Dismissed

Kerala State Industrial Development Corporation Ltd. v. Sriram Epc Ltd.

Kerala HC21 Oct 2020RFA/531/2015

Case brief

AI extract

What is this about?

The High Court of Kerala dismissed the first regular appeal filed by Kerala State Industrial Development Corporation. The court upheld the trial court's finding that the termination of the construction contract was illegal and allowed the respondent to recover costs and refund security, rejecting claims of breach of contract and limiting defenses.

What did the court decide?

The judgment and decree of the lower court were upheld; the security amount and costs of materials and work were ordered to be recovered/refunded as per the lower court.

Kerala State Industrial Development… — Contract and Commercial Disputes | Kerala HC (2020)

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IN THE HIGH COURT OF KERALA AT ERNAKULAM

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PRESENT

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THE HONOURABLE MR.JUSTICE T.V.ANILKUMAR

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WEDNESDAY, THE 21ST DAY OF OCTOBER 2020 / 29TH ASWINA, 1942

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RFA.No.531 OF 2015

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AGAINST THE JUDGMENT DATED 07-02-2015 IN O.S.NO.115/2006 OF I ADDITIONAL SUB COURT,THIRUVANANTHAPURAM

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APPELLANTS/DEFENDANTS:

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1 KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD., REPRESENTED BY ITS DEPUTY GENERAL MANAGER, KESTON ROAD, KOWDIAR, THIRUVANANTHAPURAM-695003.

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2 CHIEF ENGINEER, KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD., KESTON ROAD, THIRUVANANTHAPURAM-695003.

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3 THE MANAGING DIRECTOR, KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD., KESTON ROAD, THIRUVANANTHAPURAM-695003.

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BY ADV. SRI.P.U.SHAILAJAN, SC, KSIDC

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RESPONDENT/PLAINTIFF:

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SRIRAM E.P.C. LTD., MOOKAMBIKA COMPLEX, 4TH FLOOR, NO.4, LADY DESIKACHARY ROAD, MYLAPORE, CHENNAI-600004 REPRESENTED BY ITS DIRECTOR SANTHOSH KAMATH, S/O.JAGANNATH KAMATH, F2 PALM BEACH, IV SEAWARD ROAD, VALMIKI NAGAR, CHENNAI-41.

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BY ADVS. SRI.JOHN JOSEPH VETTIKAD SRI.C.JOSEPH JOHNY

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THIS REGULAR FIRST APPEAL HAVING BEEN FINALLY HEARD ON 16-10-2020, THE COURT ON 21-10-2020 DELIVERED THE FOLLOWING:

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Dated this the 21^st day of October, 2020

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J U D G M E N T

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The appellants are defendants 1 to 3 in

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O.S.No.115/2006 before I^st Additional Sub Judge,

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Thiruvananthapuram. They are Kerala State

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Industrial Development Corporation Limited represented by the Chief Engineer (hereinafter

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called as, 'the Corporation') and the Managing Director thereof. The respondent is an Amalgamated Public Limited Construction Company in Chennai (hereinafter called as, 'the Company').

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The respondent obtained a decree for

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recovery of money towards cost of work done, materials and security deposit from the appellants after declaring the order of the Corporation terminating the work contract executed between parties as illegal. Being aggrieved, the decree and judgment are challenged in this appeal.

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The respondent executed Ext.A2 work contract on 2.3.1998 in favour of the Corporation undertaking to construct a water treatment plant of 5 MLD at Koothuparambu in Kannur for a probable estimate amount of Rs.1,36,29,295/- within a term of 15 months. Security amount of Rs.2 lakhs was also deposited.

