Holding

The Court may grant a set‑off even outside Order 21 Rule 18; the first claim under clause 68 is a valid set‑off, but the second claim under clause 71 does not qualify as an equitable set‑off and cannot be adjusted.

Summary

The contractor Lakshmichand & Balchand entered into two road‑repair contracts with the State of Andhra Pradesh. An arbitrator awarded the contractor Rs.99 lakhs, but the civil court set aside the award and the High Court allowed only Rs.16 lakhs. In execution proceedings the State claimed a set‑off of Rs.22.91 lakhs: Rs.10.21 lakhs under clause 68 of the same contract (final bill) and Rs.12.69 lakhs under clause 71 of a separate contract alleging breach. The High Court permitted set‑off of the first amount but held the second could not be adjusted against the decretal sum. The Supreme Court examined whether a set‑off can be granted outside Order 21 Rule 18 of the CPC and whether the second claim fell within the doctrine of equitable set‑off. It held that the Court may allow set‑off even when Order 21 Rule 18 does not strictly apply, that the first claim was valid under clause 68, and that the second claim could not be treated as an equitable set‑off because the amount was not ascertained. Consequently, the appeal was allowed in part: the first adjustment was upheld and the second was set aside.

Issues considered

Whether a court can allow a set‑off in execution proceedings when the claim does not fall within Order 21 Rule 18 of the CPC.
Whether the amount claimed by the State under clause 68 of the contract (final bill) is a valid set‑off against the decretal amount.
Whether the amount claimed under clause 71 of a separate contract can be adjusted as an equitable set‑off.
Whether clause 71 can be invoked when the amount to be retained is not an ascertained sum.

Legislation cited

Code of Civil Procedure, 1908s. Order 21 Rule 18

Subjects

set offequitable set offOrder 21 Rule 18execution proceedingscontractual adjustmentarbitration awardCivil Procedure Code

Judgment

A LAKSHMICHAND & BALCHAND
v.
STATE OF ANDHRA PRADESH -,,--
•

NOVEMBER 5, 1986

B [R.S. PATHAK AND G.L. OZA, JJ.]

Civil Procedure Code, 1908-0rder 21, Rule 18-Power of the
y
Court to allow set off-When is a claim founded on doctrine of equit-
able set off.
I
c The appellant...:ontractor entered into two agreements with the
-~ _,,..
respondent State for carrying out certain road repairing works. Clause "
68 of the agreement provided for preparation or 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
D contract. While the work was in progress the contractor made certain
claims in respect of loss suffered on account of delay, escalation of rates
and other heads. The arbitrato1· 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 co111tractor claimed recovery of decretal
E amount with interest in terms of the award and cost of execution pro-
ceedings. The respondent State contested the claim contending that a
sum of Rs.22 lacs was recoverable from the appellant and claimed
adjustment against the amount due under the decree. The Executing
Court held the respondent State entitled to set off.

F
....
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
preparation of the final bill in respect of the contracts covered by the ..\
award, and (b) an amount claimed by the respondent State under a
G separate contract on the ground that the appellant bad 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 hut held that adjustment claimed could not be ..,..
made against the decretal amount hut must await determination upon
H the arbitration.

108
LAKSHMICHAND v. STATE OF ANDHRA PRADESH 109

-,· In this appeal by special leave it was contended that Order 21, A
1 Rule 18 of the Code of Civil Procedure, under which a set off can he
claimed, does not apply in terms to the present case.

Allowing the appeal in part, the Court,

HELD: I. The Court has the power to allow a set off in certain B
I circumstances even in cases which do not strictly fall within the terms of
Order 21, Rule IS of the Code of Civil Procedure. [Il2B]
. .
I... . Bhoganadham Seshaiah v. Budhi Veerabhadrayya (died) & Ors.,
r'" -AIR 1972 Andhra Pradesh 134, approved.

