"Judicial Scrutiny on Contract Termination: Patna High Court Upholds Fairness in Business Disputes"

 


Introduction

This case involves a writ petition filed by Hari Mohan Bishwas, a proprietorship firm, against the Bihar State Educational Infrastructure Development Corporation Ltd. (BSEIDC), challenging the termination of a contract (USSS-80) and the forfeiture of performance security. The petitioner alleged that the termination was done arbitrarily without providing an opportunity for a hearing, violating fundamental rights under Articles 14, 16, and 19(1)(g) of the Indian Constitution.

Background of the Case

Hari Mohan Bishwas, through its proprietor, had entered into a contract with BSEIDC for an infrastructure development project. However, on February 12, 2021, the company received a show-cause notice from BSEIDC, questioning delays and deficiencies in the project. Before the petitioner could respond, the contract was rescinded on March 5, 2021, and the performance security was forfeited.

The petitioner argued that:

  • The rescinding of the contract was unjust as they were not given adequate time to respond.

  • The termination order was passed even before the show-cause notice was received on February 27, 2021.

  • The decision violated principles of natural justice.

  • The forfeiture of security deposit was unlawful since no formal hearing was conducted.

Key Legal Issues

  1. Right to a Fair Hearing: The primary contention was that the petitioner was not given a reasonable opportunity to defend itself before the contract was terminated.

  2. Due Process in Contractual Disputes: The case questioned whether government entities must strictly adhere to procedural fairness before rescinding contracts.

  3. Forfeiture of Security Deposit: Whether the forfeiture was lawful in the absence of a proper inquiry.

Arguments by the Petitioner

  1. Breach of Natural Justice: The petitioner’s counsel argued that terminating the contract without a hearing violated basic legal principles and deprived the petitioner of their right to a fair defense.

  2. Unlawful Forfeiture: Since the security deposit was taken without justification, the petitioner sought its refund or an injunction against further financial penalties.

  3. Premature Decision: The contract was terminated before the petitioner even had a chance to present evidence against the allegations.

  4. Violation of Fundamental Rights: The action infringed upon the petitioner’s rights to conduct business freely, as protected under Article 19(1)(g) of the Constitution.

Arguments by the Respondent (BSEIDC)

  1. Contractual Terms Allowed Termination: The respondent contended that the contract contained clauses that permitted termination under specific circumstances, including project delays or inefficiency.

  2. Procedural Compliance: The company maintained that it followed due process, issuing a show-cause notice before terminating the contract.

  3. Forfeiture Was Justified: The security deposit was forfeited as a consequence of non-performance under the contract terms.

Court’s Observations and Ruling

After reviewing the case, the Patna High Court made the following key observations:

  1. Violation of Natural Justice: The court found that the petitioner was not given an adequate opportunity to present their case before termination.

  2. Invalid Termination Order: Since the show-cause notice was received after the termination decision had already been made, the court deemed the rescinding of the contract arbitrary.

  3. Fresh Proceedings Ordered: The court ruled that a new hearing must be conducted where the petitioner could present all relevant materials.

  4. Security Deposit to Remain Withheld Temporarily: The court directed that the forfeited security deposit should not be refunded until a final decision was made post-hearing.

Final Judgment

  • The contract termination order dated March 5, 2021, was quashed.

  • The petitioner was granted an opportunity to present their case before an appropriate authority.

  • A fresh decision was to be made within four weeks, ensuring procedural fairness.

  • The security deposit would remain withheld until the final resolution of the dispute.

  • The petitioner retained the right to seek further legal remedies if required.

Key Takeaways from the Judgment

  1. Government Contracts Must Follow Due Process: Even in contractual matters, public authorities must adhere to principles of fairness.

  2. Right to a Fair Hearing is Fundamental: No party can be penalized without a proper chance to respond to allegations.

  3. Forfeiture of Security Deposit Requires Justification: Authorities must provide valid reasons before confiscating financial guarantees from contractors.

  4. Judicial Oversight in Business Disputes: Courts will intervene when administrative decisions violate constitutional protections.

  5. A Model for Corporate and Public Sector Disputes: The case serves as a precedent for handling disputes between private firms and government entities.

Conclusion

The Patna High Court’s ruling in this case reinforces the principle that even government undertakings must uphold fairness and transparency in business transactions. By overturning an arbitrary contract termination, the judgment safeguards the rights of private enterprises against unjust administrative actions.

Read the full judgement Below;

https://patnahighcourt.gov.in/viewjudgment/MTUjMTAwNTAjMjAyMSMxI04=-har9g50oIWk=