 19 of 2018 arising out of SLP (Civil) No.31049 of 2016]

L. NAGESWARA RAO, J.

1. Leave granted.

2. This appeal is directed against the judgment of the High Court of Judicature at Allahabad dismissing the application filed by the Appellant under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’).

3. The Appellant is a manufacturer of wind turbine generators (WTGs). The Respondent is engaged in the business of manufacture of wind power cables and other types of cables. Two purchase orders dated 13.12.2012 and 02.02.2013 were issued by the Appellant to the Respondent for supply of cables for their WTGs. According to the Purchase Order, the supply was to be according to the terms mentioned in the order and the Standard Terms and Conditions that were attached thereto. Apart from the other conditions, the Standard Terms and Conditions contain a clause pertaining to dispute resolution. The said clause provides for a dispute to be resolved by a sole arbitrator in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The material on record indicates that the Respondent accepted all the terms and conditions mentioned in the Purchase Order except the delivery period as is evident from a letter dated 15.12.2012.

4. The Respondent, pursuant to the Purchase Order, supplied wind power cables to the Appellant. While laying the cables supplied by the Respondent-company, the Appellant discovered that the outer sheaths of the cables of 150 sq. mm. were cracked. This forced them to stop the WTGs so as to avert damage to expensive equipment. According to the Appellant, the Respondent-company did not replace the cables. The Appellant, therefore, was constrained to issue a notice dated 30.10.2014 proposing the name of a sole arbitrator in terms of the Standard Terms and Conditions. In the absence of any response, the Appellant moved the High Court of Judicature at Allahabad by filing an application under Section 11 (6) of the Act.

5. The High Court dismissed the said application by holding that an arbitrator cannot be appointed as the Appellant did not prove the existence of an arbitration agreement. The High Court relied upon the judgment of this Court in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 to hold that there is no special reference to the arbitration clause in the standard terms and conditions, so the arbitration clause cannot be said to have been incorporated into the purchase order.

6. We have heard the counsel for the Appellant and Respondent. The judgment of this Court in M.R. Engineers’ case (supra) was relied upon by both the parties. Before proceeding further, it would be necessary to appreciate the ratio of the said judgment. A few facts necessary to understand the dispute in the said case are that the Appellant therein was a sub-contractor of the Respondent. The Appellant was entrusted a part of the work by the Respondent-contractor which pertained to ‘construction of project directorate building’. It was mentioned in the sub-contract that it shall be carried out as per the terms and conditions applicable to the main contract.

A dispute arose between the parties which made the Appellant therein to approach the High Court for appointment of an arbitrator under Section 11 (6) of the Arbitration and Conciliation Act, 1996. The High Court of Kerala rejected the application on the ground that the arbitration clause in the main contract was not incorporated by reference in the contract between the Appellant and Respondent therein. In the appeal before this Court, the Appellant submitted that his case was squarely covered by Section 7 (5) of the Act and that the arbitration clause from the main contract was incorporated by reference in the sub contract between him and the Respondent.

7. This Court considered the scope of Section 7 (5) of the Act and held that a conscious acceptance of the arbitration clause found in another document is necessary for the purpose of incorporating it into the contract. It was further held that general rules of construction of contracts would have to be followed as there were no guidelines in Section 7(5) regarding the conditions that need to be fulfilled before construing a reference to a portion of a contract as a reference incorporating the whole of it along with the arbitration clause contained in it. While distinguishing ‘reference’ to another document from ‘incorporation’, this Court observed that the relevant factor was the intention of the parties either to adopt the document in its entirety or to borrow specific portions of the said document. In this connection, the Court held as follows: (M.R. Engineers’ case, para 17-19)

“17. We will give a few instances of incorporation and mere reference to explain the position (illustrative and not exhaustive). If a contract refers to a document and provides that the said document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract.

When there is such incorporation of the terms and conditions of a document, every term of such document (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract. If the document so incorporated contains a provision for settlement of disputes by arbitration, the said arbitration clause also will apply to the contract.

18. On the other hand, where there is only a reference to a document in a contract in a particular context, the document will not get incorporated in entirety into the contract. For example, if a contract provides that the specifications of the supplies will be as provided in an earlier contract or another purchase order, then it will be necessary to look to that document only for the limited purpose of ascertainment of specifications of the goods to be supplied. The referred document cannot be looked into for any other purpose, say price or payment of price. Similarly, if a contract between X and Y provides that the terms of payment to Y will be as in the contract between X and Z, then only the terms of payment from the contract between X and Z, will be read as part of the contract between X and Y. The other terms, say relating to quantity or delivery cannot be looked into.

19. Sub-section (5) of Section 7 merely reiterates these well-settled principles of construction of contracts. It makes it clear that where there is a reference to a document in a contract, and the reference shows that the document was not intended to be incorporated in entirety, then the reference will not make the arbitration clause in the document, a part of the contract, unless there is a special reference to the arbitration clause so as to make it applicable.”

8. Relevant passages from Russell on Arbitration 23 rd Edition (2007) which were relied upon by this Court for interpretation of Section 7 (5) of the Arbitration and Conciliation Act, 1996 are as under: (M.R. Engineers’ case, para 20-21)

“20. The following passages from Russell on Arbitration throw considerable light on the position while dealing with Section 6(2) of the (English) Arbitration Act, 1996 corresponding to Section 7(5) of the Indian Act. (See pp. 52-55, 23rd Edn.):

“Reference to another document.-The terms of a contract may have to be ascertained by reference to more than one document. Ascertaining which documents constitute the contractual documents and in what, if any, order of priority they should be read is a problem encountered in many commercial transactions, particularly those involving shipping and construction. This issue has to be determined by applying the usual principles of construction and attempting to infer the parties’ intentions by means of an objective assessment of the evidence.

This may make questions of incorporation irrelevant, if for example it is clear that the contractual documents in question are entirely separate and no intention to incorporate the terms of one in the other can be established. However, the contractual document defining and imposing the performance obligations may be found to incorporate another document which contains an arbitration agreement. If there is a dispute about the performance obligations, that dispute may need to be decided according to the arbitration provisions of that other document. This very commonly occurs when the principal contractual document refers to standard form terms containing an arbitration agreement.

However the standard form wording may not be apt for the contract in which the parties seek to incorporate it, or the reference may be to another contract between parties at least one of whom is different. In these circumstances it may be possible to argue that the purported incorporation of the arbitration agreement is ineffective.

