State Cannot Arbitrarily Terminate A Contract Already Ended By The Contractor Citing Authority's Default: Kerala High Court - 2025-07-09

State's Termination of Contract Post-Contractor's Notice is Arbitrary and Unreasonable: Kerala High Court

Kochi: In a significant ruling on contractual disputes involving government bodies, the Kerala High Court has held that the State cannot arbitrarily issue a termination order for a contract that has already been terminated by the contractor due to the State's own defaults. The court quashed the termination orders issued by the Public Works Department (PWD), terming them "arbitrary, unreasonable, and issued in violation of the principles of natural justice."

Justice T.R. Ravi , while hearing petitions filed by M/s Nath Infrastructures , asserted the High Court's jurisdiction under Article 226 to intervene in contractual matters where the State's actions are palpably unreasonable, even if an alternative remedy like arbitration exists.

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Background of the Dispute

The case stems from an Engineering, Procurement, and Construction (EPC) agreement dated August 7, 2020, awarded to M/s Nath Infrastructures for strengthening a section of National Highway 766 in Kozhikode. The project, with a 12-month completion period ending on September 17, 2021, was beset by delays.

The contractor cited several hindrances beyond their control, including the presence of trees and utility poles on-site, heavy rains, and disruptions caused by the COVID-19 pandemic and subsequent lockdowns. Consequently, the firm submitted multiple applications for Extension of Time (EOT).

Despite internal recommendations from PWD officials to grant the EOT—even acknowledging the validity of the contractor's reasons—the authorities failed to pass a formal order. The contractor alleged that they were encouraged to continue the work with the assurance that an extension would be granted. However, payments for the work done after the original contract period were withheld.

Frustrated by the indefinite delay in approving the EOT and the non-payment of bills, the petitioner, M/s Nath Infrastructures , issued a notice on November 10, 2022, terminating the contract under Clause 23.2 of the agreement, which provides for termination due to the "Authority's Default."

Subsequently, after the contractor filed a writ petition seeking payment for the work done, the authorities issued their own notice on March 15, 2023, followed by a final termination order on March 30, 2023, terminating the contract at the contractor's risk and cost for failing to meet project milestones.

Arguments in Court

Petitioner's Stance: Represented by Advocate Adithya Rajeev, the petitioner argued that the authorities committed a material default by failing to act on the EOT applications and withholding payments, justifying their decision to terminate the contract. They contended that the subsequent termination by the State was a mala fide and arbitrary act, intended to neutralize the contractor's prior termination and was issued without proper consideration of the facts.

State's Defence: The Special Government Pleader argued that the writ petition was not maintainable as it involved contractual disputes and disputed questions of fact, for which arbitration was the appropriate remedy. They contended that the contractor was in default for not meeting milestones and that the failure to grant an EOT did not constitute a default by the authority. They maintained that their termination of the contract was valid.

Court's Rationale and Legal Principles

Justice T.R. Ravi systematically dismantled the State's arguments, delivering a detailed judgment on the scope of judicial review in contractual matters.

On Maintainability of Writ Petition: The Court rejected the preliminary objection, relying on the Supreme Court's decision in M.P. Power Management Company Limited v. Sky Power Southeast Solar India Private Limited . It held: > "The reach of Article 14 enables a writ court to deal with arbitrary State action even after a contract is entered into by the State... The need to deal with disputed questions of fact, cannot be made a smokescreen to guillotine a genuine claim raised in a writ petition, when the actual resolution of a disputed question of fact is unnecessary to grant the relief to a writ applicant.”

On the Arbitrary Nature of State's Action: The Court found the State's conduct to be palpably unreasonable. Key excerpts from the judgment highlight the Court's reasoning: > "The respondents had, without complying with the procedure to be followed in determining the application for extension of time, admittedly extracted work from the contractor without extending the time for completion of the contract." > "Even if the State has a case that the termination order issued by the petitioner has no justification, that is not a justification for issuing a termination order five months after the notice of termination was received from the petitioner. The State had to challenge the exercise of rights by the contractor under Clause 23.2 in appropriate proceedings and cannot ignore the same."

The Court noted that the State's termination order was issued as a counter-blast, without adverting to the contractor's prior termination notice or the detailed reply submitted by them. This demonstrated a non-application of mind and a violation of natural justice.

Final Verdict

The High Court quashed the termination notice and order (Exts.P16 and P19) issued by the authorities. The Court directed the respondents to: 1. Process and make payments for the work already carried out by the petitioner within one month. 2. Release the Bank Guarantees executed by the petitioner. 3. Refrain from taking any coercive action against the petitioner based on the quashed termination orders.

The judgment clarifies that while the State has the power to terminate contracts for non-performance, it cannot exercise this power arbitrarily or as a retaliatory measure, especially when its own defaults have precipitated the dispute.