2015 (11) TMI 1751 - HC - Indian Laws

Invalidity of Contract Clause 16(2) under Indian Contract Act

Union of India Versus N.K. Garg & Co.

Union of India Versus N.K. Garg & Co. - (2015) 224 DLT 668 Issues Involved:1. Validity of Clause 16(2) of the General Conditions of Contract (GCC) under Section 23 of the Indian Contract Act, 1872.2. Entitlement of the respondent to interest on amounts awarded by the Arbitrator despite Clause 16(2) of the GCC.3. Application of public policy and immorality in the context of Clause 16(2) of the GCC.Issue-wise Detailed Analysis:1. Validity of Clause 16(2) of the General Conditions of Contract (GCC) under Section 23 of the Indian Contract Act, 1872:The petitioner argued that Clause 16(2) of the GCC, which prohibits the payment of interest on amounts payable to the contractor, is valid and should prevent the respondent from receiving interest. The petitioner relied on several Supreme Court judgments and a Full Bench judgment of the Delhi High Court, which upheld similar clauses.The respondent countered that Clause 16(2) is invalid under Section 23 of the Indian Contract Act, 1872, arguing that the clause is against public policy and thus void. The respondent cited the Constitution Bench judgment in Secy., Irrigation Deptt., Govt. of Orissa v. G.C. Roy, which supports the entitlement to interest when there is wrongful retention of money.The court examined Clause 16(2) and Section 23 of the Indian Contract Act, which states that any agreement is void if its object or consideration is unlawful, including being opposed to public policy or immoral.2. Entitlement of the respondent to interest on amounts awarded by the Arbitrator despite Clause 16(2) of the GCC:The court noted that the Arbitrator had awarded interest to the respondent, and the respondent had not previously challenged Clause 16(2) as being void under Section 23. The court permitted the respondent to argue that Clause 16(2) is hit by Section 23, which would entitle the respondent to interest.The court referred to the judgment in G.C. Roy's case, which emphasizes that a person deprived of money to which they are legitimately entitled has a right to be compensated, whether it is called interest, compensation, or damages.3. Application of public policy and immorality in the context of Clause 16(2) of the GCC:The court discussed the concept of public policy, citing the Supreme Court judgment in India Financial Assn., Seventh Day Adventists v. M.A. Unneerikutty and Anr., which defines public policy as a principle that evolves with the needs of the community. The court emphasized that public policy is dynamic and courts can interpret it to promote public interest, equity, justice, and good conscience.The court also examined the term 'immoral' as used in Section 23, referencing the Supreme Court judgment in Gherulal Parakh v. Mahadeodas Maiya and Others, which initially restricted immorality to sexual immorality. However, the court argued that immorality should be interpreted more broadly to include wrongful retention of money, which is against good conscience and public policy.The court concluded that Clause 16(2) of the GCC, which allows for the retention of money without interest, is both immoral and against public policy. It noted that the long delay in litigation often results in significant financial loss to the aggrieved party, which is unjust and promotes dishonesty.Conclusion:The court held that Clause 16(2) of the GCC is invalid and void under Section 23 of the Indian Contract Act, 1872, as it is immoral and against public policy. Consequently, the respondent is entitled to interest on the amounts awarded by the Arbitrator. The petition was dismissed, and the parties were left to bear their own costs.