The draftsmen of the Arbitration Act, 1996 were asked to provide specific guidance on the issue, but they preferred to leave it to the court to decide whether there had been a valid incorporation by reference. (Para 2.044) *** Subject to drawing a distinction between incorporation of an arbitration agreement contained in a document setting out standard form terms and one contained in some other contract between different parties, judicial thinking seems to have favoured the approach of Sir John Megaw in Aughton, namely, that general words of incorporation are not sufficient. Rather, particular reference to the arbitration clause needs to be made to comply with Section 6 of the Arbitration Act, 1996, unless special circumstances exist. (Para 2.047) Reference to standard form terms.-

If the document sought to be incorporated is a standard form set of terms and conditions the courts are more likely to accept that general words of incorporation will suffice. This is because the parties can be expected to be more familiar with those standard terms including the arbitration clause.” (Para 2.048)

21. After referring to the view of Sir John Megaw in Aughton Ltd. v. M.F. Kent Services Ltd. [(1991) 57 BLR 1] that specific words were necessary to incorporate an arbitration clause and that the reference in a sub-contract to another contract’s terms and conditions would not suffice to incorporate the arbitration clause into the sub-contract, followed in Barrett & Son (Brickwork) Ltd. v. Henry Boot Management Ltd.[1995 CILL 1026] , Trygg Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2 Lloyds’ Rep 439] and AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)] and Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd. No. 2 [2006 EWHC 2530] , Russell concludes:

“The current position therefore seems to be that if the arbitration agreement is incorporated from a standard form a general reference to those terms is sufficient, but at least in the case of reference to a non-standard form contract in the context of construction and reinsurance contracts and bills of lading a specific reference to the arbitration agreement is necessary.”

9. This Court also discussed the scope of Section 7 (5) of the Act and summarised as follows: (M.R. Engineers’ case, para 24)

“24. The scope and intent of Section 7(5) of the Act may therefore be summarised thus:

(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled:

(1) the contract should contain a clear reference to the documents containing arbitration clause,

(2) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract,

(3) the arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.

(ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.

(iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.

(iv) Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.

(v) Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties.”

10. It was ultimately found that the intention of the parties was not to incorporate the main contract in its entirety into the sub-contract. Further, this Court held that the arbitration clause in the main contract was inapplicable to the contract between the parties as the main contract was between the Public Works Department, Government of Kerala and the contractor in which the arbitration clause contemplated appointment of a committee of three arbitrators, with one each to be appointed by the State of Kerala and the Respondent therein and the third to be nominated by the Director General Road Development, Ministry of Surface Transport Roads in Government of India. Appointment of a committee of arbitrators with representatives of State of Kerala and the Government of India was totally irrelevant for the contract between the contractor and the sub-contractor.

11. Section 6 (2) of the Arbitration Act, 1996 which extends to England, Wales and Northern Ireland is in pari materia with Section 7 (5) of the Arbitration and Conciliation Act, 1996 and it reads as under:-

“6. Definition of arbitration agreement. …

(2) The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.”

12. It will be useful to understand the interpretation of the incorporation issue in England. The question whether the general words of incorporation are sufficient to incorporate an arbitration agreement arose for consideration of the High Court of Justice, Queen’s Bench Division, Commercial Court in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena [2006] EWHC 2530 (Comm). In the said case the difference between incorporation in a single contract case and a two contract case was recognized. If there is a reference to a secondary document in a contract between two parties and that secondary document is a contract to which at least one party is different from the parties to the contract in question, it would be a two contract case.

In other words, if the secondary document is between other parties or if only one of the parties to the contract in dispute is party to an earlier contract to which a reference is made, then it would be a two contract case. In such a contract general reference to the earlier contract would not be sufficient to incorporate the arbitration clause. However, if the reference is to standard terms in a contract that would be a case of ‘single contract’ and the use of general words to incorporate the arbitration agreement by a reference is permissible. As the reference in that case was to a standard form of contract which was a single contract case, Justice Langley held that the general words of incorporation were enough to incorporate an arbitration clause.

13. The question of incorporation of the arbitration clause from an earlier contract by general reference into a later contract came up for consideration before the Queen’s Bench Division again in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm). The contract in the said case pertained to sale of 10,000 metric tons of steel scrap. There were several terms in the contract under the headings material, quantity, price, shipment, discharge, rate, payment and final weight. Apart from the said terms, the contract contained a clause which was in the following terms: “All the rest will be same as our previous contracts.”

14. The dispute that arose in that case was whether general words mentioned above were capable of incorporating an arbitration clause. The difference in approach between cases in which the parties incorporate the terms of a contract between the other parties or between one of them with a third party on the one hand and those in which they incorporate the standard terms on the other hand, was noticed. The following broad categories in which the parties attempt to incorporate an arbitration clause were recognized by the Court, which are as follows:

“(1) A and B make a contract in which they incorporate standard terms. These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.

(2) A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties (3) A and B make a contract incorporating terms agreed between A (or B) and C. Common examples are a bill of lading incorporating the terms of a charter to which A is a party; reinsurance contracts incorporating the terms of an underlying insurance; excess insurance contracts incorporating the terms of the primary layer of insurance; and building or engineering sub contracts incorporating the terms of a main contract or sub-sub contracts incorporating the terms of a sub contract.

(4) A and B make a contract incorporating terms agreed between C and D. Bills of lading, reinsurance and insurance contracts and building contracts may fall into this category.”

15. In Habas’s case (supra), Justice Christopher Clarke followed the ratio in the case of ‘the Athena’ (supra) and held that in single contract cases (categories 1 and 2), a general reference would be sufficient for incorporation of an arbitration clause from a standard form of contract. In cases falling under categories 3 and 4 mentioned above which are two contract cases, it was held that a stricter rule has to be followed by insisting on a specific reference to the arbitration clause from an earlier contract. Reliance placed on the judgment of Sir John Megaw in Aughton v MF Kent Services [1991] 31 Con L.R. 60 was repelled in the following terms:

“53 I do not regard myself as bound by the decisions of the Court of Appeal in Aughton v Kent and The Ethniki to reach a different conclusion. Both were two-contract cases. Further the judgments of Sir John Megaw and Lord Justice Ralph Gibson are, in part in conflict so as to preclude either of them being binding authority even in a two contract case. The agreement of Evans LJ with Sir John Megaw’s ” analysis of the authorities with regard to arbitration clauses and specifically with regard to the incorporation of charterparty arbitration clauses into bills of lading ” was obiter.”

16. The point pertaining to the independent nature of an arbitration clause being determinative of the dispute pertaining to incorporation was also dealt with in the said judgment as follows:

“51 Like Langley J, however, I do not accept that, in a single contract case, the independent nature of the arbitration clause should determine whether it is to be incorporated. A commercial lawyer would probably understand that an arbitration clause is a separate contract collateral to another substantive contract and that the expression “arbitration clause” is, on that account, something of a misnomer for “the arbitration contract which is ancillary to the primary contract”.

But a businessman would have no difficulty in regarding the arbitration clause (as he would call it) as part of a contract and as capable of incorporation, by appropriate wording, as any other term of such a contract; and it is, as it seems to me to a businessman’s understanding that the court should be disposed to. give effect. A businessman who had agreed with his counterparty a contract with 10 specific terms under various headings and then agreed with the same counterparty terms 1-5 under the same headings as before and, as to the rest, that all the terms of the previous contract should apply, would, I think, be surprised to find that “all” should be interpreted so as to mean “all but the arbitration clause”.

