DETAILS OF THE CASE
NAME OF THE CASE: (A) Simplex Concrete piles (India) Ltd Vs. (R) Union of India
DECIDED : 23.02.2010
COURT : Delhi High Court
CORAM : Hon’ble Justice Valmiki J. Mehta
The dispute between the appellant and respondent pertained to awarding of a contract. The respondent had hired the appellant as a contractor for foundation and basement work for the R.R hospital in the Delhi Cantonment area, the work required levelling and filling up of the rocks with cement concrete.
- Whether the rights under section 55 and 73 of the Indian Contract Act 1872 can be contractually waived off?
- Whether a clause in an agreement is void if it opposes public policy?
- Whether the court should follow Ramnath International case or Asian Techs Limited’s case?
Following Legislations and Statutes have been referred to in the case:
- THE INDIAN CONTRACT ACT, 1872 :
- SECTION 23: What considerations and objects are lawful, and what not.:
The consideration or object of an agreement is lawful, unless :
1) Is forbidden by law
2) Is of such a nature that, if permitted, it would defeat the provisions of any
3) Is fraudulent
4) Involves or implies, injury to the person or property of another
5)The Court regards it as immoral, or opposed to public policy.
- SECTION 55: Effect of failure to perform at fixed time, in contract in which time is essential: When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed,becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.
- SECTION 73 : Compensation for loss or damage caused by breach of contract.—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
Hon’ble Justice Valmiki Mehta was tasked with the daunting task of deliberating on two conflicting apex court decisions, namely Ramnath International Construction (P) Ltd. Vs. Union of India (hereinafter ‘Ramnath’ and Asian Techs Limited Vs. Union of India. Both decisions dealt with the very same clauses (11 A to 11C) as the case at hand. In ‘Ramnath’ the court while interpreting the clauses held that even if the employer/Union of India is at fault, yet, the clauses bar the entitlement of the contractor to damages, on the other hand in Asian Tech, the court held that the clauses in question, prevents only the department from granting damages, but it does not prevent the arbitrator from awarding damages which are otherwise payable by the employer on account of its breach of contract.
The learned Arbitrator, in his award held that Clause 11A ought not to be interpreted to deny damages to a contractor when the fault is of the employer. Justice Mehta refers to judgements revolving around the following question: ‘What should a High Court do when faced with two judgements of the Supreme Court which apparently cannot be reconciled with respect to its ratios?’ In Govindnaik G Kalaghati vs. West Patent Press Company Limited, a full bench held by a narrow majority of 3:2, that in such a situation, the later of the two decisions should be followed. Justice Mehta was not in consonance, with this view and referred to Seervai’s Constitutional Law of India which stated that ‘In a situation of conflicting apex court judgements, the correct thing is to follow the judgement which appears to be correct to the court to state the law accurately’. The view outlined by Mr. Seervai was fortified in the full bench judgement in Indo Swiss Time Limited vs Umaro.
Numerous High Court’s such as the Bombay High court in Special Land Acquisition officer vs Municipal Corporation, Allahabad High Court in Ganga Saran Vs. Civil Judge, Harpur, Ghaziabad relied on the ratio of ‘The Punjab High Court’s decision in Indo Swiss Time Limited vs Umaro which held that:
“The High Court must follow the judgement which appears to it to lay down the law more elaborately and accurately. The mere incidence of time whether the judgements of coequal benches of the superior court are earlier later is a consideration which appears to me as hardly relevant.”
In light of the above mentioned decisions, Justice Mehta was of the view that the issue of disentitlement to damages to the contractor or the entitlement of damages would be decided wholly, independently on his own view that the clauses which bar and disentitle a contractor to claim its just claims/damages, and which a contractor is entitled to by virtue or provisions of sections 73 and 55 of the Contract Act, are void by virtue of Section 23 of the Indian Contract Act, 1872.
On reading of Section 23 of The Indian Contract Act, 1872, two parts of the section were relevant for determining the issue at hand. The first part being that clause in agreement is unlawful and void when the same is opposed to public policy. The second part is that such a contractual clause is void if allowing operation of such clause will defeat the provisions of law.
