Monday 24 May 2021

Does the corporation postpone payment to the contractor, saying that it will pay him after receiving money from the government?

  The learned Judge in North Delhi Municipal Corporation Vs.

Vipin Gupta (supra) was dealing with a batch of appeals passed in similar suits wherein the appellant-corporations were relying on clause 7 and clause 9 to delay payment to contractors who had executed the work as per their respective work orders. The relevant portion of the judgment dated 22nd March, 2018 in RFA 160/2017 is reproduced hereinbelow:-

“Conclusions and Findings

“56. The General Conditions of Contract i.e., clauses 7 and

9 which are admittedly part of the work orders issued by

both the NrDMC and the EDMC are being tested in these

batch of cases. A contract which stipulates that the

consideration would be paid in an unforeseen time in the

future based on certain factors which are indeterminable,

would in effect be a contract without consideration. Even if

the contract is held to be a valid contract, then the concept of

`reasonableness' has to be read into the same. Section 46 of

the Contract Act and the explanation thereto is clear that

“what is a reasonable time is a question of fact in each

case.” A Corporation which gets works executed cannot

therefore include terms in the contract which are per se

unconscionable and unreasonable as –

a) There is no fixed time period as to when the

funds would be available;

b) There is also no fixed mechanism to determine

as to when and in what manner the head of

account is to be determined and as to how the

Contractor would acquire knowledge of these two

facts;

c) There is also no certainty as to how many

persons are in the queue prior to the Contractor

and for what amounts;

d) There is enormous ambiguity in the receipt

under the particular heads of accounts.

57. These clauses in effect say that the Contractor is left with

no remedy if the Corporation does not pay for the work that

has been executed. Such a Clause would be illegal and

contrary to law. Such clauses, even in commercial contracts,

would be contrary to Section 25 read with Section 46 of the

Contract Act.


58. The clauses do not specify an outer time limit for

payment. The expression reasonable time has to be `a time'.

The concept of time itself is ensconced with specificity and

precision. Clause 9 is the opposite of being precise. It is as

vague and ambiguous as it could be because it depends on

factors which are totally extraneous to the contract, namely

 Allotment of funds to the Corporation by

the Government;

 Allotment of funds in a particular head;

 Allotment of funds for payments who are

in queue prior to the contractor;

59. Thus, these factors, which are beyond the control of the

Contractor and which would govern the payment of

consideration, make the said clauses of the contract

completely unreasonable. The clauses have to thus, be read

or interpreted in a manner so as to instill reasonableness in

them. {Para 9}

The learned Single Judge of this Court in North Delhi Municipal Corporation Vs. Vipin Gupta (supra) took note of this fact and observed as under:-

“33. It is slightly unfathomable as to how the Corporation can

postpone the payment to the Contractor, indefinitely. The

issuance of the tender and the work order in favour of the

Contractor has to be on the pre-condition that funds are

available with the Corporation. To ask the Contractor to wait

endlessly for his payment is wholly arbitrary. The

Corporation which hands over the works contract to the

Contractor cannot say “Do the work now, I will pay when I

have the money”. Even if such a clause has been signed and

accepted by the Contractor, it does not make the clause valid

inasmuch as it would render a fundamental condition of

contract being hit by provisions of the Indian Contract Act,

1872 (hereinafter, „Contract Act‟). Every contract, to be

valid, has to have consideration and the indefinite

postponement of consideration would be wholly

unconscionable.

 IN THE HIGH COURT OF DELHI AT NEW DELHI

 RFA (COMM) 6/2021 & CM APPLs. 10185-10188/2021

NORTH DELHI MUNICIPAL CORPORATION  Vs M/S. BARAHI CONSTRUCTION 

 Date of Decision: 15th March, 2021

CORAM:

HON'BLE MR. JUSTICE MANMOHAN

HON'BLE MS. JUSTICE ASHA MENON


Author: MANMOHAN, J (Oral):

1. Present appeal has been filed challenging order dated 7th January,

2021 passed by learned District Judge (Commercial court-05), Central

Delhi, Tis Hazari in CS(COMM) 683/2020, whereby the respondent’s

application under Order XII Rule 6 has been allowed and the suit has

been decreed against the appellant.