17. For a better understanding of the single and two contract cases and reference to standard form terms it is relevant to examine Russell on Arbitration 24 th Edition (2015) which is as under: (See pp. 52-54, 24rd Edn.) “Reference to standard form terms, single and two contract cases. If the document sought to be incorporated is a standard form set of terms and conditions the courts are more likely to accept that general words of incorporation will suffice. This is because the parties can be expected to be more familiar with those standard terms, including the arbitration clause.

In Sea Trade Maritime Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd, (The “Athena”) No.2 the Court drew a distinction between what is described as a “two contract case”, that is where the arbitration clause is contained in a secondary document which is a contract to which at least one party is different from the parties to the contract in question, and “a single contract case” where the arbitration clause is in standard terms to be found in another document.

Relying on dictum of Bingham LJ in Federal Bulk Carries Inc v. C. Itoh & Co Ltd (The “Federal Bulker”), Langley J stated that: “In principle, English law accepts incorporation of standard terms by the use of general words and, I would add, particularly so when the terms are readily available and the question arises in the context of dealings between established players in a well-known market. The principle, as the dictum makes clear, does not distinguish between a term which is an arbitration clause and one which addresses other issues. In contrast, and for the very reason that it concerns other parties, a “stricter rule” is applied in charterparty/bills of lading cases. The reason given is that the other party may have no knowledge nor ready means of knowledge of the relevant terms. Further, as the authorities illustrate, the terms of an arbitration clause may require adjustment if they are to be made to apply to the parties to a different contract.”

The Court therefore reinforced the distinction between incorporation by reference of standard form terms and of the terms of a different contract, and concluded that in a single contract case general words of incorporation are sufficient, whereas by its nature a two contract case may require specific reference to the other contract, unless the secondary document is stated to be based on standard form terms containing an arbitration agreement. In that case, presumably specific reference to the arbitration clause would not be needed.

As discussed below, this approach has been endorsed in subsequent cases, albeit drawing a slightly different but “material” distinction between incorporation of the terms of a separate contract – standard or otherwise – made between the same parties which are treated as “single contract” cases, even where there is in fact more than one contract; and those where the terms to be incorporated are contained in a contract between one or more different parties which are treated as the “two contract” cases. (Para 2-049)

Extension of the single contract cases. Recently, the courts appear to have extended the “single contract” principle applicable to standard form contracts, where general words of incorporation will suffice, to other types of contract where the same rationale can be said to apply. Thus, if the document sought to be incorporated is a bespoke contract between the same parties, the courts have accepted this as a “single contract” case where general words of incorporation will suffice, even though the other contract is not on standard terms and constitutes an entirely separate agreement.

The rationale for this approach is that the parties have already contracted on the terms said to be incorporated and are therefore even more likely to be familiar with the term relied on than a party resisting incorporation of a standard term. Put another way, if general words of incorporation are sufficient for the latter, they should be even more so for the former. The courts also appear to have accepted as a “single contract” case a situation where the contract referred to is between one of the parties to the original contract and a third party, where the contracts as a whole “were entered into in the context of a single commercial relationship”.(Para 2-050)

[Emphasis Supplied]

18. This Court in M.R. Engineers’ case, which is discussed in detail supra, held the rule to be that an arbitration clause in an earlier contract cannot be incorporated by a general reference. The exception to the rule is a reference to a standard form of contract by a trade association or a professional institution in which case a general reference would be sufficient for incorporation of an arbitration clause. Reliance was placed by this Court on Russell on Arbitration 23 rd Edition (2007) . The development of law regarding incorporation after the judgment in M.R. Engineers requires careful consideration.

It has been held in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL [2010] EWHC 29 (Comm) that a standard form of one party is also recognized as a ‘single contract’ case. In the said case, it was also held that in single contract cases general reference is enough for incorporation of an arbitration clause from a standard form of contract. There is no distinction that is drawn between standard forms by recognized trade associations or professional institutions on one hand and standard terms of one party on the other. Russell on Arbitration 24 th Edition (2015) also takes note of the Habas’s case.

19. We are of the opinion that though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause. In M.R. Engineers this Court restricted the exceptions to standard form of contract of trade associations and professional institutions. In view of the development of law after the judgment in M.R. Engineers’ case, we are of the opinion that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause. In other words, general reference to a standard form of contract of one party will be enough for incorporation of arbitration clause.

A perusal of the passage from Russell on Arbitration 24th Edition (2015) would demonstrate the change in position of law pertaining to incorporation when read in conjunction with the earlier edition relied upon by this Court in M.R. Engineers’ case. We are in agreement with the judgment in M.R. Engineer’s case with a modification that a general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the arbitration clause.

20. In the present case, the purchase order was issued by the Appellant in which it was categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The Respondent by his letter dated 15.12.2012 confirmed its acceptance of the terms and conditions mentioned in the purchase order except delivery period. The dispute arose after the delivery of the goods.

No doubt, there is nothing forthcoming from the pleadings or the submissions made by the parties that the standard form attached to the purchase order is of a trade association or a professional body. However, the Respondent was aware of the standard terms and conditions which were attached to the purchase order. The purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause.

21. For the aforementioned reasons, the appeal is allowed and the judgment of the High Court is set aside. Justice Sushil Harkauli is appointed as the Arbitrator to adjudicate the dispute between the parties.

 [S.A. BOBDE]

 [L. NAGESWARA RAO]

New Delhi;

January 05, 2018

Agreements in restraint of legal proceedings is void u/s 28

Contract

Indian Contract Act 1872

Section 28 of the Contract Act was introduced on the recommendation of the Law Commission in order to remove the anomalies created by the earlier Act. The position of law settled before the amendment[ 1997 amendment to the Section] was that Section 28 would invalidate only a clause in an agreement which restricts a party from enforcing his right absolutely or which limits the time within which he may enforce his right. Section 28 before the amendment does not come into operation when contractual term spell out an extension of a right of a party to sue or spell out the discharge of a party from the liabilities.

Indian Contract Act 1872

28. Agreements in restraint of legal proceedings, void.-

Every agreement,—

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability,. under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.

Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—

This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2.—Saving of contract to refer questions that have already arisen.—

Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.L

Exception 3.—Saving of a guarantee agreement of a bank or a financial institution.—

This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability.