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Ext.A2 contract agreement was, however,

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cancelled on 13.1.1999 by the Chief Engineer as per Ext.A23 proceedings passed by him on certain grounds. The main ground on which the contract was terminated is that the respondent delayed execution of work and was able to complete only 1% in lieu of 70% which should have been completed as per the schedule. One more ground taken for cancellation is that the respondent engaged a sub-contractor against the terms of the contract and this conduct amounted to breach of the agreement. The security

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deposit was therefore terminated as per the above

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proceedings. The Chief Engineer by another

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proceedings marked as Ext.B22, quantified the probable loss sustained by the Corporation for rearranging the work as Rs.12,19,769/-. The respondent challenged the action of the Chief Engineer invoking clause 31 of Ext.A2 contract agreement which provided for settlement of all disputes between parties before the Managing Director of the Corporation. The Managing Director dismissed the claim petition on 7.9.1999 by Ext.A24 order.

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In the usual course, the suit should have been brought within a period of three years from

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the date of termination of contract in compliance of Article 113 of the Limitation Act, 1963. But the respondent filed the suit after seven years and only in 2006. According to the respondent, he was

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entitled to exclusion of time as permitted by Section 14 of the Limitation Act, 1963 since he was prosecuting O.P.(Arb)No.143/2000 before District Court, Thiruvananthapuram, challenging Ext.A24 order of the Chief Engineer in good faith. That original petition was dismissed by Ext.A30 order only 5.1.2006. Therefore, according to the respondent, the suit was filed within time.

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Though Ext.A24 order passed by the Managing Director was not interfered with in Ext.B30 order, consequential Ext.B22 order fixing loss of the Corporation and advice for initiation of revenue recovery proceedings were challenged by the respondent in O.P.No.299/1999 before this Court and in Ext.B26 order dated 22.1.2007, the said

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proceedings of the Chief Engineer were set aside during the pendency of the present suit. In the present suit, the respondent had challenged the

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legality of Ext.B22 order which no longer survives after Ext.B26 order of this Court. In other words, prosecution of the suit against third appellant, Managing Director has become unnecessary.

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According to the respondent, Ext.A23 order

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of the Corporation is illegal for several reasons. According to the Company, the delay was not willful but it was attributable to the conduct of the Corporation. It is contended that the work site was not handed over in time after clearing 50 coconut trees standing in the property. It is also said that drawings of various components required for commencing the work were not tendered in time and there were frequent revisions of structural drawings which mainly contributed to the delay. It

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is contended that the drawings enabling commencement of work were supplied only in the month of August, 1998. The respondent also contends

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that it did not engage any sub-contractor but only expressed the desire to have the service of a subcontractor which under law could not have been taken as a ground for rescission of the contract. On these grounds, the respondent sought for a decree before the court below declaring Ext.A23 order terminating the work contract as illegal. As consequential relief, the Company also sought for a decree for value of work completed to the tune of Rs.3,50,000/-. Towards the value of materials stored in the premises and unused, estimated to the tune of Rs.5,85,000/- was also sought to be recovered in the suit. Besides all these, the security amount of Rs.2 lakhs was also demanded to be refunded.

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total amount of Rs.8,36,233/- with interest.

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statement contended that the order terminating the

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work contract was fully justified and in accordance with the terms and conditions in Ext.A2 contract.

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It was stated that the contractor alone had the legal obligation to remove the coconut trees standing in the property and reluctance of the respondent in this regard alone contributed to delay. It was stated that structural drawings for commencement of the work were one of the tender documents available with the consultant and the respondent did not for no good reason make use of the drawings for commencement of work. Another contention is that occasional revision of drawings during the progress of the work was inevitable and whenever revisions were made, the drawings were timely supplied to the respondent. It is alleged that respondent failed to mobilise the cement, metal and sand etc. for re-enforcing cement

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concrete works which formed the lion share of the work. Further the arrangement of sub-contract without the prior approval of the Corporation amounted to breach of contract and for all these reasons, the work contract was terminated after notice. Towards re-arranging the work through another contractor, the Corporation calculated a probable loss of Rs.12,19,769/- which it sought to recover from the respondent through a counter claim filed along with the written statement.

