Termination of Contract Without Valid Notice Is Illegal: Patna High Court

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The State is one of the most powerful institutions in the country. Not checking the actions of the state can lead to misuse of power. Judiciary once again asserted its duty as the watchdog of democracy by ensuring that the state did not misuse its powers.

Facts

The matter in hand is with respect to an agreement that a person entered on 27th September 2018 with the Superintending Engineering, NH Circle. It dealt with proper maintenance of NH-120 (181.465 km to 201.665km). The dispute arose based on the fact that the maintenance was not properly carried out even after the passage of 90 days. On 28th May 2019, the petitioner called for the termination of the contract citing Clause 23.2.1 of it.

After this, the petitioner and the respondents corresponded on grounds of forest clearance and site for construction work. The respondent finally terminated the agreement with the petitioner on 20th March 2020, stating that the petitioner failed to carry out the construction work, which was in spite of several opportunities. The respondent also issued a fresh tender that was in favour of another party.

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The matter of contention id the order the respondents had given. The order that was promulgated which was dated 15th October 2018 had terminated the engineering procurement and construction agreement dated and to forfeit performance bank guarantee and additional bank guarantee.

Order

The order stated that

“If the action is found to be arbitrary, the State cannot take a plea that the State and its functionary are free to act according to its own standard.”

The Court added,

“If the State was adamant to take action in terms of the agreement and terminate the agreement, there was no justifiable reason to deny termination of the agreement at the request of the petitioner.”

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The Court while noting that the State had failed to comply with the 15-day notice period stated that

“The State is not a favourite litigant even in the commercial activities of the State its action is to be judged at the touchstone of Article 14 of the Constitution of India.”

The Court also added,

“State is not free to act according to its own standard.”

References

The Court referred to previous judgement while arriving at the said conclusion. This includes

Vitarelli v Seaton, a US case which placed the Court as a reliant authority and which stated that “State action had to be judged at the touchstone of the terms and conditions of the agreement”

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The Court also cited that judgement in the case of ABL International Ltd. v. Export Credit Guarantee Corporation of India, to prove maintainability and jurisdiction under the provisions of Article 226 of the Indian Constitution for arbitrary termination of an agreement or a contract.


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