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Contract Frustrated Under Section 56 ICA; Termination & PBG Invocation Invalid
The High Court of Calcutta in Rahee-GPT (JV) & Ors. v. Union of India & Ors. (C.S. (COM) No. 56 of 2024), decided on March 10, 2026, held that a contract stands discharged under Section 56 of the Indian Contract Act, 1872 (ICA), where performance becomes impracticable due to materially incorrect foundational assumptions, and that termination and invocation of performance bank guarantees (PBG) in such circumstances are unsustainable.
The dispute arose from a Contract for Construction of a Bridge, awarded by the Railway Authorities, between River IB and Brajraj Nagar stations in connection with 3rd Line between Chapma-Jharsuguda. The plaintiffs, a joint venture, relied on a sub-soil exploration report furnished by the defendants which indicated soft subsoil conditions. During execution, however, hard rock strata were encountered at depth, which was neither disclosed in the report nor contemplated under the Bill of Quantities (BoQ). The plaintiffs contended that the contractual rates and methodology were premised on excavation through ordinary soil and that the absence of a provision for rock strata rendered execution commercially unviable and technically impracticable.
The plaintiffs further contended that despite repeated communications seeking re-investigation, revised methodology and rate adjustments, the defendants failed to address the mismatch between actual site conditions and contractual assumptions. It was argued that performance became impossible within the contractual framework and that the subsequent termination notices issued under Clause 62 of the general conditions of the Contract, along with the invocation of the PBG, were illegal.
The defendants contended that the plaintiffs failed to make adequate progress despite extensions of time and issuance of 7-day and 48-hour notices. It was argued that the contract permitted use of controlled blasting for well sinking and expressly barred claims arising from obstructions or difficulties encountered during execution. The defendants further attributed the delay solely to the plaintiffs and raised counterclaims alleging financial loss due to re-tendering and project delay.
The High Court of Calcutta held that the sub-soil exploration report formed a foundational basis of the contract and that the presence of hard rock strata, which was absent from the report, materially altered the nature, cost, and methodology of performance. It observed that excavation through rock required fundamentally different techniques, including blasting and specialised processes, involving significantly higher cost and time, which were not reflected in the agreed rates or contractual framework.
The High Court of Calcutta further noted that in the subsequent tender for the balance work, the defendants themselves introduced separate items and substantially higher rates for excavation in hard rock, thereby evidencing that the original contract did not contemplate such conditions. It rejected the contention that permission to use blasting mitigated the difficulty, holding that such permission failed to address the absence of corresponding contractual rates.
Applying Section 56 of the ICA, the High Court of Calcutta held that the contract had become impracticable for performance in its original terms due to supervening circumstances not attributable to the plaintiffs. It further held that termination of the contract and invocation of the PBG were unjustified in the facts of the case.
The High Court of Calcutta also rejected the counterclaims raised by the defendants for want of evidence, noting the absence of proof of alleged losses, including increased project cost and revenue impact. Accordingly, the Hon’ble Court declared that the contract stood discharged on account of supervening impossibility, set aside the impugned termination notices and invocation of the PBG, and granted relief in favour of the plaintiffs.
