PETITIONER:
STATE OF KARNATAKA ETC.
Vs.
RESPONDENT:
SHRI RAMESHWARA RICE MILLS THIRTHAHALLI ETC.
DATE OF JUDGMENT24/02/1987
BENCH:
NATRAJAN, S. (J)
BENCH:
NATRAJAN, S. (J)
REDDY, O. CHINNAPPA (J)
CITATION:
1987 AIR 1359 1987 SCR (2) 398
1987 SCC (2) 160 JT 1987 (1) 578
1987 SCALE (1)448
ACT:
Indian Contract Act, 1872--s. 73 --Agreement--Clause
12Interpretation of--Right to assess damages when
arises--Damages for breach of condition of agreement--As-
sessment to be made by an independent body and not by par-
ties to the contract.
Revenue Recovery Act--Damages for breach of conditions
of contract--Whether recoverable as arrears of land revenue.
HEADNOTE:
Clause 12 of the agreements separately entered into
between the respondents and the appellant-State provided
that "for any breach of conditions the first party (the
respondent) shall be liable to pay damages to the second
party (the State) as may be assessed by the second party in
addition to the forfeiture in part or full of the security
amount deposited by the first party and that any amount that
may become due or payable by the first party to the second
party under any part of the agreement, shall be deemed to be
and may be recovered from the first party as if they were
arrears of land revenue.
According to the State the respondents committed a
breach of their respective contract and, therefore, demanded
payment of damages as assessed by the authorities represent-
ing the State. As the respondents failed to pay the damages,
the State initiated recovery proceedings under the Revenue
Recovery Act. The respondents challenged the recovery pro-
ceedings by filing suit/writ petition.
The Full Bench of the High Court dismissed the Second
Appeal (out of which C .A. No. 471 of 1975 arises) preferred
by the State holding that the State is not competent to
adjudicate upon the question whether the respondent commit-
ted breach of contract, that the State is not competent to
assess the damages for any breach of contract not admitted
by the respondent and that the damages so assessed cannot be
recovered as if they were arrears of land revenue. Following
this decision, the High Court allowed the writ petitions
filed by the other respondents and quashed the recovery
proceedings.
399
In the appeal to this Court on behalf of the State it
was contended that the authorities representing the State,
even though a party to the agreement are empowered under
Clause 12 to not only assess the damages occasioned by the
breach of the conditions but also to adjudication any issue
concerning the commission of the breach itself.
Dismissing the Appeals,
HELD: 1. On a plain reading of the words in Clause 12:
"and for any breach of conditions set forth herein-before,
the first party shall be liable to pay damages to the second
party as may be assessed by the second party", it is clear
that the right of the second party to assess damages would
arise only if the breach of conditions is admitted or if no
issue is made of it. If it was the intention of the parties
that the officer acting on behalf of the State was also
entitled to adjudicate upon a dispute regarding the breach
of conditions the wording of Clause 12 would have been
entirely different. A right to adjudicate upon an issue
relating to a breach of conditions of the contract would not
flow or is not inhered in the right conferred to assess the
damages arising from a breach of conditions. The power to
assess damages is a subsidiary and consequential power and
not the primary power. [403A-C]
2. Adjudication by the Officer regarding the breach of
the contract cannot be sustained under law because a party
to the agreement cannot be an arbiter in his own cause.
Interests of justice and equity require that where a party
to the contract disputes the committing of any breach of
conditions the adjudication should be by an independent
person or body and not by the other party to the contract.
The position will, however, be different where there is no
dispute or there is consensus between the contracting par-
ties regarding the breach of conditions. In such a case the
Officer of the State even though a party to the contract
will be well within his rights in assessing the damages
occasioned by the breach in view of the specific terms of
Clause 12. [403D-F]
3. The Full Banch while taking the view that the State
is not entitled to recover damages as arrears of land reve-
nue because damages for breach of conditions will not amount
to "money due under the contract" has wrongly relied upon
the decision of this Court in Divisional Forest Officer v.
Mool Chand AIR 1971 SC 694. Here the Court is concerned with
cases where the agreement entered into between the Govern-
ment and the private persons specifically provides for
recovery of damages as arrears of land revenue. The Full
Bench has failed to notice that even though the damages
become payable on ac-
400
count of breach of conditions of contract, the liability to
pay damages does not fail outside the terms of the contract
but within the terms of the contract. The words "any amount
that may become due or payable by the first party to the
second party under any part of this agreement" have to be
read in conjunction with the earlier portion of the Clause
stipulating liability on the party contracting with the
State to pay damages for breach of conditions. Therefore, it
follows that though damages become payable on account of
breach of conditions of the agreement they nevertheless
constitute amount payable under the contract, that is, under
one of the terms of the contract imposing liabilities to pay
damages for breach of conditions. Therefore, the opinion of
the Full Bench in so far as the recovery of damages as
arrears of land revenue is concerned is not in accordance
with law. [403H; 404A-F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 471 of
1975. etc.