(a) Explanation.—

(i)In Exception 3, the expression “bank” means—a “banking company” as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949).
(b)”a corresponding new bank” as defined in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(c)”State Bank of India” constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);
(d)”a subsidiary bank” as defined in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(e)”a Regional Rural Bank” established under section 3 of the Reg, tonal Rural Banks Act, 1976 (21 of 1976);
(f)”a Co-operative Bank” as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(g) “a multi-State co-operative bank” as defined in clause (cciiia) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); and
(ii)In Exception 3, the expression ‘a financial institution” means any Public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956).[ Inserted dt. 5.1.2013]


  • In respect of the arbitration clause in an agreement requiring the claim to be filed within 90 days from the date the final bill was raised for payment. It was held that the said clause in the arbitration agreement limiting the time during which a claim can be made by a party would be clearly against public policy and would be void under Section 28 of the Contract Act. Supreme Court in National Insurance Co. Ltd v. Sujir Ganesh Nayak and Co. and Anr. ; It was held that an agreement which curtails the period of limitation and prescribes a shorter period than prescribed by law would be void as offending Section 28 of the Contract Act. This was so because such an agreement would seek to restrict a party from enforcing his right in court after the period prescribed under the agreement expires even though the period prescribed by law for enforcement of his relief has yet not expired. However, there was possibility of agreements which do not seek to curtail the time for enforcement of the right but which provide for forfeiture or waiver of a right itself if no action is commenced within the period stipulated by the agreement and such a clause would not fall within the mischief of Section 28 of the Act.
  • Undoubtedly when the parties have agreed on a particular forum, the Courts will enforce sauch agreement. This is not because of a lack or ouster of its own jurisdiction by reason of concensual conferment of jurisdiction on another Court, but because the Court will not be party to a breach of an agreement. Such an agreement is not contrary to public policy nor does it contravene Section 28 or Section 23 of the Contract Act. This has been held in Jakkam Singh vs. M/s. Gammon (India) Ltd., AIR 1971 SC 740; A. B. C. Laminart Pvt. Ltd. vs. A. P. Agencies, (1989) 2 SCC 163 and Modi Entertainment Network vs. W. S. G. Cricket Pte. Ltd., (2003) 4 SCC 341, 351. The decision of the Delhi High Court in Rajendra Sethia vs. Punjab National Bank, AIR 1991 Del. 285 relied on by the Commission which holds to the contrary is, therefore, clearly erroneous. Man Roland Druckimachinen AG Vs Multicolour Offset Ltd. and another[SC 2004 APRIL]

  • SUPREME COURT CASES-

AVM SALES CORPORATION VS M/S ANURADHA CHEMICALS PVT LTD[SC 2012(2)SCC 315

RAJASTHAN STATE ELECTRICITY BOARD VS M/S UNIVERSAL PETROL CHEMICAL LTD[SC 2009(3) SCC 107

Col. D. I. Mac PhersonVersus M. N. Appanna and another [SC 1951 Feb]

KEYWORDS: Concluded contract

Capture

As there was no concluded contract, the decree passed by him awarding compensation to the plaintiff for breach of contract cannot be sustained

AIR 1951 SC 184 : (1951) SCR 161

(SUPREME COURT OF INDIA)

Col. D. I. Mac Pherson Appellant
Versus
M. N. Appanna and another Respondent

(Before : Saiyid Fazl Ali, B. K. Mukherjea And N. Chandrasekhara Aiyar, JJ.)

Civil Appeal No. 35 of 1950, Decided on : 09-02-1951.

Contact—No concluded contract—Decree passed awarding compensation to the plaintiff for breach of contract cannot be sustained—offer and acceptance.

Counsel for the Parties:

Shri C. R. Pattabhi Raman, Advocate, instructed by Shri M. S. K. Sastri, Advocate for Appellant. Shri Jindra Lal, Advocate, instructed by Shri Rajinder Narain, Advocate for Respondents.

JUDGMENT

Fazl Ali, J—(on behalf of himself and Mukherjea And Chandrasekhara Aiyar JJ.)—This is an appeal from a judgment of the Judicial Commissioner of Coorg in a suit filed by respondent 1 (hereinafter referred to as the plaintiff) against the appellant (hereinafter referred to as defendant 1) and respondent 2 (herein after referred to as defendant 2), for the specific performance of a contract. Defendant 1 owned a bungalow in Mercara known as “Morvern Lodge.’ The suit which has given rise to this appeal was instituted by the plaintiff for the specific performance of an alleged contract of sale in respect of this bungalow.

2. It appears that defendant 1 owned certain estates in Mercara, and one Mr. White was an alternative Director in one of the estates, and Youngman was the manager of another estate also belonging to defendant 1 and was looking after “Morvern Lodge’’ during his absence. It seems that about the middle of 1944, the plaintiff asked White if be would cable to defendant 1 his offer of ` 4,000 for the bungalow, and, on 1-6-1944, White sent a cable to defendant 1 to the following effect:”Have enquiries Mercara bungalow if for sale, wire lowest figure.’’ On 24-7-1944, the plaintiff wrote to defendant 1 that he was prepared to purchase the bungalow for ` 5,000 and if the offer was acceptable to him, he (defendant 1) should inform the plaintiff to which bank he should issue a cheque in payment of the price. This letter was followed up by a cable from Youngman to defendant 1 to the following effect:”Have had offer Morvern Lodge rupees six thousand ,for immediate possession.’’ On 8-8-1944, Youngman received a cable from defendant 1 saying:

“Won’t accept less than rupees ten thousand.” On 7- 8-1944, the plaintiff wrote to Youngman asking him whether his offer had been accepted, and saying that he was prepared to accept any higher price if found reasonable. Meanwhile, on the 8th August, defendant 1 sent an airgraph to Youngman, which states inter alia:

“I got a cable from you a few days ago saying you had an offer of ` 6,000 for Morvern Lodge. At the same time I got one from White saying value of Bungalow was ` 10,000. So wired you-’’Won’t accept less than ` 10,000. “ ‘

On 9-8-1944, Youngman wrote to the plaintiff as follows:

“In reply to your letter, dated 7th August, I received yesterday a cable from Col. MacPherson regarding your offer of ` 6.000, which reads as follows:”Won’t accept less than rupees ten thousand” MacPherson.”

The plaintiff has stated in his plaint that this letter of Yoangman was received by him on 14-8-1944, and he immediately accepted the “counter-offer made by defendant 1,” and confirmed it in writing in a letter addressed to Youngman. In his evidence, however, the plaintiff has stated that he met Youngmen on the 11th August after receiving his letter and told him personally that he would pay ` 10,000 for the bungalow and will require immediate delivery. There was also some talk about the conveyance charges, and ultimately the plaintiff agreed to bear those charges. Afterwards, he wrote to Youngman a letter on the 14th August in which after referring to the conversation he had with the latter he stated as follows:

“I hereby confirm my oral offer of ten thousand for the bungalow. I shall be grateful if you will kindly hurry up with consultation with your lawyers at Madras and make arrangement to receive the money and hand over the bungalow as early as practicable.”