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The court below on the basis of pleadings, raised 12 issues and it decided all of them against the appellants. It was held that the suit was not barred as contended and the termination of contract was illegal. After appreciating the evidence on record, it held that the delay in commencement of the work was not contributed by the respondent. On the other hand, delay was held to be attributable

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by the conduct of the Corporation in supplying drawings for commencement within time and also clearing of the site by removing the standing coconut trees. The court below also accepted the contention of the respondent that there was no evidence for any sub-contractor being appointed and the mere expression of desire for engaging a sub-contractor by itself did not vitiate the

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contract.

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evidence was tendered in evidence. Exts.A1 to A30 were marked on the side of the respondent whereas

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Exts.B1 to B41 were marked on the side of the

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appellants.

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The two material questions that arise for

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consideration in this appeal are the following;

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agreement is illegal?

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(ii)Whether suit is barred by limitation?

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Point No.(i) : The learned counsel for the

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appellants contended that respondent committed breach of contract for reasons explained in Ext.A23 proceedings of the Chief Engineer of the Corporation and the court below without appreciating the contentions of the appellants and also examining the evidence, came to a wrong conclusion that the termination was illegal. It was submitted that the decree was granted by the court below rests solely on the letters and correspondence exchanged between parties and no oral evidence which was essential for decision of issues was adduced by the respondent. It was stated that there is no evidence to prove the cost of work allegedly completed by the respondent and also the cost of materials stored or unused. The learned counsel for the appellants referring to me several

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clauses in Ext.A2 contended that the responsibility for the breach of the contract rests entirely on the respondent and the repeated requests and directives issued by the Corporation from time to time were disregarded by the respondent.

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The contention of the appellants that the respondent was under contractual obligation to clear the site was rightly rejected by the court below holding that no clause obliging the appellant in that regard was incorporated in Ext.A2. In my view, the view taken by the court below is correct and Ext.A2 does not contain any clause which bound the respondent to take steps for clearing the work site. It is an admitted fact that 50 coconut trees were standing in the property without which the work could not have been commenced. The evidence on record shows that there was discussion between parties as to who should remove the trees and

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finally the respondent was allowed to remove the trees. This is evident from the letter produced on record and for want of oral evidence alone, the finding of the court below cannot be restored. Therefore delay in commencement of the work cannot be said to be attributable to the conduct of the respondent.

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There was delay in supplying structural drawings to the respondent without which the work could not have been started. Ext.A4 letter issued to the Corporation indicates that the respondent made complaint of non receipt of drawings indicating the approved site. Following Ext.A4 letter, structural drawings were supplied. Later, drawings were revised and only in the month of August, 1998, final drawings were received by the respondent. The contention of the appellants that drawings being one of the tender documents was

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available with the consultant was rejected by the

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court below commenting that those were only indicative of nature rather than functional. It was definitely found that the respondent alone could not be held liable for the slow progress in the work. In my view, this finding is in tune with the evidence and it does not require any interference.

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It was contended that respondent committed

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breach by engaging a sub-contractor for execution of civil work. This contention was not proved as

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rightly held by the court below. What rather surfaces from evidence is that respondent made a suggestion to the Corporation that a sub-contract for execution of civil work could be possibly arranged by him. Mere expression of desire or suggestion by itself cannot be taken as a conduct amounting to breach of contract. After meticulously discussing all the contentions raised on either

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side as to the responsibility for the breach of contract, the court below held that the termination of work contract by proceedings dated 13.1.1999 was illegal and the respondent could not have been held liable for the loss allegedly due to the Corporation on account of proposed rearrangement of work. I do not find any reason to interfere with the finding of the court below.

