Holding

Clause 12 permits the State to assess damages only when the breach is admitted or undisputed, and such assessed damages are recoverable as arrears of land revenue, but the State cannot adjudicate the existence of a breach.

Summary

The State of Karnataka entered into agreements with private contractors that contained Clause 12, which stipulated that any damages for breach of conditions would be assessed by the State and could be recovered as arrears of land revenue under the Revenue Recovery Act. After a contractor was found to have short‑delivered rice, the Deputy Commissioner assessed damages and the State initiated recovery proceedings. The contractors challenged the State’s right to both determine whether a breach occurred and to recover the assessed damages as land‑revenue arrears. The Supreme Court held that the clause only allows the State to assess damages when the breach is admitted or undisputed; the State, being a party to the contract, cannot act as an arbiter of the existence of a breach. However, once damages are validly assessed under the contract, they constitute amounts payable under the agreement and may be recovered as arrears of land revenue. Consequently, the appeals filed by the State were dismissed.

Issues considered

Whether Clause 12 confers on the State the power to adjudicate the existence of a breach of contract when disputed.
Whether a party to a contract can act as an arbiter in its own cause for assessing damages.
Whether damages assessed under such a clause can be recovered as arrears of land revenue under the Revenue Recovery Act.
Interpretation of the right to assess damages under Clause 12 – does it arise only when breach is admitted or undisputed?

Legislation cited

Subjects

contract lawbreach of contractassessment of damagesstate as partyrevenue recoveryclause interpretationIndian Contract Actarrears of land revenue

Judgment

STATE OF KARNATAKA ETC.
A
v.
SHRI RAMESHWARA RICE MILLS THIRTHAHALLI ETC.

FEBRUARY 24, 1987

B [O. CHINNAPPA REDDY & S. NATARAJAN, JJ.]

Indian Contract Act, 1872-s. 73 -Agreement-Clause 12-
Interpretation of-Right to assess damages when arises-Damages for
breach of condition of agreement-Assessment to be made by an inde- .i I
pendent body and not by parties to the contract.
c --.tr
Revenue Recovery Act-Damages for breach of conditions of
contract-Whether recoverable as arrears of land revenue.
" )
l
Clause 12 of the agreements separately entered into between the 't-- ,.
respondents and the appellant-State provided that "for any breach of
D co:tditions 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 he deemed to be and may be recovered from the f"irst party as if
E they were arrears ofland revenue.

According to the Sta.te the respondents committed a breach of
their respective contract and, therefore, demanded payment of
damages as assessed by the authorities representing the State. As the
respondents failed to pay the damages, the State initiated recovery
F proceedings under the Revenue Recovery Act. The respondents chal-
lenged the recovery proceedings by f"ding 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 hold-
ing that the State is not competent to adjudicate upon the question
G whether the respondent committed 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 f~
decision, the High Court allowed the writ petitions filed by the other
respondents and quashed the recovery proceedings.
H
398
STATE OF KAR. v. S.R.R.M. 399

In the appeal to this Court on behalf of the State-it was contended
A
that the authorities representing the State, even though a party to the
agreement are empowered nuder Clause 12 to not only assess the dam-
ages occasioned by the breach of the conditions but also to adjudication
any issue concerning the commission of the breach itself.

Dismissing the Appeals, B

HELD: 1. On a plain reading of the words in Clause 12: "and for
any breach of conditions set forth herein-before, the fU"st 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
c
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 D
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 con-
tract cannot be sustained nuder law because a party to the agreement
cannot be an arbiter in his own cause. Interests of justice and equity E
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 con-
sensus between the contracting parties regarding the breach of condi-
tions. In such a case the Officer of the State even though a party to the F
contract will be well within bis rights in assessing the damages occas-
ioned by the breach in view of the specific terms of Clause 12. [403D-F)

3. The Foll Bauch while taking 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 "money doe under the G
contract" has wrongly relied upon the decision of this Court in
Divisional Forest Officer v. Moo/ Chand AIR 1971 SC 694. Here the
Court is concerned with cases where the agreement entered into bet-
ween the Government and the private persons specifically provides for
recovery of damages as arrears of land revenue. The Foll Bench has
failed to notice that even though the damages become payable on ac- H
400 SUPREME COURT REPORTS [1987] 2 S.C.R.

count of breach of conditions of contract, the liability to pay damages
A
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 Ibis 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 dam-
B ages 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, c
under one of the terms of the contract imposing liabilities to pay dam-
ages for breach of conditions. Therefore, the opinion of the Full Bench
i
_.._..,.
in so far as the recovery of damages as arrears of land revenue is
concerned is not in accordance with law. [403H; 404A-F]
c
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 471
of 1975. etc.

