Supreme Court Orders Interest on Refund for Unusable Shipbreaking Plot: Gujarat Maritime Board vs. Asiatic Steel Industries Ltd. (2020)

Date of the Judgment: 24 November 2020

Citation: (2020) INSC 903

Judges: Indira Banerjee, J. and S. Ravindra Bhat, J.

Can a government body withhold a refund for a failed contract and avoid paying interest, especially when the failure is due to their inaction? The Supreme Court of India addressed this question in a case involving the Gujarat Maritime Board and a company that bid for a ship-breaking plot. The core issue was whether the Board was liable to pay interest on the refund amount when the plot allotted was unusable. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice S. Ravindra Bhat, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

The Gujarat Maritime Board (the Board) issued a tender notice on 02 August 1994, for the allotment of plots for ship-breaking at Sosiya, near Bhavnagar, Gujarat. Asiatic Steel Industries Ltd (Asiatic Steel) made the highest bid and was allotted Plot V-10 on 08 November 1994, for ₹3,61,20,000 (the Principal). Asiatic Steel paid an earnest money deposit of ₹5,00,000 on 08 November 1994, and the remaining amount of $1,153,000 in foreign currency on 22 March 1995. However, soon after the allotment, Asiatic Steel and other allottees informed the Board that the plots were not suitable for ship-breaking due to the presence of rocks and lack of proper connectivity. Despite these concerns, the Board did not take any action to rectify the situation. On 19 May 1998, Asiatic Steel informed the Board that it wished to abandon the contract and demanded a refund of the payment with 10% interest per annum from the date of remittance. The Board agreed to refund the principal amount but refused to pay any interest and stated that the refund would be directed to the original allottee, M/s Ganpatrai Jaigopal. Subsequently, Asiatic Steel filed a writ petition before the High Court seeking a refund of the amount with interest.

Timeline

Course of Proceedings

The High Court of Gujarat, through an interim order dated 26 February 2002, held that Asiatic Steel was prima facie entitled to a refund with 10% interest per annum and directed the Board to deposit the principal amount with interest. The Board complied with this order. On 17 September 2014, the High Court identified the following surviving issues: (a) Whether interest should be calculated from 24 March 1995 or 19 May 1998; (b) Whether the earnest money of ₹5,00,000 should be refunded; and (c) Whether the interest rate should be 10% or 12% per annum. The Board resolved on 17 December 2014 to refund the earnest money with 10% interest from 19 May 1998. The High Court then examined the issue of interest quantification and held that since Asiatic Steel had initially claimed 10% interest, it was not justified in claiming more. The only remaining issue was the date from which interest on the principal was to be calculated. The High Court held that the Board was liable to compensate Asiatic Steel for the period it retained the money, and considering that the company was Singaporean, the interest rate was altered to 6% per annum for the period the money was with the Board. The High Court directed the Board to refund the earnest money with 10% interest and pay 6% interest on the principal from 08 November 1994 to 19 May 1998.

Legal Framework

The court considered the following provisions of the Indian Contract Act, 1872:

• Section 64: “When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.”
• Section 65: “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”
• Section 73: “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”
• Section 75: “A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.”

Arguments

Arguments on behalf of the Gujarat Maritime Board:

• The dispute is contractual, and Sections 64 and 65 of the Indian Contract Act, 1872, apply only to void or voidable contracts, which was not the case here.
• Sections 73 and 75 of the Indian Contract Act, 1872, are inapplicable as no breach of contract was proven against the Board, nor was there a finding of rightful rescission by Asiatic Steel.
• The Board had already refunded the entire amount to Asiatic Steel.
• Asiatic Steel had accepted the site conditions and later abandoned the contract due to the site being unsuitable.
• The Board had informed Asiatic Steel that the plot was ready and possession was to be taken by 30 November 1995, but Asiatic Steel did not take possession.
• Interest was not payable under the terms of the contract.

Arguments on behalf of Asiatic Steel Industries Ltd:

• The Board failed to provide basic infrastructure and clear the rocks, making it impossible for Asiatic Steel to commence business.
• The Board took about 4 years to take action on its promise to create surrounding infrastructure and clear the rocks.
• Asiatic Steel had repeatedly requested the Board to remove the rocks.
• The Board’s failure to provide a usable plot led to Asiatic Steel abandoning the project and seeking a refund.
• Asiatic Steel incurred heavy losses due to interest costs and depreciation of the rupee.
• The Board’s agreement to refund the principal and earnest money shows their acceptance of their inability to provide the promised plots.
• Other similarly situated allottees were paid interest on their deposits.
• Interest is compensation for the denial of the right to utilize the money.
• Objections were raised about the unsuitability of the land before the major part of the payment was made.
• The ‘as is where is’ clause does not absolve the Board of its liability to provide a usable plot.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues but addressed the core question of whether the Gujarat Maritime Board was liable to pay interest on the refund amount to Asiatic Steel, considering the circumstances of the case.