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The learned counsel for the respondent

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raised a contention that counter claim for damages put forward by the appellants in the suit was already dismissed by the court below which was not challenged and therefore, in the absence of such challenge, this Court was not bound to reconsider the issue as to legality of order terminating the work contract. The contention is to the effect that the dismissal of counter claim equals to a dismissal of a cross suit and therefore the

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respondent is entitled to the benefit of finality of decision which arose out of rejection of counter claim on merits. I cannot accept this argument since what is barred by principle of res judicata is only a claim for damages which alone the appellants are precluded from canvassing, in the absence of a challenge against the rejection of counter claim. The decisions cited in this respect by parties and reported in Cholapllakkal Abdul

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Nazer v. Kuttanparambath K.Lakshmana Das and Another (2016(4) KHC 140) and Mathew v. Rajan (2016 KHC 154) are therefore distinguishable on facts.

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The lower court rightly fixed the cost of the steel materials stored and unused by the respondent in the work premises. So also, the cost of work done by the respondent was also rightly fixed. As to the amount of security in deposit, there is no dispute at all. The respondent was thus

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found to be entitled to recover a gross amount of

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Rs.8,36,233/-. I do not find any reason to interfere with the view of the court below upholding the claim. Point No.(i) is answered

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against the appellants.

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Point No.(ii) : The respondent contends

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that suit is not barred by limitation since the Company is entitled to exclusion of time taken for prosecuting in good faith O.P.(Arb)No.143/2000

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before District Court, Thiruvananthapuram and the suit was filed immediately after dismissal of the original petition by Ext.A30 order dated 5.1.2006.

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The court below accepted this contention and the benefit of exclusion of time under Section 14 of the Indian Limitation Act, 1963, was extended to the respondent. This finding is seriously attacked by the learned counsel for the appellants contending that the prosecution of O.P.

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(Arb)No.143/2000 was not in good faith at all. His

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contention is that the respondent was, right from the beginning, aware of the fact that Ext.A2 contract agreement did not contain an arbitration clause authorising referral of the disputes between parties to an arbitral tribunal. A decision of this Court reported in Mac-N-Hom Systems v. P.S.Varrier (2003 KHC 1251) was relied on in this respect and

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Paragraph 22 thereof was specifically drawn to my attention. On the other hand, the learned counsel for the respondent submitted that the Company being greatly aggrieved by Exts.A23 and B22 proceedings of the Chief Engineer, was chasing litigations challenging the orders of the Corporation terminating work contract and assessing damages and

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that by all means, the prosecution of the litigations revealed the respondent's conduct to be in good faith and therefore also was the Company

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was entitled to the benefit of exclusion of time

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taken for prosecuting O.P.(Arb)No.143/2000 as sanctioned by Section 14 of the Limitation Act. In this respect, a decision reported Zafar Khan and others v. Board of Revenue, U.P. and others (1984 KHC 521) was relied on by the learned counsel.

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It is true that the cause of action for the

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suit arose as early as on 13.1.1999 when the work contract was terminated by the Chief Engineer. In the absence of any specific article governing the situation, Article 113 of the Limitation Act, 1963 which provides for institution of suit within three years when the right to sue accrues, alone could apply to the case on hand.

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In clause 31 of Ext.A2 contract agreement, the parties agreed to settle all kinds of disputes including breach of contract before Managing Director of the Corporation and accept his decision

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as final and binding. The Managing Director by Ext.A24 order dismissed the claim raised by the respondent and held that the contract was validly terminated and further the Corporation was entitled to claim damages for the loss sustained. This order was passed on 7.6.1999. The respondent was by all means aggrieved by this order. He therefore chose to challenge the order in O.P.(Arb)No.143/2000 before the District Court, Thiruvananthapuram. The court dismissed the original petition on 5.1.2006. If the time taken in the proceedings in the original petition could be excluded under Section 14, the company will no doubt be entitled to exemption. But the contention of the appellants is that the prosecution of the said original petition was not in good faith since Ext.A2 itself provided that the dispute between parties was under no circumstance referable to arbitrator. In this respect, the

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learned counsel referred to clause 18 in Ext.A2 which insisted the parties to refer such disputes arising between them, which could not be settled by way of mutual negotiation, to the civil court situated in the District of Thiruvananthapuram. Since the appellants rely on clauses 18 and 31, they are extracted below;

