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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO…9732../2016 (arising out of S.L.P.(Civil) No.11876/2013)

Mahanadi Coalfields Ltd. & Ors. …Appellants

Vs.

M/s. Dhansar Engineering Co. Pvt.Ltd & Anr.       .....Respondents

J U D G M E N T

A.M.KHANWILKAR,J.

Leave granted.

2. This appeal challenges the judgment of the Division Bench of

the High Court of Orissa at Cuttack dated 7th November 2012 in

Writ Petition (Civil) No. 1093/2006.

3. Briefly  stated,  on 2nd December  2002 the  appellants  issued

notice inviting tenders for  the work of  extraction and transfer  of

Coal/Coal Measure Strata (CMS) by deploying  “Surface Miners” on

hiring basis at various Open Cast Projects, inter-alia, at Lakhanpur.

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The  respondents  were  declared  the  lowest  bidder  having  quoted

Rs.17/- per cubic meter for the stated contract. A letter of intent

was issued in favour of the respondents on 4th April, 2003 which

was accepted by the respondents on 14th April, 2003. Work order

was issued in favour of the respondents on 23rd April, 2003 and a

formal agreement was executed between the parties on 26th May

2003.  The relevant  clauses  of  the  agreement  are  clauses  2  to  5

which read as under:

“2) Time shall be considered as one of the essence of the contract and the time for the completion of the contract shall be counted from 16.04.2003 of from the date of issue of L.O.I. to which terms the contractor agreed at the time when his tender was accepted and the contract shall be completed  by  15.04.2004  provided,  sufficient  face  is provided by the management.  

3) The work order has already been issued for a period of one year for a quantity of 49,50,000 Cum.  At the rate of Rs. 17.00/Cum. for an amount of Rs. 8,41,50,000.00.  

4) The contractor shall re-deploy the Surface Miner in other OCPs as per direction of the Company.

5) The tendered quantity may be reduced or increased by +/- 30%. No claim shall  lie on the company for such variation in quantity whether increase or decrease.  The tenderer  must  be  in  a  position  to  increase  the  machine capacity  upon 30% extra daily  quantity  within  45 days notice.  ”

(emphasis supplied)

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4. As the agreement refers to the terms and conditions of  the

tender  document,  we  may  usefully  refer  to  the  relevant  clauses

therein.

“11.0 VARIATION IN  SCHEDULED QUANTITY EXTENT AND RATE

The quantity given in the “Schedule of Quantity’s provisional and is meant to indicate the extent of the work and to provide a  uniform  basis  for  tendering  and  any  variation  either  by addition or omission shall not vitiate the contract.

The tendered quantity may be reduced or increased by 30%. No  claim  shall  be  on  the  company  for  such  variation  in quantity whether increase or decrease.  Tenderer must be in a position  to  increase  the  machine  capacity  within  45  days notice to achieve the extra increased quantity.

If the additional altered or substituted work includes any item of work for which no “rate is specified in the contract, “rate” for  such  item  shall  be  determined  by  the  Company Headquarters in the following manner:-

a) The rate shall be derived from the rate for similar or near similar item of work awarded in the Company, or

b) The rate shall be derived from contractor’s rate claimed for such item of work supported by analysis of the rate claimed by the contractor.   The  rate  to  be  determined  by  the  Company Headquarters  as  may  be  considered  reasonable  taking  into account  percentage  of  profit  and  overhead  not  exceeding  ten percent or on the basis of market rate, if any prevailing at the time when work was done.

However, the Engineer-in-charge shall be at liberty to cancel the instruction by giving notice in writing and to arrange to carry out the work in such manner as he considers advisable under  the  circumstances.   The  contractor  shall  under  no circumstances suspend the work in the plea of non-settlement of rates.

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The time of completion of the originally contracted work shall be extended/reduced by the Company in the proportion that the additional/reduced work (in value) bears to the original contracted work (in value), as may be assessed and certified by the Engineer-in-charge.

The  company  through  its  Engineer-in-charge  or  his representative, on behalf of the company, shall have power to omit  any  part  of  the  work  for  any  other  reason  and  the contractor shall be bound to carry out the work in accordance with the instruction given to Engineer-in-change.  No claim for extra charges/damages shall be made by the contractor on these grounds.

In  the  event  of  any  deviation  being  ordered  which  in  the opinion of the contractor changes radically the original scope and  nature  of  the  contract,  the  contractor  shall  under  no circumstances suspend the work, either original or altered or substituted and the dispute/disagreement as to the nature of deviation or the rate to be paid therefore shall  be resolved separately with the company.  

13. TIME FOR COMPLETION OF CONTRACT

Time is the essence of the contract.

The  contractual  period  of  work  shall  be  as specified in NIT/LOI Agreement.  The work shall be deemed to have  commenced  within  60  days  of  the  issue  of  Letter  of Intent at all the places and should be able to execute 100% of the daily awarded quantity from 61th day from the date of issue of LOI.

Agreement should be executed before the release of 1st, on A/c. bill.  

For failure to reach the desired quantity from 61th day of issue of LOI, contractor shall be liable for penalty @ 20% of amount for shortfall quantity i.e. (shortfall quantity x awarded rate x 20%).

The  contractor  must  be  prepared  to  work continuously for three shifts a day and all the working days in a year.

