1. These appeals arise out of the common judgment of the First Additional Sub Court, Ernakulam in O. P. Nos. 59 of 1980 and 80 of 1980, which ended with the Award passed by the Chief Engineer being made into decree of Court The Award was passed in O. P. No. 59 of 1980. O. P. No. SO of 1980 filed by the Government to set aside the award has been dismissed.
2. The first appellant Government of Kerala through the second appellant Superintending Engineer, Irrigation Central Circle, Trichur, entered into a contract with the respondent on 19-9-1975 to do the wort of improvements to Champakkara Canal-Dredging works and allied works. The work was agreed to be completed on or before 15-7-1976. The agreement also required the respondent-contractor to maintain progress in work as prescribed in the schedule in Clause 3 of the agreement. There was also a provision in the contract to enable penalty to be levied in case of failure on the part of the contractor to maintain stipulated progress. He did not maintain stipulated progress and extensions of time were granted on contractor's requests as per supplemental agreements. Or account of the delay in maintaining agreed progress in the work, penalties were levied against the contractor at the rates prescribed. After the completion of the work end the drawing of the final bill, disputes arose between the contracting parties and as provided in the agreement, disputes were referred to the Chief Engineer (Arbitration). The claims of the respondent-contractor were under eight different heads. On 13-6-1980 the Arbitrator passed an award to the following effect:
'Claims 1, 2 and 3. No legal injury or damages are caused by the claimants to respondents.
From withheld amount a sum of Rupees 7,35,000/- (Rupees seven lakhs and thirty five thousand only) shall be refunded to claimant by the respondents.'
As authorised by the Arbitrator the award was filed in the Court by respondent's advocate. Respondent filed O. P. No. 59 of 1980 for passing a decree in terms of the award to which the appellants raised objections. Appellants also filed O. P. No. 80 of 1980 to set aside the award and this was opposed to by the respondent. By a common judgment, the teamed subordinate Judge overruld objections of the appellants and made the award into decree of Court directing both parties to suffer their respective costs.
3. The first submission made by the learned Government pleader is that the respondent having received final payment for the work in November, 1977 in full and final settlement of all his claims and under Clause 62 (c) of M. D S. S. which forms part of the contract by virtue of Clause 5 of the agreement dated (9-9-1975, is debarred from making any further claim after receiving payment under the final bill. According to the learned Government Pleader, in this view, the Arbitrator had no jurisdiction to entertain the claim of the respondent or to pass an award. We are unable to agree that the plea involves a question of jurisdiction. At best it may involve a plea of estoppel, estopping the responded from raising the claim after he accept payment under the final bill, assuming that he accepted it without protest. To say that the respondent is estopped from raising claim or contention is one thing; bat to say that Arbitrator had no jurisdiction to entertain the claim or to pass award in that behalf is quite a different thing. The pkae of estoppel shuts the parties from raising the claim; the plea of lack of jurisdiction bars the Arbitrator from entertaining the claim or parsing the award. The plea of estoppel does not involve a plea of want of jurisdiction. We also find that the plea of want of jurisdiction had not been raised in any form before the Arbitrator; it was raised for the first time before the Court below. The appellants cannot, therefore, be permitted to raise such a plea, they having failed to raise it before the Arbitrator. This contention, therefore fails.
4. The more important contention raised by the teamed Government Pleader is that the Arbitrator in awarding a sum of Rupee 7,35,000/- to be refunded to the respondent by the appellants gave the reason for the decision as 'no legal injury or damages are caused by the respondent-claimant to the appellants'. This reasoning assumes that unless legal injury or damage is caused, the appellants are not entitled to levy penalty as contemplated in the agreement and this proposition of law on which the Arbitrator acted, is said to be vitiated by error apparent on the face of the record. That there has been no legal injury or damage sustained by the appellants on account of the breach rendered by the respondent of the contract is a finding recorded by the Arbitrator. The Arbitrator has proceeded on the basis that in the absence of legal injury or damage compensation for breach of contract, cannot be granted and therefore the State Government was not justified in levying penalty from the respondent. The question which arises for consideration is whether even in the absence of legal injury resulting from the breach of the contract, claim for compensation will lie in the light of Section 74 of the Contract Act, 1872 (for short the 'Act').
