The Bombay High Court (Aurangabad Bench) has ruled that for the purpose of limitation in a works contract involving running account bills, the cause of action for a dispute over the final amount accrues not from the date of physical completion of the work, but from the date the final bill is paid or denied, as running account bills are provisional and final settlement occurs only upon finalization of the last bill.
The High Court also clarified that the “period under consideration” for calculating price variation under a contractual clause like Clause 56 is the period covered by each respective Running Account (R.A.) Bill, not the entire operative period of the contract. Thus, escalation must be computed contemporaneously with each R.A. Bill for the work done during that specific period, and re-computing the entire escalation at the end of the contract by averaging indices over the total duration is an erroneous interpretation of the contract.
The Court held that while the suit was filed within the stipulated period of limitation, the plaintiff’s interpretation of Clause 56 regarding price escalation was incorrect. Thus, the defendants had correctly paid the price escalation amounts in accordance with the contract by calculating them for each R.A. Bill. Consequently, the Court found that no case was made out for the grant of Rs. 5.76 Crores towards further escalation costs. The Commercial Appeal filed by the defendants was allowed with costs.
The Division Bench comprising Justice Arun R. Pedneker and Justice Vaishali Patil-Jadhav observed that running account bills are provisional in nature and do not represent a final settlement of rights and liabilities between the parties. The final settlement occurs only upon the acceptance of the final bill.
The Bench explained that although the physical work was completed on 30/06/2013, the final measurement and computation of the escalated price were yet to be done. The final R.A. Bill was paid on 12/04/2016, and the cause of action crystallized on this date upon the partial payment and denial of the full claimed amount. Therefore, the suit filed in December 2017 was held to be within the limitation period under Article 55 of the Limitation Act, 1963.
Regarding the interpretation of the price escalation clause, the Bench observed a distinction between the “operative period of the contract” (the entire duration of the work) and the “period under consideration” for calculation. The formulas for labour, material, and POL components specifically refer to the “cost of work done during the period under consideration”, which the Bench interpreted to mean the period covered by each respective R.A. Bill.
The Bench noted that the plaintiff’s method of re-computing escalation for the entire 20-year period as a single unit was contrary to the contractual scheme, since the purpose of the clause is to protect parties from market price variations during the contract, not to provide a windfall profit by applying final-day indices to the entire project history.
Briefly, the plaintiff, Gurunanak Industries, was awarded a contract for the construction of the “Nimna Dudhana Project – Earthen Dam” by the defendants on 16/03/1995, with an accepted value of Rs. 2.80 Crores. The work, initially stipulated for completion within 24 months, was extended multiple times, and was ultimately completed on 30/06/2013. The dispute arose over the calculation of the price escalation amount payable under Clause 56 of the tender document.
The plaintiff contended that out of a total payable amount of Rs. 10.02 Crores, the defendants paid only Rs. 4.26 Crores in 2016, leaving a balance of Rs. 5.76 Crores, due to incorrect calculation of escalation. The plaintiff filed a commercial suit for recovery of this amount on 21/12/2017. The defendants contested the suit, arguing that price escalation was correctly calculated and paid with each of the 57 Running Account (R.A.) Bills from 1994 to 2013, which the plaintiff accepted without objection. The defendants also raised a primary objection that the suit was barred by limitation, as it was filed more than three years after the work’s completion on 30/06/2013.
Appearances:
Advocate S. G. Bhalerao, for the Appellants
Advocate A. P. Bhandari and AGP A. R. Kale, for the Respondents
