Supreme Court Upholds Contractor’s Claim: No Abandonment of Contract in Shripati Lakhu Mane vs. Maharashtra Water Supply Board (2022)

Introduction

Date of the Judgment: 30 March 2022

Citation: Civil Appeal No. 556 of 2012

Judges: Hemant Gupta, J., V. Ramasubramanian, J.

Can a contractor be deemed to have abandoned a project if they stop work due to significant changes in the original contract terms? The Supreme Court of India recently addressed this question in a case involving a dispute between a contractor and the Maharashtra Water Supply and Sewerage Board. The court clarified that a contractor’s refusal to continue work under altered conditions does not automatically equate to abandonment of contract. The bench comprised Justices Hemant Gupta and V. Ramasubramanian, with the judgment authored by Justice V. Ramasubramanian.

Case Background

The appellant, a registered contractor, was awarded a contract for a rural water supply scheme in Ratnagiri District on 03 July 1986. The contract, valued at Rs. 80,45,034, stipulated a 30-month completion period. However, the project faced several hurdles:

Initially, the work order was put on hold on 28 July 1986, and then reinstated on 17 December 1986. The contractor then faced issues with the non-availability of specified pipes, leading to proposed changes in pipe dimensions. This resulted in the contractor demanding revised rates. Further complicating matters, on 02 March 1987, the contractor was instructed to halt pipeline work and start work at another location. The bills raised by the contractor were not honored promptly due to a shortage of funds. Consequently, the contractor stopped work, leading to the Board threatening to withdraw the work order and impose a daily fine. This ultimately led to the contractor filing a suit for recovery of Rs. 51,35,289.

Timeline

Course of Proceedings

The Trial Court partially decreed the suit on 02 February 1998, ordering the respondents to pay Rs. 24,97,077 with 10% interest. Aggrieved, the respondents appealed to the High Court of Judicature at Bombay. The High Court partially allowed the appeal on 24 April 2009, reducing the decree amount to Rs. 7,19,412. The contractor then appealed to the Supreme Court against this reduction.

Legal Framework

The Supreme Court considered Section 67 of the Indian Contract Act, 1872, which states:

“67. Effect of neglect of promisee to afford promisor reasonable facilities for performance.—If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby.”

The court noted that this provision excuses a promisor from non-performance if the promisee fails to provide reasonable facilities for the performance of the contract.

Arguments

The appellant argued that they were entitled to the full amount as decreed by the Trial Court. The appellant contended that the High Court erred in disallowing the claims for security deposit, overheads, and loss of profits based on the incorrect finding of abandonment. The appellant’s key arguments included:

• The respondents initially put the work order in abeyance and then changed the pipe specifications, which led to a demand for modified rates.
• The respondents instructed the appellant to stop the original pipeline work and start work at a different location.
• The respondents failed to make timely payments, which hindered the appellant’s ability to continue the work.
• The respondents themselves granted an extension of time to complete the contract, which is contradictory to the claim of abandonment.

The respondents argued that the appellant had abandoned the work and was therefore not entitled to the claims. The respondents’ key arguments included:

• The appellant did not progress with the work after the second bill was cleared.
• The appellant did not complete the work within the stipulated time.
• The respondents had the right to impose a fine for the delay.

The innovativeness of the argument of the appellant was that the respondents themselves had caused the delay by putting the work order in abeyance, changing the specifications and not making timely payments. The appellant also argued that the respondents had granted an extension of time which is contradictory to the claim of abandonment.

Issues Framed by the Supreme Court

The main issue framed by the Supreme Court was:

1. Whether there was abandonment of work by the appellant.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

• Section 67 of the Indian Contract Act, 1872: Regarding the effect of neglect by the promisee to provide reasonable facilities for performance.
• Halsbury’s Laws of England, Volume 9, Fourth Edition, Paragraph 694: Regarding remedies available when a party refuses to perform their part of a contract.

Judgment

Authorities Viewed by the Court:

• Section 67 of the Indian Contract Act, 1872:* The court used this provision to highlight that the respondents’ actions in altering the contract terms and delaying payments excused the appellant’s non-performance. The court stated that the respondents failed to provide reasonable facilities for the performance of the contract.
• Halsbury’s Laws of England, Volume 9, Fourth Edition, Paragraph 694:* The court used this to highlight the remedies available to a party when the other party refuses to perform their part of the contract, including suing for breach or rescinding the contract and suing for quantum meruit.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the fact that the respondents themselves had caused the alterations in the contract terms and delayed payments. The court emphasized that the respondents had not invoked the clause to rescind the contract and also granted an extension of time to complete the contract, which is contradictory to the claim of abandonment.

The court reasoned that the contractor’s refusal to continue work under altered conditions could not be termed as abandonment. The court stated that the respondents had failed to provide reasonable facilities for the performance of the contract.

The court rejected the High Court’s finding of abandonment, emphasizing that the contractor’s actions were a response to the respondents’ failure to adhere to the original contract terms. The court stated that the refusal to perform the obligations can be termed as breach of contract and not abandonment.

The court held that the High Court was in error in overturning the judgment of the Trial Court with regard to the claims for security deposit, overheads and loss of profits.

The Court quoted from the judgment, “The entire sequence of events narrated in the preceding paragraph would show that the appellant was not guilty of anything including abandonment.”

The Court quoted from the judgment, “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 Court quoted from the judgment, “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.”

Key Takeaways

• A contractor’s refusal to continue work due to significant changes in the original contract terms does not automatically constitute abandonment of contract.
• If the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal.
• Parties to a contract must adhere to the original terms, and any material alterations can allow the other party to refuse performance without being deemed in breach.
• If one party refuses to perform their part of the contract, the other party can sue for breach or rescind the contract and sue for quantum meruit for the work already done.

Directions

The Supreme Court directed that the bank guarantee furnished by the appellant shall stand discharged.

Specific Amendments Analysis

There was no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that a contractor’s refusal to continue work due to material alterations in the original contract terms does not constitute abandonment of contract. This case clarifies that a party is excused from performance if the other party fails to provide reasonable facilities for the performance of the contract. This case also reiterates that a party can sue for breach or rescind the contract and sue for quantum meruit if the other party refuses to perform their part of the contract.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s judgment and restoring the Trial Court’s decree. The court held that the contractor’s refusal to continue work under altered conditions did not amount to abandonment. This judgment reinforces the principle that parties to a contract must adhere to the original terms, and any material alterations can allow the other party to refuse performance without being deemed in breach.