M/S. Kusal Construction Company vs Municipal Corporation Of Delhi
2011 Latest Caselaw 4229 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                          RFA No.373/2002

%                                                   30th August, 2011

M/S. KUSAL CONSTRUCTION COMPANY                          ......Appellant
                         Through:           Mr. J.P. Sengh, Senior Advocate
                                            with Mr. S.K. Bhaduri, Advocate
                                            and Mr. Sumeet Batra,
                                            Advocate.

                          VERSUS

MUNICIPAL CORPORATION OF DELHI                             ...... Respondent
                        Through:            None.

CORAM:

HON'BLE MR. JUSTICE VALMIKI J.MEHTA

    1.   Whether the Reporters of local papers may be
         allowed to see the judgment?

    2.   To be referred to the Reporter or not?

    3.   Whether the judgment should be reported in the Digest?


VALMIKI J. MEHTA, J (ORAL)

1.            This case is on the „Regular Board‟ of this Court since

4.7.2011. Today the same is effective item No.5 in the „Regular Board‟.

When the case had come up on 25.8.2011, the counsel for the appellant

had very fairly agreed to inform the standing counsel for the respondent.

On behalf of the appellant, a letter dated 25.8.2011 is placed on record



RFA No.373/2002                                               Page 1 of 14
 informing the respondent of the matter being listed in the Court. In spite

of the above, there is no appearance on behalf of the respondent. I have

therefore heard the learned senior counsel for the appellant and after

perusing the record am proceeding to dispose of the appeal on merits.

2.            The challenge by means of this Regular First Appeal under

Section 96 of Code of Civil Procedure, 1908 (CPC), is to the impugned

judgment and decree of the trial Court dated 17.4.2002 whereby the suit

of the appellant/plaintiff for specific performance or in the alternative for

refund   of   earnest   money    was   dismissed.    Neither was     specific

performance granted and nor was the appellant/plaintiff held entitled to

refund of the advance price/earnest money paid. Learned senior counsel

for the appellant at the outset confines his prayer for refund of the

advance price which has been paid to the respondent. He states that he

does not challenge the decree so far as refusal of relief of specific

performance is concerned.

3.            The facts of the case are that the appellant participated in an

auction conducted by the respondent and bid for two plots being plot No.

D-II and plot No. D-III situated in Panchvati Shopping Centre, New Subzi

Mandi, Delhi. The disputes in the present case pertain to plot No.D-III.

Admittedly, the appellant failed to comply with the terms and conditions

of the auction and did not deposit the balance price.        Ultimately, the


RFA No.373/2002                                               Page 2 of 14
 respondent    vide      its    resolution    dated    10.4.1978     permitted   the

appellant/plaintiff to adjust the sum of Rs.1 lakh out of the sum of

Rs.1,87,500/- deposited with respect to plot No.D-III to be adjusted

against plot No.D-II.         With respect to the subject plot D-III by virtue

resolution   of   the    respondent         dated    10.4.1978    (Ex.PW1/15)   the

appellant/plaintiff was granted time upto 26.9.1978 to make the payment

of the balance amount alongwith interest @ 18% per annum, however,

the appellant did not deposit the amount and which resulted in the

respondent declining to grant the plot to the appellant and also forfeited

the earnest money.


4.           Learned senior counsel for the appellant has argued that

though specific performance has been refused, however, even if the

appellant/plaintiff/proposed buyer was guilty of breach of contract, yet,

the respondent could not have forfeited the earnest money inasmuch as

merely by breach of contract, a person is not entitled to forfeit the

advance amount paid, may be termed as earnest money, unless loss is

caused to such person. It is argued that it has not been the case of the

respondent/defendant in the written statement that on account of breach

on the part of the appellant/plaintiff to deposit the balance amount, the

respondent/defendant was caused losses. Learned senior counsel for the



RFA No.373/2002                                                      Page 3 of 14
 appellant relied upon the Constitution Bench decision in the case of

