A Division Bench of the Supreme Court held that a State instrumentality such as the Maritime Board is expected to act without any arbitrariness towards its contractual duties.
Brief facts of the case
The Maritime Board allotted a certain plot of land by a tender agreement to the Respondents, Asiatic Steel. Later, the Respondents repeatedly approached the Board for the unsuitability of land for their commercial purpose.
Asiatic Steel then sent a letter to the Board that it wished to abandon the contract and demanded that the payment be refunded. The Gujarat High Court granted interest to be paid to the Respondents for the period of the contract.
The Maritime Board aggrieved by the High Court’s judgment has filed the present appeal.
Appellant’s Arguments
The subject matter of the present dispute is a contract. Therefore, to determine whether the Board had to pay compensation for any benefit received under the contract, a breach of such a contract should be proved. Sections 64 and 65 of the Indian Contract Act, 1872 (“Contract Act”), lays down the law in the case of a return of benefit for a void/voidable contract. These provisions do not apply when there is no allegation as to the contract being void.
The Board had already refunded the entire amount to Asiatic Steel. Section 73 and 75 of the Contract Act were inapplicable, as the breach was not proven or found. The High Court could not find a rightful rescission of the contract by Asiatic Steel. The sole basis of the High Court’s direction to pay interest was that the Board had an obligation to compensate Asiatic Steel for its enjoyment of the principal during the stated period. Further, the Board had not suffered any loss on account of termination of the contract.
The Respondents accepted and provided an undertaking of their satisfaction of the site, in the contract entered into between the parties. They then went on to abandon the contract on grounds of the site being unsuitable for their commercial activities.
Respondent’s Arguments
The Board took about 4 years to act on its promise to create surrounding infrastructure and clear the rocks on the site. Despite repeated promises to clear the site, the Board failed to deliver upon the agreements.
Asiatic Steel could not commence commercial production. They were left with no option but to abandon the project and seek a refund.
On account of the Board’s failure to remove the rocks, the Respondents could not take possession of the plot. Therefore, the interest is due from the date of deposit till the date of payment. The interest is essentially compensation for denial of the right to utilize the money due.
Court’s Observations
The Bench noted that the Respondents, Asiatic Steel was unaware of the site conditions. This is important because they were willing to commit a substantial amount in foreign exchange for the plot which it bid for and was eventually granted. Also, an undertaking was furnished on its behalf for the plot.
It stated that the conduct of all the successful bidders suggests that they expected that the plots would be given in usable condition, within a reasonable time. The Board could not rectify the conditions by removing the beachfront rocks.
The Board has also not given any suitable reasons for its inaction. It is clear from the Board’s conduct that it never responded to the letters written by Asiatic Steel. Even Asiatic Steel’s request for permission to carry out the necessary clearance work at the cost of the Board was not responded to – either positively or negatively. Further, whenever any bidder approached the court complaining that the plot allotted was unusable, the Board decided to refund the amount, even with interest.
In the case of Asiatic Steel, however, when the demand was made for a refund, the Board did not act, forcing the company to approach the court. They firstly filed a civil suit which was later withdrawn, and then in a writ petition.
The Court opined that the Board’s complete silence in responding to Asiatic Steel’s demand for refund, coupled with the absence of any material placed on record. It suggests that the complaints were subject to complete arbitrariness. The Board’s conduct or indifference regarding the refund sought (in respect of which there was no meaningful argument on its part before the High Court) can be only on the premise that it wished the parties to approach the court, till a decision could be taken to refund the amounts received by it.
Court’s Decision
The Bench ordered for the grant of interest for the money held by the Respondent, Maritime Board for the stated period.
Click here to read the judgment in Chief Executive Officer, Maritime Board v. Asiatic Steel Industries.
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