No Room for Discretion in Contractual Matters

Recently, in the case of the State of Madhya Pradesh v. M/S Sew Construction Limited & Ors.1, the Supreme Court (“SC“) has held that discretion holds no place in matters relating to contracts unless the discretion has been expressly incorporated by the parties as part of the contract.

The State of Madhya Pradesh (“State“) published a tender for construction of the Masonry Dam and Sew Infrastructure Limited (“Contractor“) was the winning bidder. The parties entered into a contract in 1993 that set a deadline of 60 months for the project’s completion.

After a break, the work was resumed again in 2000. The Contractor requested a different quarry during construction in 2002, but the executive engineer declined, which decision was upheld by the superintending engineer. As a result, the Contractor referred the matter to arbitration.

The Contractor renewed his request for the alternative quarry in 2002 while the arbitration procedures were ongoing. A committee of two executive engineers and one sub-divisional officer inspected both the primary quarry and the alternate quarry and was found that there was no sand in the original quarry, making the request of the Contractor reasonable. The superintending engineer therefore issued a conditional authorization for an alternate quarry.

The Contractor requested an increase in payment due to the expense of transporting the sand from the quarry, but the superintending engineer denied the same. The Contractor requested statutory arbitration as a means of resolving the issue as a result of this rejection. The arbitral tribunal granted an award in favour of the Contractor. In response to this, the State filed a revision petition, which the Madhya Pradesh High Court (“High Court“) dismissed primarily because it found that the Contractor’s claims were not time-barred, res judicata was not relevant, and the Contractor was entitled to the escalation in accordance with the contract terms. Hence, an appeal was filed by the State against the ruling of the High Court.

The State contended that res judicata would apply because the claims were dismissed vide the first arbitral award issued in 2007. It was also contended that the Contractor objected for escalation after a period of four year. As a result, it was asserted that the Contractor should not be allowed to bring up this issue now. Finally, it was argued that because the claim was filed in 2007, the arbitration request was barred by limitation under the terms of the contract.

The Contractor contended that as sand was a necessary component for the performance of the contract, hence the claim for escalation was valid because the Contractor had to go further to carry out the contract. The distance caused the Contractor to incur more expenses, which had an impact on the Contractor’s profitability. Res judicata, it was argued, would not apply because the current proceedings dealt with a later time period whereas the prior arbitral award dealt with the first section of the clause.

Regarding the Contractor’s argument that the first portion of the clause was addressed by the prior arbitral award, the SC stated that this argument would result in the contract being divided into two sections, which is not permitted. Rights and obligations cannot be read separately since the contract is a single agreement that discharges as a single obligation and hence, the contention was rejected.

In relation to the escalation claim, the SC noted that the contract’s provision determines whether the claim is valid. According to the inspection report, the need for a different quarry was legitimate and the Contractor had no control over the situation. As a result, the escalation request was legitimate because the requirements as set out in the clause were met.

Regarding the argument that the previous arbitral award was invalid due to res judicata, the SC emphasised that in the original proceedings, there was no factual support for the necessity for an alternative quarry and that no scenario was established that was out of the Contractor’s control. The necessity for a different quarry in the current proceedings was justified, according to a letter that was issued by the Superintending Engineer. Res judicata was not applicable since these facts made the current proceedings different from the original arbitral proceedings.

When it came to the escalation issue, the SC interpreted the language in the contract and determined that the circumstances set forth in the clause were satisfied, creating a right to request escalation under the terms of the contract. The executive engineer did not have the authority to impose any further conditions for claiming escalation once the prerequisites specified in the clause had been met. The executive engineer went above and beyond the terms of the contract by putting forth additional requirements.

According to the provisions of the contract itself, obligations and rights of the parties subsist or perish. There is no room for discretion granted to the officials overseeing the contract, even if one of the parties is a governmental body. Unless the parties have expressly integrated discretion, an administrative law principle, as a part of the contract, has no place in contractual matters. When interpreting the terms of contracts, it is the duty of the court to reject the exercise of any such discretion that is wholly outside the scope of the contract.

The SC dismissed the appeal after finding that the award through which the escalation was given was valid for the reasons stated above.

1 Civil appeal no. 8571/2022