It appears that 3 days later, i. e, on the 17th August, one Subbayya Wrote to Youngman stating that “he confirmed his offer of ` 10,500 made to him (Youngman) the previous dey for the purchase of the bungalow,” and he excepted that the latter had cabled to defendant 1 communicating the offer as promised. It seems that Youngman did not communicate Subbayya’s offer to defendant 1 but sent a cable to him on the 26th August to the following effect:”Offered ten thousand Morvern Lodge immediate possession. May I sell.’’On the same day, White cabled to defendant 1 in the following terms:

“Hold offer for Morvern Bungalow rupees eleven thousand cash subject immediately acceptance and occupation. Strongly recommend acceptance.”

On the 29th August, Youngman sent an airgraph to defendant 1 in which he wrote as follows:

“Thank you for your Airgraph letters of 8th August which reached me on 24th instant. I cabled you on Saturday an offer of ` 10,000 for Morvern Lodge from the would-be purchaser who previously had offered ` 6,000, but I had a call from White a day or two ago and he tells me that he cabled an offer on the same day of ` ll,000. I expect you will have answered these and will have accepted White’s offer. If you have decided will you please arrange for a Power-of-Attorney to be prepared as soon as possible.”

In the meantime, defendant 1 sent a cable to White to the following effect:

“Accept rupees eleven thousand Morvern Lodge occupation permitted, when full amount deposited my account Mircantile Bank Madras inform Youngman.”

Thereafter, defendant 1 paid the amount of Rs, 11,000 and occupied the bungalow.

3. The question to be decided in this Case is whether in view of the correspondence which has been reproduced, it could be held that there was a concluded contract for the sale of “Morvern Lodge” in favour of the plaintiff on the14th August, as stated by him in the plaint. The Judicial Commissioner of Coorg who tried the suit held that there was a concluded contract, but, instead of giving to the plaintiff a decree for specific performance, awarded a sum of ` 3,000 as compensation to him. Against this decree, defendant 1 alone has appealed, after obtaining a certificate under S. 109 (c), Civil P. C. from the Judicial Commissioner. The plaintiff has not preferred any appeal.

4. The plaintiff’s case, (supra) is that the cable sent by defendant 1 on the 5th August, and received by Youngman on the 8th, to the effect that he would not accept less than ` 10,000, was a counter-offer made by him through Youngman to the plaintiff, and the contract was complete as soon as he accepted it. We however find it difficult to hold on the entire facts of the case that there was any concluded contract on 14-8-1944, and we are supported in this view by the well-known case of Harvey v. Facy,(1893) A. C. 552:’ (62 L. J. P. C. 127), in which the facts were somewhat similar to those of the present case. In that case, the appellants had telegraphed to the respondents “Wil1 you sell us B. H.P.?’ Telegraph lowest cash price’’, and the respondents had telegraphed in reply. “Lowest price for B. H. P. £900,” and then the appellants telegraphed. “we agree to buy B. H. P’. for £900 asked by you. Please send us your title deed in order that we may get early possession,.’ but received no reply. On these facts, the Privy Council held that there was no contract, and Lord Norris, who delivered the judgment of the Board, observed as follows:

“The third telegram from the appellants treats the answer of L. M. Facey stating his lowest price as an unconditional offer to sell to them at the price named. Their Lordships cannot treat the telegram from L.M. Facey as binding him in any respect, except to the extent it does by its terms, viz., the lowest price. Everything else is left open, and the reply telegram from the appellants cannot be treated as an acceptance of an offer to sell them ; it is an offer that required to be accepted by L. M. Facey. The contract could only be completed if L.M. Facey had accepted the appellant’s last telegram. It has been contended for the appellants that L. M. Facey’s telegram should be read as saying ‘yes’ to the first question put in the appellant’s telegram, but there is nothing to support, that contention. L. M. Facey’s telegram gives a precise answer to a precise question, viz., the price. The contract must appear by the telegrams, whereas the appellants are obliged to contend that an acceptance of the first question is to be implied. Their Lordships are of opinion that the mere statement of the lowest price at which the vendor would sell contains no implied contract to sell at that price to the persons making the inquiry.”

5. The conclusion at which we have arrived is strengthened by certain facts which emerge from the correspondence between the parties. The real question is whether defendant had made a counter offer in his cable of 5th August or he was merely inviting offers. The plaintiff in his letter of 14th August addressed to Youngman, stated that he confirmed his oral offer of ten thousand for the bungalow, and he did not say in so many words that he accepted the ‘counter. offer’ of defendant 1. Similarly, in the cable which Youngman sent to: defendant 1 on 28th August, he did not state that the latter’s offer had been accepted, but stated that he had been offered ` 10,000 for the bungalow and concluded with the words “May I sell?” Neither party thus treated defendant 1’s cable as containing a counter-offer. On the other hand, they proceeded on the footing that the plaintiff had made an offer of ` 10,000 which was subject to acceptance by defendant 1. Apparently, defendant 1 was in communication not only with Yonngman but also White, and both of them rightly thought that no transaction could be concluded without obtaining defendant 1’s express assent to it.

6. Mr. Jindra Lal, counsel for the plaintiff, who pressed his points with force and ability, contended that by 26-8-1944, Youngman had come under the influence of the rival bidder or at least that of White who was supporting him, and the cable to defendant 1 was deliberately framed by Youngman in such a way as to prejudice the plaintiff. There is however nothing in the evidence to support such an extreme conclusion. On the other hand, Youngman has frankly stated in his evidence that he felt it improper to entertain Subbayya’s higher offer and did not communicate it to defendant 1. This statement is supported by the cable of 26th August, and, if Youngman can be said to have had any leaning at all, it was certainiy in favour of the plaintiff. In these circumstances, it would be difficult to hold that Youngman had deliberately misdescribed the plaintiff’s acceptance of the counter-offer as his offer in the cable which he sent on 26th August to defendant 1.

7. It seems to us that the view taken by the Judicial Commissioner is not correct, and, as there was no concluded contract, the decree passed by him awarding compensation to the plaintiff for breach of contract cannot be sustained. We therefore allow the appeal, set aside the judgment and decree of the Judicial Commissioner and dismiss the plaintiff’s suit. Having regard to the circumstances of the case, we make no order as to costs.

Suresh Kumar Wadhwa Vs. State of Madhya Pradesh & Ors.[SC 2017]

KEYWORDS:-Public notice inviting bids-

Supreme Court-min

A right to forfeit being a contractual right and penal in nature, the parties to a contract must agree to stipulate a term in the contract in that behalf. A fortiori, if there is no stipulation in the contract of forfeiture, there is no such right available to the party to forfeit the sum.
a party to the contract can insist for performance of only those terms/conditions, which are part of the contract. Likewise, a party to the contract has no right to unilaterally “alter” the terms and conditions of the contract and nor they have a right to “add” any additional terms/conditions in the contract unless both the parties agree to add/alter any such terms/conditions in the contract.

