# [1979] 3 S.C.R. 188

- **Citation:** [1979] 3 S.C.R. 188
- **Court:** Supreme Court of India
- **Decided:** 1979-02-13
- **Case number:** Civil Appeal No. 2010 of 1969
- **Bench:** P. N. Bhagwati, AD. KoSHAL
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1979-3-s-c-r-188-7773
- **Pages:** 6

## Headnote

Contract-Stipulated titne as essence of contract-Meaning of -Right to
rescind the contract-When accrues.
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Clause (2) of a works contract entered into by the plaintiff (respond'ent) with
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the defendant (appellant) stipulated that time was of th~ essence of the contract,_ ~
that time (of one year) allowed for carrying out the \\'ork shall be strictly ob~
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served by the contractor, and that the contractor shall pay compensation at a
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certain percentage for every day when the work re1nained unfinished after the
proper dates. One of the three courses open to the defendant under cl. (3) was
to rescind the contract in case the contractor rendered himself liable to pay
con1pensation or O·bandoned the work owing to serious illness or death of the
contractor or any other cause and in that event security deposit of the contractor was to stand forfeited.
It was also provided in that clause that in the event
of any of the above courses being adopted by the defendant the contractor
shell have no claim to compensation for any loss sustained by him.
The work remained unfinished beyond the stipulated time.
The defendant
rejected the contractor's request for extension of time and eventually rescinded
the contract under cl. (3) and forfeited the security deposit.
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In the plaintiff's suit for refund of security deposit and payment of certain
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other sums, the trial court, holding that the forfeiture of security deposit was
legal, granted a decree for its refund.
O~ appeal the High Court held that the right to rescind n contract being a
right to put an end to it, it could not exist after the date for its performance had
expired and that in this case the right of re_scission having been exercised after
the expiry of the date of contract, the impugned action of the defendant in rescinding the contract ..vtls unjustified.
Allowing the appeal,
HELD : I. The rescission of the contract was well-founded and the forfeiturt
of the security deposit woo justified. [193 F]
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2. Although cl. (2) specifically mentioned that time was of the essence of the
contract, all that was meant was that in case the work was not completed within
the originally specified time, the plaintiff would be liable to pay such compensa~
tion for delay in execution as was fixed within the limits of that clause.
This
is clear not only from clause (2) but also from clause (3). These two clauses
must be read together.
So read, the contract was to continue to be in force till
the completion of the work or its abandonment. Time was of the essence only
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in the sense that if the plaintiff completed it within the originti1 period of one
year, he would not be liable to pay any con1pensation but in case he overstepped
that limit he would have to compensate for every day of de-lay and that the right
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MAHARASHTRA v. D. B. KULKARNI (Koshal, J.)
189
to rescission would accrue only when compensation due exceeded the amount
of the security d'eposit or the plaintiff aba.ndoned the \1/0rk. Till the time it was
rescined, the contract was in force. [193 A~C]

## Text

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188
STATE OF MAHARASHTRA & ANR.
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DIGAMBAR BALWANT KULKARNI
February 13, 1979
[P. N. BHAGWATI AND AD. KoSHAL, JJ.J
Contract-Stipulated titne as essence of contract-Meaning of -Right to
rescind the contract-When accrues.
•
Clause (2) of a works contract entered into by the plaintiff (respond'ent) with
1
"
the defendant (appellant) stipulated that time was of th~ essence of the contract,_ ~
that time (of one year) allowed for carrying out the \\'ork shall be strictly ob~
c
served by the contractor, and that the contractor shall pay compensation at a
i
D
certain percentage for every day when the work re1nained unfinished after the
proper dates. One of the three courses open to the defendant under cl. (3) was
to rescind the contract in case the contractor rendered himself liable to pay
con1pensation or O·bandoned the work owing to serious illness or death of the
contractor or any other cause and in that event security deposit of the contractor was to stand forfeited.
It was also provided in that clause that in the event
of any of the above courses being adopted by the defendant the contractor
shell have no claim to compensation for any loss sustained by him.
The work remained unfinished beyond the stipulated time.