5. The main part of Section 74 of the Act reads thus :
'74. Compensation for breach of contract where penalty stipulated for.-- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penally, the party complaining of the breach is enlitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be the penalty stipulated for.'
Mark the words 'whether or not actual damage or loss is proved to have been caused thereby'. On the strength of these words, the learned Government Pleader contends tout in a case coming under Sec. 74 of the Act, it is not necessary for the party claiming compensation under this section to prove that actual 'damage or loss' has resulted and therefore even in the absence of legal injury, compensation is payable on breach simpliciter. There is no doubt that the case fails under Section 74 since the contract provides for payment or deduction at a particular specified rate for every breach or default.
6. It is necessary to understand the scheme of Chapter VI of the Act which consists of three sections, viz., Sections 73, 74 and 75. The main part of Section 73 reads thus :
'73. Compensation for loss or damage caused by breach of contract.-- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.-- When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation.-- In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.'
Section 75 provides for compensation for any damage which a person to a contract sustains through the non-fulfilment of the contract, where he rightfully rescinds a contract.
7. Heading of Chapter VI of the Act is 'of the consequences of breach of contract.' All the three sections provide for compensation in case of breach of contract, not for breach simpliciter, but for loss or damage. What Section 73 contemplates is compensa-tion for any 'loss or any damage' caused to the party to the contract thereby, which naturally arise in the usual course of thing from such breach, or which the parties knew, when they made the contract to be likely to result from the breach. Section 74 contemplates the grant of 'reasonable compensation not exceeding the amount so named or as the case may be the penalty stipulated for'. Section 75 also postulates payment of 'compensation for any damage which is sustained'. The consequence of breach of contract contemplated in Chapter VI of the Act is the liability to pay compensation on the part of the person who has broken the contract and the right of the party, who has suffered by such breach, to obtain compensation., 'Compensation' is 'something that constitutes an equivalent or recompense; making things equivalent; satisfying or making amends.' This is how the word 'compensation' has been explained in Biswas's Encyclopaedic Law Dictionary and in Jowitt's Dictionary of English Law, Black's Law Dictionary explains compensation as 'indemnification; payment of damages; making amends;making whole; giving an equivalent or substitute of equal value; that which is necessary to restore an injured party to his former position;' 'compensation' signifies restoration of position or making things equivalent or recompense. Necessarily something must have happened as a result of the breach of the contract which requires an act of recompense or restoration. If the breach has not resulted in any harm, loss or damage to the other party, the question of recompensing him or restoring to him something which he has lost would not arise. That is the reason why Section 73 of the Act states 'compensation for any loss or damage caused to him thereby'. However grievous or serious an act of breach may be, if it does not lead to any loss or damage caused to the other party, Section 73 will not give rise to a right of compensation.
8. The words 'loss' or 'damage' have particular significance. It is not any loss however fanciful it is, or any damage merely imagined, that will give rise to a cause of action for claiming compensation, 'toss' is in the normal sense involves a material loss. Damage means injury or any loss; injury not per se, but with some material consequence. lowitt's Dictionary of English Law explains that 'damage' means 'loss or harm occurring in fact'. James A. Ballentine's Law Dictionary explains the word 'damage' as derived from the Latin word 'damnum' which comes from the verb 'demo', that is to take away and means a species of loss, rignifying the thing taken away -- the lost thing which a party is entitled to have re-stored to him so that he may be made whole again.' The use of the words 'loss' or 'damage' in Section 73 and the word 'damage' used in Section 75 would necessarily indicate that the party who complains of a breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract. That is because every breach of every contract need not necessarily result in 'loss or damage' actually. There may be a breach and yet the contracting party may not really suffer any loss or damage. To illustrate, take the case of a contract of sale of a commodity to be performed within a particular period at the price agreed between the parties. The person who has agreed to supply the commodity fails to do so. At the expiry of the period contemplated, the price of the commodity falls. If the commodity had been supplied on the last day of the period prescribed or before that, the party who had agreed to purchase the commodity would have to resell the same at the price lowes than what he has agreed to pay to the supplier. No doubt, he is faced with breach of the contract, but in the normal course, it cannot be said that he sustains any loss or damage in the sense in which those words have been used in Section 73 of the Act Thus, it could be seen that compensation payable under Section 73 of the Act as also under Section 75 of the Act is only for the 'loss or damage caused by the breach' and not on account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, he cannot claim compensation.
