Withholding of Amounts by Employer from Amounts Payable to Contractor

-Gunjan Chhabra

Partner, Litigation & Dispute Resolution

At any given point, in a country like India, various infrastructure projects are ongoing. In most of these projects, it has become a norm for the employers to keep on deducting, retaining and withholding sums from the amounts payable to the Contractors against their Running Account Bills (RA Bills), without even going to the Court or to arbitration. This kind of practice by the employer, whether private or public, compels the Contractor to initiate the dispute resolution process, even though there might not be any other claim except the claim to receive the sums wrongfully deducted.

Whether this practice is correct or incorrect came into question before the Delhi High Court in a very recent judgment last month, Shapoorji Pallonji & Co. v. UOI WP(c) 9281/2017, decided on 13.12.2018, and has also been discussed in various judgments previously. In view of these issues it becomes important to re-visit the factors which are relevant in order to get a stay on the wrongful recoveries from amounts due to the contract.

 

Factors to see if a stay can be obtained

  1. Language of the Clause – In determining whether a stay can be granted in a case where a wrongful recovery is proposed to be made, the most relevant factor is the language of the particular clause, which empowers the employer to make recoveries. Below provided are sample clauses in cases where a stay has been granted against such recoveries.
    •  In Shapoorji Pallonji the clause was as follows, “CLAUSE 29 i) Whenever any claim or claims for payment of a sum of money arises out of or under the contract or against the contractor, the Engineer-in-Charge or the Government shall be entitled to withhold and also have a lien to retain such sum or sum in whole or in part from the security, if any deposited by the contractor and for the purpose aforesaid, the Engineer-in-Charge or the Government shall be entitled to withhold the security deposit, if any, furnished as the case may be and also have a lien over the same pending finalization or adjudication of any such claim. In the event of the security being insufficient to cover the claimed amount or amounts or if no security has been taken from the contractor, the Engineer-in-Charge or the Government shall entitled to withhold and have a lien to retain to the extent of such claimed amount or amounts referred to above, from any sum or sums found payable or which may at any time thereafter become payable to the contractor under the same contract or any other contract with the Engineer-in-Charge of the Government or any contracting person through the Engineer-in-Charge pending finalization of adjudication of any such claim.                                                                                                                                It is an agreed term of the contract that the sum of money or moneys so withheld or retain under the lien referred to above by the Engineer-in-Charge or Government will be kept withheld or retained as such by the Engineer-in-Charge or Government till the claim arising out of or under the contract is determined by the arbitrator (if the contract is governed by the arbitration Clause) by the competent court, as the case may be and that the contractor will have no claim for interest or damages whatsoever on any account in respect of such withholding or retention under the lien referred to above and duly notified as such to the contractor. For the purpose of this clause, where the contractor is a partnership firm or a limited company, the Engineer-in-Charge or the Government shall be entitled withhold and also have a lien to retain towards such claim amount or amounts in whole or in part from any sum found payable to any partner/limited company as the case may be, whether in his individual capacity or otherwise.

ii) Government shall have the right to cause and audit and technical examination of the works and final bills of the Contractor including all supporting vouchers, abstract, etc. to be made after payment of the final bill and if as a result of such audit and technical examination any sum is found to have been over paid in respect of any work done by the contractor under the contract or any work claimed to have been done by him under the contract and found not to have been executed, the contractor shall be liable to refund the amount of over payment and it shall be lawful for Government to recover the same from him in the manner prescribed in sub-clause (i) of this Clause or in any other manner legally permissible and if it is found that the contractor was paid less than what was due to him under the contract in respect of any works executed by him under it, it amount of such under payment shall be duly paid by Government to the contractor without any interest thereon whatsoever.

  • In Union of India v. Raman Iron Foundry (1974)2SCC231 , which is also one of the cases relied upon by the Delhi High Court, the relevant clause was Clause 18, “ Recovery of sums due.–Whenever any claim for the payment of a sum of money arises out of or under the contract against the contractor, the purchaser shall be entitled to recover such sum by appropriating in whole or in part, the security, if any, deposited by the contractor, and for the purpose aforesaid, shall be entitled to sell and/or realise securities forming the whole or part of any such security deposit. In the event of the security being insufficient, the balance and if no security has been taken from the contractor, the entire sum recoverable shall be recovered by appropriating any sum then due or which at any time thereafter may become due to the contractor under the contract or any other contract with the purchaser or the Government or any person contracting through the Secretary, if such sum even be not sufficient to cover the full amount recoverable, the contractor shall on demand pay to the purchaser the balance remaining due.”
  • In Raman Iron, the Supreme Court had held that a sum which was neither due nor payable could not be covered under such a clause.
    • In Gangotri Enterprises v. Union of India (2016)11SCC720, the clause relevant for such a retention was also Clause 18, “18. Recovery of sums due–whenever any claim for the payment of a sum of money arises out of or under the contract against the contractor, the purchaser shall be entitled to recover such sum by appropriating in whole or in part, the security, if any, deposited by the contractor, and for the purpose aforesaid, shall be entitled to sell and/or realise securities forming the whole or part of any such security deposit. In the event of the security being insufficient, the balance and if no security has been taken from the contractor, the entire sum recoverable shall be recovered by appropriating any sum then due or which at any time thereafter may become due to the contractor under the contract or any other contract with the purchaser or the Government or any person contracting through the Secretary, if such sum even be not sufficient to cover the full amount recoverable, the contractor shall on demand pay to the purchaser the balance remaining due.”

