Municipal Contract Dispute: Supreme Court Rules on Work Order Cancellation

The Supreme Court of India recently delivered an important judgment in the case of Municipal Council Gondia vs. Divi Works & Suppliers, HUF & Ors.. The dispute revolved around the cancellation of a work order for supplying furniture to schools operated by the Municipal Council due to the financial crisis induced by the COVID-19 pandemic. The decision clarifies the limits of judicial intervention in contract matters, particularly under Article 226 of the Constitution.

Background of the Case

The Municipal Council Gondia had invited bids for purchasing desks, benches, almirahs, and tables for its schools. An e-tender was issued on 19.09.2019, and the contract was awarded to Divi Works & Suppliers, HUF (hereinafter referred to as the original writ petitioner). A formal work order was issued on 07.02.2020, following the approval of the Standing Committee of the Municipal Council. However, due to the financial strain caused by the COVID-19 lockdown, the Maharashtra government issued a Government Resolution (G.R.) on 04.05.2020, directing that non-priority expenditures should be suspended.

In compliance with the G.R., the President of the Municipal Council directed that no purchases should be made, leading to the suspension of the work order on 18.05.2020. Eventually, on 07.07.2020, the work order was canceled. The original writ petitioner challenged this decision before the Bombay High Court.

Petitioner’s Arguments

The original writ petitioner argued that the cancellation of the work order was arbitrary and violated the terms of the contract.
It claimed that it had already manufactured the required furniture as per the specifications and that cancellation would result in significant financial losses.
It contended that the COVID-19 lockdown did not justify canceling a contract that had been duly awarded and approved.
The petitioner sought a writ of mandamus directing the Municipal Council to accept the manufactured goods and make payments as per the work order.

Respondent’s Arguments

The Municipal Council argued that the contract was canceled due to financial constraints caused by the pandemic.
It contended that the petitioner had not taken any significant steps to supply the goods before the cancellation.
The Council submitted that judicial intervention in contractual matters should be limited, especially when there were disputed questions of fact.
It pointed out that the contract was canceled based on a legitimate government directive (G.R. dated 04.05.2020).

Bombay High Court’s Decision

The High Court ruled in favor of the original writ petitioner, setting aside the cancellation of the work order. It held that the petitioner was entitled to supply the goods and receive payment. The Municipal Council was directed to accept the manufactured furniture.

Supreme Court’s Judgment

The Supreme Court overturned the High Court’s ruling, emphasizing that:

The High Court erroneously issued a writ of mandamus, effectively enforcing specific performance of a contract.
The petitioner had not conclusively proved that the goods were manufactured as per the work order.
The cancellation of the work order was justified due to financial constraints and government directives.
Disputed questions of fact, such as whether the petitioner had manufactured the goods, could not be adjudicated under a writ petition.
The petitioner had the option to seek damages through a civil suit but could not compel the Municipal Council to accept the goods.

Key Excerpts from the Supreme Court Judgment

The Court observed:

“From the impugned judgment and order passed by the High Court, it appears that the High Court was made to believe that the original writ petitioners had already manufactured the goods which are customized and as per the specifications and the work order. However, it is now found that there are no manufactured goods readily available which can be supplied to the appellant – Council.”

The Court further stated:

“Even otherwise, no writ of mandamus could have been issued virtually granting the writ for specific performance of the contract/work order in a writ petition under Article 226 of the Constitution of India.”

Final Verdict

The Supreme Court allowed the appeal, setting aside the High Court’s judgment. However, it clarified that the petitioner could initiate a civil suit for damages if it had suffered losses due to the contract’s cancellation.

Conclusion: Implications of the Judgment

This ruling has important implications:

It reaffirms that courts should exercise restraint in interfering with contractual matters under writ jurisdiction.
It upholds the principle that disputed questions of fact should be resolved through civil suits, not writ petitions.
It provides clarity on the scope of Article 226, emphasizing that it cannot be used to enforce contractual obligations.

The judgment sets a precedent for government bodies and contractors, highlighting the limitations of judicial intervention in administrative decisions related to contract execution.

Petitioner Name: Municipal Council Gondia.
Respondent Name: Divi Works & Suppliers, HUF & Ors..
Judgment By: Justice M. R. Shah, Justice B. V. Nagarathna.
Place Of Incident: Gondia, Maharashtra.
Judgment Date: 28-02-2022.

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