M/S Astha And Saumya Construction vs. The State Of Bihar

Held

The Court held that the contract had become frustrated due to the non-acquisition of land by the authorities, making its performance impossible. The Court noted that a decision to foreclose the contract was taken at the highest level in February 2020, and a communication was issued in March 2020. The respondents' contention that the land was subsequently acquired and the petitioner was notified in 2023 was considered insufficient to override the 2020 foreclosure decision, especially after a lapse of three years. The Court reasoned that the petitioner could not be expected to complete the work after such a delay at the old rates due to escalation in costs of labor, materials, and other charges, and the imposition of GST. The Court also found merit in the petitioner's argument that they should not bear the GST burden on a contract initially based on VAT rates. The Court relied on the principle of frustration of contract and the judgment cited by the petitioner, which applied to the present case. The Court directed the authorities to finalize the measurement book, if not already done, and make the necessary payments to the petitioner expeditiously, preferably within eight weeks.

Facts

M/s Astha and Saumya Construction (Petitioner) entered into an agreement with the Water Resources Department, Government of Bihar (Respondent) on November 6, 2017, for earth work and structure in Kashri Distributary. The Petitioner commenced work but could not complete it due to the non-acquisition of the required land by the authorities. Meetings were held, and a decision was taken at the ministerial level in February 2020 to foreclose the agreement due to the non-availability of land. A formal communication was issued on March 4, 2020. Final measurements were conducted, and recommendations for foreclosure were made. Despite this, the Petitioner did not receive payment for work done, security deposit, or deducted amounts. In February 2023, the Petitioner received a letter threatening penal action for non-completion, which the Petitioner contested citing delays beyond their control, price escalation, and the introduction of GST.

Key Issues

1. Whether the contract entered into between the petitioner and the respondents for earth work and structure in Kashri Distributary became frustrated due to the non-acquisition of land by the authorities, thereby absolving the petitioner of further obligation to perform the work at old rates? 2. Whether the petitioner is entitled to payment for the work done, refund of security deposit, and deducted amounts, considering the decision to foreclose the agreement in 2020? 3. Whether the petitioner can be compelled to pay GST on a contract originally estimated at VAT rates, especially after the agreement was effectively foreclosed? Petitioner's arguments: The petitioner argued that the contract became impossible to perform due to the non-acquisition of land, constituting frustration of contract under Section 56 of the Contract Act, 1872. They contended that the decision to foreclose the agreement in 2020, taken at the ministerial level, should be implemented, and payments for work done should be made. They also argued that they should not be burdened with GST on a contract that predated its implementation and was based on VAT rates, especially when the contract was foreclosed. They relied on the principle of "force majeure" and the impossibility of performance. Respondent's arguments: The respondents, through their counter-affidavit, acknowledged the difficulty in acquiring land and the recommendation for foreclosure. However, they also stated that the land was subsequently acquired and the petitioner was put on notice in 2023. They contended that the petitioner had not turned up for finalizing measurements, which was denied by the petitioner.