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If  the contractor,  without  valid reason,  commits default  in commencing the execution of  the work within 60 days from the date of issue of LOI or fails to attain within specified date of issue of Letter of Intent, the required quantity to give the ultimate output as per the schedule of quantity, the company shall without prejudice to any other right or remedy, be  at  liberty,  by  giving  15  days  notice  in  writing  to  the contractor, to forfeit the Earnest Money deposited by him and to terminate the contract.  ………………….

14.0 EXTENSION OF DATE OF COMPLETION

On happening  of  any  event  causing  delay  as  stated hereunder, the contractor shall apply for time extension to the CGM/GM of the Area.  

a)  Abnormally bad weather b)  Serous loss or damage by fire c) Civil  Commotion,  strike  or  lockout  affecting  execution  of

work d) Non-availability  of  working  force  or  site  which  is  the

responsibility of the company to supply.  e) Any  other  cause  which,  at  the  sole  discretion  of  the

company, is beyond the control of the contractor.

The  contractor  may  request  the  company  in  writing  for extension of time within 14 days of happening of such event ceasing  delay  stating  the  period  for  which  extension  is desired.  The company may, considering the eligibility of the request,  give  a  fair  and  reasonable  extension  of  time  of completion  of  the  work. Such  extension  shall  be communicated to the contractor, in writing, by the company through the Engineer-in-charge within 1 month of the date of receipt of such request.  ……………………

30.0 DEFAULT AND PENALTY

30.1 LOSS OR DAMAGE

Any  loss  or  any  expenditure  for  damages  incurred  by company will be recoverable from the contractor whether fully or partly if such expenditure for damages have been caused either directly or indirectly due to any negligence or failure on the part of the contractor.

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30.2. SHORTFALL PENALTY IN MECHANICAL EXCAVATION AND LOADING  

The average daily quantity of the quarter shall be worked out by dividing the mutually agreed quarterly allotted quantity by the  working days of  the quarter,  ending on 30th June,  30th September,  31st December  &  31st March  Average  daily quantity of a quarter must conform to average daily quantity of the year contractual period.

In the event of the Contractors failure to comply with the rate of  rate  of  progress  as  per  the  agreed  progress  chart  the contractor shall be liable to pay a penalty on the quantity by which  the  contractor  has  fallen  short  from  the  allotted quarterly quantity at the rate of 20% of the awarded rate.  

For failure of produce size coal as per NIT (-100 mm size), the contactor shall also be liable for penalty at the rate of 20% of the awarded rate for such over size quantity.

The shortfall penalty will be recovered concurrently from the running bill which will be adjusted annually subject to that the  total  penalty  is  limited  to  20%  of  (Annual  Shortfall Quantity x Rate).

30.3 WAIVAL OF PENALTY

The company may at its sole discretion waive the payment of penalty  in  full  or  in  part  in  request  received  from  the contractor depending the merit of the case if the entire work is completed  within  the  date  as  specified  in  the  contract  or within extended period approved without imposing penalty.  

31.0. SETTLEMENT OF DISPUTE

Except  where  otherwise  provided  for  in  the  contract,  all questions  and  disputes  relating  to  meaning  of  the  scope, specification and instructions herein before mentioned and as to any other question, claim right matter or thing whatsoever in  any  way  arising  out  of  or  relating  to  the  contract, instructions,  orders  or  these  conditions  or  otherwise concerning the works or the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof,  shall  be referred to

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the Chairman-Cum-Managing Director of the Company or any other person authorized by him.  

It is also a terms of the Contract if the contractor (s) do/does not make any demand for any claim(s) in writing 90 days of receiving  the  intimation  from  the  company  that  the  bill  is ready  for  payment  or  of  the  date  of  receiving  payment whichever  is  earlier,  the  claim  of  the  Contractor(s)  will  be deemed to have been waived and absolutely barred and the Company shall  be released and discharged of  all  liabilities under the contract in respect of these claims.”  

(emphasis supplied)

5. The respondents commenced the work of  surface miners at

Lakhanpur and completed around 70% of the awarded quantity by

the end of February 2004. Due to financial problems faced by the

respondents vide letter dated 13th February 2004, they requested

the appellants to allow them to close the contract by invoking power

to reduce the quantity by 30% of awarded quantity, under clause

11 of the general terms and conditions of the NIT; and to issue fresh

tender for the remaining work. The appellants did not accede to the

said request and informed the respondents vide letter  dated 16th

February 2004,  stating that  the  agreement is  for  performing the

contract upto 100% of awarded value and provision of executing

extra  30%  quantity  on  the  same  terms  and  conditions.  The

respondents requested the appellants vide letter dated 9th May 2004

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to extend the time frame for completion of the remaining contract

upto 15th July 2004 as the contract period was only till 15th April,

2004.  The said letter reads thus:

ANNEXURE-P8

DHANSAR ENGINEERING CO. PVT. LTD.,

SITE

P.O. Dhansar   P.O. Jorabaga Dhanbad – 828106 (Jharkhand) Via Belpahar Ph: 0326 – 307161/7074. Dist.: Jharsuguda (Orissa) Fax: 0326 303294 Ph.: 06645 -233222

E-mail – decopl@dte.vsnl.net.in

Ref: No. DECO/NIT 276/2004 Date: 09.05.2004

To The chief General Manager Lakhanpur Area Mahanadi Coalfields Ltd., (Through proper channel)

Sub:   WORK  OF  EXTRACTION  AND  TRANSFER  OF COAL/COAL MEASURE STRATA BY DEPLOYING SURFACE MINER  ON  HIRING  AT  LAKHANPUR  OCP  OF  LAKHANPUR AREA (NIT – 276) VIDE WORK ORDER NO. MCL/CGM/LKPA/ SO(M)/SUR. MINER/2003-04/001 DATED 23.04.2003.

