Law Web: Whether the government can claim liquidated damages from other party while extending time for completion of project contrary to terms of contract?

5.2 In the communication granting extension of time with levy

of penalty, penalty is levied by the State Government

invoking Clause 3.5.5(v) of the OPWD Code. However, it is

required to be noted that Clause 3.5.5(v) of the OPWD

Code shall be applicable in a case where the contract is

terminated. It permits the appropriate authority/State to

terminate the contract with penalty when the progress of

work is not as per the conditions of contract. Here, it is not

a case of termination of the contract. Therefore, Clause

3.5.5(v) of the OPWD Code which has been invoked in the

communication granting extension of time but with levy of

penalty shall not be applicable at all.

5.3 So far as the reliance placed upon Clause 3.5.30 of the

OPWD Code by learned counsel appearing on behalf of the

State is concerned, even under the said clause, there is no

provision for imposition of penalty while granting extension

of time. Clause 3.5.30 only provides that while

communicating to the contractor of extension of time, he

must be informed that extension is granted without

prejudice to State Government’s right to levy compensation

under relevant clause of the contract. If the relevant clause

of the contract is seen and/or considered, there is no

condition stipulated in the contract that while granting the

extension of time, there may be levy of penalty. The

relevant clause with respect to the extension of time is

Clause-4, which has been reproduced hereinabove. Neither

the contract nor the OPWD code provides for imposition of

penalty while extending the contract. Therefore, levy of

penalty while granting extension of time is wholly without

authority of the law and is illegal. The same has been

rightly set aside by the High Court.

5.4 Even otherwise, it is required to be noted that before the

levy of penalty of a particular percentage, while granting

extension of time, no opportunity of being heard has been

given to the contractor as to why the penalty may not be

imposed while granting extension of time and at what rate.

In a given case, the State Government might be justified in

imposing the penalty while granting the extension.

However, the contractor must be put to notice that

extension of time can be granted on imposition of

reasonable penalty. However, without putting the

contractor to notice, unilaterally, the State is not justified

in levying the penalty while granting extension of time.

6. In view of the above and for the reasons stated above, the

High Court has rightly set aside the penalty levied while

granting extension of time.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4934 OF 2022

The State of Odisha & Ors. Vs Radheshyam Agrawal

Author: M.R. SHAH, J.

Dated: MARCH 24, 2023.

1. Feeling aggrieved and dissatisfied with the impugned

judgment(s) and order(s) passed by the High Court of

Orissa at Cuttack in Writ Petition Nos. 14922/2019,

10344/2021 and 20066/2019, by which, the Division

Bench of the High Court has allowed the said writ petitions

preferred by the respective contractors – original writ

petitioners and has set aside the penalty imposed while

granting the extension of time to complete the work

awarded, the State of Orissa has preferred the present

appeals.

2. For the sake of convenience, the facts in Civil Appeal No.

4934/2022 arising out of the impugned judgment and

order passed by the High Court in Writ Petition No.

14922/2019 are narrated, which in a nutshell are as

under: -

2.1 That the respondent herein – original writ petitioner, who

is a special class contractor was awarded the contract for

work of “improvement to Khariar Boden Sinapali Road

(MDR-121) from 8/000 Km. & 9/000 Km., 12/200 Km. to

20/959 Km., 23/550 Km. to 29/000 Km. & 44/300 Km. to

48/800 Km. in the District of Nuapara under NABARD

Assistance RIDF-XIII).” As per the contract and work order,

the work was to be completed by 12.09.2009. However, the

contractor could not complete the work within the

stipulated period and continued up to 12.03.2014. He

completed the work by 12.03.2014. The contractor –

original writ petitioner applied for extension of time for the

work. The request for extension of time came to be

accepted and allowed by the appropriate authority/State

Government vide order dated 07.02.2019, without price

escalation during the extended period from 13.09.2009 to

12.03.2014 but with levy of penalty @ 0.25% over the

value of the work done during the extended period as per

para 3.5.5(v) of Odisha Public Work Dept. Code (OPWD

Code) Volume-I.

2.2 Levy of penalty @ 0.25% while granting extension of time

from 13.09.2009 to 12.03.2014 was the subject matter of

writ petition before the High Court.

2.3 It was the case on behalf of the original writ petitioner –

contractor before the High Court that the levy of penalty

while granting extension of time was wholly impermissible.

It was submitted that para 3.5.5(v) of OPWD Code Volume-

I under which the penalty was levied could not have been

invoked as the penalty under the said para can be imposed

only in a case where the contract is terminated.

2.4 On the other hand, it was the case on behalf of the State

that as there was a delay on the part of the contractor in

not completing the work within the stipulated period and

the contractor applied for extension of time which came to

be accepted by the State Government, it was open for the

department/State to levy the penalty for the delayed

period.

2.5 Accepting the submission made on behalf of the original

writ petitioner – contractor that the levy of penalty while

granting the extension of time was illegal and arbitrary and

beyond para 3.5.5(v) of OPWD, by the impugned judgment

and order, the High Court has set aside the levy of penalty

which is the subject matter of present appeal.

2.6 In Civil Appeal Nos. 4935 and 4936/2022, similar

penalties have been levied by the State, however, the

percentage of the penalty varies. On a similar reasoning,

the High Court has set aside the levy of penalties in the

said cases also. Hence, the present appeals by the State of

Orissa.

3. Shri Sibo Sankar Mishra, learned counsel appearing on

behalf of the State has vehemently submitted that it is not

in dispute and it cannot be disputed that the contractor

did not complete the work within the stipulated time and

as such, there was a delay on the part of the contractor in

completing the work and that the contractor applied for

extension of time which came to be allowed by the State

Government, however, subject to payment of penalty on

the value of the work done during the extended period.