Public policy as a concept has been deliberated on in numerous decisions, with courts often placing reliance on the definitions provided by authors such as Maxwell and Winfield. Justice Mehta placed heavy reliance on the apex court’s decision in Indian Financial Association of Seventh Day Adventists Vs. M.A Unneerikutty and Another to cull out the two following principles:
- Public policy is a dynamic and everchanging concept. Courts have resorted to the public policy doctrine to further the public interest, equity, good conscience and justice.
- A law which is made for individual benefit can be waived by an individual/ private person, however, when such law includes a public interest/public policy element, such rights arising from the law cannot be waived because the same becomes a matter of public policy.
On the aspect pertaining to Section 23, reliance was placed on the Hon’ble Supreme court judgement in being M.G Brothers Lorry Service Vs. M/s. Prasad Textiles, wherein the bench held that a contractual clause which is in the teeth of a provision which furthers the intendment of a statute, has to give way and such a clause becomes void and inoperative by virtue of Section 23 of the Contract Act. It further held, an arbitration agreement cannot by themselves exclude the statute itself which is being drafted by the legislature to look after the arbitration matters. Thus, if there was a public policy element in sections 55 or 73, then the rights under these sections cannot be waived.
Justice Mehta precisely notes that section 73 and 55 are the very heart and foundation of the contract act. If parties to a contract can break the contract at will, the very edifice of the contract act will be destroyed and hence not enter into one as the guilty party would not be punished? It is thus a matter of public policy that the sanctity of the contracts and bindingness should be given precedence over the entitlement to breach the same by virtue of contractual clauses with no remedy to aggrieved party. A bold but pertinent statement was “ The entire commercial world will be in complete turmoil if the effect of Sections 55 and 73 of the Contract Act are taken away”.
In view of the observations of the Supreme Court in ‘M.G Brothers’ and the division bench in ‘Ircon International’, the expressions “public policy” and “if permitted will defeat the provisions of the law” in Section 23 have to be interpreted to further the object of the contract act and not defeat the same. Provisions of the contract which will set at naught the legislative intendment of the contract act are void being against public interest and public policy. Thus, Justice Mehta held that contractual clauses such as Clauses 11A to 11C, on their interpretation to disentitle the aggrieved party to the benefits of section 55 and 73, would be void being violative of section 23 of The Contract Act.
On the issue of whether Ram Nath International’s Judgement or Asian Techs Ltd applies, Justice Mehta placed focus on the intendment of the contract act and analysing both macro and micro positions held that Asian Techs lays down a law which would further the object and purpose of the Contract Act. However, as both decisions are apex court decisions, the court noted that its observations were strictly in terms of the limited parameters of the facts of the present case to decide the aspect of entitlement or disentitlement of damages. Thus, the court did not venture ahead of this and felt it would be best for a larger bench of the apex court to finally decide whether there was a conflict between the 2 judgements and if so, which ratio of the judgements ought to prevail.
The Hon’ble Delhi High Court held that contractual clauses which prohibit the entitlement of rightful damages of a person is clearly hit and are void by virtue of section 23 of the Contract Act. The court awarded an interest of 9 percent per annum from the date of this judgement till payment under section 29 of the Arbitration Act, 1940.
The judgement, in my opinion is a bold and highly impactful one. It reaffirms the sanctity of contracts and provides a significant relief to contractors, especially those dealing with the government sector. The case has been cited on and relied on 9 times across various High Courts which is a strong indicator of the soundness of Hon’ble Justice Valmiki’s reasoning.
 Ramnath International Construction (P) Ltd. Vs. Union of India (2007) 2 SCC 453
 Asian Techs Limited Vs. Union of India (2009) 10 SCC 354
 Special Land Acquisition officer vs Municipal Corporation AIR 1980 Kan 92
 Indo Swiss Time Limited vs Umaro.AIR 1981 P&H 213
 Special Land Acquisition officer vs Municipal Corporation AIR 1988 Bom 9
 Allahabad High Court in Ganga Saran Vs. Civil Judge, Harpur, Ghaziabad AIR 1991 Alh 114
 Seventh Day Adventists Vs. M.A Unneerikutty and Another (2006) 6 SCC 351
M.G Brothers Lorry Service Vs. M/s. Prasad Textiles (1983) 3SCC 61
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