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“18. Arbitration shall not be a means for settling of disputes. All disputes unless settled by Mutual negotiation, will be referred to the Civil courts with Jurisdiction at Trivandrum.” (emphasis supplied)

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“31. SETTLEMENT OF DISPUTES All disputes and difference of any kind whatever

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arising out of or in connection with the contract or the carrying out of the works (whether during the progress of the work or after their completion and whether before or after the determination, abandonment or breach of the contract) shall be settled by The Managing Director KSIDC who shall state his decision in writing. Such decision may be in the form of a final certificate or otherwise. The decision of the Managing

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Director KSIDC shall be final and binding on the contractor.”

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According to the learned counsel for the

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appellants, prosecution of O.P.(Arb)No.143/2000 cannot be considered to be in good faith since it

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was a futile exercise done by the respondent knowing fully well that the decision of the Managing Director never constituted to be an award of an arbitrator. While the respondent filed O.P. (Arb)No.143/2000, the appellants raised a specific contention in their counter that the order dated

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7.6.1999 was not an arbitral award inasmuch as clause 18 provided for referral of the dispute in question only to the civil court and debarred the parties from taking to arbitral proceedings. In short, the contention of the appellants is that the respondent cannot successfully take the plea of good faith so long as it has not acted with due care and attention.

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It is difficult to read from the language in clause 18 that disputes raised before the Managing Director in compliance with clause 31, were agreed to be referred to the civil court. A meticulous reading of clause 18 indicates that what was contemplated by parties was referral to civil court of only those disputes which could not have been settled by them through mutual negotiation. It is difficult to conceive that clause 31 contained a scheme for mutual negotiation. The words used in clause 31 envisaged a settlement and resolution of disputes otherwise by mutual negotiation. The Managing Director was invested with authority under clause 31 to hear the parties and decide their rights in writing. That decision was agreed to become final and binding on the contractor. The characteristic features of the proceedings under clause 31 cannot be treated on par with the

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proceeding intended for a mutual negotiation. According to me, both are different. The contractor whose claim is negatived by the Managing Director, in exercise of powers under clause 31 had a legitimate cause to look for a forum where the legality of the decision could be effectively challenged. I do not for a moment hold the view that Ext.A30 decision of the learned District Judge

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was either wrong or interpretation put on clause 31 was misconceived.

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Though it was ultimately held that the

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order of the Managing Director did not amount to an arbitral award and O.P.(Arb)No.143/2000 was not consequentially maintainable, the fact remains that Ext.A24 decision of the Managing Director was nevertheless susceptible to slightly different interpretation, also distinct from what the learned District Judge had tried to put on. Because process

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of arbitration basically means determination of a matter in dispute by a person appointed by the parties. In that manner, if the Company had taken clause 31 as containing an arbitration clause, its claim for exemption from limitation under Section 14 on the plea of bona fide prosecution of the original petition before the District Court is hardly liable to be rejected. When clause 31 admitted reasonable scope for a debatable interpretation, the objection of the appellants based on clause 18 that arbitration was agreed to be excluded by the parties as per the terms of the contract must be held to be devoid of any merit. The facts reported and decided in Mac-N-Hom Systems's case supra , are distinguishable from the present case. Therefore, in my opinion, the respondent succeeded in establishing that they were prosecuting O.P.(Arb)No.143/2000 in good faith.

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Even otherwise also, it could be seen that

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the respondent challenged Ext.B22 proceedings of the Chief Engineer issued pursuant to the termination of the work contract, before this Court in O.P.No.299/1999 and it was set aside during the pendency of the suit. The conduct of the respondent indicates that it had been pursuing its grievance without sleeping over its rights. The conduct of the Company taken as a whole would indicate that it was diligent and acting with proper care and attention all throughout. It had no tangible and legitimate reason to be assured that decision of the Managing Director taken on the disputes referable to clause 31, by all means was not an arbitral award. I do not find any reason to interfere with the finding of the court below that respondent was entitled to exemption from the law of limitation.

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