Tulip Kanth

New Delhi, April 1, 2022: Holding that the Bombay High Court was clearly in error in overturning the judgment of the Trial Court with regard to certain claims on a wrong understanding that there was abandonment of contract on the part of the appellant-contractor, the Supreme Court has clarified that a refusal by one party to a contract may entitle the other party either to sue for breach or to rescind the contract and sue on a quantum meruit for the work already done.

The Division Bench of Justice V. Ramasubramanian and Justice Hemant Gupta said, “ It is fundamental to the Law of Contract that whenever a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is open to the other party not to perform the original contract. This will not amount to abandonment.”

The factual background of this case was that the appellant, a registered contractor with the Government of Maharashtra,  was issued with a work order for the execution of the work of Regional Rural Piped Water Supply Scheme for Dabhol-Bhopan and other villages in Ratnagiri District, at the cost of Rs.80,45,034. The time for the completion of the work was stipulated as 30 months but the Engineering Works Division issued a letter informing the appellant that the work order was kept in abeyance.Later, the appellant was informed to start the work.

When the Contractor started executing the work, repeated orders were issued by the Superintending Engineer and the Works Division(second & third respondents) asking the Contractor to modify the construction work at various places and also in some instances, to change the place of construction. The bills raised by him were not honored in time due to shortage of funds and the appellant did not proceed with the work. 

As a result, the second respondent issued a threat to withdraw the work order and also to levy a fine of Rs 10 per day from March 1, 1988. Ever since then, the parties were at loggerheads, which ultimately led to the appellant filing a suit for recovery of a sum of Rs 51,35,289.This claim for the aforestated sum was made under various heads such as value of the work done, release of the security deposit, compensation, damages etc.

Eventually, the Trial Court, decreed the suit partially, directing the respondents to pay to the appellant, a sum of Rs. 24,97,077 together with interest at 10% per annum from the date of the suit till realization. Aggrieved by the decree so granted, the respondents filed a regular civil appeal under Section 96 of the Code of Civil Procedure, 1908 on the file of the Bombay High Court and the High Court allowed the appeal partially and reduced the decree amount to Rs.7,19,412. Hence, the plaintiff had come up with this appeal.

The appeal in question was actually confined to 3 heads of claims namely, the release of security deposit, over-heads for the period from January 1989 to September 30,1990 and loss of profits, which were disallowed by the High Court. 

The only issue that arose for consideration was if there was abandonment of work by the appellant as the main reason why the High Court rejected the claims under the aforesaid 3 heads, was that the appellant had abandoned the work under the main contract.

After considering the entire sequence of events, the Top Court held that the appellant was not guilty of anything including abandonment. Admittedly, Clause 3(a) of the contract enabled the respondents to rescind the contract, forfeit the security deposit and entrust the work to another contractor at the risk and costs of the appellant. This clause was never invoked by the respondents. Therefore, the Court was surprised as to how the High Court could have found the appellant guilty of abandonment, especially in the light of the communications between the parties.

Speaking for the Bench, Justice Subramanian noted that the respondents issued the work order on July 3,1986 but directed the work order to be kept in abeyance by a subsequent letter dated July 28,1986. After this, stalemate was lifted by a letter dated December 17, 1986 and two things happened namely, a change in the diameter of the pipes supplied by the respondents for carrying out the contract and request for the performance of additional work without finalization of the modified rates. So, the respondents could not even accuse the appellant of non-performance of the contract.

Observing that refusal of the Contractor to perform the obligations, can perhaps be termed as breach of contract and not abandonment, the Bench stated, The refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as abandonment of contract.”

According to the Court, the respondents made it difficult for the appellant to execute the contract as per the terms originally agreed as they did not choose the option of rescinding the contract and suing for damages in terms of clauses 3 (a) and (b) of the Contract.

During the pendency of the first appeal before the High Court, the respondents deposited a sum of Rs.42,98,168 towards the amount decreed by the Trial Court and the amount deposited by the respondents before the High Court was withdrawn by the appellant by furnishing a bank guarantee. Thus, while allowing the Appeal and restoring the decree of the Trial Court, the Bench also discharged this Bank Guarantee.

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