Holding

A contractor who accepts the employer’s delayed performance without giving notice cannot claim damages for the employer’s earlier non‑performance, and the lower courts’ finding of coercion in the supplemental agreements was unsupported, leading to the appeal being allowed.

Summary

The State of Kerala appealed a judgment that had awarded damages to contractor M.A. Mathai for alleged delay in completing work. The contractor claimed that extensions and supplemental agreements were obtained under coercion and that, lacking an escalation clause, he was entitled to damages. The trial court and Kerala High Court accepted his claim, finding the agreements were not freely consented to and awarding Rs.10,00,000 in damages. The Supreme Court held that when a contractor accepts the employer’s belated performance without giving notice, he cannot claim damages for the employer’s earlier non‑performance, and that the lower courts’ finding of coercion was unsupported by evidence. Consequently, the appeal was allowed and the High Court’s judgment set aside.

Issues considered

Can a contractor claim damages for delay after accepting the employer's belated performance without giving notice of his intention to claim?
Whether supplemental agreements executed without an escalation clause can be deemed to have been obtained by coercion and thus be invalid?
Is the suit filed by the contractor for damages or for payment for extra work performed?
Does the contractor have a right to damages under Sections 55 and 56 of the Indian Contract Act when the contract lacks an escalation clause?

Legislation cited

Indian Contract Act, 1872s. 55, s. 56

Subjects

contract lawwork contractextension of timedamagescoercionescalation clauseSection 55Section 56noticebelated performanceIndian Contract Act

Judgment

STATE OF KERALA AND ANR. A
v.
M.A. MATHAI

APRIL 9, 2007

[DR. ARillT PASAYAT AND LOKESHWAR SINGH PANTA, JJ.] B

-y
Contract Act, 1872:
/
s. 55-Work contract-Completed in extended time-Suit by contractor
for damages-Agreement containing no escalation clause-Trial Court and c
High Court decreeing suit of contractor and awarding him damages holding
that extension agreements were due to coercion-Held, for coming to such
conclusion there is no material on record-Mere assertion by plaintiff should
not have been accepted-If, instead of avoiding contract, contractor accepts
belated performance of reciprocal obligation on part of employer, contractor D
cannot claim compensation for non-performance of reciprocal promise by
employer at agreed time-Judgment of High Court set aside.
r
Respondent-contractor filed a suit against the appellant-State, for
recovery of a certain amount in connection with the work executed by him.
The State Government contested the suit on the grounds that the contractor E
did not complete the work within the extended period; that the stand taken by
the contractor that extensions had been sought for and supplemental
agreements executed not under his free will, was based on no evidence; and
that there was no clause in the agreement for any escalation. The trial court
held that the supplemental agreements were executed under threat of
forefeiture and decreed the suit by awarding the claimed amount as damages. F
~ On appeal by the State, the High Court agreeing with the view taken by the
trial court, held that though the contractor was entitled to damages under
other heads also, but since he himself had claimed a lesser amount, the claim
was restricted to the decretal amount Aggrieved, the State Government filed

- the present appeal.

Allowing the appeal, the Court
G

A
HELD: 1. When the contract is not completed at agreed time, and if
instead of avoiding the contract, the contractor accepts the belated performance
995 H
+-
996 SUPREME COURT REPORTS '[2007] 4 S.C.R.

A of reciprocal obligation on the part of the employer, the innocent party i.e. the y

contractor, cannot claim compensation for any loss occasioned by the non-
performance of the reciprocal promise by the employer at the time agreed,
unless, at the time of such acceptance, he gives notice to the promisor of his
intention to do so. It was pointed out that there was no clause for any
escalation. (Paras 3 and 8) (998-G-H; 997-D-E)
B
1.2. In the instant case, the suit was only for damages. The plaint itself
indicated that it was a "suit for recovery of money for damages". The trial -..-
court proceeded on the basis as if the suit was for damages. In fact, the High
Court itself observed that the primary issue related to assessment of damages. -...:_
c The stand that the amount was claimed not for damages, but for extra work
done, cannot be countenanced. (Para 5 and 7) (997-H; 998-C)

General Manager, Northern Railway and Anr. v. Sarvesh Chopra, (2002)
4 sec 45, referred to.
-
Chitty on Contracts, 28th Edn. 1999, p.1106, para 20-015, referred to.
D
1.3 Both the trial court and the High Court have without any basis come
")_
tohold that the supplemental agreement was due to coercion etc. The finding
that the agreements were not obtained by free will and free consent and in
the normal course of events, to say the least, is an inferential conclusion not
E supported by any evidence. For coming to such conclusion, material had to be
placed, evidence had to be led. Mere assertion by the plaintiff without any
material to support the said stand should not have been accepted by the trial
court and the High Court. The judgment of the High Court is set aside.·
(Para 9 and 6) (999-C; 998-A-B)

F CIVIL AP.PELLA TE JURISDICTION : Civil Appeal No. 7333 of2004. 'f

F~om the Final Judgment and Order dated 27.01.2004 of the High Court "'
ofKerala at Emakulam in AS No. 290of1994.

G. Prakash for' the Appellants.
G
T.G. Narayanan Nair for the Respondent. ..
The Judgment of the Court was delivered by
).....

DR. ARIJIT PASAYAT, J. 1. Challenge in this appeal is to the judgment
H rendered by a Division Bench of the Kerala High Court dismissing the appeal
STATE OF KERALA v. M.A. MATHAI [PASAY AT, J. ] 997
filed by the appellant-State and its functionary questioning legality of the A
·judgment and decree in O.S. No.859 of 1988 on the file of the Sub Court,
Trichur. The suit was filed for recovery of money in connection with the
award of work undertaken by the respondent-plaintiff who is the contractor.

