Government contract billing deductions and liquidated damages cap at 12% under express terms; excess set-offs refundable, appeal dismissed

Where parties are governed by an express contract stipulating consideration and liquidated damages, a claim in quantum meruit under s.70 Contract Act is impermissible, since reasonable compensation is implied only when price is not fixed and contractual stipulations cannot be displaced as unreasonable; consequently, deduction from the counterparty's bills beyond the contractual entitlement was unjustified and any excess had to be refunded. Applying the mandatory nature of statutory contracting formalities for Government contracts as reflecting public policy, the Court held the contract capped liquidated damages at 12%, and only that amount could be adjusted, with any higher sum being recoverable by the other party; the appeal was dismissed and the HC/TDSAT view was upheld.

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Issues Involved:
1. Justification of appellant's adjustment of dues.
2. Applicability of Section 70 of the Indian Contract Act, 1872.
3. Claim for liquidated damages under contractual terms.
4. Calculation and entitlement to interest on the principal amount.

Issue-wise Detailed Analysis:

1. Justification of appellant's adjustment of dues:
The dispute arose under the Telecom Regulatory Authority of India Act, 1997, where the respondent sought recovery of INR 1,10,57,268/- plus interest from the appellant. The core issue was whether the appellant was justified in adjusting this amount from the dues payable by deducting from the respondent's bills. The TDSAT examined the Purchase Order dated 01.10.2008, particularly clauses 4 and 8, which outlined the scope of order and delivery schedule. It was found that the respondent failed to provide the required last mile connectivity within the stipulated time and even by the time the contract was terminated on 11.01.2011. The TDSAT concluded that the respondent's failure could not be entirely blamed on the appellant, and thus, the appellant's unilateral deduction was not justified.

2. Applicability of Section 70 of the Indian Contract Act, 1872:
The court considered whether a claim in quantum meruit under Section 70 of the Indian Contract Act, 1872, was permissible when parties are governed by a contract. Section 70, which deals with obligations arising from non-gratuitous acts, applies when there is no contractual relationship between the parties. The court referred to various judgments, including Moselle Solomon v. Martin & Co., Kanhayalal Bisandayal Bhiwapurkar v. Indarchandji Hamirmalji Sisodia, and Mulamchand v. State of M.P., to establish that Section 70 cannot be invoked when an express contract exists between the parties. The court concluded that since there was a contract governing the relationship, Section 70 was not applicable.

3. Claim for liquidated damages under contractual terms:
The TDSAT examined clauses 16.2 to 16.4 of the Purchase Order, which stipulated the conditions for liquidated damages. Clause 16.2(b) allowed for liquidated damages in case of failure to install and commission the project, limited to a maximum of 12% of the purchase order value. The TDSAT determined that the appellant could levy liquidated damages amounting to INR 25,83,181/- but not more. The appellant's action of imposing rentals unilaterally was found to be without authority under the contract or Section 70 of the Contract Act.

4. Calculation and entitlement to interest on the principal amount:
The TDSAT allowed the respondent's claim but only in part. The principal amount payable after deducting the permissible liquidated damages was calculated as INR 84,74,087/-. The respondent's claim for interest at 18% was not upheld due to the absence of such a stipulation in the contract. Instead, the TDSAT directed payment of interest at the rate of 9% from the date the amounts became due until the date of the judgment.

Conclusion:
The Supreme Court upheld the TDSAT's judgment, confirming that the appellant was entitled to deduct only INR 25,83,181/- as liquidated damages, and the remaining amount of INR 84,74,087/- plus interest at 9% was to be paid to the respondent. The appeal was dismissed, affirming that claims under Section 70 of the Contract Act were not permissible when governed by an express contract.

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