IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

    CIVIL APPEAL NO(S).6726­6729 OF 2019 (Arising out of SLP(C ) No(s). 1436­1439 of 2019)

M/S. TULSI NARAYAN GARG, SARAWAGI MOHALLA, SHEOPUR THROUGH ITS PROPRIETOR TULSI NARAYAN GARG          …..APPELLANT(S)

VERSUS

THE M.P. ROAD DEVELOPMENT AUTHORITY, BHOPAL & OTHERS …..RESPONDENT(S)

O R D E R

Rastogi, J.

1. The instant appeals are directed against the common

judgment dated 26th February, 2018 and order in review petitions

dated 7th September, 2018 of the High Court of Madhya Pradesh

filed at the instance of the present appellant quantifying the

liquidated damages assessed by the officer of the respondents to

be recoverable pending adjudication before the Arbitral Tribunal

constituted under the Madhya Pradesh Madhyastham Adhikaran

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Adhiniyam, 1983(hereinafter being referred to as “Adhiniyam,

1983”).

2. The facts in brief culled out from the record and relevant for

the purpose are that the appellant is a proprietorship firm

registered as  Class ‘A’ contractor.   In response to the  notice

inviting tender for construction and maintenance of rural road

under the Pradhan Mantri  Gram Sadak Yojna  for package no.

3712 and package no. 3714 consisting of two roads(i.e.

constructed one way relating to Vijaypur to Chota Kheda way (2

km) and second, relating to Sonthava to Advad way (7.750 km)

change 5240 meter in DPR slab culvert and protection wall,

tender  was  awarded to the  appellant and in furtherance, the

work order was issued on 6th  October, 2008 and pursuant

thereto, agreement no. 11 and agreement no. 12 was executed

between the appellant and the first respondent.  As per the work

order, the  date  of completion  was twelve  months, i.e. till  21st

October, 2009.   The first respondent, invoking clause 52 of the

work agreement nos. 11 and 12, terminated the agreement for

slow progress of  work on 7th  October,  2013 and 27th  October,

2014 respectively.  

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3. The first respondent invoking clause 44.1 and 53.1 of the

agreement served a notice to the appellant on 9th October, 2015

for determining the liquidated damages that came to be

challenged by the appellant by filing of a Writ Petition No. 7003 of

2015 before the  High  Court  of  Madhya  Pradesh.   In the first

instance, that  writ  petition came  to  be  disposed of vide  order

dated 6th  September, 2016 with liberty to the appellant to

challenge order of termination before the Arbitral Tribunal under

the provisions of the Adhiniyam, 1983.   In terms of the liberty

afforded, the appellant filed a reference petition against the

termination of agreement and damages claimed by the first

respondent before the Madhya Pradesh Arbitral Tribunal under

Section 7 of the Adhiniyam, 1983 and as informed to this Court

that is still pending adjudication before the Arbitral Tribunal.

4. Pending adjudication before the Arbitral Tribunal, the first

respondent issued notice to the appellant dated 17th March, 2017

for package 3712 and package 3714 to recover alleged damages.

In furtherance thereof, respondent no. 2(General Manager of the

1st  respondent) issued the communication in  which  he asked

respondent no. 3(Collector, Sheopur, M.P.) to take steps in

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respect of agreement no. 11 and agreement no. 12 towards

alleged liquidation damages as arrears of land revenue for the

aforesaid packages that came to be challenged by the appellant

by filing the Writ Petition Nos. 4087 and 4088 of 2017 and it was

specifically stated in Para XIX of the petition indicating that what

has been claimed by the respondents as liquidated damages is

sub judice before the Arbitral Tribunal and action taken by the

respondents pending arbitral proceedings is unwarranted.

5. After hearing the parties, petitions came to be dismissed by

the  High  Court  vide judgment impugned dated  26th  February,

2018 on the premise that General Manager of the 1st respondent

has initiated the proceedings under clause 53.1 of the agreement

and once the  liquidated damages have been quantified by  the

authority, the  action cannot  be faulted  with for initiating the

recovery proceedings distinguishing the judgment of the full

Bench of the Madhya Pradesh High Court on which the reliance

was placed by the appellant in  B.B. Verma and another  Vs.

State of M.P. and another  AIR 2008 MP 202(FB) which is a

subject matter of challenge in the instant appeals.

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6. The main thrust of the submission of  learned counsel for

the appellant is that when the alleged liquidated damages

quantified by the General Manager of the 1st  respondent are

pending adjudication  before the  Arbitral Tribunal, the further

action which has been initiated for making recovery pursuant to

the notice served as an arrears of land revenue is unwarranted

and in support of his submission, reliance has been placed not

only on the full Bench judgment of the High Court of Madhya

Pradesh  but also on the  Order of this  Court passed in  Civil

Appeal No. 5169 of 2016 dated 13th  May, 2016 and taking

assistance thereof, learned counsel submits that the recovery

proceedings initiated by the respondents pursuant to the

damages quantified invoking clause 53.1 of the contract pending

adjudication are unjustified and such action initiated deserves to

be quashed and set aside.   However, what being claimed by the

respondents will always be open to be examined by the Arbitral

Tribunal and obviously the outcome will be binding on the

parties subject to their rights available under the law.

