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PETITIONER: LAKSHMICHAND & BALCHAND

       Vs.

RESPONDENT: STATE OF ANDHRA PRADESH

DATE OF JUDGMENT05/11/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. OZA, G.L. (J)

CITATION:  1987 AIR   20            1987 SCR  (1) 108  1987 SCC  (1)  19        JT 1986   785  1986 SCALE  (2)725

ACT:     Civil Procedure Code, 1908--Order 21, Rule 18---Power of the  Court  to  allow set off--When is a  claim  rounded  on doctrine of equitable set off.

HEADNOTE:     The  appellant-contractor  entered into  two  agreements with  the  respondent State for carrying  out  certain  road repairing  works.  Clause 68 of the agreement  provided  for preparation of the final bill of the contractor after taking into  account amounts received by him earlier, while  clause 71  permitted the State to retain or deduct money due  under the contract from an amount due to the contractor under  any other contract. While the work was in progress the  contrac- tor  made  certain  claims in respect of  loss  suffered  on account  of delay, escalation of rates and other heads.  The arbitrator  held the contractor entitled to Rs.99 lacs.  The civil court refused to pass a decree in terms of the  award. The High Court on appeal allowed the claim to the extent  of Rs.16  lacs together with interest. The  contractor  claimed recovery  of decretal amount with interest in terms  of  the award  and  cost of execution  proceedings.  The  respondent State  contested  the claim contending that a sum  of  Rs.22 lacs was recoverable from the appellant and claimed  adjust- ment against the amount due under the decree. The  Executing Court held the respondent State entitled to set off.     In  the revision petition before the High Court  it  was contended  for the appellant that the respondent  State  was not  entitled to set off in execution proceedings, and  that the  sum of which adjustment was sought consisted of (a)  an amount claimed by respondent State as due to it upon  prepa- ration of the final bill in respect of the contracts covered by  the award, and (b) an amount claimed by  the  respondent State  under  a  separate contract on the  ground  that  the appellant had committed a breach of that contract. The  High Court  having  regard to cl. 68 of the agreement  found  the respondent  State  entitled to set off so far as  the  first claim  was concerned. It justified the second claim also  by reference to cl. 71 of the contract but held that adjustment claimed  could not be made against the decretal  amount  but must await determination upon the arbitration.

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109     In  this appeal by special leave it was  contended  that Order  21,  Rule 18 of the Code of  Civil  Procedure,  under which  a set off can be claimed, does not apply in terms  to the present case. Allowing the appeal in part, the Court,     HELD:  1. The Court has the power to allow a set off  in certain  circumstances even in cases which do  not  strictly fail  within the terms of Order 21, Rule 18 of the  Code  of Civil Procedure. [112B]     Bhoganadham  Seshaiah v. Budhi Veerabhadrayya  (died)  & Ors., AIR 1972 Andhra Pradesh 134, approved.     2.  The  respondent State’s claim to adjustment  of  the amount  due to it upon the preparation of the final bill  is covered  by cl. 68 of the contract. What was awarded to  the contractor under the decree was an amount relating to a part only of the work entrusted to him. The contract was still in the process of execution. Any amount claimed by him for such work  was  subject to a final settlement of account  on  the preparation of the final bill. The fight to payment depended on  the  terms of the contract. Any payment made  while  the contract  was still being worked out was in the nature of  a provisional  payment.  It was always subject  to  adjustment against amounts found due on preparation of the final  bill. Such  adjustment was implied in the very terms of  the  con- tract. The High Court was, therefore, right in holding  that the amount claimed by the State Government on this count was entitled  to be set off against the decretal amount  claimed by the contractor. [112C E]     3.1  The  claim to adjustment of the amount  claimed  on breach  of  another contract is rounded in the  doctrine  of equitable  set  off but there is no evidence  on  record  to bring  the case within the operation of the doctrine. It  is not a case where cross demands rise out of the same transac- tion,  or the demands are so connected in their  nature  and circumstances  that they can he looked upon as part  of  one transaction. [112F G]     3.2 The benefit of cl. 71 of the contract can be claimed only if the amount sought to. he retained is an  ascertained sum,  an  amount which can be readily adjusted  against  the amount  payable  under the other contract.  In  the  instant case, the amount sought to be adjusted had yet to be  deter- mined as a liability against the contractor. The decision of the  High  Court cannot, therefore,  he  sustained.  [112GH, 113A]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 4083  of 1986 110     From  the  judgment  and order dated  13.4.1984  of  the Andhra Pradesh High Court in C.R.P. No. 3072 of 1983. Dr. Y.S. Chitale, G.N. Narayan and N. Nittar for the  Appel- lant.     T.S.  Krishnamurthy  Iyer,  T.V.S.N. Chaff  and  Ms.  V. Grover for the Respondent; The Order of the Court was delivered by     PATHAK, J. This appeal is directed against the  judgment and order of the High Court of Andhra Pradesh disposing of a revision  petition filed by the Appellant in execution  pro- ceedings.     The  Appellant  is a contractor, who  entered  into  two agreements  with the Government of the State of Andhra  Pra-