2. Briefly stated, the facts of the present case are that Respondent-

Plaintiff was awarded five work orders on 1/4/2016 and it completed the same within stipulated time, to the satisfaction of the appellant. The final

bills for all work orders amounting to Rs. 38,34,799/- were approved by

the appellant. However, the payment was not released within prescribed

time. Thereafter, the respondent-plaintiff sent a legal notice to the

appellant to which the appellant replied stating that the payments would

be made after the amount is released by the SDM/Delhi Government. The

respondent-plaintiff then filed the suit for recovery before the District Court.

3. Appellant contested the suit and admitted its liability to pay the

amount of passed bills but stated that work orders were placed at the

request of SDM/Delhi Govt. and due to non receipt of payment from

them, the payment to the respondent-plaintiff could not be released.

During the pendency of the suit, respondent-plaintiff had made an offer to

the appellant to pay the principal amount by 31st December, 2020 upon

which the interest and costs would be waived off. However, the appellant

refused the said offer and filed an application under Order VII Rule 11.

Subsequently, the respondent-plaintiff filed an application under Order

XII Rule 6 in which the impugned order has been passed.

4. Learned senior counsel for the appellant submits that learned

District Judge failed to appreciate that the relief sought for by the

respondent under the garb of application under Order XII Rule 6 CPC

was beyond the scope of the terms and conditions of the contract.

5. He states that learned District Judge failed to appreciate that the

work orders were placed at the request of SDM/Delhi Government and due to non-receipt of payment from them, the payment to the contractor

cannot be released.


6. He further states that there was a condition in the NIT that the

payment of the Bills will depend upon availability of funds in a particular

head of account and even the payments will be made on queue basis i.e.

first and past liabilities to be given priorities and after those clearance, the

payment to the contractor will be released after the demand of the bills is

received from the concerned SDM and that no interest shall be paid on

the bill amount.

7. He emphasizes that there are judgments passed by the learned

Single Judge of this Court wherein the queue basis payment had been

approved. In support of his contention, he relies upon the judgments of

the learned Single Judges in RFA 786/2016, RFA 818/2017 and RFA

835/2017. According to him, these judgments take a contrary view to the

one taken in RFA 160/2017 decided on 22nd March, 2018 by a different

learned Single Judge of this Court.

8. This Court is of the view that the present appeal is liable to be

dismissed inasmuch as a learned Single Judge of this Court in ‘North

Delhi Municipal Corporation Vs. Vipin Gupta’ RFA 160/2017 has dealt

with all the grounds urged herein and the same are no longer res integra.

It is relevant to point out that the appellant herein had preferred an SLP

against the aforesaid order of the learned Single Judge, which came to be

dismissed vide order dated 03rd January, 2019.

9. The learned Judge in North Delhi Municipal Corporation Vs.

Vipin Gupta (supra) was dealing with a batch of appeals passed in similar suits wherein the appellant-corporations were relying on clause 7 and clause 9 to delay payment to contractors who had executed the work as per their respective work orders. The relevant portion of the judgment dated 22nd March, 2018 in RFA 160/2017 is reproduced hereinbelow:-

“Conclusions and Findings

“56. The General Conditions of Contract i.e., clauses 7 and

9 which are admittedly part of the work orders issued by

both the NrDMC and the EDMC are being tested in these

batch of cases. A contract which stipulates that the

consideration would be paid in an unforeseen time in the

future based on certain factors which are indeterminable,

would in effect be a contract without consideration. Even if

the contract is held to be a valid contract, then the concept of

`reasonableness' has to be read into the same. Section 46 of

the Contract Act and the explanation thereto is clear that

“what is a reasonable time is a question of fact in each

case.” A Corporation which gets works executed cannot

therefore include terms in the contract which are per se

unconscionable and unreasonable as –

a) There is no fixed time period as to when the

funds would be available;

b) There is also no fixed mechanism to determine

as to when and in what manner the head of

account is to be determined and as to how the

Contractor would acquire knowledge of these two

facts;

c) There is also no certainty as to how many

persons are in the queue prior to the Contractor

and for what amounts;

d) There is enormous ambiguity in the receipt

under the particular heads of accounts.