3.1 It is further submitted that as such on conjoint reading of

Clause 2(a) & (b), Clause 4 of the terms and conditions of

the contract and Clause 3.5.30 of OPWD Code, the State

Government has the power to impose penalty for delay in

work under the contract.

3.2 It is contended that the High Court has failed to appreciate

that there was a huge delay in completion of the work

under the contract and therefore, merely because of

mentioning of the penalty being imposed under a different

provision, the contractor shall not be entitled to claim any

equitable right of removal the imposition of penalty.

3.3 Making the above submissions and relying upon the

relevant clause of the contract and relevant clauses of

OPWD Code, it is prayed that the present appeals be

allowed.

4. All these appeals are vehemently opposed by Shri

Shubhranshu Padhi, learned counsel appearing on behalf

of the respective respondents – original writ petitioners.

4.1 It is vehemently submitted by Shri Padhi, learned counsel

appearing on behalf of the respective respondents –

original writ petitioners that in the facts and

circumstances of the case, the High Court has not

committed any error in setting aside the penalty levied

while granting extension of time.

4.2 It is further submitted that in the communication/order

granting extension of time but with penalty, the State

Government has relied upon Clause 3.5.5(v) of OPWD

Code. That as rightly observed by the High Court, the said

clause shall not be applicable while imposing penalty while

granting extension of time. It is contended that Clause

3.5.5(v) shall be applicable in a case where the contract is

terminated due to the failure on the part of the contractor

to carry out the work. That in the present case, it was not

a case of termination of the contract, but of extension of

time. That therefore, the High Court has rightly observed

that the levy of penalty while granting extension of time

was bad in law.

4.3 It is further contended that during the course of the

submissions learned counsel appearing on behalf of the

State has relied upon Clause 3.5.30 of the OPWD Code.

That however, even the said Clause 3.5.30 of the OPWD

Code does not permit the State to levy penalty while

granting extension of time.

4.4 It is averred that even otherwise, once the time is extended

on the application submitted by the contractor that there

was a genuine reason for which the contractor could not

complete the work within the stipulated time, thereafter, it

was not open for the State to levy/impose the penalty

while extending the time that too, without giving any

opportunity of being heard to the contractor on the

quantum of penalty.

4.5 Making the above submissions, it is prayed that the

present appeals be dismissed.

5. Having heard learned counsel appearing on behalf of the

respective parties and having gone through the impugned

judgment(s) and order(s) passed by the High Court, the

short question which is posed for consideration of this

Court is whether the State Government is justified in

levying the penalty while granting extension of time in

favour of the contractor when the contractor fails to

complete the work within stipulated time under the

contract and subsequently, completes the work beyond the

period prescribed under the contract?

5.1 In order to consider the aforesaid issue, the relevant

clauses of the contract and OPWD Code, are required to be

referred to and considered, which are as under: -

Relevant provision of the contract agreement

Extension of Time

Clause-4 "If the contractor shall desire an extension of

the times for completion of the work, on the ground of his

having been unavoidably hinder in its execution or any

other ground he shall apply in writing to the Executive

Engineer within 30 days of the date of the hindrance on

account of which he desires such extension as aforesaid

and the Executive Engineer shall, if in his opinion (which

shall be final) reasonable grounds be shown thereof,

authorize such extension of time, if any, as may in his

opinion, be necessary or proper. The Executive Engineer

shall at the time inform the contractor whether he claims

compensation for delay.”

Relevant provisions of the OPWD Code

Clause (V) of para 3.5.5 of the OPWD Code, Vol. I: -

"Percentage Contract will be in addition of item rate, lump

sum contractors etc. In such contracts the schedule of

quantities shall mention estimated rate of such item and

amount thereof. The Contractor has to mention

percentage excess or less over the estimated cost (in

figures as well as words) in the prescribed format

appended to the tender document. The Contractors

participated in the tender for more than one work may

offer conditional rebate. Rebate offer submitted in

separate sealed envelope shall be opened, declared and

recorded first. The rebate so offered, shall be considered

after opening of all Page 3 of 5 packages called in the

same tender notice. The Contractors who wish to tender

for two or more work shall submit separate tender for

each. Each tender shall have the name and number of the

works to which they refer, written on the envelope. The

adopted format for percentage rate is same as that of the

form adopted for item rate tenders but the word "item

rate" shall be replaced by "percentage rate" and the

contract form may be named as P-1. In this for time is the

essence. The Contractor is required to maintain a certain

rate of progress specified in the contract. The contract

can also be terminated with penalty when the progress of

work is not as per the conditions of contract. The quantity

mentioned can be increased or reduced to the extent of

10% for individual items subject to a maximum of 5%

over the estimated cost. If it exceeds the limit stated

above prior approval of competent authority is mandatory

before making any payment. The period of completion is

fixed and cannot be altered except in case of exceptional

circumstances with due approval of next higher authority.

….”

Clause 3.5.30 of the OPWD Code

“Application for extension of time for the completion of a

work on the grounds of unavoidable hindrance or any

other grounds shall be submitted by the contractor within

30 days of such hindrance and the Divisional Officer shall

authorise or recommend such extension of time as

deemed necessary or proper within fifteen days of the

receipt of such an application. In cases where the

sanction of the higher authority to the grant of extension

of time is necessary, the Divisional Officer should send

his recommendation as expeditiously as possible. The

higher authority should communicate his decision within

60 days from the date of receipt on recommendation in

his office. If the orders of the competent authority are not

received in time the Divisional Officer may grant

extension of time under intimation to the concerned

authorities so that the contract might remain in force, but

while communicating this extension of time, he must

inform the contractor that extension is granted without

prejudice to Govt.'s right to levy Compensation under

relevant clause of the contract.”