Party in breach of contract dispute can’t decide and recover penalty on its own; must be left to independent authority: SC

The bench, which went into the case laws on the topic, said, “Judicial precedents establish that while the respondents (state in the case), may assess compensation for breach of contract, they lack the competence to unilaterally determine the specific sum payable as compensation or penalty under section 74 of the Indian Contract Act. This limitation arises from the fundamental principle that a party to a contract cannot be the judge in its own cause. The quantification of such compensation or penalty must be undertaken by a court or independent authority…”.

On August 25, 2025, the Rajasthan High Court dismissed the state’s appeal challenging the September 15, 2023, order of the Commercial Court, Kota, following which it approached the SC.

The high court noted that the appeal was filed beyond the statutory limitation period. The HC also noted that the state, while urging it to condone the delay, initially contended that it occurred because the officers were busy with the Lok Sabha elections.

Terming it “ridiculous”, the HC asked the state to file an additional affidavit. The HC added that in the additional affidavit, “the blame seemed to have moved on the advocates”. Dismissing the application for condonation of delay, the HC said, “It is therefore quite evident that either the application with the affidavit in support is false or the new affidavit is false.”

Before the SC, Advocate Kartikeya Asthana said Rajasthan, in its application for condonation of delay, cited three reasons: first, the change in lawyers in light of the change in the state government, second, that concerned officials being deputed owing first to Assembly elections, and thereafter 2024 parliamentary elections, and third, the ensuing code of conduct during the election period.

However, the Rajasthan High Court rejected the second and third reasons, sought an additional affidavit, and erred in holding that the petitioners were taking a completely new ground in the additional affidavit by purportedly shifting the blame to the advocates.

The Rajasthan Public Works Department (PWD) engaged Pareta’s firm for some road construction in the state’s Baran district. However, after some work was not completed, the contract was terminated, and a compensation/penalty of Rs 13,29,242 was imposed on him for the losses suffered. Of this, Rs 6,35,375 was recovered from his bills. Subsequently, the department imposed an additional Rs 52,53668 compensation/penalty on the firm.

The commercial court in Kota noted that the penalties were “indisputably determined and levied unilaterally” and that the state had “acted without competence.” It asked the state to return the Rs 6,35,375 “unlawfully recovered” from the firm with 6 per cent interest from the date of filing of the suit until its realisation.

Subsequently, on September 3, 2025, the executing court issued a warrant for the attachment of the department’s movable properties to recover Rs 10,27,987, comprising Rs 6,35,375 and 6 per cent interest.