Supreme Court overturns High Court order on road construction payment: Union of India vs. M/S Puna Hinda (2021)

Introduction

Date of the Judgment: 6 September 2021
Citation: (2021) INSC 596
Judges: Hemant Gupta, J. and A.S. Bopanna, J.

Can a High Court intervene in a contractual dispute between a government body and a contractor, especially when the contract includes an arbitration clause? The Supreme Court of India recently addressed this question in a case involving a road construction project in Arunachal Pradesh. The core issue revolved around whether the High Court should have entertained a writ petition regarding disputed payments, or if the matter should have been resolved through arbitration as per the contract. The Supreme Court overturned the High Court’s decision, emphasizing the limitations of writ jurisdiction in purely contractual disputes.

Case Background

In 2008, the Union of India issued a tender for the construction and improvement of a road between Lumla and Tashigong in Arunachal Pradesh. M/S Puna Hinda, the respondent, won the bid with an initial contract value of Rs. 31,87,58,950. The work order, issued on 15.7.2009, was later amended on 15.3.2012, increasing the cost to Rs. 35,03,15,695.23. The project included formation work, permanent work, and surface work, with specific measurement processes outlined in the contract.

After completing the formation work by 20.9.2012, M/S Puna Hinda requested a joint survey. The Board of Officers conducted a survey on 23.1.2013, recommending quantities for execution and payments. However, the Competent Authority rejected this report on 29.10.2013, citing discrepancies in the measurements. This led to a series of disputes regarding payment, with M/S Puna Hinda claiming Rs. 23,68,11,589.02 in its final bill submitted on 17.6.2014. The final bill was returned unacted upon on 10.8.2014. The government claimed that all payments due as per the contract had already been made.

M/S Puna Hinda then filed a writ petition in the Gauhati High Court, seeking payment of Rs. 31,57,16,134 with 18% interest, challenging the rejection of the joint survey report. The High Court ruled in favor of M/S Puna Hinda, directing the government to make the payments based on the joint survey report. The Union of India appealed this decision to the Supreme Court.

Timeline

Legal Framework

The judgment refers to the General Conditions of Contract, specifically clause 2.8, which outlines the measurement process for excavation work:

“2.8.1 Excavation for roadway shall be measured by taking cross Section at suitable intervals in the original position before the work starts and after its completion and computing the volumes in cum by the method of average and areas for each class of material encountered. Where it is not feasible to computes volumes by this method because of erratic location of isolated deposits, the volumes shall be computed by other accepted methods.
2.8.2 At the option of the Engineer-In-Charge/QC Contract, the Contractor shall leave depth indicators during excavations of such shape and size and in such positions as directed so as to indicates the originals ground level as accurately as possible. The Contractor shall see that there remain intact till the final measurements are taken.”

The judgment also references Section 80 of the Code of Civil Procedure, 1908, which relates to the issuance of notice before filing a suit against the government.

Arguments

Arguments of the Appellant (Union of India):

• The primary argument was that the High Court should not have entertained a writ petition for a purely contractual matter, especially when an arbitration clause existed in the contract.
• The Union of India contended that the Joint Survey Report was not approved by the competent authority and was based on incorrect interpretations of the Hill Road Manual.
• It was argued that the writ petitioner’s claims were inflated and not supported by the measurement books prepared during the execution of the work.
• The appellants asserted that all payments due as per the contract had already been made, and the contractor was attempting to claim extra amounts based on an unapproved report.
• The Union of India relied on the judgments of the Supreme Court in Kerala State Electricity Board & Anr. v. Kurien E. Kalathil & Ors. [ (2000) 6 SCC 293 ] and Joshi Technologies International Inc v. Union of India & Ors. [(2015) 7 SCC 728] to argue that writ jurisdiction should not be used to settle contractual disputes.

Arguments of the Respondent (M/S Puna Hinda):

• M/S Puna Hinda argued that the Joint Survey Report was valid and should be the basis for payment.
• They claimed that the department was not paying for the work done, and the delay in payment had caused financial losses.
• The respondent challenged the authority of the officer who issued the letter dated 27.8.2015, denying their claims.
• M/S Puna Hinda contended that the department’s actions were arbitrary and unjust, warranting the High Court’s intervention.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the High Court was justified in entertaining a writ petition for a contractual dispute involving disputed questions of fact.
2. Whether the Joint Survey Report could be the basis for payment when it was not approved by the competent authority.
3. Whether the High Court was correct in directing payments based on the Joint Survey Report, especially when the contract included an arbitration clause.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided 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 Supreme Court relied on Kerala State Electricity Board & Anr. v. Kurien E. Kalathil & Ors. [(2000) 6 SCC 293]* to reiterate that writ petitions are not the appropriate remedy for contractual disputes. The Court emphasized that disputes arising from contracts, especially those involving public bodies, should be settled through the ordinary principles of contract law and not through writ jurisdiction.

