2013 (2) TMI 702 - SC - Indian Laws

Supreme Court upholds contract termination citing breach, affirms natural justice principles. Forfeiture valid, bank guarantee excessive.

M/s A.S. Motors Pvt. Ltd. Versus Union of India & Ors.

M/s A.S. Motors Pvt. Ltd. Versus Union of India & Ors. - 2013 (4) SCR 409, 2013 (10) SCC 114, 2013 (3) JT 316, 2013 (3) SCALE 15 Issues Involved:1. Legality of the contract termination by the National Highway Authority of India (NHAI).2. Compliance with principles of natural justice.3. Justification for forfeiture of performance security and invocation of bank guarantee.4. Application of Section 74 of the Contract Act regarding forfeiture and penalty.Detailed Analysis:1. Legality of the Contract Termination:The appellant challenged the termination of the contract by NHAI, arguing that it was legally invalid. The Supreme Court found no merit in the appellant's contention, affirming that the termination was justified based on the evidence collected by the agency employed by NHAI. The court noted that the appellant had violated the terms of the contract by charging excess fees from vehicle owners, which was substantiated by the agency's report. The High Court's findings were upheld, confirming that the termination was based on proof of breach committed by the appellant.2. Compliance with Principles of Natural Justice:The appellant argued that the termination violated the principles of natural justice, particularly the requirement of a fair hearing. The Supreme Court rejected this argument, stating that the principles of natural justice are flexible and context-dependent. The court observed that the appellant was given a show-cause notice, provided with all relevant documents, and had the opportunity to present its case. The absence of allegations of mala fides and the appellant's failure to demonstrate any prejudice indicated substantial compliance with natural justice principles. The court cited several precedents emphasizing that natural justice requirements vary based on the facts and circumstances of each case.3. Justification for Forfeiture of Performance Security and Invocation of Bank Guarantee:The High Court had partially allowed the appellant's writ petition, upholding the forfeiture of performance security but quashing the invocation of the bank guarantee. The Supreme Court agreed with the High Court's assessment, noting that NHAI had already recovered a significant amount from the appellant, which exceeded the contracted amount. The court found that the invocation of the bank guarantee was unjustified without a proper estimation of the excess collection. The High Court's decision to quash the invocation of the bank guarantee was affirmed.4. Application of Section 74 of the Contract Act:The appellant contended that the forfeiture of performance security and the penalty imposed were arbitrary and unfair under Section 74 of the Contract Act. The Supreme Court referred to several precedents, including Fateh Chand v. Balkishan Das and SAIL v. Gupta Brother Steel Tubes, to clarify that an aggrieved party is entitled to compensation for breach of contract, subject to the outer limit of the penalty stipulated. The court held that the forfeiture of performance security was permissible under the contract terms and that the appellant should have sought remedies through a proper civil action if it questioned the reasonableness of the amount recoverable.Conclusion:The appeal was dismissed, affirming the High Court's decision. The termination of the contract, forfeiture of performance security, and the principles of natural justice were all upheld as being properly addressed. The invocation of the bank guarantee was deemed unjustified, and the appellant was advised to seek civil remedies for any further disputes regarding the reasonableness of the recoverable amounts. The court emphasized the importance of clean hands and proper conduct when seeking equitable relief.