Fateh Chand vs. Balkishan Das AIR 1963 Supreme Court 1405

and also the decision in the case of Maula Bux Vs. UOI, 1969 (2) SCC

554, in support of his proposition. It is argued that in terms of the

aforesaid Constitution Bench judgment in the case of Fateh Chand

(supra) and also the other decision of the Supreme Court in the case of

Maula Bux (supra) once there is a clause of forfeiture, the same

automatically becomes a clause of penalty and is void by virtue of

Section 74 of the Contract Act. It is argued that there are two types of

contracts.   One set of contracts are where loss cannot be estimated e.g.

delay in construction of road where there is going to be toll charges or

construction of an oil exploration rig where it is not known that what

would be the loss which would be caused qua the oil which would have

been extracted. Other set of contracts are like contracts of sale/purchase

of immovable property where the loss can actually be estimated and

proved. Learned senior counsel for the appellant argued that whereas

first type of contract was the subject matter of the decision of the

Supreme Court in the case of O.N.G.C. Vs. Saw Pipes Ltd., 2003 (5)

SCC 705 (where the example of delay in construction of a road and loss

of toll is also considered) the subject contract is a contract which is

squarely covered under the facts of the case in the case of Fateh Chand


RFA No.373/2002                                            Page 4 of 14
 (supra).    It is argued that in the case of Fateh Chand (supra) the

Supreme Court was dealing with only an Agreement to Sell with respect

to an immovable property and in that context had disallowed forfeiture of

the advance price paid and it was held that there can be forfeiture only of

a nominal amount.


5.           In my opinion, the argument as raised by the learned senior

counsel for the appellant is well founded. I have had an occasion to

consider this aspect recently in the case titled as Dilip Kumar

Bhargava Vs. Urmila Devi Sharma & Ors. decided on 31.3.2011 in

RFA No.129/2011. In that case, I have considered these very arguments

as are advanced by the learned senior counsel for the appellant in this

case and have held that there cannot be automatic forfeiture of earnest

money in cases involving Agreement to Sell of immovable property even

assuming that the buyer is guilty of breach of contract.     The relevant

observations are contained in paras 3 to 7 of the said judgment and

which read as under:-

     "3.     Learned counsel for the appellant relies upon the
     Constitution Bench decision of the Supreme Court in the case of
     Fateh Chand Vs Balkishan Dass, (1964) 1 SCR 515; AIR 1963
     SC 1405 and more particularly its paras 8,10,15 and 16 which read
     as under:-




RFA No.373/2002                                             Page 5 of 14
       8. The claim made by the plaintiff to forfeit the amount of Rs
      24,000 may be adjusted in the light of Section 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 sometime
      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 terrorem 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 presumptions 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.

      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


RFA No.373/2002                                              Page 6 of 14
       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.

      15. Section 74 declares the law as to liability upon breach of
      contract where compensation is by agreement of the parties
      pre-determined, or where there is a stipulation by way of
      penalty. But the application of the enactment is not restricted
      to cases where the aggrieved party claims relief as a plaintiff.
      The section does not confer a special benefit upon any party; it
      merely declares the law that notwithstanding any term in the
      contract predetermining damages or providing for forfeiture of
      any property by way of penalty, the court will award to the
      party aggrieved only reasonable compensation not exceeding
      the amount named or penalty stipulated. The jurisdiction of the
      court is not determined by the accidental circumstance of the
      party in default being a plaintiff or a defendant in a suit. Use of
      the expression "to receive from the party who has broken the
      contract" does not predicate that the jurisdiction of the court to
      adjust amounts which have been paid by the party in default
      cannot be exercised in dealing with the claim of the party
      complaining of breach of contract. The court has to adjudge in
      every case reasonable compensation to which the plaintiff is
      entitled from the defendant on breach of the contract. Such
      compensation has to be ascertained having regard to the
      conditions existing on the date of the breach.