9. Can it be said that Section 74 of the Act spells out a different approach Can it be said that Section 74 operates, so to say, as an exception to the other two sections in Chapter VI and would support claim of compensation even in case of a mere breach which does not result in 'any loss or damage' to the party complaining In order to answer these questions we must understand the rationale behind and the reason why the words 'whether or not actual damage or loss is proved to have been caused thereby' have been inserted in Section 74 of the Act.
9-A. From what we have explained of the connotation of the words 'loss' and 'damage', it has to be seen that these words mean only 'actual or real loss or damage'. The word 'actual' means only 'real'. Sections 73 and 75 of the Act do not use the word 'actual'. But it cannot be said that for the purpose of Sections 73 and 75 of the Act 'loss or damage' necessary to be established for claiming compensation need not be real or actual, but can be unreal or non-actual, i. e. non-existent. The word 'compensation' can be used only in the context of a real or existing loss or damage. The omission of the word 'actual' in Sections 73 and 75 is not designed for any particular purpose; but only because it is unnecessary. Even in the absence of the word 'actual', compensation can be claimed under Sections 73 and 75 only if the breach is proved to have resulted in loss or damage. The legislature could not have intended that under Section 74, compensation could be claimed even if the breach has not been proved to have resulted in loss or damage.
10. In order to decipher the legislative purpose behind the use of the word 'actual' in Section 74 and the phrase 'whether or not actual damage or loss is proved to have been caused thereby', we must examine the historical background of the law relating to compensation for breach of contract. Charters of 18th Century which established Courts of Justice for the three Presidency Towns of Bombay, Calcutta and Madras, introduced in their jurisdiction English Common Law and English Statute law in force at that time so far as they were applicable to Indian circumstances. Later siatutes laid down that disputes of contract must be decided in accordance with the personal law of the parties. Chartered High Courts were established in 1862. Mofussil Courts were required to apply principles of justice, equity and good conscience which in practice resulted in applying the rules of English Common Law to the cases before the Courts. It was in this background that the Indian Contract Act was enacted in 1872. It represents in effect and substance the Code of English Law.
11. 'Damages' is a common law remedy for breach of contract. Common Law has its own rules to deal with cases where in a contract a sum is named as amount to be paid in case of breach. A sum could be so Darned in the contract by way of liquidated damages. The parties could, particularly in cases where determination of the amount of compensation would be a complicated exercise, or where the quantification would normally be uncertain, assess, fairly and reasonably, the quantum of damages which according to the usual course of things would have to be paid. The parties could before hand make an assessment and stipulate the sum so assessed in the terms of the contract. In such a case English Courts regard them as liquidated damages enforceable at law. This tenure of English Common Law was evidently being taken advantage of by the stronger among the parties to the contract to introduce into the contract, harsh, extortionate and unconscionable terms and conditions. The Courts of Equity frowned upon such terms in contract and began to treat such terms and conditions as clauses of penalty and used to grant relief against such penalty. The approach of Equity Courts could be understood from the interesting passage at page 550 in the 3rd Edition of Story on Equity, which is extracted below:
'..... If it be said, that it is his own folly to have made such a stipulation, it may equally well be said, that the folly of one man cannot authorise gross oppression on the other side. And law, as a science, would be unworthy of the name, if it did not to some extent provide the means of preventing the mischiefs of improvidence, rashness, blind confidence, and credulity on one side; and of skill, avarice, cunning and a gross violation of the principles of morals and conscience, on the other. There are many cases in which Courts of equity interfere upon mixed grounds of this sort. There is no more intrinsic sanctity in stipulations by contract, than in other solemn acts of par-ties, which are constantly interfered with by Courts of equity upon the broad ground of public policy, or the pure principles of natural justice. Where a penally or forfeiture is designed merely as a security to enforce the principal obligation, it is as much against conscience to allow any party to pervert it to a different and oppressive purpose, as it would be to allow him to substitute another for the principal obligation. The whole system of equity jurisprudence proceeds upon the ground, that a party having a legal right, shall not be permitted to avail himself of it for the purposes of injustice or fraud, or oppression or harsh and vindictive injury.'
