Expired Contract Cannot Be Terminated: Madras High Court Partly Sets Aside Arbitral Award Favouring Southern Railway

Holding that a contract that has already expired cannot thereafter be terminated, the Madras High Court has partly set aside an arbitral award that upheld Southern Railway's termination of a works contract and the consequent forfeiture of deposits.

“The very process of termination presupposes that there is a subsisting contract. If there is no subsisting contract, there is nothing to be terminated thereafter,” Justice N. Anand Venkatesh observed while partly allowing a petition under Section 34 of the Arbitration and Conciliation Act filed by Sivashankar & Co.

The dispute arose out of a contract for the construction of a new foot overbridge at Chennai Egmore railway station. The Letter of Acceptance was issued on November 7, 2016, and the agreement was executed on March 27, 2017. The project was supposed to be completed within a period of 12 months. Extensions were granted until June 30, 2020. It was admitted that no further extension was granted thereafter.

Despite this, the Railways issued a termination notice on September 30, 2020, and forfeited the Earnest Money Deposit (EMD), Performance Guarantee (PG), and Security Deposit (SD).

The arbitral tribunal had justified the termination by referring to breach and principles of repudiatory breach. The High Court disagreed, holding that once the contract had come to an end by efflux of time on June 30, 2020, there was no subsisting contract capable of termination. The finding of the tribunal justifying termination, the Court said, was “clearly perverse and suffers from patent illegality.”

Consequently, the forfeiture of EMD, PG, and SD could not be sustained. The Court set aside the rejection of Claims 1 to 4 and 7, directed a refund of the forfeited amounts with 9% interest from June 30, 2020, till the date of actual payment, and quashed the counterclaims awarded in favour of the Railways. The award in all other respects was confirmed.

The court also addressed the tribunal's reasoning that the contractor had not challenged the termination under Section 9 (interim relief) of the Arbitration Act. The Court observed that if the petitioner had sought to enjoin the respondent from terminating the contract under Section 9, such a prayer would have been rejected under Section 14 of the Specific Relief Act, 1963, since the dispute was capable of being compensated in monetary terms.

“The petitioner could not have challenged the termination of contract under Section 9 of the Act since if the petitioner has sought for injuncting the respondent from terminating, it would have been rejected under Section 14 of the Specific Relief Act, 1963 since it is capable of being compensated in terms of money,” the court observed.

Costs of Rs. 2 lakh were awarded to the contractor.