The defendant
rejected the contractor's request for extension of time and eventually rescinded
the contract under cl. (3) and forfeited the security deposit.
E
In the plaintiff's suit for refund of security deposit and payment of certain
F
other sums, the trial court, holding that the forfeiture of security deposit was
legal, granted a decree for its refund.
O~ appeal the High Court held that the right to rescind n contract being a
right to put an end to it, it could not exist after the date for its performance had
expired and that in this case the right of re_scission having been exercised after
the expiry of the date of contract, the impugned action of the defendant in rescinding the contract ..vtls unjustified.
Allowing the appeal,
HELD : I. The rescission of the contract was well-founded and the forfeiturt
of the security deposit woo justified. [193 F]
G
2. Although cl. (2) specifically mentioned that time was of the essence of the
contract, all that was meant was that in case the work was not completed within
the originally specified time, the plaintiff would be liable to pay such compensa~
tion for delay in execution as was fixed within the limits of that clause.
This
is clear not only from clause (2) but also from clause (3). These two clauses
must be read together.
So read, the contract was to continue to be in force till
the completion of the work or its abandonment. Time was of the essence only
H
in the sense that if the plaintiff completed it within the originti1 period of one
year, he would not be liable to pay any con1pensation but in case he overstepped
that limit he would have to compensate for every day of de-lay and that the right
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MAHARASHTRA v. D. B. KULKARNI (Koshal, J.)
189
to rescission would accrue only when compensation due exceeded the amount
of the security d'eposit or the plaintiff aba.ndoned the \1/0rk. Till the time it was
rescined, the contract was in force. [193 A~C]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2010 of 1969.
(From the Judgment and Decree dt. 11-7-68 of the Bombay High
Court in Appeal No. 534 of 1960) .
Girish Chandra and M. N. Shroff for the appellant.
A. G. Ratnaparkhi for the respondent.
The Judgment of the Court was delivered by
KosHAL, J. The facts giving rise to this appeal by the two defendants (who are the State of Maharashtra and one of its Executive
Engineers) on certificate granted by the High Court of Bombay against
its judgment dated 11th July 1968 may be briefly stated. In the year
1955, defendant No. 1 decided to construct an aqueduct over Kulthi
Nala situated in Malegaon Sub-Division of Nasik district. The Executive Engineer, Nasik Irrigation Division, invited tenders for the work
which was entrusted to the plaintiff in acceptance of his tender on
conditions n.duced to writing in the form of exhibit 66. The estimated
cost of the work was Rs. 1,55,854.00 and it was to be completed within
12 months from the date of the written order to commence it which
happened to be the 16th of May 1955. The plaintiff paid a sum of
Rs. 1558/- as earnest money and another of Rs. 3896/- as security
deposit to defendant No. 1. Clauses (2) and (3) of the contract in
accordance with which the work was to be executed provided as
follows:-
"(2) : The time allowed for carrying out the work as
entered in the tender shall be strictly observed by the contractor
xx
xx
The work shall throughout the
stipulated period of the contract be proceeded with all due
diligence (time being deemed to be of the essence of the
contract on the part of the contractor) and the contractor
shall pay as compensation an amount equal to one per cent
or such smaller amount as the Superintending Engineer
xx
xx
xx
may decide
xx
for every day that
the work remains uncommenced, or unfinished
after
the
proper dates.
And further to ensure good progress during
the execution of the work, the contractor shall be bound, in
all cases in which the time allowed for any work exceeds
one month, to complete
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SUPREME COURT REPORTS
(1979] 3 s.c.R:-
in 1/4 of time 1/10 of the work,
in 1/2 of time 4 /10 of the work,
in 3/4 of time 8/10 of the work
xx
xx
xx
'(X
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xx"
"(3) : In any case in which under any clause or clauses
of this contract the contractor shall have rendered himsdI
liable to pay compensation amounting to the whole of his
security deposit xx
xx
xx
xx
or in the
case of abandonment of the work owing to serious illness or
death of the contractor or any other cause, the Executive
Engineer
xx
xx
xx
shall have power to
adopt any of the following courses :-
(a) to rescind the contract (of which rescission notice
in writing to the contractor under the hand of the Executive
Engineer shall be conclusive evidence) and in that case the
security deposit of the contractor shall stand forfeited and
be absolutely at the disposal of the Government.
