1. In Civil Suit No. 2/ 1961 the plaintiff claimed a decree for Rs. 28,907.44 P. The learned District Judge, Kota passed a decree for Rupees 17,340.26 P. and dismissed the rest of the suit. It is against this decree that the defendant State has filed this appeal for the dismissal of the entire suit and the plaintiff-respondent has cross-objected and has claimed an additional decree for a sum of Rs. 6,835.29 P.
2. For the construction of Kansuan Aqueduct situated in Tehsil Ladpura. District Kota, the tender dated 29-9-1954 of the plaintiff was accepted by the Executive Engineer by his letter dated 29-1-1955, An agreement No. 26 of 1954-55 to that effect was executed between the parties- In terms of the agreement, the work was to be completed by the plaintiff contractor upto 9-1-1956. According to the plaintiff, there were heavy monsoons in Rajasthan in the year 1955 and on account of that earth filled on 31/2 bays and behind the abutment and guide wall was washed off sometime in the month of August. 1955 and had caused damage and delayed the completion of the work. However, the plaintiff continued the work. He also applied for the extension of time. The extension was not formally granted, but he was allowed to continue the work. The plaintiff also pleaded that the officers of the defendant State failed to do the dewatering of the foundation in time and they could not take a decision for long as to whether the bed of the canal was to be cement plastered or to be constructed by cement concrete. However, the work was completed on 8th March. 1957. The plaintiff was paid all the running bills less the security deposit in terms of Clause 1 of the agreement. By wav of security deposit a sum, of Rs. 37,503/- remained deposited with the Department. The final bill was also prepared for a sum of Rs. 4164/- less 10%, security deposit, but it was not paid. The plaintiff thus claimed a refund of Rs. 37,503/- and the amount of Rs. 3,748/-of the final bill, in all Rs. 41,251/-. The Public Works Department (Irrigation) though accepted the amount, but claimed to deduct a penalty of Rs. 15,000/-alleged to have been imposed by the Chambal Control Board in its 34th Meeting held at New Delhi on 9-8-1958. The Department further claimed a deduction of Rs. 10.198.44 P. After having made this deduction, the defendant paid to the plaintiff in September. 1959 a sum of Rs. 16,052.56 P. The plaintiff represented the matter to the Department, but having failed, he instituted the suit for the recovery of Rs. 25.198.44 P. after having served the statutory notice under Sec. 80 of the Code of Civil Procedure. In addition to the above sum, he has also claimed Rs. 3,709/- by way of interest at the rate of 6% per annum from 8-7-1958-Thus his claim in the present suit is for Rs. 28,907.44.
3. The defendant State did not dispute the facts stated above, but it pleaded that the plaintiff contractor was liable to pay compensation to the full extent of the security deposit amount in terms of the agreement, but the Chief Engineer (Irrigation) took a lenient view in the matter and recommended that a sum of Rupees 10,000/- be imposed as a penalty, but the Chambal Control Board determined the amount of penalty as Rs. 15,000/- and thus the Government was justified to deduct a sum of Rs. 15,000/- from the amount due to the plaintiff. It was also contended by the defendant State that a sum of Rs. 4,722/5/-was recovered from the contractor for the various materials issued to him and for the service rendered by the Department. As regards the sum of Rs. 5,475-11 annas it was stated that it was withheld on account of various objections pointed out by the Audit. It, however agreed to pay the said amount- The State also disputed the right of the plaintiff to claim interest.
4. The learned trial Judge framed four issues and recorded the evidence of the parties. After having considered the evidence on record, the learned District Judge held under issue No. 1 that the penalty of Rs. 15,000/- was unreasonable in view of the statement of the Chief Engineer (Irrigation) Rajasthan D. W. 1 Shri Motiram. He held that 1% of the estimated cost of the suit work which comes to Rs. 3,750/- will be a reasonable compensation for non-completion of the contract work within time by the plaintiff. Under issue No, 2 he held that the recovery of Rs. 4,722.31 P was proper and the plaintiff was liable to pay the said amount. The learned trial Judge further held under Issue No. 3 that the plaintiff was entitled to get interest at the rate of 6% per annum from 22-5-1960 to the date of filing of the suit. He thus decreed the plaintiff's suit for Rs. 17,340,46 P and allowed pendente lite and further interest at the rate of 6%.
5. We have heard learned Deputy Government Advocate and the learned counsel for the respondent. On behalf of the State it has been contended that the learned trial Judge was in error to hold that the penalty of Rs. 15,000/- imposed was unreasonable. He had no power to fix the amount of penalty at Rs. 3,750. On the other hand learned counsel for the plaintiff-respondent submitted that the defendant State was not entitled to any amount of compensation under the agreement. His contention in short is that when the plaintiff failed to complete the work within the stipulated period, no action was taken by the Chief Engineer (Irrigation) in terms of clause 2 of the agreement. He allowed the plaintiff to continue the work and accepted the performance of the contract work in March. 1957. Even the final bill was prepared in January, 1958 and it was only after that that the Chief Engineer thought of imposing a penalty and which too had not been levied by him. He only recommended the penalty to be imposed and it was the Chambal Control Board which fixed the amount of penalty at Rs. 15,000-According to the learned counsel, the Chambal Control Board had no authority to determine the penalty. It was also contended that the Department had not suffered any loss and in this view the defendant State was not entitled to claim any compensation in accordance with the provisions of Section 74 of the Contract Act.
6. The appellant State has not pressed any other contention in its appeal except as stated above. Similarly, learned counsel for the plaintiff-respondent does not contest the finding on issue No. 2. Thus the controversy for determination between the parties is as to whether compensation could be recovered by the Public Works Department (Irrigation) from the plaintiff contractor for the belated completion of the work.