From the Judgment and Order dated 25.9.72 of the Karna-
taka High Court in Regular Second Appeal No. 311 of 1969.
B.R.L. Iyengar and T.R. Ramasesh for the Appellants.
M.S. Ganesh, R.B. Datar, Mrs. B. Tamta, N. Nettar, S.S.
Jabali and B .P. Singh for the Respondents.
The Judgment of the Court was delivered by
NATARAJAN, J.C.A. No. 471 of 1975 by certificate and
C.A. No. 3602 of 1984 and C.A. No. 461 of 1987 (arising out
of S.L.P. (Civil) No. 13120 of 1985) by Special Leave raise
common questions of law and hence they were heard together
and are disposed of by this common judgment. The judgments
of the High Court in all the three cases have been rendered
in accordance with the opinion rendered by a Full Bench of
the High Court in a reference made in Regular Second Appeal
No. 311 of 1969. The opinion of the Full Bench was sought
for in the following circumstances.
The respondent in C.A. No. 471 of 1975 entered into an
agreement with the State of Mysore to purchase paddy on its
behalf under the Paddy Procurement Scheme, 1959 and to hull
the paddy and supply rice. Clause 12 of the agreement re-
lates to breach of conditions of the agreement and the
consequences that would ensue on such breach. The said
clause, referring to the respondent and the State as first
party
401
and second party respectively is worded as under:-
“In token of the first party’s willingness to
abide by the above conditions, the first party
has hereby deposited as security a sum of Five
Hundred Rupees only with the second party and
for any breach of conditions set forth herein-
before, the first party shall be liable to pay
damages to the second party as may be assessed
by the second party, in addition to the for-
feiture in part or whole of the amount depos-
ited by him. Any amount that may become due or
payable by the first party to the second party
under any part of the agreement, shall be
deemed to be and may be recovered from the
first party as if they were arrears of land
revenue.”
The State alleged that the respondent had committed a
breach of the contract by making short delivery of rice and
demanded payment of damages assessed at Rs.7,344.16ps. by
the Deputy Commissioner. As the respondent failed to pay the
damages the State initiated proceedings under the Revenue
Recovery Act to recover the amount as if it were arrears of
land revenue. The respondent filed a suit to challenge the
recovery proceeding as being illegal and for a permanent
injunction to restrain the State from pursuing the recovery
proceedings. The trial court dismissed the suit but the
Appellate Court decreed the suit. The State preferred a
Second Appeal to the High Court. In the Second Appeal a
reference was made to the Full Bench for its opinion since
there were two conflicting decisions of Division Benches of
the High Court on the questions of law raised in the appeal.
The Full Bench answered the reference in the following
manner:-
“Where an agreement between the State and a
private person provides that for any breach of
any of the conditions of such agreement by
such person he shall be liable to pay such
damages as may be assessed by the State and
that any amount that may become due or payable
by such person to the State under any part of
that agreement, shall be deemed to be and may
be recovered from such person as if they were
arrears of land revenue–
(i) the State is not competent to
adjudicate upon the question whether such a
person committed breach of contract and that
the State is not competent to assess
402
damages for any breach of the contract which
is not admitted by the other side:
(ii) damages so assessed cannot be
recovered from such person as if they were
arrears of land revenue”.
In accordance with the opinion of the Full Bench the
Second Appeal preferred by the State was dismissed. The High
Court, however, granted a certificate of leave to the State
and that is how this appeal by certificate has come to be
filed.
The other two appeals relate to two contractors who had
entered into agreements with the State of Mysore for con-
structing certain buildings. As the contractors failed to
complete the works their contracts were terminated and in
terms of the agreements entered into by them the damages
payable by them for breach of contract were assessed and the
damages were sought to be recovered as arrears of land
revenue. Both the contractors filed writ petitions under
Article 226 of the Constitution and challenged the validity
of the assessment of the damages and the recovery proceed-
ings. Following the ruling of the Full Bench referred to
above the High Court allowed both the writ petitions and
quashed the proceedings for recovery of damages. Against the
judgments of the High Court the State has preferred the
other two appeals.
Mr. B.R.L. Iyenger, learned counsel for the appellant
contended that the terms of clause 12 of the agreement are
wide and comprehensive enough to hold that the Deputy Com-
missioner representing the State has competence and sanction
to decide whether any breach of the conditions of the con-
tract had been committed and also to determine the quantum
of damages payable for the breach. In other words, the
argument was that the Deputy Commissioner, even though a
party to the agreement is empowered under Clause 12 to not
only assess the damages occasioned by the breach of the
conditions but also to adjudicate upon any issue concerning
the commission of the breach itself. The learned counsel,
therefore, submitted that the opinion rendered by the Full
Bench and the judgments rendered in pursuance thereof are
unsustainable and hence the appeals by the State should be
allowed.
