Roshan Lal vs Shri Manohar Lal
1999 Latest Caselaw 827 Del

ORDER

Vikramjit Sen, J.

1. The Plaintiff has filed this suit for recovery of Rs. 12,20,000/- under Order xxxvII of the Code of Civil Procedure, 1908. In the plaint it has been averred that on 16.12.1996 an Agreement was entered into between the parties for the purchase of WZ 431 Sri Nagar, Shakur Basti, Delhi, for a total consideration of Rs. 30,00,000/-; and thereupon Earnest Money of Rs. 3,00,000/- was handed over by the Plaintiff to the Defendant. The Defendant had covenanted to handover possession of the property on the execution of a Power of Attorney on 16.3.1996 (palpably this is a mistake and should read as 16.3.1997) on the receipt of the balance sale consideration of Rs. 27,00,000/-. This Agreement further witnessed that if the Defendant fails to perform his obligations then he would be liable to pay double the amount of Earnest Money. Thereafter a further sum of Rs.3,00,000/- was paid by the Plaintiff to the Defendant on 27.12.1996 and this payment was acknowledged on the same receipt dated 16.12.1996. These facts are not in dispute.

2. It is averred by the Plaintiff that the Defendant started avoiding the Plaintiff and for this reason the latter wrote a letter dated 13.2.1997 requesting the former to complete the sale transaction. Since this letter failed to evoke any response, a legal notice dated 27.2.1997 was served upon the Defendant. In this notice it was requested that, since 16.3.1997 was a 'close day', the Defendant should reach the office of the Sub Registrar, Pitam Pura, Delhi in the "early hours of 17.3.1997 with all the requisite documents, papers, permission and clearance from the appropriate authority for transfer so that the rest of the formalities should be carried out on 17.3.1997". The Plaintiff appears to have purchased a Cash Order dated 6.3.1997 for the balance payment of Rs. 24,00,000/-, a photocopy of which is stated to have been sent along with another legal notice dated 11.3.1997, which was, however, received back with the endorsement that despite repeated visits by the postman the addressee was not found. The Defendant failed to turn up on 17.3.1997 and hence the sale transaction could not be completed.

3. It is the Plaintiff's case that he was ready and willing to perform his part of the contract and that Defendant had committed a breach thereof. The Plaintiff again sent a legal notice dated 21.3.1997 service of which was refused by the Defendant. This correspondence is available on the record.

4. The plaint sets out the claim in the words "that since the Defendant has failed to perform his part of the obligations in terms of the Agreement to Sell dated 16.3.1996, as such the Defendant was bound to pay double the amount of the earnest money, which was Rs.12,00,000/-. This amount of Rs.12,00,000/- is payable on the written contract." Interest at the rate of 24% per annum computed from 18.3.1997 was added on to comprise the claim in suit for a sum of Rs.12,00,000/-.

5. In Defendant's application under Order xxxvII Rule 5 of the Code of Civil Procedure for grant of leave to defend the suit, being I.A. No. 2813/98, the grounds are that the Plaintiff did not intend performing his obligations in the Agreement since the prices of property had gone down and the only objective sought to be achieved was "extracting the double penalty from the Defendant." It was further submitted in this application that the "suit filed is not maintainable".

6. Relying on the Plaintiff's failure to accept the Defendant's offer to sell the property recorded in Court on 22.10.1997, it has been averred that "the defendant is ready and willing to perform the contract". Shri V.K. Makhija, learned Senior counsel for the Defendant had agitated these grounds in the course of arguments, and had relied on Union of India Vs. Raman Iron Foundry, . He also relied on State of Gujarat Vs. M/s. M.K. Patel & Co. and Another, in which the learned Chief Justice followed the dictum stated in the case of Raman Iron Foundry's case (supra). Predicating his arguments on these precedents learned Senior counsel for the Defendant submitted that even in the face of a clause in the Agreement where damages had been liquidated, in view of Section 74 of the Contract Act, these damages must first be proved and hence leave to defend should necessarily be granted. He further argued that in effect, the suit was of specific performance and that Order xxxvII would not be available in these circumstances.

7. In Raman Iron Foundry's case (supra) the Supreme Court had extracted the following part of the judgment of Chagla, J. in Iron and Hardware (India) Co., Vs. Firm Shamlal and Bros., :

"In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.

As already stated, the only right, which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till determination there is no liability at all upon the defendant."

8. The Supreme Court thereafter distilled this proposition further in the following sentence "a claim for damages for breach of contract is, therefore, not a claim for a sum presently due and payable and the purchaser is not entitled, in exercise of the right conferred upon it under clause 18, to recover the amount of such claim by appropriating other sums due to the contractor". There is no doubt as was stressed by Shri G.L. Rawal, learned counsel for the Plaintiff that the Supreme Court had to construe clause 18 of the Contract between those parties in Raman Iron Foundry's case (supra). This clause is also reproduced for ready reference.

