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Judgment
Sanjay Kishan Kaul, C.J.—The petitioner has filed the present writ petition under Article 226 of the Constitution of India aggrieved by the action of the respondents in seeking to deduct what the respondents claim as liquidated damages from the amount due to the petitioner under different contracts. Learned counsel for the respondents does not dispute before us that what is sought to be recovered is allegedly liquidated damages. It is his say that the petitioner failed to fulfill its obligation under the tender awarded and complete the work and, thus, the respondents were within their rights to recover the amount. It is further stated that there are specific terms of the tender that in case outstandings are due they can be recovered from the amounts which may be lying to the credit of a contractor with the respondents qua other contracts.
In our considered view, the matter is within very limited compass i.e. whether there can be a recovery by the Superintending Engineer merely on the basis that according to him there is default of the petitioner and liquidated damages are due and payable.
The aforesaid issue is really not res-integra in view of various judicial pronouncements. Learned counsel has drawn our attention to a Division Bench judgement of this Court in CWP No. 13285 of 2012 titled SECL Industries Limited v. The State of Haryana and others, decided on 09.10.2012. The said judgement in fact after formulating the aforesaid proposition in turn relied upon the judgements of the Hon''ble Supreme Court in Union of India (UOI) Vs. Raman Iron Foundry, and Murlidhar Chiranjilal Vs. Harishchandra Dwarkadas and Another, . Once again, the Superintending Engineers of the State of Haryana were called upon to make deductions on account of damages/penalty imposed on the termination of the contracts. While examining this issue, the Division Bench observed that the provisions of Section 73 of the Indian Contract Act, 1872 (hereinafter referred to as the Act) would have to be referred to. Thus, there has not only to be a breach of contract, but reasonable steps to mitigate the losses arisen on account of the breach. Section 74 of the Act entitles the parties to claim a reasonable compensation from the offending party which has broken the contract and such a compensation can be determined even at the time of entering into the contract being the pre-estimated damages. They cannot, however, be penal in nature. Thus, what is dispensed with is proof of actual loss or damage. The Supreme Court in Union of India v. Raman Iron Foundry''s case (supra), thus, held that the claim for liquidated or unliquidated damages would, thus, stand on the same footing with the condition that in case of the stipulated amount it has the outer limit of the damages. The right of a party aggrieved by breach of contract is to sue for damages and the claim for damages does not become a debt until adjudication. There has to be, thus, an adjudication by a judicial forum or by arbitration.
In the conspectus of the aforesaid legal position, the right course of action for the respondents in the present case was to go to the Court (there is stated to be no arbitration clause) to recover damages and not to treat the mere quantification of the outer limit of damages as a debt due for which straightway recovery could take place. The legal principle is, thus, quite clear that a claim for liquidated damages does not give rise to the debt until the liability is adjudicated and the damages assessed by a decree or order of a Court or other adjudicatory authority.
The respondents in the present case have sought to recover the amount without following the process of law and even today they insist that the action taken should be upheld. Ex-facie, the action is not sustainable and contrary to the settled legal position.
The impugned memorandum dated 24.09.2012 issued on the basis of the alleged liquidated damages is, thus, quashed with a natural sequitur that the amount so deducted in pursuance thereto would be paid to the petitioner in accordance with law. The petitioner would also be entitled to costs quantified at Rs. 7500/-. The writ petition stands accordingly disposed of.