12. When the parties agreed that in case one party shall do a stipulated act or omit to do it, the other party shall receive just reasonable and conventional damages for loss sustained by such act or omission, in such cases, Courts of equity would not interfere to grant relief. But where the provision assumes the character of gross extravagance or of wanton and unreasonable disproportion to the nature or extent of the injury. Courts of equity would regard the provision as in terrorem and refuse to enforce it. However in those cases also reasonable compensation would be awarded. The law has been pithily summarised in Cheshire and Fifuot's Law of Contract at page 556 in the following manner :
'Firstly, it may be a genuine pre-estimata of the loss that will be caused to one parly if the contract is broken by the other. In this case it is called liquidated damages and it constitutes the amount, no more and no less, that the plaintiff is entitled to recover in the event of breach without being required to prove actual damage.
Secondly, it may in the nature of a threal held over the other party in terrorem -- a security to the promisee that the contract will be performed. A sum of this nature is called a penalty, and it has long been subject to equitable jurisdiction. Courts of equity have taken the view that, since the penalty is designed as mere security for the performance of the contract, the promisee is sufficiently compensated by being indemnified for his actual loss, and that he acts unconscionablyif he demands a mm which, though certainlyfixed by agreement, may well be disproportionate to the injury. The rule, therefore it that a plaintiff who brings an action for the enforcement of a penalty can recover compensation only for the damage that he has in fact suffered. He is not entitled to recover the sum stated in the contract if be bus not in fact suffered so much loss.'
This was how the expression 'actual loss' of 'loss suffered in fact' gained currency in English Common law. These expression have been used to distinguish between case of liquidated damages with genuine pre-estimate of the loss made in the contract and cases of penalties. A provision for liquidated damages is specifically enforceable in English Courts, whatever be the extent of the loss suffered actually or in fact. In such a case the Court would not make an assessment of the actual loss or damage, but would enforce the provision. In the case of provision for penalty, however, since it is not enforceable as such, the Court has to determine the loss or damage suffered in fact, in reality or actually and assess compensation on that basis.
13. The Indian Legislature in giving shape to Section 74 of the Act resolved to do away with two significant features of English Common Law. One is the distinction between liquidated damages enforceable in Court of law and penalties against which rcliel would bo given. Both these situations have been brought together in Section 74 of the Act thus doing away with the distinction between the two maintained by the English Common Law. Under Section 74 of the Act. whether it is a case of liquidated damage? or penalty, what the party faced with the breach gets is only reasonable compensation, subject to the limit of the amount stipulated in the contract itself. The second point of departure is that while in English Common Law penalty clause has to be completely ignored and the party claiming compensation has to prove the extent of loss or damage suffered in fact or actually, and obtain compensation on that basis, Section 74 dispenses with such proof of the extent of real or actual or factual loss or damage, but provides for grant of reasonable compensation, subject to the condition that it shall not exceed the sum stipulated as penalty in the contract. The proof of the extent of loss or damage suffered in fact, i.e. proof of extent of actual damage or loss suffered is sought to be dispensed with in Section 74 of the Act. It is only in this light that the expression 'whether or not actual damage or low is proved to have been caused thereby' has been introduced in Section 74 of the Act. This historical background of the provision would explain the purport of Section 74 of the Act.