7. Per contra, learned counsel for the respondents, on the

other hand, while supporting the finding of the impugned

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judgment submits that once the adjudication has been made by

the General Manager of the Authority after the show cause notice

being served and liquidated damages having been quantified, no

error was committed by the respondents in initiating the recovery

proceedings and the judgment on which the appellant has placed

reliance of which a reference has been made has no application

in the instant cases and this what the High Court has observed

in the impugned judgment needs no interference.

8. We have considered the submissions made by the parties

and with their assistance perused the material available on

record.

9. It is not disputed that the termination of the agreement no.

11 and agreement no. 12 and consequential liquidated damages

claimed by the respondents have been questioned by the

appellant in reference petitions filed under Section 7 of the

Adhiniyam, 1983 on  5th  October, 2016 and  20th  March 2017

respectively and  both the references  are  pending  adjudication

before the Arbitral Tribunal where the dispute in reference to the

claim  of liquidated  damages of the respondents is yet to the

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adjudicated.  It will be appropriate, at this stage, to take note of

the  clauses of the  agreement relevant  for the present purpose

which are extracted as under:­

“24. Dispute Redressal System  

If any dispute or difference of any kind what­so­ever shall  arises in connection with or arising out of this Contract or the execution of Works or maintenance of the Works thereunder, whether before its commencement or during the progress of Works or after the termination, abandonment or breach of the Contract, it shall, in the first instance, be referred for settlement to the competent authority, described along with their powers in the Contract Data, above the rank of the Engineer. The competent authority shall, within a period of 45 days after being requested in writing by the  Contractor to  do so, convey  his  decision to the Contractor. Such decision in respect of every matter so referred shall, subject to review as hereinafter provided, be final and binding upon the Contractor. In case the Work is already in progress, the Contractor shall proceed with the execution of the Works, including maintenance thereof, pending receipt of the decision of the competent authority as aforesaid, with all due diligence.   

25. Arbitration  

Either party will have the right of appeal against the decision of the competent authority, nominated under Clause 24, to the Madhya Pradesh Arbitration Tribunal constituted under Madhya Pradesh Madhyastham Adhikaran  Adhiniyam  1983 provided the amount of claim is more than Rs. 50,000/­.

44.  Liquidated Damages  

44.1  The Contractor shall pay liquidated damages to the Employer at the rate per week or part thereof stated in the  Contract  Data for the  period that the Completion Data is later than the Intended Completion Date.  Liquidated damages at the same rate  shall  be withheld if the Contractor fails to achieve the milestones prescribed in the Contract Data. However,

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in case the Contractor achieves the next milestone the amount of the liquidated damages already withheld shall be restored to the Contractor by adjustment in the next payment certificate. The total amount of liquidated damages shall not exceed the amount defined in the Contract Data. The Employer may deduct liquidated damages from payments due to the Contractor.  Payment of liquidated damages shall  not affect the Contractor’s other liabilities.

53.  Payment upon Termination  

53.1  If the contract is terminated because of a fundamental breach of contract by the contractor, the Engineer shall issue a certificate for value of the work done and materials ordered less liquidated damages, if any, less advance payments received up to the date of the issue of the certificate and less the percentage to apply to the value of the work not completed as indicated in the Contract Data. If the total amount due to the Employer exceeds any payment due to the Contractor, the difference shall be recovered from the security deposit and performance security, if any amount is still left un­recovered it will be a debt payable to the Employer.”  

10. In terms of the clauses 44.1 read with 53.1 of the

agreement, it emerges that if there are liquidated damages to be

payable upon termination of contract by the contractor, inbuilt

redressal system has been provided under Clause 24 which, in

the instant cases, was invoked through the General Manager of

the 1st  respondent and the party aggrieved thereof can certainly

approach to the Arbitral Tribunal constituted under the

Adhiniyam, 1983 in terms of clause 25 of the agreement.

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11. Indisputedly, in the instant cases, for both the two

agreement nos. 11 and 12, the general manager of the 1st

respondent quantified the liquidated damages as alleged and that

has been the subject matter of challenge raised by the appellant

in the reference petitions filed before the Arbitral Tribunal under

Section 7 of the Adhiniyam, 1983 which is still pending

adjudication and once the remedial mechanism provided under

the Adhiniyam, 1983 has been availed by the appellant which is

pending adjudication, the respondents were not justified in

initiating the recovery proceedings without awaiting the outcome

of the arbitral proceedings.  It is the settled principles of law that

a party to an agreement cannot be an arbiter in his own cause.

