2

A provision in a supply agreement was that the purchaser would have unilateral right to
determine the amount of liquidated damages which would be recoverable and that such
quantification would be final and not challengable by the supplier. The court said that the
provision was clearly in restraint of legal proceedings. It was an attempt to oust the
jurisdiction of the courts and the right of the party to seek judicial adjudication.

The appellant contended that it has the unilateral right to determine the Liquidated
damages under Clause 16.2 and that the quantum of Liquidated Damages decided by
the appellant, even if it is exorbitant, would be final and cannot be challenged. We find
the contention of the respondent that if the said contention of the appellant is
supported, it would mean that a party would be held liable to damages of whatever
amount the other party demands without recourse to a remedy, to be relevant and
should be given due importance. Such a contention by the appellant would be in
violation of Section 28 and Section 74 of the Indian Contract Act.

One party not to be adjudicating authority

In a case before the Supreme Court^" a clause in a contract was to the effect that for any
breach of the conditions of the contract the first party shall be liable to pay damages to the
second party as may be assessed by the second party. This clause was held to bevoid because
it had the effect of making a party also a judge to decide breach and assess damages. The
court said: "The power to assess damages is subsidiary and consequential power and not the
primary power. Even assuming for argument's sake that the clause afforded 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 breach can be sustained under the law because a party to the agreement cannot be
an arbiter in his on cause. Interests of justice and equity require that where a party to a contra
t disputes breach, adjudication should be by an independent person or body and not by the
other party to the contract. The position will be different where there is no dispute or there is
consensus between the parties regarding the breach of conditions. In such a case, the officer
of the State even though a party to the contract will be within his rights in assessing the
damages occasioned by the breach."^^" The cumulative effect of the decisions is that when
breach is not admitted, one of the contracting parties cannot arrogate to itself the power to
claim compensation for the breach from the other party without there being any adjudication
by an outside agency as to whether there was any breach of contract. The State could not be a
judge in its own cause or its own arbiter.

Moreover it would also

defeat the notions laid down under the principles of natural justice wherein it

has been recognized that a party cannot be a judge in his own cause. The

judgment of this Court in State of Karnataka v. Shree Rameshwara Rice Mills

(1987) 2 SCC 160, is significant in this matter. The Court had stated:

...Even assuming 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, adjudication by the officer regarding

the breach of the contract can not be sustained under law because a party to the

agreement cannot be an arbiter in his own cause. Interest 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.

319. State ofKarnataka v Shree Rameshwara Rice Mills, (1987) 2 SCC 160: AIR 1987 SC
1359.
320. Anchor Lines (P) Ltd v Cement Corpn of India Ltd, (2000) 4 Kant LJ 485, a party to the
contract cannot be arbiter in his own cause; adjudication of disputed question of breach of
contract should be by some independent person or body of persons. The party holding bank
guarantee first encashed it and then gavenotice to the other of the alleged breach
of contract
and adjustment of the guarantee amount against self-assessed damages. All this was held to
be wrong.
321. J.G. Engineers (?) Ltd v Union of India, (2011) 5 SCC 758: AIR 2011 SC 2477, breach
of
contract and termination of contract based on exclusion clauses and excepted matters involv
ing the question as to which party committed breach or delay and whether the contract was
validly terminated, could be decided only by the adjudicatory forum, i.e. court or arbitral
tribunal, and not by a party to the contract.

The above stated position can be ascertained through the judgment of this Court
in the
case of State of Karnataka v. Shree Rameshwara Rice Mills (1987) 2 SCC
160.
This Court in the said case, made a clear distinction between adjudicating upon
an issue
relating to a breach of condition of contract and the right to assess damages
arising
from a breach of condition. It was held that the right conferred to assess
damages
arising from a breach of condition does not include a right to adjudicate upon a
dispute
relating to the very breach of conditions and that the power to assess damages is
a
subsidiary and consequential power and not the primary power.