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PETITIONER: STATE OF MAHARASHTRA & ANR.

       Vs.

RESPONDENT: DIGAMBAR BALWANT KULKARNI

DATE OF JUDGMENT13/02/1979

BENCH: KOSHAL, A.D. BENCH: KOSHAL, A.D. BHAGWATI, P.N.

CITATION:  1979 AIR 1339            1979 SCR  (3) 188  1979 SCC  (2) 217

ACT:      Contract-Stipulated time as essence of contract-Meaning of-Right to rescind the contract-When accrues.

HEADNOTE:      Clause (2)  of a  works contract  entered into  by  the plaintiff  (respondent)   with  the   defendant  (appellant) stipulated that  time was  of the  essence of  the contract, that time  (of one  year) allowed  for carrying out the work shall be  strictly observed  by the contractor, and that the contractor shall  pay compensation  at a  certain percentage for every  day when  the work  remained unfinished after the proper dates. One of the three courses open to the defendant under cl.  (3) was  to rescind  the  contract  in  case  the contractor rendered  himself liable  to pay  compensation or abandoned the  work owing to serious illness or death of the contractor or  any other  cause and  in that  event security deposit of  the contractor  was to  stand forfeited.  It was also provided in that clause that in the event of any of the above courses  being adopted by the defendant the contractor shall have  no claim  to compensation for any loss sustained by him.      The work  remained  unfinished  beyond  the  stipulated time. The  defendant rejected  the contractor’s  request for extension of  time and  eventually  rescinded  the  contract under cl. (3) and forfeited the security deposit.      In the  plaintiff’s suit for refund of security deposit and payment  of certain other sums, the trial court, holding that the forfeiture of security deposit was legal, granted a decree for its refund.      On appeal the High Court held that the right to rescind a contract  being a  right to put an end to it, it could not exist after  the date  for its  performance had  expired and that in  this case  the  right  of  rescission  having  been exercised after  the expiry  of the  date of  contract,  the impugned action  of the defendant in rescinding the contract was unjustified.      Allowing the appeal, ^      HELD: 1.  The rescission  of  the  contract  was  well- founded and  the forfeiture  of  the  security  deposit  was justified. [193 F]

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    2. Although  cl. (2)  specifically mentioned  that time was of  the essence  of the contract, all that was meant was that  in   case  the  work  was  not  completed  within  the originally specified  time, the plaintiff would be liable to pay such  compensation for  delay in  execution as was fixed within the  limits of  that clause.  This is  clear not only from clause  (2) but also from clause (3). These two clauses must be read together. So read, the contract was to continue to be  in force  till the  completion of  the  work  or  its abandonment. Time  was of the essence only in the sense that if the  plaintiff completed it within the original period of one year, he would not be liable to pay any compensation but in  case   he  overstepped  that  limit  he  would  have  to compensate for every day of delay and that the right 189 to  rescission  would  accrue  only  when  compensation  due exceeded the amount of the security deposit or the plaintiff abandoned the  work. Till  the time  it  was  rescined,  the contract was in force. [193 A-C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2010 of 1969.      (From the Judgment and Decree dt. 11-7-68 of the Bombay High Court in Appeal No. 534 of 1960).      Girish Chandra and M. N. Shroff for the appellant.      A. G. Ratnaparkhi for the respondent.      The Judgment of the Court was delivered by      KOSHAL, J.  The facts giving rise to this appeal by the two defendants  (who are the State of Maharashtra and one of its Executive  Engineers) on certificate granted by the High Court of  Bombay against  its judgment  dated 11th July 1968 may be  briefly stated.  In the  year 1955,  defendant No. 1 decided to  construct an  aqueduct over Kulthi Nala situated in Malegaon  Sub-Division of  Nasik district.  The Executive Engineer, Nasik Irrigation Division, invited tenders for the work which  was entrusted  to the plaintiff in acceptance of his tender  on conditions  reduced to writing in the form of exhibit  66.   The  estimated  cost  of  the  work  was  Rs. 1,55,854.00 and it was to be completed within 12 months from the date  of the written order to commence it which happened to be  the 16th of May 1955. The plaintiff paid a sum of Rs. 1558/- as  earnest  money  and  another  of  Rs.  3896/-  as security deposit  to defendant No. 1. Clauses (2) and (3) of the contract  in accordance  with which  the work  was to be executed provided as follows:-           "(2): The  time allowed  for carrying out the work      as entered  in the tender shall be strictly observed by      the contractor  xx xx  The work  shall  throughout  the      stipulated period of the contract be proceeded with all      due diligence  (time being  deemed to be of the essence      of the  contract on the part of the contractor) and the      contractor shall pay as compensation an amount equal to      one  per   cent  or   such  smaller   amount   as   the      Superintending Engineer  xx xx  xx may  decide  xx  for      every  day   that  the  work  remains  uncommenced,  or      unfinished after  the  proper  dates.  And  further  to      ensure good  progress during the execution of the work,      the contractor  shall be  bound, in  all cases in which      the time  allowed for  any work  exceeds one  month, to      complete 190                in 1/4 of time 1/10 of the work,

