Doctrine of Election Estops Party from Challenging Penal Recoveries After Accepting Contractual Benefits and Admitting Infrastructure Deficiencies

The petitioner, a partnership firm, was awarded a contract in 2013 to construct a 17,500 MT capacity godown under the Private Entrepreneur Guarantee (PEG) Scheme on a "Build, Own and Operate" basis.

A Lease and Service Agreement was executed with the Food Corporation of India (FCI), establishing a 10-year guaranteed hiring period starting February 27, 2015.

At the time of takeover, the godown lacked essential infrastructure, specifically drainage and black-topping of internal roads.

The petitioner provided undertakings in 2015 to complete these works, and FCI granted extensions until February 26, 2016.

The black-topping was only completed in mid-2017.

Consequently, FCI issued orders on September 3, 2021, and November 15, 2021, to recover penalties from rentals based on a "Cost Saving Amount" (CSA) formula approved by a High Level Committee (HLC).

The petitioner challenged these recoveries as arbitrary and violative of natural justice.

1. Whether the writ petition is maintainable despite arising from a contractual relationship involving a State instrumentality.

2. Whether the respondent-FCI acted arbitrarily or outside the scope of the agreement by imposing penal recoveries for delayed infrastructure completion.

3. Whether the doctrine of estoppel precludes the petitioner from challenging the recoveries after failing to meet undertakings and enjoying the benefits of the contract.

Article 226 jurisdiction is not ousted in contractual matters if the State’s action is arbitrary or violates Article 14.

The doctrine of "approbate and reprobate" and the principle of estoppel prevents a party from accepting the benefits of a contract while avoiding its corresponding obligations.

Liquidated damages require proof of loss for penal amounts unless damage is impossible to quantify.

The Court noted that black-topping of internal roads was an essential infrastructure component under the Model Tender Form.

Although the petitioner argued that the 2016 law-and-order situation in Kashmir caused the delay, the Court found this untenable because the extended deadline for completion expired in February 2016, months before the disturbances began in July 2016.

The Court observed that the HLC decisions regarding "Cost Saving Amount" and "Actual Utilization Basis" were uniform national policies intended to prevent unjust enrichment of investors who received full rentals without providing full infrastructure.

The Court highlighted that under Clause 5 of the Agreement, FCI had the power to terminate the contract for such breaches; opting for a fiscal recovery instead constituted a "lenient view".

Since the petitioner failed to challenge the foundational HLC decisions and only attacked the consequential orders, and because they had benefited from the contract despite the breach, the challenge failed.

The Court found no merit in the allegation of arbitrariness, as the recoveries were based on a transparent methodology related to financial advantages gained through non-execution of work; the writ petition was dismissed, all interim directions were vacated, and the impugned recovery orders were upheld.