57. These clauses in effect say that the Contractor is left with

no remedy if the Corporation does not pay for the work that

has been executed. Such a Clause would be illegal and

contrary to law. Such clauses, even in commercial contracts,

would be contrary to Section 25 read with Section 46 of the

Contract Act.


58. The clauses do not specify an outer time limit for

payment. The expression reasonable time has to be `a time'.

The concept of time itself is ensconced with specificity and

precision. Clause 9 is the opposite of being precise. It is as

vague and ambiguous as it could be because it depends on

factors which are totally extraneous to the contract, namely

 Allotment of funds to the Corporation by

the Government;

 Allotment of funds in a particular head;

 Allotment of funds for payments who are

in queue prior to the contractor;

59. Thus, these factors, which are beyond the control of the

Contractor and which would govern the payment of

consideration, make the said clauses of the contract

completely unreasonable. The clauses have to thus, be read

or interpreted in a manner so as to instill reasonableness in

them.

60. By applying the above said principles, in respect of final

bills raised by Contractors for works executed, that have

been approved by the Engineer-in-Charge, the Clauses have

to be read in the following manner:

a) Reasonable time for making of payments of

final bills in respect of work orders up to Rs.5

lakhs shall be 6 months and work orders

exceeding Rs.5 lakhs shall be 9 months from the

date when the bill is passed by the Engineer-in-

Charge.

b) The queue basis can be applicable for the

payments to be made in chronology. However, the

outer limit of 6 months and 9 months cannot be

exceeded, while applying the queue system.

c) The payments are held to become due and

payable immediately upon the expiry of 6 months

and 9 months and any non-payment would attract

payment of interest for the delayed periods.

d) A conjoint reading of Clauses 7 & 9 along with

the amendment dated 19th May, 2006, clearly

shows that for the payment of bills, the contractors

have to follow the queue basis and as and when

the amount is available under the particular head

of account, the amount would be payable. The

amendment does not, however, have a condition

that no interest is payable for delayed payment.

Such a condition exists only in Clause 7. Clause 9,

therefore, when read with the amendment has to

mean that the Corporation itself considers 50

months and 9 months to be the reasonable periods

for which the payments of the final bills can be

held back.

e) To the extent that queue basis is applied only

for clearing of payments which do not extend

beyond the period of 6 months and 9 months

period, it is reasonable. However, if the queue

basis is applied in order to make Contractors wait

for indefinite periods for receiving payments, then

the same would be unreasonable and would have

to therefore be read down.

10. The appellant has sought to distinguish the aforesaid judgment on

the ground that the clause 9 has subsequently been amended and the

Learned Single Judge had dealt with pre-amendment clause 9. It is

pertinent to note that pre-amendment clause 9 prescribed a time period

for making payments i.e. payment of bills of upto Rs. 5 Lac had to be

made within a period of Six months from the date of passing of bill and in

case of bills of more than Rs. 5 Lac, the payment had to be made within a

period of 9 months. The same has been amended by office order dated

10th June, 2014. The amended clause 9 now reads as under:-

“The contractor will get payment of his passed bills

depending upon on availability of funds in particular heads

of account. Payment will be made strictly on queue basis. No

interest will be payable to contractor in case if delay in

payment on account of non-availability of funds in particular

head of accounts of MCD.”

11. Perusal of the amended clause 9 shows that the appellants have

deliberately removed the time period prescribed for making payments in

order to ‘overcome’ the directions issued by the learned Single Judge of

this Court in RFA 160/2017. In fact, this is not the first time the appellant

has adopted this mechanism inasmuch as they had previously amended

clause 9 to include the “queue basis payment” to neutralize judgment of

another learned Single Judge of this Court in Jagbir Singh Sharma v.

Municipal Corporation of Delhi in CS(OS) 1797/2007. The learned

Single Judge of this Court in North Delhi Municipal Corporation Vs.