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              in 1/2 of time 4/10 of the work,                in 3/4 of time 8/10 of the work      xx        xx        xx        xx        xx        xx"           "(3): In  any case  in which  under any  clause or      clauses of  this contract  the  contractor  shall  have      rendered himself  liable to  pay compensation amounting      to the  whole of his security deposit xx xx xx xx or in      the case  of abandonment  of the  work owing to serious      illness or  death of the contractor or any other cause,      the Executive  Engineer xx  xx xx  shall have  power to      adopt any of the following courses:-           (a) to  rescind the  contract (of which rescission      notice in  writing to  the contractor under the hand of      the Executive  Engineer shall  be conclusive  evidence)      and in that case the security deposit of the contractor      shall stand forfeited and be absolutely at the disposal      of the Government.           (b) xx    xx   xx   xx   xx   xx           (c) xx    xx   xx   xx   xx   xx           In the  event of  any of  the above  courses being      adopted by the Executive Engineer, the contractor shall      have no claim to compensation for any loss sustained by      him."      Clauses (4)  and (5)  of the contract related to action to be  taken when  the progress of any particular portion of the work was found unsatisfactory. Provision was made in the contract for  interim payments of running bills submitted by the plaintiff  and  for  final  payment  to  him  against  a certificate of  completion of  the work.  Clause (6)  of the contract provided  for extension  of time  during which  the work was to be completed, in pursuance of applications to be made by  the plaintiff.  A provision was made in clause (14) of the  contract for  extension of  time as a consequence of additions to or alteration in the work.      The  plaintiff   started  executing  the  work  and  by December 1955, running payments amounting to Rs. 13,967/- in all had  been made to him against bills submitted by him. In the month of March 1956, Shri Y. A. Shinde, defendant No. 2, came to  occupy the  post of  Executive  Engineer  in  Nasik Irrigation Division  and called  upon the plaintiff to speed up the execution of the work as the progress thereof was not satisfactory. However,  the work continued to be executed at a snail’s  pace and  on May  9, 1956  the plaintiff  made an application 191 (exhibit 54)  for extension of the time fixed for completion of the  work by a period of six months. That application was rejected by  defendant No.  2  who  informed  the  plaintiff accordingly through  a letter  dated June  15, 1956 (exhibit 55) which  stated inter  alia that  the reasons put forth by the plaintiff  for extension  of  the  time-limit  were  not convincing, that  the  application  had  not  been  received within the  time prescribed  in that behalf by clause (6) of the contract  and that  the proportion  of the work executed did not  conform to the condition contained in clause (2) of the contract, the value of the work executed till then being only Rs. 25,000/-. The letter further informed the plaintiff that he  had become  liable to pay compensation under clause (2) of  the contract  and called  upon him to show cause why action should  not be  taken against  him under  clause  (3) thereof.  Ultimately,  by  letter  dated  October  30,  1956 (exhibit 48)  the plaintiff  was informed  that it  had been decided to  burden him  with compensation at the rate of Rs. 5/- per  day for the entire period commencing on the 16th of May 1956 and ending with the completion of the work and that