(b) xx
(c) xx
xx
xx
xx
xx
xx
xx
xx
xx
In the event of any of the above courses being adopted by
the Executive Engineer, the contractor shall have no claim
to compensation for any loss sustained by him."
Clauses ( 4) and ( 5) of the contract related to action to be taken
when the progress of any particular portion of the work was found
unsatisfactory.
Provision was made in the contract for interim payments of running bills submitted by the plaintiff and for final payment
to him against a certificate of completion of the work. Clause (6) of
the contract provided for extension of time during which the work was
to be completed, in pursuance of applications to be made by the plaintiff. A provision was made in clause ( 14) of the contract for extension of time as a consequence of additions to or alteration in the work.
The plaintiff started executing the work and by December 1955,
running payments amounting to Rs. 13,9671- in all had been made to
him against bills submitted by him.
In the month of March 1956,
Shri Y. A. Shinde, defendant No. 2, came to occupy the post of
Executive Engineer in N asik Irrigation Division and called upon the
plaintiff to speed up the execution of the work as the progress thereof
was not satisfactory.
However, the work continued tQ be executed at
a snail's pace and on May 9, 1956. the plaintiff made an application
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MAHARASHTRA v. D. B. KULKARNI (Koshal, J.)
191
(exhibit 54) for extension of the time fixed for completion of the work • ~
by a period of six months. That application was rejected by defendant
No. 2 who informed the plaintiff accordingly through a letter dated
June 15, 1956 (exhibit 55) which stated inter alia that the reasons put
forth by the plaintiff for extension of the time-limit were not convincing,
that the application had not been received within the time prescribed
in that behalf by clause ( 6) of the contract and that the proportion o!
the work executed did not conform to the condition contained in clause
( 2 J of the contract, the value of the work executed till then being only
Rs. 25,000/-.
The letter further informed the plaintiff that he had
become liable to pay compensation under clause (2) of the contract
and called upon him to show cause why action should not be taken
against him under clause ( 3) thereof.
Ultimately, by letter dated
October 30, 1956 (exhibit 48) the plaintiff was informed that it had
been decided to burden him with compensation at the rate of Rs. 5 /-
per day for the entire period commencing on the 16th of May 1956 and
ending with the comple\ion of the work and that if the plaintiff failed
to show satisfactory progress within a month of the date of the letter,
defendant No. 2 would be compelled to increase the rate of compensaticn and take suitable penal action against the plaintiff. The work not
having made much progress and the plaintiff having stopped its execution, he was informed by a letter dated January 17, 1957 (exhibit 49)
tr.at the contract stood rescinded under clause
(3)
thereof.
The
de!cndan'.s also forfeited the security deposit which had by then swelled, presumably on account of the addition of interest, to Rs. 4679/-
( although this amount has been erroneously described by the High
Court as consisting of the earnest money of Rs. 1558/- and the security
deposit of Rs. 3896/-).
In his suit, the plaintiff claimed a refund of the said amount of
Rs. 4679/-, another sum of Rs. 2500/- on account of the balance due
to him for part execution of the work and still
another
sum
of
Rs. 4000/- by way of damages.
The trial court found that the plaintiff had failed to prove that any
snm was due to him for execution of the work or by way of damages,
but further held that the forfeiture of the security deposit was illegal.
ll therefore granted a decree to the plaintiff for the sum of Rs. 4679/-
only with interest at 3 per cent per annum from the date of the suit
till realisation and also proportionate costs of the suit.
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Aggrieved by the decree passed by the trial court, the defendants
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went up in appeal to the High Court and the plaintiff filed his cross
objections to the decree appealed from which was maintained by the
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192
SUPREME COURT REPORTS
[1979] 3 s.c.R.