Treatment of the Issue by the Court

The following table demonstrates how the Court dealt with the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court used the following authorities to support its reasoning:

• Union of India, Tr. Dir. of IT v. M/s Tata Chemicals Ltd. [CITATION]: The Court used this case to support the principle that interest is a form of compensation for the use and retention of money collected unauthorizedly.
• Dilbagh Rai Jarry v. Union of India [CITATION]: The Court quoted this to emphasize that the State is not an ordinary litigant and should meet honest claims.
• P.P. Abubacker v. Union of India [CITATION]: The Court quoted this approvingly to highlight that the State should be a virtuous litigant.
• Gurgaon Gramin Bank v. Khazani [CITATION]: The Court referred to this to highlight the need for government bodies to resolve disputes internally.
• State of A.P. v. Pioneer Builders [CITATION]: The Court referred to this to discuss the purpose of Section 80 of the Code of Civil Procedure.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The Board’s inaction and failure to provide a usable plot.
• The Board’s discriminatory conduct in not refunding the amount with interest when other similarly situated allottees were refunded with interest.
• The principle that interest is a form of compensation for the use and retention of money.
• The State’s obligation to act fairly and not arbitrarily.

Logical Reasoning:

The Court reasoned that the Board’s conduct was arbitrary and discriminatory, as it had refunded other similarly situated allottees with interest. The Court also emphasized that the Board, as a public body, should act fairly and not force parties to approach the court to get their dues.

The Court considered alternative interpretations, such as the Board’s argument that the dispute was contractual and that interest was not payable under the terms of the contract. However, the Court rejected these arguments, stating that the Board’s inaction and failure to provide a usable plot justified the payment of interest.

The decision was based on the principle that interest is a form of compensation for the use and retention of money, and that the Board had enjoyed the money for a period without providing any benefit to Asiatic Steel. The Court also emphasized the State’s obligation to act fairly and not arbitrarily.

The Court stated:

“In this court’s opinion, the claim for interest by Asiatic Steel – and the response of the Board, on that issue, is to be judged in the light of both parties’ conduct and what was expected of the Board as a state instrumentality.”

“In the opinion of this court, the Board’s complete silence in responding to Asiatic Steel’s demand for refund, coupled with the absence of any material placed on record by it suggesting that the complaints had no substance leaves it vulnerable to the charge of complete arbitrariness.”

“In this case, conduct of the Board betrays a callous and indifferent attitude, which in effect is that if Asiatic Steel wished for its money to be returned, it had to approach the court.”

The Court modified the High Court’s judgment by directing that the interest on ₹3,61,20,000 should be calculated from 22 March 1995, instead of 08 November 1994, to 19 May 1998.

Key Takeaways

• Government bodies must act fairly and reasonably when dealing with contractual disputes.
• Interest is a form of compensation for the use and retention of money, especially when the retention is due to the inaction of one party.
• Public bodies should not force citizens to approach the courts to get their dues when the facts and circumstances warrant a refund.
• The “as is where is” clause in a contract does not absolve a party of its liability to provide a usable product or service.

Directions

The Supreme Court directed that the interest on ₹3,61,20,000 should be calculated from 22 March 1995 to 19 May 1998, modifying the High Court’s order, which had directed the interest to be calculated from 08 November 1994.

Development of Law

The ratio decidendi of the case is that a government body is liable to pay interest on a refund of contract consideration when the contract is not fulfilled due to the government body’s inaction. This judgment reinforces the principle that government bodies must act fairly and reasonably and not force citizens to approach the courts to get their dues. There is no change in the previous position of law but a reaffirmation of the principle of fairness and equity in contractual matters involving the State.

Conclusion

The Supreme Court dismissed the appeal filed by the Gujarat Maritime Board, subject to a modification regarding the date from which interest was to be calculated. The Court held that the Board was liable to pay interest on the refund amount to Asiatic Steel, emphasizing that the Board’s inaction and failure to provide a usable plot justified the payment of interest. This judgment reinforces the principle that government bodies must act fairly and reasonably and not force citizens to approach the courts to get their dues.