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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

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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]

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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

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             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

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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

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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