Dear Sir,  Management  is  fully  aware  that  tender  rate  of

Rs.  17/-  per  Cum for  the work is  all  time low and wholly unworkable.  We are working at this rate at a colossal loss.  

We started the work almost at the approach of monsoon  on  16.04.2003  and  we  could  not  also  speed  up progress because of transportation restriction between 11.00 A.M.  &  4.00  P.M.  against  heat  wave  alert  and  thereafter on-set of heavy rains consequenting upon bad, water-logged & slippery road followed by short supply of rakes. With all these  operational  hazards  beyond  our  control,  we  could accomplish 34.74 Lakhs Cum upto 31.03.2004.

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As our financial loss was soaring day by day, we had  requested  for  foreclosure  of  the  work  after  we  have completed 70% of  the work but  this  was not  agreed to  by GM(TC) vide his letter No. 1251 dated 26.03.2004.

Therefore, being under contractual obligation we had, no other alternative but to apply for extension of time upto 15.07.2004 and would request you to kindly treat the contract as closed with the completion of the above awarded quantity as we are ill-afford to bear further loss.  

Thanking You,

Yours faithfully, Sd/-

For Dhansar Engineering Co. Pvt. Ltd.”

6. This  request  of  the  respondents  was  considered  by  the

appellants in its 68th Meeting of  the Board. Extension of three

months  time  was  granted  while  reserving  the  right  to  impose

penalty.  The respondents were informed accordingly vide letter

dated 5th June 2004. As a result of this decision, the contract

period was extended until 15th July 2004 on the same terms and

conditions agreed upon. As the contract period was subsisting till

15th July 2004, the appellants issued an approval  order dated

11th June 2004 to increase of 30% extra quantity i.e. 14.8 Lakh

cubic meter at the existing rate of next tender rate or whichever

is  lower,  amounting  to  Rs.  252.42  Lakh.  The  respondents  by

letter dated 11th June 2004, however, reiterated that the contract

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Copy to:  1)  The Director (Technical) MCL, Burla,  2)   The General Manager, Lakhanpur Area.”

7. The respondents by another letter dated 6th July 2004 seeking

closure of contract due to financial hardship, stated that they were

withdrawing  their  operations.  The  appellants,  however,  by  letter

dated 7th July 2004 called upon the respondents to continue with

the  remaining  work assigned under  the  contract  which was still

subsisting;  and  also  noted  that  the  respondents  had  by  then

completed only 105% of the contract work out of 130%. The said

communication reads thus:

“  ANNEXURE –P12

“UNDER JURISDICTION OF SAMBALPUR COURT ONLY” MAHANADI COALFIELDS LIMITED

(A SUBSDIARY OF COAL INDIA LIMITED)

Corporate Office Office of the Chief General  Manager

M.C.L. Complex LAKHANPUR AREA Jagriti Vihar P.O. bandhabahal – Via:  Belpahar Burla – 768018 Dist.: Jharsuguda, Pin 768217 Dist: Sambalpur (Orissa) phone: 33202, STD CODE: 06645

Ref: No. MCL/CGM/LKPA/SO(M)/932 Date: 07.07.2004

To

M/s Dhansar Engineering Co. pvt. Ltd.

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Site Office: P.O. Jorabaga, Via – Belpahar, Dist: Jharsuguda (Orissa) Pin: 768217.

Ref: (1)  Work  order  No.  MCL/CGML/LKPA/SOM(M)/Sur Miner/2003-04/001  dated  23.04.2003  for  Extraction  and Transfer of Coal/Coal measure strata by deploying ‘Surface Miners” on hiring basis at Lakhanpur OCP (NIT-276).

Sub: Contract of Surface Miner work at Lakhnapur OCP (under NIT  No. 276)  

Dear Sir,

Kindly  refer  to  your  letter  No.  DECO/NIT-276/2004  dated 6.07.2004 on the above subject.  

This is to bring to your notice that as per clause No.2 of the work order forming part  of  the agreement  the tendered quantity can be increased by 30% and no claim shall lie on the company for such variation till date only 105% (approx.) of the awarded quantity has been executed by you.  There is no communication from MCL-HQ for finalization of new contract for the above work till date.  

In such condition you are requested to continue your  operation  of  surface  miner  at  Lakhanpur  OCP  till completion of 30% extra quantity.  Withdrawal of operations of Surface Miner at this stage will  seriously affect dispatch of coal  to  our  Pit  head  customer  (OPGC)  and  other  linkage customers earning a bad name to the company.