      16. There is no evidence that any loss was suffered by the
      plaintiff in consequence of the default by the defendant, save
      as to the loss suffered by him by being kept out of possession
      of the property. There is no evidence that the property had
      depreciated in value since the date of the contract provided;
      nor was there evidence that any other special damage had
      resulted. The contact provided for forfeiture of Rs 25,000
      consisting of Rs, 1039 paid as earnest money and Rs 24,000
      paid as part of the purchase price. The defendant has conceded
      that the plaintiff was entitled to forfeit the amount of Rs 1000


RFA No.373/2002                                                 Page 7 of 14
       which was paid as earnest money. We cannot however agree
      with the High Court that 13 percent of the price may be
      regarded as reasonable compensation in relation to the value
      of the contract as a whole, as that in our opinion is assessed on
      an arbitrary assumption. The plaintiff failed to prove the loss
      suffered by him in consequence of the breach of the contract
      committed by the defendant and we are unable to find any
      principle on which compensation equal to ten percent of the
      agreed price could be awarded to the plaintiff. The plaintiff has
      been allowed Rs 1000 which was the earnest money as part of
      the damages. Besides he had use of the remaining sum of Rs
      24,000, and we can rightly presume that he must have been
      deriving advantage from that amount throughout this period. In
      the absence therefore of any proof of damage arising from the
      breach of the contract, we are of opinion that the amount of Rs
      1000 (earnest money) which has been forfeited, and the
      advantage that the plaintiff must have derived from the
      possession of the remaining sum of Rs 24,000 during all this
      period would be sufficient compensation to him. It may be
      added that the plaintiff has separately claimed mesne profits
      for being kept out possession for which he has got a decree and
      therefore the fact that the plaintiff was out of possession
      cannot be taken, into account in determining damages for this
      purpose. The decree passed by the High Court awarding
      Rs.11,250 as damages to the plaintiff must therefore be set
      aside.                                (Underlining added)

  4. To the same effect are the observations in Maula Bux Vs. UOI,
  1969 (2) SCC 554, and para 4 of which reads as under:-

      "4. Under the terms of the agreements the amounts deposited
      by the plaintiff as security for due performance of the contracts
      were to stand forfeited in case the plaintiff neglected to
      perform his part of the contract. The High Court observed that
      the deposits so made may be regarded as earnest money. But
      that view cannot be accepted. According to Earl Jowitt in "The
      Dictionary of English Law" at p. 689 : "Giving an earnest or
      earnest-money is a mode of signifying assent to a contract of
      sale or the like, by giving to the vendor a nominal sum (e.g. a
      shilling) as a token that the parties are in earnest or have made
      up their minds." As observed by the Judicial Committee in
      Kunwar Chiranjit Singh v. Har Swarup A.I.R.1926 P.C.1




RFA No.373/2002                                               Page 8 of 14
       Earnest money is part of the purchase price when the
      transaction goes forward : it is forfeited when the transaction
      falls through, by reason of the fault or failure of the vendee.

      In the present case the deposit was made not of a sum of
      money by the purchaser to be applied towards part payment of
      the price when the contract was completed and till then as
      evidencing an intention on the part of the purchaser to buy
      property or goods. Here the plaintiff had deposited the amounts
      claimed as security for guaranteeing due performance of the
      contracts. Such deposits cannot be regarded as earnest money.

      5. 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 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.

      ...

There is authority, no doubt coloured by the view which was taken in English cases, that Section 74 of the Contract Act has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach : Natesa Aiyar v. Appavu Padayachi I.L.R. [1913] Mad. 178 Singer Manufacturing Company v. Raja Prosad I.L.R.[1909] Cal. 960 Manian Patter v. The Madras Railway Company I.L.R.[1906] Mad.188 But this view is no longer good law in view of the judgment of this Court in Fat eh Chand's case MANU/SC/0258/1963 : [1964]1SCR515 : [1964]1SCR515 . This Court observed at p. 526 :

"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.... 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."

The Court also observed :

"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 Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases whereupon 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 way 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 Section 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.", and that,

"There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited."

