State Of Karnataka Etc vs Shri Rameshwara Rice Mills ... on 24 February, 1987

    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.

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    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

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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

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       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.

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