7. Section 74 of the Contract Act provides '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 penalty the party complaining of the breach is entitled, whether or not actual damages 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, penalty stipulated for.' According to this provision, in the event of the breach of a contract whether actual damage or loss is proved to have been caused, the party complaining may still claim reasonable compensation not exceeding the amount named in the contract. The provision, therefore, contemplates that there must be a damage or loss in fact. It is only in the event of want of proof that a reasonable compensation can still be determined by the Court and be paid to the party complaining. In Bhai Panna Singh v. Bhai Ariun Singh, AIR 1929 PC 179, the Board observed while interpreting Section 74 of the Contract Act 'the effect of Section 74 is to disentitle the plaintiffs to recover simpliciter the sum fixed in the contract whether penalty or liquidated damages. The plaintiffs must prove the damages they have suffered.' The pro-vision of this section came for interpretation in S.A. Bhut v. V. N. Jamdar, AIR 1959 Bom 452, Mudholkar J. (as he then was) observed 'No doubt Section 74 says that where a' sum is stated in the contract as payable to a party if a breach thereof caused by the other party the Court has power to grant compensation to the firm even though actual loss or damage is not proved. But that does not mean that compensation can be awarded even though no loss whatsoever has been caused. For the very concept of award of compensation is bound up with loss or damage that results from a breach of contract. AH that Section 74 permits is award of compensation even where the extent of the actual loss or damage is not proved and gives discretion to the Court to fix the amount. Where, as here, no loss or damage has ensued there can be no question of awarding compensation.........'
8. In Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405, their Lordships of the Supreme Court held:
'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 a 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 Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing 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 or 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 or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract to be likely to result from the breach.
9. The same principle has been reiterated in another Supreme Court case, Maula Bux v. Union of India, AIR 1970 SC 1955. According to these authorities, it is amply clear that if on account of breach of contract, the complaining party has not suffered any loss, he is not entitled to any compensation whatsoever even if the sum is named in the contract and is to be paid in the event of breach. As already noticed, what the section provides is that if the loss has in fact occurred but the complaining party has not been able to prove it, in that event, the Court has got a discretion to determine reasonable compensation and award the same to the complaining party. In the present case, the Chief Engineer (Irrigation) has come in the witness-box. He has very clearly, and categorically stated that on account of the delay on the part of the contractor in completing the work, there occasioned, in fact, no loss to the Government. He has also admitted that the rates had gone high and the contractor continued to work and he did, in fact, complete the work. This Is not disputed that the work entrusted to the plaintiff contractor was a very little part of the Chambal Project. Even if he had completed the work, it was possible (sic) for the State Government to work the canal Shri Motiram D. W. 1 was right when he stated that the State Government did not suffer any loss on account of the belated completion of the work by the plaintiff. In view of this statement of, the Chief Engineer (Irrigation) himself. it is difficult for us to hold that the Department sustained any loss on account of the breach of the contract in not having completed the work within the stipulated time. Section 74 of the Contract Act is fully applicable and the defendant State was not at all entitled to recover any amount by way of compensation from the plaintiff.
10. There is also another aspect of the case. According to the terms of the agreement, the plaintiff was to complete the work on 9-1 1956 and the time was of the essence of the contract. It is also admitted that the work was not completed by that date. Even if we ignore, the accusations made by the plaintiff against the officers of the defendant State in not making it possible for the plaintiff to complete the work by 9-1-1956, we have to notice that the plaintiff was allowed to continue to work beyond that date and no action was taken against him and the performance of the part of his contract was accepted. It is true that the Department did not extend the time formally, but it 'allowed him to work and complete the same in March or April, 1957. The Chief Engineer did not impose any penalty in terms of clause 2 of the agreement nor was the contract rescinded or the incomplete work got done by any other contractor. Even the final bill was prepared in January. 1958 after the work had been completed in March or April. 1957. The penalty was imposed by the Chambal Control Board on 9-8-1958. According to the terms of the contract, the Chambal Control Board had no authority to fix any penalty in terms of the contract. It was the Chief Engineer (Irrigation) who alone was authorised to determine the compensation for a breach of the contract and, as a matter of fact, it should have been done soon after 9-l-1956 when the plaintiff was not able to complete it. Clause 2 of the agreement provides that the compensation shall be deducted from time to time as the delay would occur in the progress of the work. The Chief Engineer was the person to determine the compensation from time to time, in writing. Obviously [he did not do. In the circumstances of the case, it would amount to a waiver of his right to fix the compensation and to recover the same from the plaintiff. Thus the penalty in question imposed was not by the Chief Engineer himself and secondly, no compensation was fixed in accordance with Clause 2 of the agreement. In this view of the matter, we are of opinion that no penalty could have been recovered by way of compensation from the plaintiff for the alleged breach of contract.
11. The learned trial Judge was Sn error when he fixed Rs. 3750/- as a reasonable compensation for the non-completion of the contract work within time, by the plaintiff. In our opinion, the plaintiff was not at all liable to pay the compensation in the circumstances of the case.
12. As a result of the foregoing discussion the defendant's appeal fails and it is hereby dismissed. The plaintiff's cross-objection is partly allowed and we award a decree for Rs. 20,475.13 P plus interest from 22-5-1960 to the date of suit at the rate of 6% per annum. Thus the decree will be for Rs. 20,475.13 P plus Rs. 749.87 P as interest total Rs. 21,225/-. The plaintiff shall also get pendente lite and future interest on the amount of Rs. 20,475.13 P at the rate of 6% per annum till realisation. The plaintiff will get proportionate costs of both the Courts.