Thanking You,  

Yours faithfully, SD/-

GENERAL MANAGER LAKHANPUR AREA

Copy to:

The Chairman-cum-Managing Director, MCL Buria The Director (T), MCL, Burla The General Manager (TC), MCL HQ, Burla The Staff Officer (Mining) LKPA”

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abandon execution after  completing 100% of  the work on account of our un-economical plight out has been continuing wit  the  execution  to  cooperate  with  the  management  to arrange next recourse, so as to ensure that the production schedule of Lakhanpur OCP does not suffer any set back.  

We could not however elicit any communication to our letters or any sympathetic decision from the management. In the  meanwhile  the  contract  period  also  expired  by 15.07.2004.

In  view  of  the  above  situation  we  have  no  other alternative but to withdraw from operation after working the full period of the contract.

You  are  therefore  requested  to  kindly  take  up  final measurement as on 15.07.2004 and finalise the contract.

Thanking  you  and  assuring  you  of  our  best cooperation to all time come.

Yours faithfully,  

Sd/- For Dhansar Engineering Co. Pvt. Ltd.

Copy to: 1. The  CMD,  MCL,  Burla  Fax  No.  0663

-2432066/2542366 2. The D(T), MCL, Burla, Fax No. 0663 – 2542509 3. The GM (TC), MCL, Burla, Fax No. 0663 – 2542629.”

9. As  the  respondents  had  already  informed the  appellants  of

their  intention to withdraw from operation after the full  contract

period, a fresh tender process was commenced by the appellants

which culminated with a letter  of  intent  in favour of  third party

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(Sainik Mining and Allied Services) but at a higher rate of Rs.31.50

per cubic meter.  

10. The bills submitted by the respondents for the work executed

under  the contract  dated 26th May 2003 were considered by the

Board of the appellants in its 72nd meeting. The decision taken in

the said meeting was communicated to the respondents by letter

dated 8th December 2014 which reads thus:

“ANNEXURE R/9

MAHANADI COALFIELDS LIMITED (A subsidiary of Coal India Limited) P.O.  –  Jagruti  Vihar,  Burla,  Distt.  Sambalpur-768020 (Orissa) Gram : SAMBCOAL,: Fax : (0663) 2542770 Phone : PBX :- (0663) 2542461 to 2542469

Ref. No. MCL/SBP/GM(TC)/2004/1047 Dt. 08.12.2004

To,  General Manager, Lakhanpur Area

Dear Sir, Enclosed herewith please find a copy of Extract

from the Draft Minutes of the 72nd meeting of the Board of Directors of MCL held on 27th November, 2004 at Kolkata in respect of imposing penalty by way of forfeiture of Earnest Money  Deposit  of  Rs.  20.00  lakhs  to  M/s.  Dhansar Engineering  (P)  Ltd.,  for  non-performance  of  130% of  the total  contracted  quantity  under  NIT  –  276.   The  relevant extract is appended below:-  

“The Board deliberated on the subject in detail and  in  consideration  of  the  facts  and  circumstances

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highlighted  in  the  agenda  note  and  in  recognition  of  the clarification offered during deliberation, decided that penalty as proposed in the agenda note in terms of the provisions of the contract be imposed on M/s Dhansar Engineering pvt. Ltd.  For  non-performance of  130% of  the total  contracted quantity under NIT-276.

Proposed in the Agenda Note Clause No. 16 – (Forfeiture of Earnest Money)

The  contractor  is  liable  for  forfeiture  Money Deposit  under Clause No. 16(a)  and 16(d)  which reads as under:- 16(2) withdraws his offer during the validity period of offer. 16(a) fails to execute the order as per terms and conditions thereof. In the present case the EMD is Rs. 20.00 lakhs. Clause No. 30.2 (Shortfall penalty in Mechanical excavation and loading)

-  130% of Contract Quantity – 63,70,000.00 Cu.m. -  Final quantity executed – 53,49,437.55 Cu.m. -   Balance quantity to be executed – 10,20,562.45 Cu.m. -   Working rate - Rs. 17.00 per Cu.m. -   20% of working rate       Rs. 3.40 per Cu.m.  -   Payable penalty for not executing       Upto 130% quantity Rs. 34,69,911.00

These  penalties  may  be  imposed  individually  or collectively  depending  on  the  decision  taken  by  the Management.  The imposition of penalty may be decided on the background that the contractor working at a very low rate has executed 108.47% in spite of incurring heavy losses and  withdrew  only  when  the  new  contract  was  finished ensuring that there is no loss of production.  

Yours faithfully Sd/- Illegible

General Manager (TC)

Encl : As above”

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11. The  Board  of  the  appellants  in  its  78th Meeting  decided  to

impose penalty for non-execution of the balance contract work by

the respondents and including the financial  loss incurred by the

appellants due to allocation of that work to third party at higher

rate.  In terms of that decision,  an approval  order for recovery of

penalty was issued by the appellants on 3rd November 2005 which

reads thus:

“ANNEXURE -19

MAHANADI COALFIELDS LIMITED (A subsidiary of Coal India Limited) P.O. – Jagriti Vihar Burla – 768018 Distt: Sambalpur-768020 (Orissa) Gram : SAMBCOAL,: Fax : (0663) 2542770 Phone : PBX :- 2542461 to 2542470

Ref: No. MCL/SBP/GM(TC)/2005/1100 Date: 03.11.2005

APPROVAL ORDER

Sub: Imposition  of  penalty  to  M/s  Dhansar  Engineering Company Pvt.  Ltd.,  under  NIT-276 (Dt;  01.12.2002)  for  the work of “Extraction and Transfer of Coal/Coal Measure Strata by deploying “Surface Miners” on hiring basis at lakhanpur OCP, Lakhanpur Area.