In the absence of any power in the contract to forfeit the license money deposited by the licensee, the action of the Union to forfeit the license fees is held illegal

SUPREME COURT OF INDIA

BENCH:-  [R.K. AGRAWAL] [ABHAY MANOHAR SAPRE]

ACT: Section 74 of the Indian Contract Act, 1872

The principle adopted: Similarly, it is also a settled law that if any party adds any additional terms/conditions in the contract without the consent of the other contracting party then such addition is not binding on the other party. Similarly, a party, who adds any such term/condition, has no right to insist on the other party to comply with such additional terms/conditions and nor such party has a right to cancel the contract on the ground that the other party has failed to comply such additional terms/conditions.

HISTORY: Division Bench of the High Court dismissed the appeal filed by the appellant herein and affirmed the judgment and decree dated 23.12.1997 passed by the 9th Additional District Judge, Bhopal in C.S. 1 No.2-A/97 by which the appellant’s suit for declaration and refund of security amount deposited with the respondents was dismissed.

[Civil Appeal No.7665 of 2009]

Abhay Manohar Sapre, J.

1. This appeal is filed by the plaintiff against the final judgment and order dated 21.11.2006 passed by the High Court of Madhya Pradesh, Bench at Jabalpur in First Appeal No.127 of 1998 whereby the Division Bench of the High Court dismissed the appeal filed by the appellant herein and affirmed the judgment and decree dated 23.12.1997 passed by the 9th Additional District Judge, Bhopal in C.S. 1 No.2-A/97 by which the appellant’s suit for declaration and refund of security amount deposited with the respondents was dismissed.

2. Facts of the case lie in a narrow compass. They, however, need mention, in brief, to appreciate the controversy involved in the appeal.

3. The appellant is the plaintiff whereas the respondents (State of M.P. and its officials) are the defendants in a civil suit out of which this appeal arises.

4. Respondent No. 3 (defendant No. 3)-a Nazul Officer, Bhopal issued an advertisement on 07.01.1996 in daily newspaper for and on behalf of State of M.P wherein it was published that four nazul plots of the State would be sold in public auction on 11.01.1996 on the terms and conditions set out therein. Anyone interested could participate in the public auction by following the terms and conditions mentioned in the public notice.

It is apposite to reproduce the public notice including its terms/conditions herein below:

“All are hereby informed that the public auction of Government nazul plots of situated at Mahavir Nagar, Arera Colony, Bhopal is to be carried out. The description of the nazul plots is as follows: Place Plot No. Area Arera Colony, Bhopal E 5/5 2880 sq ft E 5/17 2880 sq ft E 2/12 13251.03 sq ft E 2/12 9600 sq ft The public auction of the aforesaid plots will done on 11.01.1996 starting at 11 A.M. in the court of the nazul officer capital city scheme Bhopal and the conditions of the auction will be as follows:

1. Each plot shall be auctioned separately.

2. Bidder must be Income Tax Assessee and proof of Assessment for 1994-95 shall be necessary.

3. Before taking part in the bid, each bidder shall have to deposit a Bank draft of Rs. 3.00 lacs with Nuzul Officer as a security.

4. The highest bidder shall have to deposit 1/4th amount of his bid immediately after closure of auction for the plot in question.

5. Within 7 days from the date of acceptance of his bid, the bidder shall have to deposit entire amount of his bid after adjustment of security deposit and one fourth amount already deposited.

6. After receipt of full payment, the possession of plot after demarcation shall be delivered to bidder on site and he shall be granted a permanent lease for 30 years.

7. Collector, Bhopal shall have power to cancel any auction/bid without assigning any reasons.”

5. The appellant was one of the participants in the auction proceedings. The appellant, accordingly, in terms of clauses 2 and 3 of the public notice deposited his Income Tax Return for the year 1994-95 and also deposited a sum of Rs. 3 lakhs vide Bank Draft No. 6858812 dated 10.01.1996 with respondent No. 3 as security.

6. The auction was held on 11.01.1996. The appellant quoted his bid at Rs.53,80,000/- for plot No.E-5/5 situated in Mahavir Nagar, Arera Colony, 4 Bhopal. The appellant’s bid was declared the highest amongst those who participated. The Respondent No. 3 accordingly accepted the appellant’s bid for plot No. E-5/5.

7. The Respondent No. 3 then asked the appellant to deposit 1/4th amount of the total amount on the same day in terms of public notice. The appellant accordingly deposited a sum of Rs.10.45 lakhs by cheque No. 309991 dated 11.01.1996 drawn in favour of respondent No. 3.

8. On 25.01.1996, the appellant received a letter dated 24.01.1996 from respondent No. 3 informing him that his bid for plot No. E-5/5 is accepted subject to “special terms and conditions”.

These conditions, which are mentioned in the letter, read as under:

“1.Annual lease rent @ 7.5% will be charged from the bidders on the accepted bid amount.

2. If the lease rent for 10 years is deposited in lumpsum, then the remaining 20 years will be free from lease rent.

3. The lease shall have to be renewed as per rules after 30 years.

4. All the conditions of auction will be binding on the bidders.”

9. The appellant, on receipt of aforesaid letter, replied to respondent No.3 on 29.01.1996 stating that the “special terms and conditions” mentioned in the letter were neither published nor informed to him at any point of time earlier and nor was he ever made aware of any such terms and conditions till he received the letter dated 25.01.1996. The appellant, therefore, declined to accept the “special terms and conditions” and requested respondent No. 3 to return the security amount of Rs.3 lakhs, which he had deposited at the time of submission of the bid.

10. On 08.02.1996, respondent No. 2 issued a show cause notice to the appellant stating therein 6 as to why the amount of Rs.3 lakhs be not “forfeited” and the plot in question is re-auctioned. The appellant, vide his reply dated 12.02.1996 replied that since he has not accepted the “special terms and condition” offered by respondent No. 3 in their acceptance letter, the appellant is entitled to ask for refund of the security amount of Rs.3 lakhs from respondent No. 3 and that respondent No. 2 has no right to forfeit such amount.

11. Respondent No. 2, by his letter dated 24.02.1996 informed to the appellant that a sum of Rs. 3 lakhs deposited by him (appellant) towards security has been forfeited.

12. The appellant, on 28.02.1996, then served a legal notice to the respondents under Section 80 of the Code of Civil Procedure, 1908 and demanded refund of Rs. 3 Lakhs. The respondents, however, did not refund the money. The appellant was, 7 therefore, constrained to file the civil suit against the respondents for a declaration that the letter dated 24.02.1996 forfeiting the security amount of Rs 3 lakhs be declared as bad in law and further prayed for refund of Rs. 3 lakhs along with interest at the rate of Rs.18% p.a..