High Court in its entirety. The High Court agreed with the findings
of the trial court and on the question of rescission of the contract
observed as follows :-
"In our view in law the contract could not be rescinded
subsequent to the expiry of the due date for the performance
thereof. The right to rescind a contract is the right to put it
to an end and such right cannot exist after due date for the
performance expires. The right to rescind the contract is the
right to accept anticipatory breach thereof by the promissor,
i.e., prior to the expiry of the date of the performance of the
contract.
This right arises in favour of the promisee under
section 39 of the Contract Act. A contract cannot be abandoned by either side either by a promissor or a promisee after
the expiry of the due date for performance thereof. For the
above reasons in our view the abandonment of the work of
the contract as mentioned in sub-clause (a) of the clause
relate to (anticipatory) breach of the contract by the contractor before the due date for the performance thereof. In
this case the Executive Engineer purported to rescind the
con'.ract which had become dead some time in August 1956.
He purported to do so on the ground that the contractor had
abandoned the contract some time in October 1956.
The
Executive Engineer in our view, had no power under clause
(3) to rescind the contract having regard to the facts and
circumstances which we have already pointed out above. The
forfeiture of the security deposit on the footing that the contract was validly rescinded must be held to be unjustified and
untenable."
It was on the basis of this conclusion that the trial court's decree
for Rs. 4679/- passed in favour of the plaintiff was affirmed. On the
9th of June 1969 however, the High Court certified the case to be a
fit one for appeal by the defendants to the Supreme Court under subclause ( c) of clause (1) of article 133 of the Constitution of India.
At that s'age defendant No. 1 agreed to pay the costs of the respondent
in the proceedings before the Supreme Court.
2. Learned counsel for the appellants has challenged the correet-
:iess of the observations made by the High Court and
reproduced
above. Those observations, according to him, run counter to the tenor
of clauses (2) and (3) of the contract governing the execution of the
work ·and we are of the opinion that his criticism thereof is justified.
Although in clause (2) of the contract it was specifically mentioned
that time was of the essence of the agreement between the parties, all
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MAHARASHTRA v. D. B. KULKARNI (Kasha/, l.)
I 93
that was meant was that in case the work was not completed within
the time originally specified in that behalf, the plaintiff would be liable
to pay such compensation for delay in execution as was fixed by the
Superintending Engineer within the limits laid down in the clause. This
becomes clear not only from the provision appearing in clause (2) and
stating that "the contractor shall pay as compensation an amount equal
to I per cent or such smaller amount as the Superintending Engineer
may decide for every day that the work remains uncommenced, or unfinished after the proper dates" but also from the contents of clause
(3) of the contract, which would become operative only if the plaintiff
-~ renders himself liable to pay compensation [in accordance with clause
1
(2)] or abandons the work either on account of serious illness or
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death or for any other cause and it is then that the contract would become liable to rescission. Clauses (2) and (3) have to be read together and interpreted with reference to each other and their provisions,
read as one single whole, clearly mean that the contract was to continue
to be in force till the completion of the work or its abandonment. The
time was of the essence of the contract only in the sense that if the
plaintiff completed it within the original period of one year, he would
not be liable to pay any compensation but that in case he overstepped
the said time-limit he would have to compensate the defendants for
eve.y day of the delay in completing the work and that the right to
rescission would accrue to the defendant No. 2 only when the compensation due exceeded the amount of the security deposit or the plaintiff
abandoned the work. Till the time the contract was rescinded therefore, it was fully in force and the rescission was consequently wellfounded, being squarely covered by clause (3) of the contract, subclause (a) of which conferred on the Executive Engineer the right to
forfeit the security deposit Far from being illegal, the forfeiture was
~_fully justified and the High Court's finding to the contrary is liable to
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be reversed.
3. Jn the result the appeal succeeds and is accepted, the decree of
the High Court is set aside and the suit of the plaintiff is dismissed in
its entirety.
In accordance with the undertaking given by defendant
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No. 1 on the 9th June 1969 to the High Court when it certified the
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case to be a fit one for appeal to this Court, the plaintiff shall be
entitled to the costs incurred by him in this Court. In respect of costs
in the two courts below, we make no order.
P.B.R.
Appeal allowed.