On recommendation of the committee to examine the  issue  on  imposition  of  penalty  under  NIT  –  276  dated 02.12.2002 to M/s Dhansar Engineering Company Pvt. Ltd., for  the  work  of  “Extraction  and  Transfer  of  Coal/Coal Measure Strata by deploying “Surface Miners” on hiring basis at  Lakhanpur  OCP,  Lakhanpur  Area,  the  same  has  been

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agreed by D(T) /D(F)/D(P)/CMD/MCL.  The MCL Board in its 78th meeting held on 27.10.2005 under item No. 78.C/20 has been pleased to approve the proposal of imposition of penalty in  terms  of  provision  of  the  contract  to  M/s.  Dhansar Engineering Company Pvt. Ltd. By non performance of 130% of  total  contacted  under  NIT  -276  (dt:  02.12.2002)  for  an amount of Rs. 1,57,40,655.22 (Rupees One Crore Fifty-seven Lakh  Forty  Thousand  Six  Hundred  Fifty-five  and  paisa Twenty-two only) under the Clause – 30.1 (loss  or damage) of the agreement.

Sd/- General Manager (TC)  

Distribution: 1. GM Lakhanpur Area 2. CGM(F) MCL, HQ 3. TS to CMD, MCL 4. TS to D(T), MCL 5. Secy. To D(F), MCL 6. Sanction Order file”

12. Aggrieved,  the  respondents  filed  Writ  Petition  under  Article

226 of the Constitution of India and prayed as follows:

“  PRAYER

In  the  circumstances,  it  is  therefore  prayed  that  Your Lordships be graciously pleased to issue a Rule NISI in the nature of certiorari calling upon the Opposite Parties, to show cause  as  why  the  impugned  letter  dated  08.12.2004  vide Annexure-22 issued by the General Manager (TC), Mahanadi Coal  Fields  Limited,  Opposite  party  No.2  imposing  penalty shall not be quashed and if the Opposite Parties fail to show cause or show insufficient cause make the said Rule absolute.

AND

Issue a Writ in the nature of mandamus directing the Opposite parties to pay  a sum of Rs. 79,01,434.60 to the Petitioner

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No.1 Company, which has been illegally withholding by the Opposite parties.  

AND Issue a Writ in the nature of Mandamus directing the

Opposite  Parties  to  pay  interest  @  18% per  annum as  the Opposite Parties have illegally withhold the outstanding dues of  Rs.  79,01,434.60  of  Petitioner  No.1  Company  since 15.07.2004.

AND Issue  such  other  Writ/Writs,  Order/Orders,

Direction/Directions as this Hon’ble Court may deem it fit and proper.

And for this act of Kindness the Petitioner shall as in duty bound ever pray.”

13. The Writ Petition was opposed by the appellants by filing reply

affidavit.   The  appellants  raised  preliminary  objection  about  the

maintainability  of  the  Writ  Petition.  On  merits,  the  appellants

asserted that the demand raised against the respondents was in

accord with the  terms and conditions of  the contract  and if  the

respondents were aggrieved by the same they were free to resort to

the procedure for settlement under clause 31 of the agreement. The

Division  Bench  of  the  High  Court,  however,  allowed  the  Writ

Petition preferred by the respondents on the finding that it was not

permissible for the appellants to allot extra work to the respondents

at the fag end of the contract period in terms of clause 5 of the

contract which envisaged giving 45 clear days notice for variation of

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the  quantity  under  the  contract.  That  notice  was  given  to  the

respondents  only  on  11th June  2004  even  though  the  extended

contract period was to expire on 15th July 2004. The Court held

that, surprisingly after extending the contract period on 5th June

2004, within six days on 11th June 2004 the appellants decided to

enhance the contract quantity by 30%. That was not a bonafide act

and was unacceptable. The Court also held that the appellants had

not offered any explanation as to in what circumstances decision to

impose  penalty  was  taken by  the  Board of  Directors.  The Court

further noted that the respondents had executed the contract upto

108.47% at  a  very  low  rate,  and  incurred  heavy  losses  in  that

regard. Further,  a new contract for  Lakhanpur OCP was already

awarded  and  there  was  no  loss  of  production  caused  to  the

appellants.  On these  basis,  the Division Bench allowed the  Writ

Petition in the following terms:

“16. Accordingly, the letter dated 8.12.2004 of the General Manager  (T.C)  Mahanadi  Coalfields  Limited  under Annexure-22 proposing to levy shortfall penalty as well as, its Approval  Order  dated 03.11.2005 under Annexure-A to  the counter affidavit are hereby quashed.  The outstanding dues payable to the petitioner be released in its favour within the period  of  thirty  days  along  with  simple  interest  @  8%  per

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annum to be computed from the date of conclusion of contract, i.e.  from 16.7.2004.   The bank guarantee furnished by the petitioners,  pursuant  to  the  direction  of  this  Court  dated 28.7.2009  are  hereby  directed  to  be   cancelled  and consequently,  directed  that  the  same  be  returned  to  the petitioners forthwith.