"18. Recovery of Sums due:

Whenever any claim for the payment of a sum of money arises out of or under the contract against the contractor, the purchaser shall be entitled to recover such sum by appropriating in whole or in part the security, if any, deposited by the contractor, and for the purpose aforesaid, shall be entitled to sell and/or, realise securities forming the whole or part of any such security deposit. In the event of the security being insufficient, the balance and if no security has been taken from the contractor, the entire sum recoverable shall be recovered by appropriating any sum then due or which at any time thereafter may become due to the contractor under the contract or any other contract with the purchaser or the government or any person contracting through the Secretary, if such sum even be not sufficient to cover the full amount recoverable, the contractor shall on demand pay to the purchaser the balance remaining due."

9. Whatever be the ambit of the applicability of the decision in Raman Iron Foundry's case (supra) in my opinion the disputes in the present case are covered on all fours by a decision of a Constitution Bench of the Supreme Court in Fateh Chand Vs. Balkishan Dass, . The facts of that case are set out in para 7 of the Judgment and the view taken by the Court is contained in the immediately following paragraphs 8 to 11. They read as under :

7. The Attorney-General appearing on behalf of the defendant has not challenged the plaintiff's right to forfeit Rs.1,000/- which were expressly named and paid as earnest money. He has, however, contended that the covenant which gave to the plaintiff the right to forfeit Rs. 24,000/- out of the amount paid by the defendant was a stipulation in the nature of penalty, and the plaintiff can retain that amount or part thereof only if he establishes that in consequence of the breach by the defendant, he suffered loss, and in the view of the Court the amount or part thereof is reasonable compensation for that loss. We agree with the Attorney-General that the amount of Rs. 24,000/- was not of the nature of earnest money. The agreement expressly provided for payment of Rs.1000/- as earnest money, and that amount was paid by the defendant. The amount of Rs.24,000/- was to be paid when vacant possession of the land and building was delivered , and it was expressly referred to as "out of the sale price". If this amount was also to be regarded as earnest money, there was no reason why the parties would not have so named it in the agreement of sale. We are unable to agree with the High Court that this amount was paid as security for due performance of the contract. No such case appears to have been made out in the plaint and the finding of the High Court on that point is based on no evidence. It cannot be assumed that because there is a stipulation for forfeiture the amount paid must bear the character of a deposit for due performance of the contract.

8. The claim made by the plaintiff to forfeit the amount of Rs. 24,000/- may be adjudged in the light of Sec. 74 of the Indian Contract Act, which in its material part 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 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."

The section is clearly an attempt to eliminate the somewhat elaborate refinements 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 terrors is a penalty 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 presumption under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.

9. The second clause of the contract provides that if for any reason the vender fails to get the sale-deed registered by the date stipulated, the amount of Rs.25,000/-(Rs.1,000 paid as earnest money and Rs. 24,000/- paid out of the price on delivery of possession) shall stand forfeited and the agreement shall be deemed cancelled. The covenant for feature of Rs. 24,000/- is manifestly a stipulation by way of penalty.

10. 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.

11. Before turning to the question about the compensation which may be awarded to the plaintiff, it is necessary to consider whether Sec. 74 applies to the stipulations for forfeiture of amounts deposited or paid under the contract. It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Sec. 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression "the contract contains any other stipulation by of penalty" comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon Courts by Sec. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. We may briefly refer to certain illustrative cases decided by the High Courts in India which have expressed a different view."

10. Applying these decisions to the facts of the present case it would lead to the conclusion that a triable issue definitely arises in respect of the claim for the damages stipulated in the subject Agreement. None of the above cases were Summary suits and even then it was held that it was incumbent on the Plaintiff to prove that the liquidated damages were not in the nature of a penalty.

11. On facts, a perusal of the receipt dated 6.12.1996 discloses that a sum of Rs.3,00,000/- was paid on 16.12.1996 in cash. That was the occasion for the execution of the receipt by the seller and the incorporation therein of the clause "if I refuse to do so then I shall pay double the amount of earnest money and damages". The Earnest Money, therefore, was only Rs. 3,00,000/-. The subsequent payment of another sum of Rs. 3,00,000/- on 27.12.1996 would not render that payment to also constitute the Earnest Money, merely because acknowledgement of this payment is also contained on the receipt dated 16.12.1996. Inasmuch as what is claimed in the plaint is a refund of the sum of Rs. 6,00,000/- together with double that amount as damages, a triable case exists which warrants the grant of unconditional leave to defend the suit.

12. The total sale consideration was Rs. 30,00,000/-. If the construction sought to be given by the Plaintiff to the Agreement is to be accepted it would amount to granting a sum of Rs.12,00,000/- as damages that too in the duration of three months. However, contrary to the thrust of the plaint, it would have to be assumed that during this period the prices of property had fallen drastically as has been pleaded in para 5 of the application, since this averment has not been specifically denied, as it ought to have been. It is very likely that the purchaser had therefore elected to make a claim for damages rather than go through with the subject Agreement for sale.