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desh  for providing B.T. Macadam wearing coat and seal  coat along  two  stretches of the  Hyderabad-Vijayawada  National Highway. While the work was in progress, the contractor made certain claims in respect of the loss suffered on account of delay, escalation of rates and other heads. The claims  were referred to arbitration. On September 4, 1979 the Arbitrator held the contractor entitled to a sum of Rs.99,00,000  under five  heads  of claim. The contractor applied to  the  Civil Court  for  making the award a rule of the Court  while  the State Government prayed for setting aside the entire  award. The  Civil Court set aside the award and refused to  pass  a decree in terms of the award. The contractor-appealed to the High Court, and on April 19, 1982 the High Court allowed the appeal  to the extent of one of the claims only,  the  claim being for loss of profit in the sum of Rs. 16,00,000 togeth- er with interest. The appeal was dismissed in respect of the other heads of claim.     For  the realisation of the amount due under the  decree the  contractor  filed  Execution Petition No.  48  of  1982 before  the V Additional Judge, City Civil Court,  Hyderabad claiming  recovery  of Rs. 16,00,000  towards  the  decretal amount,  Rs.7,80,000 towards interest in terms of the  award up  to the date of the execution petition and  Rs.8,691  to- wards costs of the Execution Petition. The State  Government filed  objections,  contending  inter alia  that  a  sum  of Rs.22,91,332  was recoverable by it from the contractor  and claimed adjustment against the amount due to the  contractor under  the  said decree. It urged that after  adjusting  the amount  due to the State Government the balance  payable  to the contractor would stand reduced to Rs.76,667. This sum 111 together with the other deposits of the contractor with  the Government  and  refundable  to him,  viz.  Rs.3,92,236  was deposited  in the Executing Court. The  contractor  withdrew the  amount without prejudice to his rights to  contest  the adjustment. The Executing Court held that the State  Govern- ment was entitled to set off the amounts claimed by it,  and accordingly  adjourned  the Execution Petition  for  further proceedings.     The contractor filed a revision petition before the High Court and contended that the State Government was not  enti- tled  to claim adjustment in execution proceedings.  It  was pointed out that the sum of Rs.22,91,332 of which adjustment was  sought by the State Government against the  amount  for which  the contractor had taken out execution, consisted  of (a)  an amount of Rs.10,21,800 claimed by the State  Govern- ment as due to it upon the preparation of the final bill  in respect  of  the contracts covered by the award and  (b)  an amount  of  Rs. 12,69,532 claimed by  the  State  Government under a separate contract on the ground that the  contractor had  committed  a breach of that  contract.  The  contractor disputed  both claims. He contended that the final  bill  in respect  of  the earlier contract had been prepared  in  his absence  and  that he challenged the  inclusion  of  several items in that bill. In regard to the latter amount he  urged that he was not guilty of any breach of contract.     The High Court has found that so far as the first  claim to adjustment was concerned the State Government was  justi- fied in making it because the arbitration was effected while the  work was still in progress and the contract was in  the process of execution by the contractor, and having regard to clause  68 of the agreement final payment had to be made  to the  contractor after taking into account the  amount  which had  been received by him earlier. The second claim  to  ad- justment  was  made by the State  Government  under  another