The writ petition is allowed with the aforesaid terms. No Costs.”

14. Aggrieved, the appellants have filed the present appeal. This

Court  passed  an  interim  order  on  12th April,  2013,  directing  to

maintain status quo as it existed on that date until further orders.

15. According  to  the  appellants  the  High  Court  has  committed

manifest error in entertaining the Writ Petition. Firstly,  in respect

of a purely contractual matter and moreso when efficacious remedy

under clause 31 of the contract was available to the respondents for

redressal of their grievance.  Secondly, on merits the High Court

has  misconstrued  and  misapplied  the  contractual  terms  and  in

particular  clause  5  of  the  contract.  However,  if  the  terms  and

conditions of the contract are read as a whole, it leaves no manner

of  doubt  that  the  appellants  had  the  discretion  to  extend  the

original contract period; and having done so at the request of the

respondents,  the  respondents  were  bound  by  the  terms  of  the

contract till 15th July 2004. Further, before that date at any point of

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time,  it  was  open  to  the  appellants  to  reduce  or  increase  the

contract quantity upto 30%. The sole plea of the respondents for

their  inability  to  perform the  contract  was  founded  on  financial

difficulty and sufferance of  further loss due to low contract rate.

That  can  be  no  consideration  for  walking  out  of  the  contract.

Moreso,  after  the  extra  quantity  was  allocated  the  respondents

could have asked for further time for completing the extra work, if

they were not in a position to complete the same within the contract

period. That request could have been considered by the appellants

appropriately. The respondents did not do so. Instead, they insisted

to withdraw from operation merely because the rate of contract was

not affordable to them. Resultantly, the appellants had to allot the

extra quantity of unfinished work by the respondents, to third party

at a higher rate. The fact that the appellants did not suffer any loss

of production, it does not follow that no financial loss was suffered

by the appellants due to higher rate paid for the unfinished extra

work.  The  appellants  were,  therefore,  justified  in  recovering  the

difference of rate in respect of unfinished extra work and penalty

therefor.  That  was  a  legitimate  demand  under  the  terms  and

conditions of the contract between the parties.

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16. The  respondents,  on  the  other  hand,  contend  that  it  was

unfair on the part of the appellants not to allow the respondents to

close  the  contract  as  per  the  original  contract  and  within  the

extended  contract  period  i.e.  upto  15th July  2004.  Further,  the

respondents cannot be made liable for the unfinished extra quantity

of work as that was allotted only on 11th June 2004, leaving very

little time for the respondents to complete the same for which the

appellants should blame themselves. According to the respondents,

the  High  Court  was  right  in  concluding  that  clause  5  of  the

agreement did not permit the appellants to allot an extra quantity of

work to the extent of 30% at the fag end of the extended contract

period, absent 45 clear days notice mandated therein. Further, the

High Court has passed an equitable order also keeping in mind that

the respondents had already executed 108.47% of the contract work

by suffering  heavy  losses,  which fact  is   substantiated  from the

execution of new contract at the rate of Rs.31.50 per cubic meter as

against  the  rate  of  Rs.17/-  per  cubic  meter  payable  to  the

respondents.   It  is  also  contended  that  the  demand for  penalty

amount  is  unilateral  and without  any  just  cause.   The same is

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illegal.   Hence,  contends  the  learned  counsel,  the  appeal  be

dismissed.

17. Having  heard  the  learned  counsel  for  the  parties  at  some

length, we find force in the plea of the appellants. The challenge in

the Writ Petition filed by the respondents was limited to the letter

dated 8th December 2004, issued by the General  Manager of  the

appellants.  The respondents had not challenged the extension of

contract period till 15th July 2004 vide letter dated 5th June 2004,

the decision of the appellants to allot an extra quantity of 30% work

and much less the decision of the Board to impose penalty taken on

27th October,  2005  and  communicated  to  the  respondents  vide

Approval Order dated 3rd November 2005. The High Court, however,

has not only set aside the letter dated 8th December 2004 but also

the Approval Order dated 3rd November 2005.  

18. For doing so, the High Court has taken support from clause 5

of the Contract. That clause cannot be read in isolation. The other

terms and conditions  of  the  contract  must  be  read  as  a  whole.

Clause 5 of the agreement dated 26th May 2003 posits authority in

the appellants to reduce or increase the tendered quantity by +/–

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30%, whilst  the contract  is  subsisting.  Indisputably,  the original

contract period was upto 15th April, 2004. At the instance of these

respondents, the same stood extended till 15th July 2004.  The extra

30% work was allotted to the respondents on 11th June 2004, before

expiry of the extended contract period i.e. 15th July 2004. As the

contract  period  was  extended  and  that  decision  was  allowed  to

attain finality, it inevitably obliged the respondents to fulfill all the

contractual stipulations under the original agreement including to

complete the assigned quantity of work  -  be it original quantity or

extra quantity - before 15th July 2004. The fact that they had to

suffer financial loss due to low contract rate could not be cited as

an excuse to extricate from that contractual obligation.  