2. The High Court was of the view that the court below had fixed award
of damage ofRs.9,53,669/- and found that the plaintiff was entitled to damage B
under other head and, therefore, restricted the decretal amount to
Rs.10,00,000/- The appeal was accordingly dismissed.

3. In support of the appeal learned counsel for the appellant submitted
that the letters on which reliance had been placed show that the contractor C
was not doing the work within stipulated period and had been asked for to
apply for extension. The basic stand of the plaintiffrespondent was that the
extensions had been sought for and supplemental agreements were executed
not on the free will and free consent of the plaintiff but it was due to
circumstances which prevailed at that time which necessitated the plaintiff to
agree to the commands of the defendants. To put it differently as noted above D
the plaintiff had contented that it was due to coercion that these supplemental
agreements were executed. The trial court concluded that on the threat of
forfeiture, re-allocation and re-arrangement at the cost of the plaintiff the
execution of supplemental agreement was done. It is pointed out that there
was no clause for any escalation. It was wrongly assumed by the trial court
that the supplemental agreements and declarations made by the plaintiff were E
not binding on him as it was not obtained by free consent and free will and
in the normal course of events.

4. In response, learned counsel for the respondent submitted that the
amounts awarded were not for damages and it was only in respect of extra F
work done that the amounts has been awarded. It was submitted that the
department itself had recommended for payment for the extra work done and
as per rates under the contracts the amounts have been awarded. Though the
Government did not agree to the proposal, that itself shows about the
genuineness of the respondent's claim. In respect of another contract the
extra amounts have been paid. G
5. The trial court and the High Court appear to have been totally
confused about the nature of the suit. The plaint itself indicated that it was
a "suit for recovery of money for damages". In fact the High Court itself
observed at para 8 that the primary issue related to assessment of damages.
It also found that the plaintiff was entitled to damages under various heads. H
~
I

998 SUPREME COURT REPORTS [2007] 4 S.C.R.

A 6. Additionally, the trial court concluded that the supplemental
agreements (Ex. B-2 to Ex. B-6) and Declarations (B-10 to B-14) were not at
all binding on the plaintiff. If that was really so, there could not have been
any extension. The finding that these documents were not obtained by free
will and free consent and in the normal course of events, to say the least, is
B an inferential conclusion not supported by any evidence.

7. As noted above, the trial court proceeded on the basis as to whether
plaintiff was entitled to damages and if so what is the amount and quantum
is to be fixed. It was noted that being a suit for damages, the plaintiff was
claiming so many items of damages in terms of money involving many
C calculations. This is contrary to respondent's plea before us. Their stand is
that the amount was not for damages but for extra work done. As noted above
it was only a suit for damages. In General Manager; Northern Railway and
Anr. v. Sarvesh Chopra, [2002] 4 SCC 45 it was inter alia observed as follows:

"In our country question of delay in performance of the contract
D is governed by Sections 55 and 56 of the Indian Contract Act, I 872.
If there is an abnormal rise in prices of material and labour, it may
frustrate the contract and then the innocent party need not perform
the contract. So also, if time is of the essence of the contract, failure
of the employer to perform a mutual obligation would enable the
contractor to avoid the contract as the contract becomes voidable at
E his option. Where time is "of the essence" of an obligation, Chitty on
Contracts (28th Edn., 1999, at p. I 106, para 22-015) states

"a failure to perform by the stipulated time will entitle the innocent
party to (a) terminate performance of the contract and thereby put an
end to all the primary obligations of both parties remaining unperformed;
F and (b) claim damages from the contract-breaker on the basis that he
has committed a fundamental breach of the contract ('a breach going
to the root of the contract') depriving the innocent party of the
benefit of the contract ('damages for loss of the whole transaction')".

G 8. If, instead of avoiding the contract, the contractor accepts the belated
performance of reciprocal obligation on the part of the employer, the innocent
party i.e. the contractor, cannot claim compensation for any loss occasioned
by the non-performance of the reciprocal promise by the employer at the time··
agreed, "unless, at the time of such acceptance, he gives .notice to the
promisor of his intention to do so". Thus, it appears that under the Indian
H law, in spite of there being a contract between the parties whereunder the
STATE OF KERALA v. M.A. MA THAI [PASAYA T, J. ] 999
="- contractor has undertaken not to make any claim for delay in perfonnance of A
the contract occasioned by an act of the employer, still a claim would be
" entertainable in one of the following situations: (I) ifthe contractor repudiates
the contract exercising his right to do so under Section 55 of the Contract Act,
(ii) the employer gives an extension of time either by entering into supplemental
agreement or by making it clear that escalation of rates or compensation for
delay would be pennissible, (iii) if the contractor makes it clear that escalation B
ofrates or compensation for delay shall have to be made by the employer and
the employer accepts perfonnance by the contractor in spite of delay and
-y
such notice by the contractor putting the employer on tenns."
.::·
9. In the instant case both the trial court and the High Court have
without any basis come to hold that the supplemental agreement was due to
c
coercion etc. For coming to such conclusion, material had to be placed,
evidence had to be led. Mere assertion by the plaintiff without any material
~
to support the said stand should not have been accepted by the trial court
and the High Court.
D
IO. Looked at from any angle the impugned judgment of the High Court
is without any basis and is set aside. The appeal is allowed but in the
r circumstances without any order as to costs.

RP. Appeal allowed.