13. Mr. G.L. Rawal, learned counsel for the Plaintiff has relied on the judgment in Pritam Singh Dhingra Vs. Smt. Ambadipudi Uma Sambamurthy, 1984 DRJ (7) 150 where it was held in the context of the issues which arise in the present case as follows:

"One of the submissions made by Mr. Wadhwani was that the suit under Order 37 of the Code was incompetent.

I am afraid, I do not agree with the submission of the learned counsel for the simple reason that the suit is based on a written agreement where under a part payment was made which contemplates a clause that in case of default by the seller, he would be liable to pay liquidated damages of Rs.10,000/-. No actual further losses are required to be proved by the purchaser. Under the circumstances, the suit was competent under the amended provisions of Order 37 of the Code of Civil Procedure particularly under Rule 1 Sub-rule (2) Clause (b) Sub-clause (1)."

13.1 What the precise challenge to the applicability of Order xxxvII was cannot be ascertained from the repeat of this case. It is also palpably evident that the ratio established by various decisions of the Apex Court were not pressed before the learned Single Judge. The applicability of this precedent must therefore be restricted to the facts of that case, reading into the decision the view that the award of liquidated damages of Rs.10,000/-, which corresponded to the part payment made, was considered not to be in the nature of a penalty. The elasticity of the ratio in this case would be stretched beyond breaking point if it is to be construed to lay down the proposition that wherever the amount of damages is laid down in a contract it would have to perforce be granted. This proposition would run counter to the interpretation given to Section 94 by the Constitution Bench of the Supreme Court in Fateh Chand's case (supra).

14. Reliance was placed by Shri G.L. Rawal, learned counsel for the Plaintiff on an earlier decision of the Constitution Bench of the Supreme Court in Sir Chunilal Vs. Mehta and Sons Ltd., contains the following pronouncement:

"A perusal of cl.14 clearly shows that the parties have themselves provided for the precise amount of damages that would be payable by the Company to the Managing Agents if the Managing Agency agreement was terminated before the expiry of the period for which it was made. The clause clearly states that the Managing Agents shall receive from the Company as compensation or liquidated damages for the loss of appointment a sum equal to the aggregate amount of the monthly salary of not less than Rs.6,000/- for and during the whole of the unexpired portion of the term of agency. Now, when parties name a sum of money to be paid as liquidated damages they must be deemed to exclude the right to claim an unascertained sum of money as damages. The contention of learned counsel is that the words "not less than" appearing before "Rs. 6,000/-" in cl. 14 clearly bring in cl. 10 and, therefore, entitle the appellant to claim 10% of the estimated profits for the unexpired period by way of damages. But if we accept the interpretation, it would mean that the parties intended to confer on the Managing Agents what is in fact a right conferred by Sec. 73 of the Contract Act and the entire clause would be rendered notice. Again the right to claim liquidated damages is enforceable under Sec. 74 of the contract Act and where such a right is found to exist no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they, at the same time, intended to allow the party who has suffered by the breach to give a go-by to the sum specified and claim instead a sum of money which was not ascertained or ascertainable at the date of the breach. Learned counsel contends that upon this view the words "not less than" would be rendered otiose. In our opinion these words, as rightly pointed out by the High Court, were intended only to emphasise the fact that compensation will be computable at an amount not less than Rs. 6,000/- p.m. Apparently, they thought it desirable to emphasis the point that the amount of Rs.6,000/- p.m. was regarded by them as reasonable and intended that it should not be reduced by the court in its discretion."

15. Applying the ratio of these precedents to the facts of the present case, it appears prima facie, that the claim of damages to the tune of Rs.12,00,000/- in an Agreement for purchase of a property valued at Rs.30,00,000/- where the Earnest Money was only Rs. 3,00,000/-, in a climate where prices of real estate was on the decline, would be unreasonable, and therefore in the nature of a penalty, which would be hit by the embargo contained in Section 74 of the Contract Act. Unconditional Leave to Defend must therefore be granted.

16. I had cogitated on the question of whether equity would not compel the grant of leave to defend conditional on the payment/deposit in Court of Rs.3,00,000/- which was admittedly the Earnest Money paid on 16.12.1996. However, in my view there is sufficient substance in the submission of Shri Makhija that even this amount would be liable for forfeiture only if it assumed that the Defendant had committed the breach. As the matter presently stands, this assumption cannot be made from the facts of the case. Hence I have desisted from laying, down this condition.

17. Shri Rawal, learned counsel for the Plaintiff, relied on the cases of Smt. Sarla Devi & Ors. Vs. Daya Ram & Ors., 1996 A I H C 3152 (Delhi), Mrs. Sushila Mehta Vs. Shri Bansi Lal Arora, ILR (1982) 1 Delhi 320 and M/s. Daya Chand Uttam Prakash Jain Vs. Smt. Santosh Devi Sharma, 1997 III AD (Delhi) 556 to justify the maintainability of the suit under Order xxxvII. In the view taken above, these decisions need not be considered.

18. I, therefore, grant unconditional leave to defend the suit. The application is disposed of accordingly, leaving the parties to bear their own costs.