14. The phrase referred to above finding a place in Section 74 only means that unlike in England, a party faced with breach of contract in India is not compelled to prove the extent of the loss or damage suffered by him in fact or actually. He need not prove in an exact manner the extent of the real loss or damage suffered by him or the loss or damage suffered by him in fact. However, if he proves it, that will certainly help the Court to arrive at the proper compensation. Even if he fails to prove it, court cannot throw out his case on that ground, but must proceed to assess reasonable compensation which is to be awarded to him, on the materials before the Court and subject to the limit of the amount stipulated in the contract. Viewed in the light, it is not possible to accept the contention of the appellant 'hat what Section 74 dispenses with is the basic condition of the breach resulting in any loss or damage which can be called 'legal injury'. The interpretation canvassed by the appellants would go against the legislative purpose in using the word 'compensation' in all the three sections, viz., Sections 73, 74 and 75 of Chapter VI of the Act. One cannot compensate a person, who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 of the Act exempts him from such responsibility and enables him to claim compensation in spite of his failure to prove the actual extent of the loss or damage provided of course he establishes the basic requirement for award of 'compensation', viz.. the fact that he has suffered some loss or damage. The proof of this basic requirement is not dispensed with by Section 74 of the Act.
15. Supreme Court had occasion to consider this matter and to pronounce on this controversy. We refer first to the decision: reported in Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515 : (AIR 1963 SC 1405), Shah, J. speaking for the Court explained the background of Section 74 of the Act thus (at pp. 1410-11 of AIR):
'The section is clearly an attempt to eliminate the somewhat elaborate refinement made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties; a stipulation in a contract in terrorem is a penally and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations miming amount to be paid in case of brench and stipulations by way of penalty.'
The scope of Section 74 has been explained by Shah, J. (as he then was) in the following manner at pages 526 and 527 (of SCR): (at p. 1411 of AIR):
'Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing or covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Sec. 74 reasonable compensation not exceeding the penalty stipulated for. In as-tessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of 'actual loss of damage'; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss of damage which naturally arose in the usual course of things, or which the parties knew when theymade the contract, to be likely to result fromthe breach.'16. In Maula Bux v. Union of India, (AIR1970 SC 1955) again speaking for anotherBench of the Court. Shah, Ag. C. J. (as hetben was) stated thus fat p. 1959): ' . .. .. Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression 'whether or not actual damage or loss is proved to have been caused thereby(tm) is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Coun to assess compensation arising from breach, white in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him,'
17. In Union of India v. Rampur Distillery and Chemical Co. Ltd., (AIR 1973 SC 1098) the Court followed the same principle and finding that the breach caused no loss at all to the party complaining of the breach, held against the claim for compensation. The same principle has been upheld in the decisions reported in Satyauarayaa Araolak-chand Shut v. Vithal Narayan Jamdar, (AIR 1959 Bom 452); in Brahmayya v. Teegala Gangaraju, (AIR 1963 Andh Pra 310); in Lekshmi Starch Factory Limited v. Muhammed Ismail (1968 Ker LT 713); State of U. P. v. Chandra Gupta and Co., (AIR 1977 All 28) and in Union of India v. Raman Iron Foundry, (AIR 1974 SC 1265).
18. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of 'legal injury' having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Sections 73 and 75 of the Act. Sec. 74 is only supplementary to Section 73 of the Act and it does not make any departure from the principle behind Section 77 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of Section 73 of the Act. 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 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 principle.? of English Common Law and also to emphasise 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.
19. The Arbitrator has found in these cases that on account of the breach committed by the respondent-contractor, the State Government has not suffered any legal injury. If that be so, the State Government was not entitled to compensation from the respondent-contractor. In that event, the State Government had no right to levy and collect any sum of money from the respondent-contractor as penalty or as compensation. It is not open to the Civil Court to test the correctness of the finding of the Arbitrator that there is no legal injury sustained by the State Government. Reasons and materials which lead to the finding of the Arbitrator are not disclosed in the award. Therefore, the correctness of the finding cannot be gone into by the Civil Court. There is no error apparent on the face of the record in so far as the finding and the conclusion are concerned. There is also no legal misconduct on the part of the Arbitrator made out. The learned subordinate Judge was, therefore, right in rejecting the contentions urged by the appellants and making the award into decree of Court.
20. In the result, the judgments and decrees of the Court below are confirmed. The appeals are dismissed with costs.