Union of India v. M/S K.S. Pappu & Sons Contractors

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** ## **THE HONOURABLE MR. JUSTICE P.SOMARAJAN** **MONDAY, THE 21ST DAY OF MARCH 2022 / 30TH PHALGUNA, 1943 RFA NO. 603 OF 2004** **AGAINST THE JUDGMENT & DECREE DATED 05/03/2004 IN OS 247/2001 OF** **ADDITIONAL SUB COURT, KOCHI** ## **APPELLANTS/PLAINTIFFS:** 1 UNION OF INDIA REP. BY THE EXECUTIVE ENGINEER, C.P.W.D.,, COCHIN CENTRAL DIVISION, COCHIN-35. 2 THE SUPERINTENDING ENGINEER C.P.W.D., TRIVANDRUM, CENTRAL CIRCLE,, GANAYALLOOR BUILDING, TRIVANDRUM-695 004,, REP. BY EXECUTIVE ENGINEER, C.P.W.D.,, COCHIN CONTROL DIVISION, COCHIN-35. BY ADV SRI.DINESH R.SHENOY ## **RESPONDENT/DEFENDANT:** M/S.K.S.PAPPU & SONS CONTRACTORS, MAIKAD P.O., ANGAMALY, REP. BY MANAGING PARTNER, SHRI K.P. PAUL. BY ADVS. SMT.SANTHA VARGHESE SRI.K.L.VARGHESE THIS REGULAR FIRST APPEAL HAVING COME UP FOR HEARING ON 21.03.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: RFA 603/2004 2 ## **JUDGMENT** The plaintiffs came up in appeal challenging the dismissal of the suit for recovery of money. The plaintiffs claim an amount of Rs.3,06,455/- based on the adjudication made by the Superintending Engineer as per clause (2) of the contract (a standard form contract) entered between the parties. Earlier, some of the disputes including the benefit claimed by the defendant were referred to arbitration, wherein it was found that the benefit under clause (2) of the contract is not arbitrable and as such it was reserved for adjudication by a court. Ext.A7 is the arbitration award. 2. Regarding the bar of res judicata, there is no adjudication by the arbitrator regarding the issue pertaining to entitlement under clause (2) of the contract and as such, there cannot be any application of the doctrine of res judicata as embodied under Section 11 C.P.C.. Hence, the suit is perfectly maintainable. 3. Ext.A1 (referred as Ext.A8 in the impugned RFA 603/2004 3 judgment) is the original agreement entered into between the parties. It is an admitted case that the work was not completed as stipulated in the agreement within the time agreed upon. Ext.A7 award was passed by the Arbitrator. The Arbitrator found that there was a delay of 381 days in the execution of the work in which 216 days was found to be justifiable and the remaining 165 days was found to be not justifiable. It is submitted by the learned counsel for the appellants that the said award has become final and conclusive. The adjudication rendered by the Arbitrator on a disputed question viz, the delay occasioned and the reason behind it, hence, is binding on the parties. It was argued by the learned counsel for the respondent that the contract was rescinded unauthorisedly by the department, the plaintiffs and there is a finding to that effect by the Arbitrator in Ext.A7 arbitration award and amounts were granted under that premise, which has become final and conclusive. Hence, the abovesaid finding is also binding on both the parties. Since there is no valid rescission of contract, there cannot be any claim for damages on that RFA 603/2004 4 account. It was submitted that a liability to compensate on any legal injury would arise only after a valid rescission of contract and relied on paragraph 33 of the decision of the Apex Court in **Kailash Nath Associates v. Delhi Development Authority ((2015) 4 SCC 136)** , which is extracted below for reference: _““33. Section 74 occurs in Chapter 6 of the Contract Act, 1872 which reads 'Of the consequences of breach of contract.' It is in fact sandwiched between Section 73 and 75 which deal with compensation for loss or damage caused by breach of contract and compensation for damage which a party may sustain through non-fulfilment of a contract after such party rightfully rescinds such contract. It is important to note that like Sections 73 and 74, compensation is payable for breach of contract under Section 74 only where damage or loss is caused by such breach.”_ 4. A Division Bench decision of this Court in **State** ## **of Kerala v. United Shippers & Dredgers (1982 KLT 738)** was also relied on, in support of the argument that unless there is a legal injury, there cannot be any application of either Section 73 or 74 of the Contract Act. It is submitted that nothing was brought out regarding any legal RFA 603/2004 5 injury alleged to have been sustained by the abovesaid laches i.e. the unjustifiable delay of 165 days. It was submitted that Section 74 will not make any departure from the principle behind Section 73 regarding legal injury and that section is only supplementary by relying on **Kottile Valappil Abdul Jabbar v. Mullantakath Amza ( 2018 SCC OnLine Ker 3382)** . But, the claim raised by the plaintiffs for damages is not on account of any rescission of contract or any liability to compensate arising out of the rescission, but on account of a clause incorporated in Ext.A1 contract viz, clause No.2 by which the parties had agreed to compensate to the extent of a maximum 10% of the contractual amount on account of delay in performing the part of contract. 5. The ratio applied by the Apex Court in a similar case pertaining to clause (2) in **Vishwanath Sood v. Union of India and Another (AIR 1989 SC 952)** was also brought to the notice of this Court. But, the question that came up before the Apex Court was whether the compensation determined under clause (2) was excluded from the scope of RFA 603/2004 6 arbitration under clause (25) therein and not with respect to the entitlement under that clause. 