✓ The Court also relied on Joshi Technologies International Inc v. Union of India & Ors. [(2015) 7 SCC 728]* to reinforce that writ remedies are limited in purely contractual matters. The Court highlighted that when a contract provides a specific mode of dispute resolution, such as arbitration, the High Court should refrain from exercising its writ jurisdiction.

What weighed in the mind of the Court?

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

• Nature of the Dispute: The Court emphasized that the dispute was purely contractual, involving disputed questions of fact related to measurements and payments. Such disputes, the Court noted, are not suitable for adjudication under writ jurisdiction.
• Availability of Arbitration: The presence of an arbitration clause in the contract was a significant factor. The Court held that the parties should adhere to the agreed mechanism for dispute resolution.
• Disputed Joint Survey Report: The Court found that the Joint Survey Report was not approved by the competent authority and was based on flawed interpretations. Therefore, it could not be the basis for directing payments.
• Lack of Admission: The Court noted that there was no admission on the part of the appellants regarding the amount claimed by the writ petitioner. The claim was disputed, and the amount was not crystallized.
• Collusion: The Court also noted a possibility of collusion between some officers of the appellants and the contractor, which influenced its decision to not rely on the Joint Survey Report.

The Court’s reasoning was based on established legal principles and precedents, emphasizing the limitations of writ jurisdiction in contractual matters. The Court also considered the practical aspects of the case, such as the difficulty in conducting resurveys after a long period, but maintained that the measurement books prepared during the execution of the work could form a reasonable basis for assessing the amount due.

The Supreme Court quoted from the judgment:
“The Joint Survey Report is not an admitted measurement, though some officers might have signed it.”

The Supreme Court quoted from the judgment:
“The Report prepared after the completion of work wherein no such work done is reflected in the measurement book prepared during execution of work is an attempt to inflate the claim raised by the writ petitioner.”

The Supreme Court quoted from the judgment:
“Therefore, in the absence of any acceptance of Joint Survey Report by the competent authority, no right would accrue to the writ petitioner only because measurements cannot be undertaken after passage of time.”

Key Takeaways

• Writ Jurisdiction Limitations: The judgment reinforces that writ jurisdiction under Article 226 of the Constitution is not to be used for resolving purely contractual disputes, especially where disputed questions of fact are involved.
• Importance of Arbitration Clauses: Parties to a contract are expected to adhere to the dispute resolution mechanisms agreed upon, such as arbitration. Courts should not interfere in such matters unless there is a clear public law element involved.
• Validity of Joint Survey Reports: Joint survey reports, if not approved by the competent authority, cannot be the basis for directing payments, especially if there are discrepancies or indications of collusion.
• Measurement Books: Measurement books prepared during the execution of work are considered more reliable evidence for assessing payments than post-completion reports.

Directions

The Supreme Court did not give any specific directions other than setting aside the High Court’s order and dismissing the writ petition. The Court implied that the dispute should be resolved through arbitration as per the contract.

Development of Law

The ratio decidendi of this case is that writ jurisdiction is not the appropriate remedy for resolving purely contractual disputes, especially when an arbitration clause exists. This reaffirms the established position of law that contractual disputes should be resolved through the mechanisms agreed upon by the parties. The judgment reinforces the principle that High Courts should not interfere in contractual matters where there is no public law element involved.

Conclusion

The Supreme Court’s decision in Union of India vs. M/S Puna Hinda clarifies the limitations of writ jurisdiction in contractual disputes, emphasizing the importance of adhering to agreed dispute resolution mechanisms such as arbitration. The Court overturned the High Court’s order, holding that writ petitions are not the appropriate forum for resolving payment disputes arising from construction contracts with disputed facts. This judgment underscores the principle that contractual matters should be resolved through the ordinary principles of contract law, not through the extraordinary remedy of a writ petition.