Employer Cannot Resume Work Through Third Parties Until 30-Day Period For Contractor’s Post-Termination Compliance Expires: Madras High Court

Madras High Court, in a significant ruling, held that an employer's right to continue terminated works through third parties or itself is not immediate and must wait for the expiry of the contractually mandated 30-day period provided to the contractor for post-termination obligations.

A single-judge bench of Justice K. Kumaresh Babu observed that the right to deploy materials and equipment under the termination clauses only "kicks in" once the timeline for the contractor to submit final settlement documents and handover the site has lapsed.

The case arose from a dispute between BNR Infrastructure Projects Private Limited (the applicant) and Yuzhan Technology India Private Limited (the respondent) concerning a contract dated October 29, 2025. Following a notice of partial termination issued by the respondent on May 30, 2026, the applicant moved the court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking to restrain the invocation of bank guarantees totaling Rs. 310 Crores and to stay the termination notice.

The primary question before the court was whether the respondent-employer was entitled to immediately resume construction activities through third-party contractors following a partial termination of the agreement. The court was also called upon to determine if the contractual right to continue works under Clause 18.1.7 was independent of the 30-day compliance window afforded to the contractor under Clause 18.1.3.

Prima Facie Findings On Project Delay

The court noted that contentious arguments were raised regarding who was responsible for the project delays. While the applicant alleged delays in site handover and design finalization, the respondent contended that the applicant failed to meet progress milestones despite multiple "catch-up plans" discussed in stakeholder meetings.

Court Notes Admitted Delays By Design Agencies

The bench observed that prima facie materials, including a report by the Project Co-ordinator M/s. Cushman and Wakefield India Private Limited, evidenced delays in handing over the site and finalizing designs. However, the court clarified that whether these specific delays impacted the applicant’s overall progress was a matter to be determined by the Arbitrator.

Contractual Scheme Of Termination Under Clause 18.1

Justice Kumaresh Babu closely examined the contractual framework governing termination. Under Clause 18.1.1, the employer is generally required to issue a "Notice to Correct" to rectify breaches before proceeding to termination. Clause 18.1.2 further mandates a 30-day prior written notice for termination upon the occurrence of specified defaults.

Interpretation Of Post-Termination Obligations

The court highlighted the significance of Clause 18.1.3, which outlines the contractor's obligations after receiving a termination notice. This clause grants the contractor a 30-day period to cease works, transfer employer-furnished items, handover completed permanent works, and submit all relevant documentation, including as-built drawings and quality records.

Employer’s Right To Resume Work Is Not Absolute

Regarding the employer's right to continue works under Clause 18.1.7, the court noted that this right includes utilizing materials handed over by the contractor and deploying withheld machinery. However, the bench emphasized that this right is intrinsically linked to the timelines established in the preceding clauses.

Right To Resume Work Kicks In Only After 30-Day Compliance Period

The court held that the respondent’s right to continue work, either by itself or through third parties, cannot be exercised while the contractor is still within the 30-day window to fulfill its post-termination duties. Since the termination notice was issued on May 30, 2026, the applicant had until June 29, 2026, to comply with its obligations.

Status Quo To Prevail Until Compliance Deadline

The bench found that the scenario where the employer could claim a lien over materials or resume works had not yet arisen. The court observed that the applicant had not yet submitted its final settlement documents, and the time for doing so was still available under the contract.

Respondent Restrained From Continuing Works Via Third Parties

Concluding that the respondent could not be heard to invoke Clause 18.1.7 before the expiry of the period under Clause 18.1.3, the court protected the applicant's position. It ruled that the respondent is not entitled to continue the works until June 29, 2026.

Arbitration To Resolve Substantive Disputes

The court refrained from dwelling upon the deeper interpretation of the termination clauses, noting that such matters fall within the jurisdiction of the Sole Arbitrator already appointed by consent. The applications were disposed of with liberty to the parties to pursue further reliefs before the Arbitrator under Section 17 of the Arbitration and Conciliation Act.

Date of Decision: 22 June 2026