13. In substance, the appellant’s suit was founded on the allegations, inter alia, that firstly, the appellant was within his right to refuse to accept the “special terms and conditions” contained in the acceptance letter dated 24.01.1996 of respondent No.3 because according to the appellant these terms and conditions were never part of the original public auction notice pursuant to which he had submitted his bid and nor such terms and conditions were communicated to the appellant till his bid was accepted and hence these conditions were not binding on him;

Secondly, in the absence of any 8 terms and conditions published in the public notice empowering respondent No. 2 to forfeit the security amount (Rs.3 lakhs), respondent No. 2 had no right/authority to forfeit a sum of Rs. 3 lakhs deposited by the appellant; and lastly, the appellant had performed his part by ensuring compliance of all necessary terms of the public notice whereas it was the respondents, who committed breach of the terms.

14. The respondents filed their written statement. While denying the appellant’s claim, the respondents justified their action in forfeiting the security amount of Rs. 3 lakhs. The respondents, however, contended that firstly, the “special terms and conditions” were orally told to the appellant at the time of auction; secondly, these terms and conditions were applicable to the auction proceedings because they are part of the Revenue 9 Book Circular (RBC) which applies to all the plots in question; and lastly, the appellant committed breach of terms by withholding the payment of 1/4th amount, when he directed “stop payment” of his cheque amount for being paid to respondent No.3. These were essentially the grounds taken in the written statement to justify the forfeiture as being legal and proper.

15. The Trial Court framed issues. Parties led evidence. By judgment/decree-dated 23.12.1997, the Trial Court dismissed the suit. It was held that the appellant failed to deposit the 1/4th amount immediately as per the terms of the public notice inasmuch as the appellant deposited the amount by cheque and later stopped its payment, which constituted a breach on his part of the terms of the public notice. It was also held that the demand of certain money by way of “special terms and 10 conditions” mentioned in the acceptance letter dated 24.01.1996 was in accordance with the Rules of RBC and, therefore, such terms and conditions were binding on the appellant for ensuring its compliance and lastly, in the light of the two breaches committed by the appellant, the respondents were justified in forfeiting the security amount deposited by the appellant.

16. The appellant, felt aggrieved, filed first appeal before the High Court. The Division Bench, by impugned order, dismissed the appeal and upheld the judgment/decree of the Trial Court. The High Court held that since the similar issue was the subject matter of another appeal (F.A. No. 794/2000- M/s Priyanka Builders vs State of MP decided on 11.11.2006) and the said appeal having been dismissed, this appeal also deserves dismissal in the light of judgment rendered in 11 Priyanka Builders’ case. The impugned judgment, however, neither recorded any reason given in the Priyanka’s case and nor mentioned the facts of Priyanka’s case with a view to show similarity between both the cases and nor recorded any independent reasoning for dismissal of the appeal.

17. The appellant (plaintiff), felt aggrieved, has filed this appeal by way of special leave before this Court.


18. Heard Mr. Prasenjit Keswani, learned counsel for the appellant and Mr. Mishra Saurabh, learned counsel for respondents 1 & 2.


19. Having heard learned counsel for the parties and on perusal of the record of the case, we are inclined to allow the appeal, set aside the impugned judgment and the decree of the two Courts below and decree the appellant’s (plaintiff’s) suit against the respondents as indicated infra.

20. Three questions, basically, arise in this appeal. First, whether the appellant (plaintiff) committed any breach of the terms and conditions of the public auction notice dated 07.01.1996; second, whether the State was justified in forfeiting the security money (Rs.3 lakhs) deposited by the appellant for the alleged breach said to have been committed by the appellant of any terms and conditions of public notice dated 07.01.1996; and third, whether the State had power to forfeit the security money in the facts of this case?

21. These questions need to be answered keeping in view the provisions of Section 74 of the Indian Contract Act, 1872 (hereinafter referred to as “the Act”) and some settled legal principles relating to law of contract.

22. Section 74 of the Act reads as under:

“74. Compensation for breach of contract where penalty stipulated for- When a contract 13 has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation- A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Exception- When any person enters into any bail-bond, recognizance or other instrument of the same nature or, under the provisions of any law, or under the orders of the Central Government or of any State Government gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Explanation- A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.”

23. Reading of Section 74 would go to show that in order to forfeit the sum deposited by the contracting party as “earnest money” or “security” for the due  performance of the contract, it is necessary that the contract must contain a stipulation of forfeiture. In other words, a right to forfeit being a contractual right and penal in nature, the parties to a contract must agree to stipulate a term in the contract in that behalf. A fortiori, if there is no stipulation in the contract of forfeiture, there is no such right available to the party to forfeit the sum.

24. The learned author-Sir Kim Lewison in his book “The Interpretation of Contracts” (6th edition) while dealing with subject “Penalties, Termination and Forfeiture clauses in the Contract” explained the meaning of the expression “forfeiture” in these words: “A forfeiture clause is a clause which brings an interest to a premature end by reason of a breach of covenant or condition, and the Court will penetrate the disguise of a forfeiture clause dressed up to look like something else. A forfeiture clause is not to be construed strictly, but is to receive a fair construction.”

(See page 838)

25. The author then quoted the apt observations of Lord Tenterden from an old case reported in (1828) Moo. & M.189 Doe d Davis vs. Elsam wherein the learned Lord while dealing with the case of forfeiture held as under: “I do not think provisoes of this sort are to be construed with the strictness of conditions at common law. These are matters of contract between the parties, and should, in my opinion, be construed as other contracts”

(see pages 840).

26. Equally well settled principle of law relating to contract is that a party to the contract can insist for performance of only those terms/conditions, which are part of the contract. Likewise, a party to the contract has no right to unilaterally “alter” the terms and conditions of the contract and nor they have a right to “add” any additional terms/conditions in the contract unless both the parties agree to add/alter any such terms/conditions in the contract.

27. Similarly, it is also a settled law that if any party adds any additional terms/conditions in the contract without the consent of the other contracting party then such addition is not binding on the other party. Similarly, a party, who adds any such term/condition, has no right to insist on the other party to comply with such additional terms/conditions and nor such party has a right to cancel the contract on the ground that the other party has failed to comply such additional terms/conditions.

28. Keeping in view the aforementioned principle of law, when we examine the facts of the case at hand then we find that the public notice (advertisement), extracted above, only stipulated a term for deposit of the security amount of Rs.3 lakhs by the bidder (appellant) but it did not publish any stipulation that the security amount 17 deposited by the bidder (appellant herein) is liable for forfeiture by the State and, if so, in what contingencies.

29. In our opinion, a stipulation for deposit of security amount ought to have been qualified by a specific stipulation providing therein a right of forfeiture to the State. Similarly, it should have also provided the contingencies in which such right of forfeiture could be exercised by the State against the bidder. It is only then the State would have got a right to forfeit. It was, however, not so in this case.

