Supreme Court Sets Aside Penalties Imposed by Odisha State Government in Extension of Time Case

In a significant judgment, the Supreme Court of India has set aside the penalties imposed by the State Government of Odisha in a case involving the extension of time for a road improvement project. The Court ruled that the State Government was not justified in levying penalties on contractors who failed to complete their work within the stipulated time. The judgment, delivered by Justices M.R. Shah and B.V. Nagarathna, emphasized that the imposition of penalties while granting an extension of time was illegal and without authority of the law.

Supreme Court stated, "Levy of penalty while granting extension of time is wholly without authority of the law and is illegal." The Court further emphasized that the relevant clause invoked by the State Government did not apply to cases where the contract was extended but rather related to the termination of a contract. Additionally, the Court noted that there was no provision in the contract or the Odisha Public Work Dept. Code (OPWD Code) authorizing the imposition of penalties while granting an extension of time.

The case before the Court involved Civil Appeal No. 4934 of 2022 arising from a writ petition filed by a special class contractor who was awarded a road improvement contract. The contractor failed to complete the work within the specified time frame and applied for an extension, which was granted by the State Government subject to the imposition of a penalty. The High Court had set aside the penalty, a decision that was upheld by the Supreme Court.

The Court also highlighted the importance of providing an opportunity for the contractor to be heard before levying a penalty, stating, "The contractor must be put to notice that extension of time can be granted on imposition of reasonable penalty. However, without putting the contractor to notice, unilaterally, the State is not justified in levying the penalty while granting extension of time."

This landmark judgment clarifies the legal position regarding the imposition of penalties in cases of time extension for contract completion. It ensures that contractors are not unduly burdened with penalties without proper notice and an opportunity to present their case. The decision will have far-reaching implications for similar cases and is expected to promote fairness and equity in contractual relationships between the State Government and contractors.

The Supreme Court's ruling will serve as a precedent and guide future decisions concerning penalties imposed during contract extensions, setting a standard that upholds the principles of natural justice and contract law.

Date of Decision: March 24, 2023

The State of Odisha & Ors. VS Radheshyam Agrawal