On a consideration of the matter we find ourselves
unable to accept the contentions of Mr. Iyenger. The terms
of Clause 12 do not afford scope for a liberal construction
being made regarding the power
403
of the Deputy Commissioner to adjudicate upon a disputed
question of breach as well as to assess the damages arising
from the breach. The crucial words in clause 12 are “and for
any breach of conditions set forth hereinbefore, the first
party shall be liable to pay damages to the second party as
may be assessed by the second party”. On a plain reading of
the words it is clear that the right of the second party to
assess damages would arise only if the breach of conditions
is admitted or if no issue is made of it. If it was the
intention of the parties that the officer acting on behalf
of the State was also entitled to adjudicate upon a dispute
regarding the breach of conditions the wording of Clause 12
would have been entirely different. It cannot also be argued
that a right to adjudicate upon an issue relating to a
breach of conditions of the contract would flow from or is
inhered in the right conferred to assess the damages arising
from a breach of conditions. The power to assess damages, as
pointed out by the Full Bench, is a subsidiary and conse-
quential power and not the primary power. Even assuming for
argument’s sake that the terms of Clause 12 afford scope for
being construed as empowering the officer of the State to
decide upon the question of breach as well as assess the
quantum of damages, we do not think that adjudication by the
Officer regarding the breach of the contract can be sus-
tained under law because a party to the agreement cannot be
an arbiter in his own cause. Interests or justice and equity
require that where a party to a contract disputes the com-
mitting of any breach of conditions the adjudication should
be by an independent person or body and not by the other
party to the contract. The position will, however, be dif-
ferent where there is no dispute or there is consensus
between the contracting parties regarding the breach of
conditions. In such a case the Officer of the State, even
though a party to the contract will be well within his
rights in assessing the damages occasioned by the breach in
view of the specific terms of Clause 12.
We are, therefore, in agreement with the view of the
Full Bench that the powers of the State under an agreement
entered into by it with a private person providing for
assessment of damages for breach of conditions and recovery
of the damages will stand confined only to those cases where
the breach of conditions is admitted or it is disputed.
The further question requiring consideration is regard-
ing the power of the State to recover damages as arrears of
land revenue under the Revenue Recovery Act. The Full Bench
has taken the view that the State is not entitled to recover
damages as arrears of land revenue because damages for
breach of conditions will not amount to
404
“money due under the contract”. The Full Bench has relied
upon a decision of this Court in Divisional Forest Officer
v. Mool Chand, AIR 1971 S.C. 694 in support of its view.
This decision cannot be an authority for the view taken by
the Full Bench because it has been rendered with reference
to facts which are entirely different. What fell for consid-
eration in that case was whether a tender amount could be
recovered from a defaulting forest contractor as arrears of
land revenue when Section 75 of the Forest Regulation and
Rule 10 of the Rules made thereunder did not provide for
such realisation. We are, however, concerned with cases
where the agreement entered into between the Government and
the private persons specifically provides for recovery of
damages as arrears of land revenue. What the Full Bench has
failed to notice is that even though the damages become
payable on account of breach of conditions of the contract,
the liability to pay damages does not fall outside the terms
of the contract but within the terms of the contract. The
words “any amount that may become due or payable by the
first party to the second party under any part of this
agreement” have to be read in conjunction with the earlier
portion of the clause stipulating liability on the party
contracting with the State to pay damages for breach of
conditions. Therefore, it follows that though damages become
payable on account of breach of conditions of the agreement
they nevertheless constitute amounts payable under the
contract i.e. under one of the terms of the contract impos-
ing liability to pay damages for breach of conditions. To
illustrate the position if the agreement provides for a
liquidated sum being paid as damages for breach of condi-
tions instead of a sum to be assessed by the Deputy Commis-
sioner, it cannot be said that the specified damages will
not be money due under the contract and hence the damages
cannot be recovered under the Revenue Recovery Act. What
applies to specified damages will likewise apply to damages
which are quantified after assessment. We, therefore, hold
that the opinion of the Full Bench in so far as the recovery
of damages and arrears of land revenue is concerned is not
in accordance with law.
As it is not disputed that in all the three cases the
Officers acting on behalf of the State have not only as-
sessed the damages but have also acted as arbiters in the
dispute regarding the alleged breach of contract, the High
Court was justified in dismissing the Second Appeal pre-
ferred by the State in R.S.A. No. 311 of 1969 and in allow-
ing the writ petitions filed by the two contractors. All the
appeals, therefore, have to fail and will accordingly stand
dismissed. The parties will pay and bear their respective
costs.
A.P.J. Appeals
dismissed.
1
?405