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contract, and the High Court justified that claim by  refer- ence  to  clause 71 of that contract,  which  permitted  the Government to retain or deduct money due under the  contract from  an amount due to the contractor under any  other  con- tract. However, it held that the adjustments claimed by  the State  Government  could not be made  against  the  decretal amount but must await determination upon due arbitration.     Learned  counsel  for the Appellant contends  before  us that  the State Government is not entitled to a set  off  at all  because, he says, a set off can be claimed  only  under Order  21  Rule 18 of the Code of Civil Procedure  and  that provision does not apply in terms to the present 112 case. Learned counsel for the respondent urges, on the other hand,  that  the power of the Court extends to  granting  an equitable  set off in appropriate cases, and the High  Court was therefore justified in making the order which it did.     We have no doubt that in certain cases the Court has the power to allow a set off even in cases which do not strictly fall  within  the terms of Order 21 Rule 18 of the  Code.  A Full  Bench of the Andhra Pradesh High Court  has  discussed the  matter in Bhoganadham Seshaiah v. Budhi  Veerabhadrayya (died)  and  Others, AIR [1972] Andhra Pradesh 134  and  has examined at some length the circumstances in which such  set off may be granted. The facts before us, however, call for a somewhat different consideration. So far as the first  claim to adjustment is concerned, the matter is covered by  clause 68 of the contract. What was awarded to the contractor under the decree was an amount relating to a part only of the work entrusted  to him. The contract was still in the process  of execution.  Any  amount  claimed by him for  such  work  was subject to a final settlement of account on the  preparation of  the  final bill. The right to payment  depended  on  the terms  of the contract. Any payment made while the  contract was still being worked out was in the nature of a provision- al  payment.  It was always subject  to  adjustment  against amounts  found due against the contractor on preparation  of the  final  bill. Such adjustment was implied  in  the  very terms  of the contract. Therefore, in regard to the  adjust- ment claimed by the State Government on the first count  the High  Court  is right, in our opinion, in holding  that  the amount  claimed  by the State Government, as  determined  on arbitration, was entitled to a set off against the  decretal amount  claimed by the contractor, and that payment  of  the decretal amount was to be subject to such adjustment.     In regard to the claim to adjustment on the second count the position is more controversial. The claim is rounded  in the  doctrine of equitable set off, but we do not find  evi- dence  before us to bring the case within the  operation  of the doctrine. It is not a case where cross demands rise  out of  the same transaction or the demands are so connected  in their nature and circumstances that they can be looked  upon as  part of one transaction. Nor can assistance  be  derived from clause 71. The benefit of that provision can be claimed only  if the amount sought to be retained is an  ascertained sum,  an  amount which can be readily adjusted  against  the amount  payable under the other contract. Here,  the  amount sought to be adjusted has yet to be determined as a liabili- ty  against  the  contractor. It has been  disputed  by  the appellant. Accordingly, clause 71 cannot be invoked. In  the result, the decision 113 of  me  High  Court  in respect of  the  adjustment  of  Rs. 12,69,532 cannot be sustained.     In the circumstances, the appeal is allowed in part, the

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judgment  and order of the High Court is modified in so  far that while the adjustment claimed by the State Government on the basis of the final bill relating to the contract covered by the award is maintained, the direction in respect of  the adjustment of the claim made under the other contract is set aside. The parties will bear their own costs. P.S.S.                                          Appeal   al- lowed. 114