Vipin Gupta (supra) took note of this fact and observed as under:-

“33. It is slightly unfathomable as to how the Corporation can

postpone the payment to the Contractor, indefinitely. The

issuance of the tender and the work order in favour of the

Contractor has to be on the pre-condition that funds are

available with the Corporation. To ask the Contractor to wait

endlessly for his payment is wholly arbitrary. The

Corporation which hands over the works contract to the

Contractor cannot say “Do the work now, I will pay when I

have the money”. Even if such a clause has been signed and

accepted by the Contractor, it does not make the clause valid

inasmuch as it would render a fundamental condition of

contract being hit by provisions of the Indian Contract Act,

1872 (hereinafter, „Contract Act‟). Every contract, to be

valid, has to have consideration and the indefinite

postponement of consideration would be wholly

unconscionable. In fact a Single Judge of this Court in Jagbir

Singh Sharma v. Municipal Corporation of Delhi [order dated

15th July, 2007 in CS(OS) 1797/2007] (hereinafter, „Jagbir

Singh‟), while dealing with Clause 9 of the General

Conditions of Contract (as it then stood) has held as

under:…………

xxx xxx xxx

35. A perusal of the old Clause 9 reveals that there was an

actual limit for making of payment i.e. 3 months and 6 months

and in the context of the said Clause, it was held in Jagbir

Singh (supra) that “every endeavor should be made by MCD

to make payment with the time period stipulated in Clause 9”.

In the case of Jagbir Singh (supra), the Corporation, in its

leave to defend application had submitted that payment would

be made as and when funds in a particular budget head are

available with it. This Court categorically rejected this stand

of the Corporation by holding “Ex facie, the stand taken in

the leave to defend applications cannot be accepted and has

to be rejected”. This Court held that the Contractors have no

role to play in the internal affairs of the Corporation. But a

perusal of the present Clause i.e., the new Clause 9 of the

General Conditions of Contract shows that what was

expressly rejected by this Court, even as a defense in the leave

to defend application in Jagbir Singh (supra), has now come

to be added in the Clause itself along with a second element of

a queue basis, which were not part of the earlier Clause and

has now been made part of the new Clause. It is, however,

completely incongruous that the addition of conditions of

availability of funds and queue basis has been made, while at

the same time retaining an upper limit of 6 months and 9

months as against the earlier 3 months and 6 months in

Clause 9 of the General Conditions of Contract. Clause 9 is,

therefore, in the teeth of the judgment of this court in Jagbir

Singh (supra) and is nothing but an attempt to neutralize the

said judgment. A Corporation which gets works executed

cannot therefore include a term in the contract which is per se

unconscionable and unreasonable as –


a) There is no fixed time period as to when the

funds would be available;

b) There is also no fixed mechanism to determine

as to when and in what manner the head of

account is to be determined and as to how the

contractor would acquire knowledge of these two

facts;

c) There is also no certainty as to how many

persons are in the queue prior to the Contractor

and for what amounts;

d) There is enormous ambiguity in the receipt

under the particular heads of accounts.

36. These clauses in effect say that the Contractor is left with

no remedy if the Corporation does not pay for the work that

has been executed. Such a Clause would be illegal and

contrary to law.

37. Corporations which form a part of the State as envisaged

under Article 12 of the Constitution have to conduct their

activities in accordance with law and public policy.

Instrumentalities of States ought to be saddled with a higher

responsibility to behave reasonably and not arbitrarily. It

can be no justification for a Corporation to claim that it

would float the tender, it would issue the works contract, it

would get the work executed, its Engineer would supervise

the work, the Engineers would pass the bills, but yet no

payment would be made. Such a luxury ought not to be

available to anyone, even a private individual/corporation

who enters into a contract, let alone a State Corporation.”