12. This exposition of law has been considered by this Court in

State of Karnataka  Vs.  Shree Rameshwara Rice Mills

Thirthahalli  1987(2) SCC 160.  Relevant para 7 is extracted as

under:­

“7. 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 powers  of the  Deputy  Commissioner to  adjudicate upon a disputed question of  breach as well  as  to assess the  damages  arising from  the  breach.  The

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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 is 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 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, 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 of justice  and equity require that where a party to a 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 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.”

(emphasis supplied)

13. Taking  assistance  of the judgment  of this  Court, the  full

Bench of the Madhya Pradesh High Court also in the case

reported in  B.B. Verma and another(supra) observed that the

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Government or its officers were not justified to initiate recovery

proceedings which is disputed by the contractor as payable

under the contract by the State Government pending decision of

the Arbitral Tribunal constituted under the Adhiniyam, 1983.  It

goes without saying that when the contractor disputes the

damages claimed by the Authority or any Officer  in  its behalf,

such an amount cannot be said to be due under the contract and

cannot be recovered as arrear of land revenue until adjudicated

in the pending reference before the Arbitral Tribunal.

14. In  Virendra Sharma Vs.  State of Madhya Pradesh and

Ors. (Civil Appeal No. 5169 of 2016 decided on 13 th May, 2016),

in the similar circumstances, this Court has considered the

terms and conditions of  the contract of  which a reference has

been made where the contract was terminated on the ground that

the contractor could not complete the work within the stipulated

period and the department suffered huge losses.   When the

demand was raised by the department that was challenged by the

contractor invoking arbitration and pending adjudication, the

recovery which was invoked by the respondents was not

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considered to be legally sustainable in law.   The extract of the

order is as under:­

O R D E R

“Leave granted.  

Admitted facts are that the appellant was awarded a contract by the respondents. The contract  was  terminated on the ground that the appellant could not complete the work within the stipulated period. The Superintendent Engineer also arrived at  a conclusion that  because of the alleged breach of contract by the appellant, Department had suffered loss and the amount of such loss be returned. The appellant did not agree with the same and as per the procedure prescribed in the contract, invoked arbitration.  

Admittedly, the matter is before the Arbitrator and no adjudication has taken place. It has yet to determine as to whether the decision of the Superintendent Engineer that the Department has suffered the loss, is correct or not.  

In these circumstances, inasmuch as the amount becomes due and payable only after adjudication, we are of the view that the recovery of the said amount cannot be made invoking the procedure of Land Revenue Act. The recovery orders are, accordingly, set aside. It would, however, be open to the Department to take further steps only after the Award is rendered by the Arbitrator depending upon the outcome thereof.  

The appeal stands disposed of.”

15. We are also of the considered view that once the dispute is

pending adjudication before the Arbitral Tribunal constituted

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under the Adhiniyam, 1983 in terms of clause 25 of the

agreement, the respondent, in the facts and circumstances, was

not justified to raise demand on termination of contract claiming

liquidated damages and the respondent cannot become an arbiter

in its own cause and unless the dispute is settled by a procedure

prescribed under the law, the respondents would not be held to

be justified in initiating recovery proceedings invoking the

procedure under the Land Revenue Act.

16.  The submission of the learned counsel for the respondents

that the liquidated damages were determined by the General

Manager of the 1st  respondent after adjudication in terms of

clause  24  of the agreement and  accordingly, the respondents

were justified in initiating recovery proceedings is without

substance for the reason that clause 24 of the agreement

provides an inbuilt mechanism but the decision of the competent

authority is to be examined invoking clause 25 for arbitration by

the Arbitral Tribunal on a reference if made under Section 7 of

the Adhiniyam, 1983.

17. Indisputedly, in the instant cases, the reference petition is

pending before the Arbitral Tribunal in reference to the liquidated

damages claimed by the respondents.  As  long as  the dispute

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remained pending adjudication, it was not justified on the part of

the respondents to initiate recovery proceedings invoking the

procedure under the Land Revenue Act without awaiting the

outcome of the arbitral proceedings.

18. Consequently, the appeals succeed and are accordingly

allowed.   The judgments of the High Court impugned dated 26th

February, 2018 & 7th September, 2018 are hereby quashed and

set aside.   It is further made clear that what has been observed

by us is only for the purpose of disposal of the instant appeals

and the Arbitral Tribunal may not be influenced/inhibited by the

observations made and decide the pending reference petition

independently in accordance with law.  No costs.

19. Pending application(s), if any, stand disposed of.

…………………………J. (N.V. RAMANA)

…………………………J. (INDIRA BANERJEE)

..……………………….J. (AJAY RASTOGI)

NEW DELHI 30th August, 2019

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