From the Judgment and Order dated 25. 9. 72 of the Karnataka
D High Court in Regular Second Appeal No. 311of1969.

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. +·
E
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
F law and ~endce they were heard together and are disposed of by this +.
common JU gment. 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. 311of1969. The opinion of the Full Bench was sought for
in the foll owing circumstances.
G
The respondent in C.A. No. 471 of 1975 entered into an agree-
ment with the State of Mysore to purchase paddy on its behalf under "f
the Paddy Procurement Scheme, 1959 and to hull the paddy and sup-
ply rice. Clause 12 of the agreement relates to breach of conditions of
the agreement and the consequences that would ensue on such breach.
H The said clause, referring to the respondent and the State as first party
STAIB OF KAR. v. S.R.R.M. [NATARAJAN, J.] 401

and second party respectively is worded as under:-
A
"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
hereinbefore, the first party shall be liable to pay damages B
to the second party as may be assessed by the second party,
in addition to the forfeiture in part or whole of the amount
deposited 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." c
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 proceed- D
ings 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 injunc-
tion 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 E
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:-

F
"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 G
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 ques-
tion whether such a person committed breach of con-
tract and that the State is not competent to assess H
402 SUPREME COURT REPORTS [1987] 2 S.C.R.

damages for any breach of the contract which is not
A
admitted by the other side:

(ii) damages so assessed cannot be recovered from such
person as if they were arrears of land revenue".

B In accordance with the opinion of the Full Bench the Second
Appeal preferred by the State was dismissed. The High Court, how-
ever, 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
C into agreements with the State of Mysore for constructing certain
buildings. As the contractors failed to complete the works their con-
tracts were terminated and in terms of the agreements entered into by
them the damages payable by them for breach of contract were asses-
sed and the damages were sought to be recovered as arrears of land
revenue. Both the contractors filed writ petitions under Article 226 of
D the Constitution and challenged the validity of the assessment of the
damages and the recovery proceedings. 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.
E •
Mr. B.R.L. Iyenger, learned counsel for the appellant con-
•
tended that the terms of clause 12 of the agreement are wide and
comprehensive enough to hold that the Deputy Commissioner repre-
senting the State has competence and sanction to decide whether any ~
F
breach of the conditions of the contract had been committed and also
to determine the quantum of damages payable for the oreach. In other
-'
words, the argument was that the Deputy Commissioner, even though
-t •.
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
G 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
H afford scope for a liberal construction being made regarding the power
STATE OFKAR. v. S.R.R.M. [NATARAJAN, J.] 403

of the Deputy Commissioner to adjudicate upon a disputed question of A
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 B
or if no issue is made of it. If it was the intention of the parties that the
t 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 condi-
tions of the contract would flow from or is inhered in the right confer- C
red to assess the damages arising from a breach of conditions. The
~
~
power to assess damages, as pointed out by the Full Bench, is a sub-
sidiary and consequential 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, D
we do not think that adjudication by the Officer regarding the breach
of the contract can be sustained under law because a party to the
agreement cannot be an arbiter in his own cause. Interests or justice
and equity require th&t 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. E
The position will, however, be different 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. F
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 not
disputed. G
The further question requiring consideration is regarding the
power of the State to recover damages as arrears of land revenue
under the Revenue Recovery Act. Th~ 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 H
404 SUPREME COURT REPORTS [1987] 2 S.C.R.

A "money due under the contract" . .The Full Bench has relied upon a
decision of this Court in Divisional Forest Officer v. Moot Chand, AIR
1971 S.C. 694 in support of its view. This decision cannot be an autho-
rity for the view taken by the Full Bench because it has been rendered
with reference to facts which are entirely different. What fell for con-
sideration in that case was whether a tender amount could be re-
B covered 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, how-
ever, concerned with cases where the agreement entered into between
the Govenment and the private persons specifically provides for re-
covery of damages as arrears of land revenue. What the Full Bench has ~·-
C 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
D 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 imposing liability to
pay damages for breach of conditions. To illustrate the position if the
E agreement provides for a liquidated sum being paid as damages for
breach of conditions instead of a sum to be assessed by the Deputy
Commissioner, it cannot be said that the specified damages will not be
money due under the contract and hence the damages cannot be re-
covered under the Revenue Recovery Act. What applies to specified
damages will likewise apply to damages which are quantified after
F 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 con-
,, cerned 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 assessed the damages but have
also acted as arbiters in the dispute regarding the alleged breach of
G contract, the High Court was justified in dismissing the Second Appeal
preferred by the State in R.S.A. No. 311 of 1969 and in allowing 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.
H
A.P.J. Appeals dismissed.