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if the plaintiff failed to show satisfactory progress within a month  of the date of the letter, defendant No. 2 would be compelled to  increase the  rate of  compensation  and  take suitable penal  action against  the plaintiff.  The work not having made  much progress  and the plaintiff having stopped its execution, he was informed by a letter dated January 17, 1957 (exhibit  49) that  the contract  stood rescinded under clause  (3)  thereof.  The  defendants  also  forfeited  the security deposit  which had  by then  swelled, presumably on account of the addition of interest, to Rs. 4679/- (although this amount has been erroneously described by the High Court as consisting  of the  earnest money  of Rs.  1558/- and the security deposit of Rs. 3896/-).      In his suit, the plaintiff claimed a refund of the said amount of  Rs. 4679/-,  another sum of Rs. 2500/- on account of the balance due to him for part execution of the work and still another sum of Rs. 4000/- by way of damages.      The trial  court found that the plaintiff had failed to prove that  any sum was due to him for execution of the work or by  way of  damages, but further held that the forfeiture of the  security deposit was illegal. It therefore granted a decree to  the plaintiff for the sum of Rs. 4679/- only with interest at  3 per  cent per annum from the date of the suit till realisation and also proportionate costs of the suit.      Aggrieved by  the decree passed by the trial court, the defendants went  up in  appeal to  the High  Court  and  the plaintiff filed  his cross objections to the decree appealed from which was maintained by the 192 High Court  in its  entirety. The High Court agreed with the findings  of   the  trial  court  and  on  the  question  of rescission of the contract observed as follows:-           "In our  view in  law the  contract could  not  be      rescinded subsequent  to the expiry of the due date for      the  performance   thereof.  The  right  to  rescind  a      contract is  the right  to put  it to  an end  and such      right cannot  exist after  due date for the performance      expires. The right to rescind the contract is the right      to accept anticipatory breach thereof by the promissor,      i.e.,  prior   to  the   expiry  of  the  date  of  the      performance of  the  contract.  This  right  arises  in      favour of the promisee under section 39 of the Contract      Act. A  contract cannot  be abandoned  by  either  side      either by a promissor or a promisee after the expiry of      the due  date for  performance thereof.  For the  above      reasons in  our view the abandonment of the work of the      contract as  mentioned in  sub-clause (a) of the clause      relate to  (anticipatory) breach of the contract by the      contractor before  the due  date  for  the  performance      thereof. In  this case the Executive Engineer purported      to rescind the contract which had become dead some time      in August  1956. He  purported to  do so  on the ground      that the  contractor had  abandoned the  contract  some      time in  October 1956.  The Executive  Engineer in  our      view, had  no power  under clause  (3) to  rescind  the      contract having  regard to  the facts and circumstances      which we have already pointed out above. The forfeiture      of  the  security  deposit  on  the  footing  that  the      contract was  validly rescinded  must  be  held  to  be      unjustified and untenable."      It was  on the  basis of this conclusion that the trial court’s decree  for Rs.  4679/-  passed  in  favour  of  the plaintiff was affirmed. On the 9th of June 1969 however, the High Court  certified the case to be a fit one for appeal by the defendants  to the Supreme Court under sub-clause (c) of

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clause (1)  of article  133 of the Constitution of India. At that stage  defendant No.  1 agreed  to pay the costs of the respondent in the proceedings before the Supreme Court.      2. Learned  counsel for  the appellants  has challenged the correctness  of the  observations made by the High Court and reproduced  above. Those observations, according to him, run counter  to the  tenor of  clauses (2)  and (3)  of  the contract governing  the execution  of the work and we are of the  opinion   that  his  criticism  thereof  is  justified. Although in  clause (2)  of the contract it was specifically mentioned that  time was  of the  essence of  the  agreement between the parties, all 193 that was  meant was  that in case the work was not completed within the  time originally  specified in  that behalf,  the plaintiff would be liable to pay such compensation for delay in execution  as was  fixed by  the Superintending  Engineer within the  limits laid  down in  the clause.  This  becomes clear not  only from  the provision  appearing in clause (2) and stating  that "the  contractor shall pay as compensation an amount  equal to 1 per cent or such smaller amount as the Superintending Engineer  may decide  for every  day that the work remains  uncommenced, or  unfinished after  the  proper dates" but  also from  the contents  of clause  (3)  of  the contract, which would become operative only if the plaintiff renders himself  liable to  pay compensation  [in accordance with clause  (2)] or  abandons the work either on account of serious illness  or death  or for  any other cause and it is then that  the contract  would become  liable to rescission. Clauses (2) and (3) have to be read together and interpreted with reference  to each  other and their provisions, read as one single  whole, clearly  mean that  the contract  was  to continue to  be in  force till the completion of the work or its abandonment. The time was of the essence of the contract only in  the sense that if the plaintiff completed it within the original  period of  one year, he would not be liable to pay any  compensation but  that in  case he  overstepped the said time-limit  he would  have to compensate the defendants for every  day of  the delay in completing the work and that the right  to rescission would accrue to the defendant No. 2 only when  the compensation  due exceeded  the amount of the security deposit  or the  plaintiff abandoned the work. Till the time  the contract was rescinded therefore, it was fully in force  and the  rescission was consequently well-founded, being squarely  covered by  clause (3) of the contract, sub- clause (a)  of which conferred on the Executive Engineer the right  to  forfeit  the  security  deposit  Far  from  being illegal, the  forfeiture was  fully justified  and the  High Court’s finding to the contrary is liable to be reversed.      3. In  the result  the appeal succeeds and is accepted, the decree  of the  High Court  is set aside and the suit of the plaintiff  is dismissed  in its  entirety. In accordance with the  undertaking given  by defendant  No. 1  on the 9th June 1969 to the High Court when it certified the case to be a fit  one for  appeal to this Court, the plaintiff shall be entitled to  the costs  incurred by  him in  this Court.  In respect of costs in the two courts below, we make no order. P.B.R.                                       Appeal allowed. 194