2021 (1) TMI 1354 - HC - Indian Laws

Maintainability of petition - availability of alternative remedy - Forfeiture of amount of performance guarantee (security) submitted by the petitioner - period of two years would start from the date of completion of the work or not. Maintainability of petition - availability of alternative remedy - HELD THAT - The word efficacious means able to produce the intended effect or result. The Gauhati High Court in Abdul Sammad vs. Executive Committee of the Marigaon Mahkuma Parishad 1980 (1) TMI 217 - GAUHATI HIGH COURT held that it is well-known that the meaning of the term efficacious is able to produce the intended result . The High Court negatived the preliminary objection raised by the respondents with regard to maintainability of the writ petition as its view was that the alternative remedy provided in that case was not likely to produce the intended result. In Raja Anand v. State of Uttar Pradesh 1966 (9) TMI 135 - SUPREME COURT the Supreme Court held that where the jurisdiction of an administrative authority depends upon a preliminary findings of facts the High Court is entitled in a writ proceeding to determine upon its independent judgment whether or not the finding of facts is correct. In Joshi Technologies International Inc. v. Union of India and Others 2015 (5) TMI 521 - SUPREME COURT the Supreme Court held that the State in its executive capacity even in the contractual field is under obligation to act fairly and cannot practice some discrimination. If the facts of such case are disputed and require assessment of evidence the correctness of which can only be tested satisfactorily by taking detailed evidence Involving examination and cross-examination of witnesses the case could not be conveniently or satisfactorily decided in proceedings under Article 226 of the Constitution. The question is no longer res integra that if instrumentality of the State acts contrary to the public good public interest unfairly unjustly unreasonably discriminatory and violative of Article 14 of the Constitution of India in its contractual or statutory obligation the writ petition would be maintainable. Forfeiture of amount of performance guarantee (security) submitted by the petitioner - HELD THAT - In the facts of the case action of the respondents in withholding the amount of the performance guarantee (security) of the petitioner is held to be arbitrary and unreasonable being violative of Article 14 of the Constitution of India. The respondents are therefore not justified in withholding the amount of performance guarantee (security) deposited by the petitioner and then insisting upon the petitioner to invoke arbitration clause rather than invoking writ jurisdiction of this Court under Article 226 of the Constitution of India - In the facts of the present case requiring the petitioner to go through the process of dispute resolution system provided for under Clause 12 of the agreement would amount to subjecting him to lengthy proceedings without there being any remedy of interim relief inasmuch as the question raised in the present writ petition is purely legal one based on interpretation of Clause 29 of the Contract Data and the impugned action of the respondent is totally against the public good being highly unjust unfair unreasonable and arbitrary. Clauses v vi vii of the exceptions to the rule of alternative remedy as enumerated in Para-16 above are therefore clearly attracted in the present case. Conclusion - The respondents are directed to refund the entire amount of performance guarantee (security) after adjusting the amount already paid to the petitioner together with interest @ 6% per annum from the date petitioner first demanded the refund i.e. from 03.05.2018 till the date of actual refund both on the amount already paid and now due to be paid for the period such amount was unduly withheld by the respondents. Petition allowed.

2025 (6) TMI 1575 - HC

The core legal questions considered by the Court in this matter are:

1. Whether the defect liability period/maintenance guarantee period under the contract is limited to two years from the date of completion of work or whether it is extended by an additional three months as per Clause 29 of the contract data.

2. Whether the respondents were justified in forfeiting the performance guarantee/security deposited by the petitioner after the expiry of the two-year defect liability period but within the additional three months period.

3. Whether the writ petition is maintainable despite the existence of an alternative dispute resolution mechanism under Clause 12 of the contract, which includes escalation to competent authorities and arbitration.

4. Whether the action of the respondents in withholding the performance guarantee/security was arbitrary, unreasonable, and violative of Article 14 of the Constitution of India.

Issue-wise Detailed Analysis

1. Interpretation of Defect Liability Period and Extension by Clause 29

The relevant legal framework comprises the terms of the contract, specifically Clauses 18 and 29 of the agreement and the corresponding contract data. Clause 18.1 states that the defect liability period shall be as per the contract data, which prescribes a two-year period for building works commencing from the date of completion. Clause 18.2 provides that the contractor must rectify defects before the end of this period, and the defect liability period automatically extends until defects are rectified. Clause 18.3 allows the Engineer to recover costs for unrectified defects from the performance security.

Clause 29 requires the performance guarantee/security to remain valid for three months beyond the completion of the defect liability period. The respondents contended that this extended the defect liability period itself by three months, thus justifying withholding the security beyond two years.