19. Failure to comply with the contractual obligation of executing

the original quantity of work or the extra work, as the case may be,

must  visit  the  respondents  with  liability  to  compensate  the

appellants in terms of other express clauses of the contract to the

extent  of  unfinished  work  and  in  particular  the  financial  loss

suffered  by  the  appellants  for  getting  the  same  work  executed

through  a  third  agency  at  a  higher  rate.   The  fact  that  the

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respondents executed 108.47% of work before 15th July 2004, could

be no justification to relieve them of their obligation to compensate

the  appellants  with  suitable  amount  for  the  unfinished  contract

work (out of 130%).

20.  Presumably to get over this position, the respondents relying

on clause 5 of the agreement would contend that the extra quantity

of work could not be allotted to them, absent 45 clear days notice

that too at the fag end of the contract period.  This argument, in our

opinion, is a complete misreading of the said clause.  It is one thing

to  say  that  the  contractor  should  be  given  sufficient  time  to

complete  the  extra  work  commensurate  with  the  extra  quantity

required to be executed by him.   However, in law, it is not open to

contend that even though the contract period is still subsisting, the

principal (appellants) could not have exercised its option to increase

the quantity of work to the extent permissible under that clause, to

be  executed  by  the  contractor  within  the  contract  period.   The

principal  (appellants)  could  be  asked  to  exercise  their  option  to

extend the contract period beyond 15th July, 2004, to enable the

respondents to complete the unfinished extra work.  If such request

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were  to  be  made  by  the  respondents,  there  would  have  been

corresponding obligation on the appellants to extend the contact

period commensurate with the increased quantity of work in terms

of clause 5 of the agreement.  The respondents, instead, opted to

walk out of the contract for the sole reason that the contract rate

agreed by  them was  very  low and was causing  financial  loss  to

them.  That can be no just reason to not fulfill their contractual

obligation.

21. Relying on the third sentence (last sentence) in clause 5, it was

contended that the employer could not have increased the tendered

quantity  in  absence  of  45  clear  days  notice.  We  agree  with  the

appellants that the said stipulation would come into play only if the

respondents were also called upon to increase the machine capacity

by  upto  30%  extra  “daily”  quantity.  In  the  present  case,  the

appellants merely allotted extra 30% quantity without requiring the

respondents  to  increase  the  daily  quantity.  There  is  marked

difference between increasing the extra quantity during the contract

period and that of increasing the extra “daily” quantity. In the case

of latter, the contractor would be required to step up the machine

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capacity  for  which  giving  of  45  clear  days  notice  to  him  is

necessary.  Suffice  it  to  observe  that  the  stipulation in the  third

sentence of clause 5 providing for 45 clear days notice was not an

impediment for the appellants to allot extra quantity of work upto

30%, whilst the contract period was subsisting.

22. The respondents had then relied on the notings of the Project

Officer dated 26th January 2005 to contend that assigning of extra

work to the respondents at the fag end of the contract period was

doubted even by the said officer.  The observations of  the Project

Officer cannot be the basis to construe the scope of Clause 5 of the

contract. Besides, it was only an inter-departmental communication

which was  duly  considered  at  different  level  in  the  office  of  the

appellants, but finally it is the decision of the Board of Directors of

the appellants that must prevail. As a matter of fact, Clause 5 of the

agreement  empowers  the  appellants  to  increase  or  reduce  the

quantity  of  work  upto  permissible  limit  whilst  the  contract  was

subsisting. That power having been exercised, the obligation of the

contractor  to  complete  the  extra  work  in  terms  of  the  subject

contract within the contract period or extended contract period was

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imperative. The respondents are not right in contending that the

appellants-Company had no authority to grant extension of time to

complete  the  enhanced  quantity.  This  contention  deserves  to  be

stated to be rejected, keeping in mind the other contractual terms

such  as  Clause  11.0  -  providing  for  variation  in  the  scheduled

quantity,  extent  and  rate;  Clause  13  -  time  for  completion  of

contract and more particularly Clause 14.0 - for extension of date of

completion. Clause 14.0 (e) was available and ought to have been

invoked by the respondents in this situation. It postulates that for

any other cause not specifically provided in sub-clauses (a) to (d) of

the same Clause, at the sole discretion of the appellants, the date of

completion  could  be  extended,  if  it  was  found  to  be  necessary

because  of  situation  beyond  the  control  of  the  contractor.  That

clause could be invoked for the situation in which the respondents

were placed due to extra work allocated to them at the fag end of

the contract (extended) period.

23. In  our  opinion,  clause  5  did  not  prohibit  the  principal

(appellants) to allot upto extra 30% quantity of work, for want of 45

clear days of subsisting contract period. Whereas, that option could

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be exercised by the appellants at any time until the contract period

was subsisting, which in this case was until 15th July 2004. In the

present  case,  such  notice  regarding  increase  of  work  upto  30%

permissible  under  clause  5  of  the  agreement,  was  given on 11th

June 2004. On this finding,  it  must follow that the respondents

committed breach of their contractual obligation, in not completing

the balance work out of 130% of work (i.e. 130  -  108.47%). To that

extent the respondents became liable to compensate the appellants

including by way of penalty and in particular towards the financial

loss caused to the appellants due to assigning the unfinished work

to  a  third  agency  (contractor)  at  a  higher  rate.  The  amount

demanded by the appellants includes the difference of contractual

rate and the actual loss suffered by the appellants for completing

the unfinished work through a third agency (contractor) at a higher

rate,  as  is  noticed  from the  communication  dated  8th December

2004 sent to the respondents.