30. So far as the four special conditions are concerned, these conditions were also not part of the public notice and nor they were ever communicated to the bidders before auction proceedings. There is no whisper of such conditions being ever considered as a part of the auction proceedings enabling the bidders to make their compliance, in case, their bid is accepted.

31. In our considered opinion, it was mandatory on the part of the respondents(State) to have published the four special conditions at the time of inviting the bids itself because how much money/rent the bidder would be required to pay to the State on allotment of plot to him was a material term and, therefore, the bidders were entitled to know these material terms at the time of submitting the bid itself. It was, however, not done in this case.

32. Since these four conditions were added unilaterally and communicated to the appellant by respondent No. 3 while accepting his bid, the appellant had every right to refuse to accept such conditions and wriggle out of the auction proceedings and demand refund of his security amount. The State, in such circumstances, had no 19 right to insist upon the appellant to accept such conditions much less to comply and nor it had a right to cancel the bid on the ground of non-compliance of these conditions by the appellant.

33. Learned counsel for the respondents (State), however, argued that it was not necessary for the State to specify the condition relating to forfeiture and four additional terms/conditions in the public notice because they were already part of RBC, which is applicable to the nazul lands in question.

34. We find no merit in this submission for more than one reason. First, the public notice inviting bids did not even contain a term that all the provisions of RBC will be applicable to the auction proceedings and second, the relevant clauses of RBC which, according to the State, were to govern the auction proceedings ought to have been quoted 20 in verbatim in the public notice itself. It was, however, not done.

35. In our considered opinion, the object behind publishing all material term(s) is/are three fold. First, such term(s) is/are made known to the contracting parties/bidders; second, parties/bidders become aware of their rights, obligations, liabilities qua each other and also of the consequences in the event of their non-compliances; and third, it empowers the State to enforce any such term against the bidder in the event of any breach committed by the bidder and lastly, when there are express terms in the contract/pubic notice then parties are bound by the terms and their rights are, accordingly, determined in the light of such terms in accordance with law.

36. When we read the facts and law laid down by this Court in the case of Maula Bux vs. Union of India, 1969(2) SCC 354 and Shri Hanuman Cotton Mills & Ors. Vs. Tata Air Craft Ltd., 1969(3) SCC 522, we find that there was a specific clause of forfeiture in the contract in both the cases. Such clause empowered one party to forfeit the earnest money/security deposit in the event of non-performance of the terms of the contract. It is in the light of such facts, Their Lordships examined the question of forfeiture in the context of Section 74 of the Contract Act. Such is not the case here.

37. Our reasoning is supported by a recent decision of this Court in Union of India vs. Vertex Broadcasting Company Private Limited & Ors., (2015) 16 SCC 198 wherein Their Lordships held inter alia that in the absence of any power in the contract to forfeit the license money deposited by the licensee, the action of the Union to forfeit the license fees is held illegal. This is what was held:

“10. Coming to the aforesaid question of availability of a power to order forfeiture, a reading of the relevant clauses i.e. Clauses 8(f), 10(d) and 12 extracted above would go to show that the Union had not protected/empowered itself to forfeit the licence fee. The forfeiture contemplated by the aforesaid clauses are altogether in different contexts and situations. In the absence of any such power, the forfeiture that has taken place in this case will have to be adjudged as null and void.”

38. Learned counsel for the respondents (State) then argued that the appellant had committed the breach of clause 4 of public notice inasmuch as he failed to pay 1/4th amount and “stopped payment” of the cheque amount to the respondents.

39. We do not agree to this argument. In the first place, the appellant ensured compliance of the term because he deposited 1/4th amount of Rs. 10,45,000/- on the same day, i.e.,11.01.1996 by cheque. Secondly, the respondents also accepted the cheque from the appellant because deposit of money by cheque was one of the modes of payment. Had it not been so, the respondents would not have accepted the cheque from the appellant. Thirdly, the stop payment was done when the appellant received the acceptance letter containing four additional conditions to which he was not agreeable. He had, therefore, every right to wriggle out of the auction proceedings and stop further payment towards the transaction. Such action on the part of the appellant (bidder) did not amount to a breach of clause 4 so as to give right to the State to forfeit the security deposit.

40. In the light of foregoing discussion, we are of the considered opinion, that the appellant did not commit any breach of the term(s) and condition(s) of the notice inviting bids and on the other hand, it was the respondents who committed breaches. In these circumstances, the State had no right to forfeit the security amount and instead it should have been returned when demanded by the appellant.

41. Learned counsel for the appellant, however, brought to our notice that after cancellation of the auction proceedings in question, the plot in question was re-auctioned by the State and the same fetched Rs.134.00 lakhs as against appellant’s bid amount of Rs.53,50,000/-. Learned counsel for the respondents did not dispute this fact. In such circumstances, we find that the respondent did not suffer any monetary loss in the transaction and on the other hand earned more money as against what they would have got from the appellant. It is for this additional reason also, we are of the view that the action on the part of the respondents(State) in forfeiting the security deposit of the appellant was wholly unjustified.

42. In this case, it was expected from the State officials to have acted as an honest person while dealing with the case of an individual citizen and in all fairness should have returned the security amount to the appellant without compelling him to take recourse to the legal proceedings for recovery of his legitimate amount which took almost 21 years to recover.

43. Indeed, this reminds us of the apt observations made by the Chief Justice M.C. Chagla in a case reported in Firm Kaluram Sitaram vs. The Dominion of India (AIR 1954 Bombay 50). The learned Chief Justice in his distinctive style of writing while deciding the case between an individual citizen and the State made the following pertinent observations in para 19: 26 “…..we have often had occasion to say that when the State deals with a citizen it should not ordinarily reply on technicalities, and if the State is satisfied that the case of the citizen is a just one, even though legal defences may be open to it, it must act, as has been said by eminent Judges, as an honest person.”

44. We are in respectful agreement with the aforementioned observations as, in our considered opinion, they apply fully to the case in hand against the State.

45. We are, therefore, of the considered opinion that both the Courts below were not justified in their respective reasoning and the conclusion in dismissing the appellant’s suit. The appellant’s suit should have been decreed against the respondents. We hereby do so.

46. The appeal thus succeeds and is allowed with cost throughout. Impugned judgment and decree of the High Court and the Trial Court are set aside and the appellant’s (plaintiff) suit is decreed against the respondents (defendants). It is declared that letter dated 24.02.1996 of the respondents forfeiting the security deposit of the appellant is illegal and bad in law. A money decree for refund of Rs.3 lakhs is accordingly passed in favour of the appellant(plaintiff) and against the respondents (defendants) along with interest payable on Rs.3 lakhs at the rate of 9% p.a. from 01.02.1996 till realization.

47. Cost of the appeal Rs.10,000/- be payable by the respondents to the appellant.

……………………………………..J. [R.K. AGRAWAL]

……………………………………..J. [ABHAY MANOHAR SAPRE]

New Delhi;

October 25, 2017