     

    In other words, the scope of the recovery which the contract provides, can be helpful to determine two things, i) What are the recoveries permitted to the employer ii) What is the nature of recovery, whether sum due or sum in the nature of damages.

2. Stage of the Arbitration Proceeding –It is usually seen what the stage of arbitration proceeding is. In most of the cases where a stay is granted on such a recovery, the arbitration proceedings are already ongoing. This is an important factor to see whether the Arbitration is ongoing or not.

3. Nature of recovery – Another important factor is to see what is the nature of the recovery to be made. Incase it is a sum in the nature of damage, the case for a grant of stay becomes even more impressive. This is because mere breach or allegation of breach of an agreement cannot necessarily make damages an amount which can be termed as a sum “due and payable”. Once a sum requires further adjudication, it cannot be recovered by the employer unilaterally.

4. Stage of Completion of works and grant of Extension of Time – This is also a relevant factor to establish the three golden factors of “Prime Facie Case”, “irrepairable injury” or “balance of convenience. In a case where a contract has already been completed, without levy of Liquidated Damages, or damages per-se, or where Extension of Time has already been granted without levy of damages, then the case in favour of a stay becomes strong.

5. Various other factors – Apart from the above factors, there are various other issues which are considered by courts while granting stay of recovery. Irreparable injury is a ground which can be proved by various means and the said provides a large ambit of grounds.

 

Peculiar Facts of Shapoorji Pallonji enabling the stay

There were various factors which were existing before the Delhi High Court in this case, which were extremely glaring and which lead to the grant of a stay. The factors are as follows:-

 

  1. The project works were completed on 26.08.2010, with various extensions of time and the last extension of time was granted upto this date, without levy of Liquidated Damages by the employer. – Whether or not a retrospective claim of damages would lie was not in issue before Court, and therefore not discussed and neither decided.

 

  1. The Contractor had initiated the arbitration proceeding for recovery of further damages and the employer had already filed its counter-claims in the said case, but the recovery notice which was now served upon the Contractor, did not form part of its counterclaims. Therefore the arbitration proceeding was still ongoing, but this fresh claim of recovery was never made therein by the employer.

 

  1. The Court relying on judgment of Raman Foundaryheld that a person who commits a breach of the contract does not automatically incur a pecuniary liability, nor does a sum or amount become due from him. The only right which an employer will have, is the right to approach court of law or arbitration and recover damages.

 

  1. After consideration of the above factors, the Delhi High Court came to a conclusion that the recoveries now being levied were in the nature of damages and was unsustainable and accordingly, the impugned letters were also set aside by the Court, leaving it open to the employer to initiate proceedings for adjudication of its claim.

 

Judgments which were ignored in the Shapporji Pallonji case

There were various judgments and legal propositions which have been ignored by the Delhi High Court while rendering its judgement. The Delhi high Court places substantial reliance on the Raman Foundry judgment which has been overruled in part by, “H.M. Kamaluddin Ansari and Co. and Ors. vs. Union of India (UOI) and Ors. (1983)4SCC417”, where the supreme Court of India has held  “We are clearly of the view that an injunction order restraining respondents from withholding the amount due under other pending bills to the contractor virtually amounts to a direction to pay the amount to the contractor-appellant. Such an order was clearly beyond the purview of Clause (b) of Section 41 of the Arbitration Act. The Union of India has no objection to the grant of an injunction restraining it from recovering or appropriating the amount lying with it in respect of other claims of the contractor towards its claim for damages. But certainly Clause 18 of the standard contract confers ample power upon the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount.”The clause 18 I the HM Ansari judgment is pari-materia with the Raman Foundry judgment.

Propositions of the HM Ansari judgment have been held in various other judgments such as, the Supreme Court’s judgment of Sant Ram & Company v. State of Rajasthan & Ors. (1997(1)SCC147,  C. Raghava Reddy vs. Superintending Engineer, Nizamabad and Anr.AIR1988AP53as well as Simplex Infrastructures Ltd. vs. National Highways Authority of India ILR(2010) Supp.(3)Delhi486.

However, the Delhi High Court in the case of Intertoll Ics Cecons. vs. National Highways Authority of India 197(2013)DLT473, has observed that the HM Ansaricase has not overruled the Raman Foundry case in entirety. The scope of overruling is discussed therein, The decision in Raman Iron Foundry was overruled in M/s. H.M. Kamaluddin Ansari & Co. v. Union of India (1983)4 SCC 417 on another point “that the clause in the contract applied to a claim itself and not only to an amount due”. However, on the nature of the claim for damages the decision in Raman Iron Foundry has not been overruled and is good law.”

The Intertoll judgment is correct to observe the limited overruling of the Raman Foundry case.

 

Denoument

Although there was a lot more to be considered by the Delhi High Court in the Shapoorji Pallonji case, there is definitely a headway which has been given in this respect. As long as it can be proved that the claim being made by the employer is in the nature of damages, a clause in the nature of a recovery clause, might not come in the way of granting a stay. There was a specific finding to this effect in the Shapoorji Pallonji case, which was, “The respondent is not claiming refund of any overpaid amount. The claim made by the respondent is for compensation for the alleged breach of the contract on the part of the petitioner in delaying the execution of the works. This is, essentially, a claim for damages…” and again “The claim made by the respondent is in the nature of damages for breach of contract which is disputed by the petitioner.”

In view of the same, the specific recovery order may be interfered with, when the recovery is made for damages and is thus made clearly outside the scope of the recovery enabling clause in the contract.

 

 

 

 

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