The Court interpreted these clauses strictly and harmoniously, emphasizing that the defect liability period is fixed at two years, and the additional three months is a validity period for the performance guarantee/security to cover any residual obligations arising from defects identified during the defect liability period but not yet rectified. The Court held that the three months does not extend the defect liability period itself but merely the validity of the security to safeguard against unrectified defects.

This interpretation aligns with the principle that contracts must be construed according to their plain language without judicial re-writing or extension beyond the parties' agreed terms, as reiterated in the Supreme Court's ruling in Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission.

2. Justification for Forfeiture of Performance Guarantee/Security

The petitioner completed the work on 08.03.2016, with the defect liability period ending on 07.03.2018. No defects were pointed out during this period. The respondents forfeited the performance guarantee/security on 22.12.2018, relying on an inspection report dated 24.05.2018 and Clause 29's three-month extension.

The Court found the forfeiture to be arbitrary and unreasonable. Since no defects were reported within the two-year defect liability period, and the three-month extension does not extend the defect liability period itself, the respondents had no legal basis to withhold or forfeit the security beyond 07.03.2018. The respondents' reliance on Clause 29 to treat the three-month period as part of the defect liability period was a misinterpretation and contrary to the contract terms.

The Court further noted that part of the security had already been refunded, and some repair work had been adjusted against the security. The balance amount was directed to be refunded with interest, reinforcing the principle that the State or its instrumentalities must act fairly and reasonably in contractual dealings.

3. Maintainability of Writ Petition Despite Alternative Dispute Resolution Clause

The respondents argued that the petitioner had an efficacious alternative remedy under Clause 12 of the agreement, which provides for dispute resolution through competent authorities and arbitration under the Madhya Pradesh Madhaystam Adhikaran Adhiniyam, 1983. They contended that the writ petition should be dismissed on this ground.

The Court undertook a comprehensive analysis of the principle of alternative remedy, referencing a rich body of precedent from the Supreme Court and other High Courts. It noted that while normally the availability of an effective alternative remedy precludes writ jurisdiction, exceptions exist. These include cases where:

Fundamental rights are involved;
There is violation of natural justice;
The order is wholly without jurisdiction;
The vires of an Act is challenged;
Availing alternative remedy results in lengthy proceedings and harassment;
The question raised is purely legal with no factual dispute;
The State acts unfairly, arbitrarily, or against public interest in contractual matters.

The Court held that in the present case, the question was purely legal, involving interpretation of contract clauses with no factual disputes. Moreover, the alternative remedy was not efficacious because the arbitration tribunal was barred from granting interim relief under Section 17 of the Adhiniyam, 1983. Requiring the petitioner to pursue the lengthy dispute resolution process would cause undue hardship and delay, amounting to unnecessary harassment.

Thus, the Court exercised its discretion under Article 226 to entertain the writ petition, finding that the respondents acted arbitrarily and contrary to the contract and public interest, justifying relief despite availability of alternative remedies.

4. Violation of Article 14 and Arbitrary Action

The Court observed that the respondents' action in forfeiting the performance guarantee/security beyond the defect liability period without any defects being pointed out was arbitrary, unreasonable, and violative of the principle of equality enshrined in Article 14 of the Constitution of India. The respondents failed to adhere to the contractual terms and acted in a discriminatory and unjust manner towards the petitioner.

The Court emphasized the State's obligation to act fairly and reasonably in contractual matters and held that the petitioner was entitled to the refund of the performance guarantee/security along with interest for the period it was wrongfully withheld.

Significant Holdings

"Clause 29 in the contract data provides that the performance guarantee/security shall be valid up to three months beyond the completion of the defect liability period (maintenance guarantee period). This implies that the defect liability period is only two years and the additional three months is for the validity of the security, not an extension of the defect liability period itself."

"The respondents on the basis of what has been stated in the contract data are not justified to claim that the additional period of three months would also be part of the defect liability period."

"The action of the respondents in withholding the amount of the performance guarantee (security) of the petitioner is held to be arbitrary and unreasonable, being violative of Article 14 of the Constitution of India."

"When the facts are not in dispute and it has been established to the satisfaction of this Court that the respondents have acted arbitrarily and contrary to the relevant stipulations in the agreement and the contract data, the availability of alternative remedy, in the facts of the present case, cannot justify rejection of the present writ petition on the spacious plea of alternative remedy."

"Requiring the petitioner to go through the process of dispute resolution system provided for under Clause 12 of the agreement would amount to subjecting him to lengthy proceedings without there being any remedy of interim relief, inasmuch as the question raised in the present writ petition is purely legal one, based on interpretation of Clause 29 of the Contract Data and the impugned action of the respondent is totally against the public good, being highly unjust, unfair, unreasonable and arbitrary."

The Court directed refund of the entire amount of performance guarantee/security after adjustment of amounts already paid, along with interest at 6% per annum from the date of first demand for refund until actual payment, to be complied with within three months.

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