12. The learned Single Judge in North Delhi Municipal Corporation

Vs. Vipin Gupta (supra) has further categorically held that the conditions

being imposed on the contractors by the appellant are “so vague and

ambiguous into the future that at no point would a Contractor, who had

executed the work order, be able to demand payment.” The relevant

observation on this aspect is reproduced hereinbelow: -

“48. The learned counsel for the Corporation also relies

upon Cauvery Coffee Traders, Mangalore v. Hornor

Resources (International) Co. Ltd. (2011) 10 SCC 420

(hereinafter, „Cauvery Coffee Traders‟) to argue that

Contractors cannot approbate and reprobate. Since

Contractors wanted to obtain benefits under the work order

and the terms of the work order (including the General

Conditions of Contract) were well known to them, they

cannot then argue that “I want the work order but without

clause 7 & 9”. This argument would have been acceptable

and appealing if the Clause under the contract had some

reasonable time limit fixed for the payment to be made, while

following a queue system. However, the Corporation argues

that there is no time limit fixed at all. There are too many

contingencies and conditions that are stipulated in order to

make payment, namely:

(i) funds should be available with the

Corporation;

(ii) funds should be available under specific head;

(iii) the Contractors’ turn to be paid should arise;

and

(iv) Interest would not be paid for the delayed

period.

49. These four conditions are so vague and ambiguous into

the future that at no point would a Contractor, who had

executed the work order, be able to demand payment. On the

one hand, the Contractor is expected to obtain all the

construction material at his own expenses, employ labour at

his own expenses and execute the work order. Thereafter, he

has to submit his bills to the Corporation and the Engineerin-

Charge has to pass the said bills. So far, the conditions

are reasonable. However, to say that even after the bills are

passed the payment would be made if and when the funds are

available, if and when Contractor’s turn comes, is in effect

to say that it would make the payment in 1 year, 5 years, 10

years or not pay at all. Such a condition in any contract

would be illegal, unconscionable and unreasonable. There is

no question of estoppel by election in such a case. In

Cauvery Coffee Traders (supra) the Supreme Court's

observation on approbate and reprobate was in the context

of a transaction that stood concluded `after extensive and

exhaustive bilateral deliberations'. The position in the

present cases is the opposite. Here it is a standard form

contract which is to be accepted without much choice. The

only choice before a Contractor is simply to not to apply for

or accept the work order itself. Thus, the authority cited on

this proposition would not apply.”

13. In view of the aforesaid, this Court is of the view that the amended

clause 9 is in the teeth of the judgment of the learned Single Judge of this

Court in North Delhi Municipal Corporation Vs. Vipin Gupta (supra)

and yet another attempt of the appellant to indefinitely and arbitrarily

delay payment to contractors.

14. This Court is in agreement with the findings of the learned District

Judge that despite there being clear directions by this Court in similar

cases, the appellant has continued to flout the directions of this Court and

unnecessarily delayed the payments to the contractors. The appellant has

continued to contest suits and file appeals on similar grounds that have

been dismissed by this Court.

15. This Court is of the opinion that there are no contradictory orders

of different learned Single Judges of this Court as contended by the

appellant inasmuch as the other order dated 01st December, 2016 in RFA

786/2016 and RFA 192/2016 passed by another learned Single Judge was

in terms of a previous consent order dated 17th November, 2016 after the

appellant and respondent had arrived at a comprehensive settlement. The

same was followed by another learned Single Judge in RFA 818/2017

decided on 25th September, 2017 as well as RFA 835/2017 decided on

27th September, 2017.

16. It is pertinent to mention that the legality of Clause 7 and 9 was not

adjudicated upon in any of these cases. It was only in the judgment dated

22nd March, 2018 passed in RFA 160/2017 whereby a learned Single

Judge of this Court considered the matter in detail on merits and passed a

comprehensive order.

17. This Court is also of the view that if the appellant has any remedy against the SDM/Delhi Government, it shall be free to invoke the same in  accordance with law.

18. Keeping in view the aforesaid, this Court finds no reason to

interfere with the impugned order or differ from the view expressed by

the learned Single Judge in North Delhi Municipal Corporation Vs.

Vipin Gupta (supra).

19. Consequently, present appeal along with pending applications,

being bereft of merits, is dismissed.

MANMOHAN, J

ASHA MENON, J

MARCH 15, 2021

js/rn

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