6. The learned counsel for the respondent on the other hand by relying on the decisions rendered by the Apex Court right from the year 1964 – decision by a Constitution Bench in (i) **Fateh Chand v. Balkishan Dass ((1964) 1 SCR 515 : AIR 1963 SC 1405)** (ii) **State of Karnataka v. Shree Rameshwara Rice Mills ((1987) 2 SCC 160)** (iii) **BSNL v. Motorola India (P) Ltd ((2009) 2 SCC 337)** and (iv) **J.G.Engineers v. Union of India ((2011) 5 SCC 758** ), argued that clause No.2 is against the basic principles of natural justice since one of the parties is permitted to take an adjudication with respect to his own cause against the principles of natural justice. The Apex Court in **Shree Rameshwara Rice Mills** 's case, **BSNL** 's case and **J.G,Engineer** 's case (supra) had gone into the said question pertaining to clause (2) in a standard form agreement and laid down that _“a contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can_ RFA 603/2004 7 _only be decided by an adjudicatory forum i.e. a court or an Arbitral Tribunal._ ” The principle behind it is that “ _a party to an agreement cannot be an arbiter in his own cause”_ . This would make the legal position clear that the decision arrived at by the Superintending Engineer by fixing liability at the maximum i.e. 10% cannot be sustained on the principle that he cannot be the arbiter for their own cause. But that will not take away the validity of clause No.2 except to the extent of permitting the Superintending Engineer to adjudicate the amount payable for the delay occasioned. Hence, the adjudication rendered by the Superintending Engineer fixing the liability at an amount of Rs.3,06,455/- cannot be sustained. 7. Yet another question also came up as to how far the party can enter into a clause enumerating compensation over and above the principle and parameters embodied under Sections 73 and 74 of the Contract Act and whether it would operate as a penalty imposed by the act of parties. It is submitted that what is agreed into by the parties is RFA 603/2004 8 squarely within the purview of Sections 73 and 74 of the Contract Act, wherein the parties have agreed to limit the scope of compensation to the maximum 10% and hence, the same cannot be brought under the classification of penalty. 8. The question whether in the absence of a legal injury, a claim for compensation can be sustained came up before a Division Bench of this Court in **State of Kerala v. United Shippers & Dredgers ( 1982 KLT 738)** , wherein the legal position was summarised as follows: “ _In a particular case where the contract itself stipulates for payment of a sum of money on the breach of contract or contains any other stipulation for penalty, the principle additionally propounded by Section 74 also will have to be applied and that is why irrespective of the amount stipulated in the contract, the party suffering from the breach is entitled only to reasonable compensation which, however, shall not exceed the amount so stipulated in the contract, whether it be a contract which stipulates a sum of money as being payable on breach of contract or whether it contains any other penal clause or whether it is a contract which does not contain any such clause, the party complaining of breach of contract cannot successfully claim compensation unless he makes out loss or damage referable to such breach. The best measure of reasonable compensation would of course be the extent of_ RFA 603/2004 9 _actual loss or damage sustained. If the extent of actual loss or damage sustained is capable of being proved that provides a safe guide for the court to determine the quantum of reasonable compensation. If quantification of loss or damage is not possible, the party who has suffered on account of the breach is not without remedy. He can still request the court to assess reasonable compensation on the materials available and award the same to him. The words in Section 74 “whether or not actual damage or loss is proved to have been caused thereby” have been employed to underscore the departure deliberately made by Indian Legislature from the complicated principles of English Common Law and also to emphasis that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. That is why Section 74 of the Act deliberately states that what is to be awarded is reasonable compensation. In a case where the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for; there is nothing to recompense, satisfy or make amends. Therefore, he will not be entitled to compensation.”_ 9. Clause (2) incorporated under the agreement really pre-supposes legal injury that may be caused on account of delay, if the work was not completed within the time stipulated. Further, it is pertaining to a public work, necessarily, it has to be viewed in the broad spectrum of interest of general public and the facility offered RFA 603/2004 10 thereunder. If it was not completed within the time stipulated, necessarily, it would be a case of legal injury as against the general public, the beneficiaries of the facilities so offered. Necessarily, it may not be possible to show any specific injury caused to any particular person apart from the society at large. As such, by attending all the circumstances and mitigating elements, it is permissible to award 1/10[th] of the amount of the maximum agreed into by the parties under clause (2) of Ext.A1 agreement, which would come to 1% of the total amount i.e. Rs.30,645/- and the suit is liable to be decreed in part to that extent. The decree and judgment of the trial court dismissing the suit is hereby set aside and a decree is granted for realization of Rs.30,645/- (Rupees Thirty Thousand Six Hundred Forty Five) to the plaintiffs from the defendant. No costs. The appeal is allowed in part accordingly. **Sd/-** **P.SOMARAJAN** sv **JUDGE**