24. The  respondents,  would  then  contend  that,  the  appellants

without  giving  any  opportunity  to  the  respondents  unilaterally

imposed penalty and despite the noting of the General Manager that

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there was no loss of production to the appellants. Similarly, a doubt

was expressed by the Project Officer regarding giving extra work to

the  respondents  at  the  fag  end  of  the  contract  period.   The

respondents have relied on the decision of this Court in Maula Bux

vs. Union of India1, in which it has been held that “where a sum is

named in the contract in the nature of  a penalty,  where loss in

terms  of  money  can  be  determined,  the  party  claiming

compensation must prove the loss suffered by it.”  It is,  however,

indisputable that financial loss was suffered by the appellants on

account  of  assigning  the  unfinished  work  to  a  third  agency

(contractor) at a higher rate.  In that, the contract rate for the same

work to be done by the respondents would have been at Rs. 17/-

per  cubic  meter,  which  the  appellants  were  required  to  get  it

executed at the rate of Rs. 31.50 per cubic meter through a third

agency.  The fact that no loss of production was suffered by the

appellants cannot relieve the respondents of that liability.  It is a

different matter that the respondents were not put to notice before

the  final  decision  was  taken  by  the  appellants  to  recover  the

financial  loss  along  with  penalty.   The  respondents  could  have

1 (1969) 2 SCC 554

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approached  the  appellants  for  reconsideration  of  their  demand

towards  penalty,  in  terms  of  Clause  30.3  of  the  contract;  and

persuade  the  appellants  to  waive  the  penalty  amount  to  be

recovered  from  them.   The  respondents,  however,  chose  to

straightway  approach  the  High  Court  by  way  of  Writ  Petition.

Notably, the High Court has not set aside the penalty amount as

such, but the entire demand being impermissible.  Since we have

reversed the findings and conclusion of the High Court and even if

this  appeal  succeeds,  the  respondents  can  be  granted  an

opportunity to make a representation to the Appellants - company,

who in turn can deal with the same in accordance with law.  If the

appellants  accept  the  claim  of  the  respondents  about  the

unjustness of  penalty or quantum thereof,  they would be free to

withdraw or modify their claim for recovery of penalty amount, if so

advised. In the event, the appellants reject the representation, they

will  be free to recover the amount as demanded towards penalty

along with interest accrued thereon, as may be permissible in law.

However, that would not absolve the respondents from the financial

liability arising due to difference of rate of contract and the actual

cost incurred by the appellants to complete the unfinished work out

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of 130% of the contract quantity, through a third agency at a higher

rate.  That can be recovered by the appellants from the respondents

along  with  interest  accrued  thereon  at  such  rate,  as  may  be

permissible  in  law,  even  if  the  representation  made  by  the

respondents  for  recall  or  modification  of  the  penalty  amount  is

pending consideration.  Considering the above, it is not necessary

for  us  to  burden  this  judgment  with  the  contention  of  the

respondents that the penalty imposed without any notice or hearing

to the respondents is vitiated; as also the decisions relied in support

of  that  contention in the case of  Gorkha Security Services vs.

Government  (NCT  of  Delhi)  &  Ors.2 and  Kumari  Shrilekha

Vidyarthi & Ors vs. State of U.P. 3

25. Similarly, it is not necessary for us to burden this judgment

with the decisions relied on by the respondents, to contend that

existence of alternative remedy is no bar to entertain a Writ Petition

under Article 226 of the Constitution of India, as held in the cases

of  Popcorn Enterainment vs.  City Development  Corporation4,

2  (2014) 9 SCC 105

3  (1991) 1 SCC 212

4          (2007) 9 SCC 593

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Harbanslal Sahnia & Anr. vs. Indian Oil Corporation Ltd. &

Ors.5, Union of India & Ors. vs. Tantia Construction Pvt. Ltd.6,

M.P.  State  Agro  Industries  Development  Corpn.  &  Anr.  Vs.

Jahan  Khan7 and  Whirlpool  Corporation  vs.  Registrar  of

Trade Marks, Mumbai8.  For, we have already examined the merits

of the controversy and more so granted liberty to the respondents to

make representation to the appellants on the question of justness of

the demand towards penalty  or  the quantum thereof.   It  will  be

open to the respondents to pursue remedy in that behalf, as may be

permissible in law.  We are not expressing any opinion one way or

the other on the issue of penalty amount.  All  questions in that

behalf are left open.  

26. Accordingly, we partly allow this appeal.  The judgment of the

Division Bench dated 7th November 2012 is set aside.  The reliefs

claimed by the respondents in the Writ Petition are disposed of in

the above terms.  

5  (2003) 2 SCC 107

6  (2011)5 SCC 697

7          (2007) 10 SCC 88 8          (1998) 8 SCC 1

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27. The appeal is partly allowed in the above terms with no order

as to costs.  

………………………………….CJI (T.S. Thakur)

…………………………………..J. (A.M.Khanwilkar)

New Delhi, September 27, 2016