2. The respondent State's claim to adjustment of the amount due c
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 con·
tract 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 pre- D
paration of the final bill. The right to payment depended on the terms of
the contract. Any payment made while the contract was still being
workecl ont was in the natnre of a provisional payment. It was always
sobject to adjnstment against amount,s found doe on preparation of the
final bill. Such adjustinent was implied in the very terms or the COD·
tract. The High Court was, therefore, right in holding that the amount E
claimed by the State Government on this count was entitled to be set off
against the decretal amount claimed by the contractor. [1!2C El

3.1 The claim to adjustment of the amount claimed on breach of
·, another contract is founded in the doctrine of equitable set off but
['- there is no e>idence 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
,..). transaction, or the demands are so connected in their natnre and circum-
stances that they can be looked upon as part of one transaction. [I l 2F GI

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 G ·
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 determined. as a liability against the contractor. The decision of
the High CIHlrt eannot, therefore, be sustained. [1!2GH, l !3A)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. ~083 H
of 1986
110 SUPREME COURT REPORTS (1987] I S.C.R.

A 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. Nittarfor the Appellant.

T.S. Krishnamurthy Iyer, T.V.S.N. Chari and Ms. V. Grover for
B the Respondent.
y
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 ~- ,,...
c petition filed by the Appellant in execution prbceedings.

The Appellant is a contractor, who entered info two agreements _:...
with the Government of the State of Andhra Pradesh for providing
B. T. Macadam wearing coat and seal coat along two stretches of the
Hyderabad-Vijayawada Na.tional Highway. While the work was in
D 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 Ar-
bitrator 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
E 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 con-
tractor 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 together with
interest. The appeal was dismissed in respect of the other heads of I
F claim. /"

For the realisation of the amount due under the decree the con- l.
tractor 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
G 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 recov-
erable 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 pay-
H able to the contractor would stand reduced to Rs.76,667. This sum
LAKSHMICHAND v. STATE OF ANDHRA PRADESH [PATHAK, J.Jl l l

together with the other deposits of the contractor with the Govern- A
ment and refundable to him, viz. Rs.3,92,236 was deposited in the
Executing Court. The contractor withdrew the amount without pre-
judice to his rights to contest the adjustment. The Executing Court
held that the State Government was entitled to set_ off-the amounts
claimed by it, and accordingly adjourned· the Execution Petition for
further proceedings. B
J.
The contractor filed a revision petition before the High Court
and contended that the State Government was not entitled to claim
I.. _adjustment in execution proceedings. It was pointed out that the sum
r of Rs.22,91,332 of which adjustment was sought by the State Govern-
ment against the amount for which the contractor had taken out execu-
tion, consisted of (a) an amount of Rs.10,21,800 claimed by the State
c
--f- Government 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 con-
tract on the ground that the contractor had committed a breach of that
contract. The contractor disputed both claims. He contended that the D
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 adjust- E
ment was concerned the State Government was justified in making·it
because the arbitr_ation was effected while the work was still in prog-
ress 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 seConct claim to adjustment was F
made by the State Government under another contract, and the High
Court justified that claim hy reference 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
contract. However, it held that the adjustments claimed by the State
Government could not be made against tl>e decretal amount but must G
. 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 H
112 SUPREME COURT REPORTS [1987] l S.C.R.

A 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 mak-
ing the order which it did.

We have no doubt that in certain cases the Court has the power to
B 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 [!972) Andhra Pradesh
!34 and has examined at some length the circumstances in which such I
set off may be granted. The facts before us, however, call for a some- - .A,
C what 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 relat-
ing 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
D 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 provisional payment. It was always subject to adjust-
ment 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 adjustment claimed by the State
E Government on the first count the High Court is right, in our opinion •.
in holding that the amount claimed by the State Government, as de-
termined 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.

F In regard to the claim to adjustment on the second count the __,~
position is more controversial. The claim is founded in the doLtrine of
equitable set off, but we do not find evidence 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 con-
nected in their nature and circumstances that they can be looked upon
G 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
liability against the contractor. It has been disputed by the appellant.
H Accordingly, clause 71 cannot be invoked. In the result, the decision
LAKSHMICHAND v. STATE OF ANDHRA PRADESH (PATHAK. J.( l l3

of ine High Court in respect of the adjustment of Rs.12,69;532 cannot A
be sustained.

In the circumstances, the appeal is allowed in part, the judgment
and order of the High Couc:t is modified in so far that while the adjust-
ment claimed by the State Government on the basis of the final bill
relating to the contract covered by the award is maintained, the direc- B
·1 ' tion in respect of the. adjustment of 1he claim made under the other
contract is 'set aside. The parties will bear their oWTYcosts .

. P.S.S. Appeal allowed.
r~-
c

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