5. In Union of India Vs. Raman Iron Foundry (1974) 2 SCC 231 there are similar conclusions. Para 11 of this judgment reads as under:-

"11. Having discussed the proper interpretation of Clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are

claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates 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 terrorem is a penalty and the Court refuses to enforce it, awarding to 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 naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due From the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages.................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 that determination there is no liability at all upon the defendant." (Underlining added)

6. A contract pertaining to breach of an Agreement to Sell is a contract where loss can be calculated, the loss ordinarily being the lesser value of the immovable property on the date of the contract. Such contracts of Agreements to Sell, being contracts where

damages can be calculated, even if, there is a provision of forfeiture of a huge amount of Rs.5 lacs, the same would be a Clause in terrorem. The Clause being in the nature of a penalty or in terrorem, such forfeiture of a huge amount cannot be allowed unless damages are actually proved, the law being that Section 74 only provides the outer limit of damages which can be awarded. The court always awards reasonable compensation depending upon the outer limit of compensation/damages which are prescribed under the contract, and which are in the nature of liquidated damages under Section 74 of the Contract Act. The present case, and other similar cases of breaches of Agreements to Sell, must be distinguished from those class of cases where loss cannot be proved and which contracts were the subject matter before the Supreme Court in the cases reported as O.N.G.C. Vs. Saw Pipes Ltd., 2003 (5) SCC 705 and Sir Chunilal V. Mehta & Sons Ltd. Vs. Century Spinning and Manufacturing Co. Ltd. AIR 1962 SC 1314 (1).

7. On reading of the aforesaid decisions of the Supreme Court it becomes clear that there cannot be forfeiture of an amount which is paid by a buyer under an Agreement to Sell to the respondents, even if, the buyer is guilty of breach of contract because the seller who has received monies, cannot forfeit the monies unless he has suffered loss in the bargain. A seller ordinarily suffers loss under an Agreement to Sell only if value of the property decreases as per the breach committed by the buyer/plaintiff/appellant and in the present case no loss has been pleaded or proved by the respondents. Even assuming therefore that the appellant/plaintiff is guilty of breach of contract, the respondent no.1, at best, can forfeit only a reasonable amount and not an amount of Rs.10 lacs out of the total sale consideration of Rs.55 lacs. It could not be argued with any conviction by the learned counsel for the respondent no.1/defendant no.1 that there are any pleadings in the trial court that the respondent no.1/defendant no.1 has been caused loss in any manner including by the value of the property having gone down. It is because of lack of any pleadings in this behalf that the respondent no.1/defendant no.1 led no evidence as to any fall in the value of the property by a specific amount of Rs.10 lacs so as to entitle him to forfeit the amount of Rs.10 lacs received as advance price."

6. Since in the present case, there is no pleading of the

respondent of loss having been caused to it on account of breach of

contract by the appellant, and no such issue was therefore raised and got

framed or evidence accordingly led, I agree with the arguments of the

learned senior counsel for the appellant that the aforesaid facts show a

purely legal issue which can be raised for the first time in an appeal

inasmuch as the same arises from admitted facts and circumstances.

Learned senior counsel for the appellant also argued that once time of

performance ceased to be essence by the respondent extending time for

performance, then, the respondent/defendant was bound to make time

performance the essence by specifically stating the same in its resolution

Ex.PW1/15 dated 10.4.1978, and which admittedly has not been done.

7. In view of the aforesaid facts, it is quite clear that even

assuming that the appellant/plaintiff was guilty of breach of contract and

was not entitled to specific performance, however, the

respondent/defendant could not have forfeited the advance price paid

merely on account of breach of contract by the appellant even though no

loss is pleaded and proved to have been caused to the

respondent/defendant. In the judgment in the case of Dilip Kumar

Bhargava (supra) I have also observed that nomenclature of the

payment i.e. whether it is earnest money or advance price paid is not

material because earnest money is really only a fraction of the price and

once the payment is a substantial part of the price, the same becomes an

advance price and does not remain as an earnest money.

8. In view of the above, the appeal is allowed to the extent that

the appellant will be entitled to refund of the amount of Rs.87,500/-

alongwith pendente lite and future interest @ 6% per annum simple till

realization. Since on behalf of the appellant, the relief of specific

performance is not prayed, the appellant will also be entitled to refund of

the amount of Rs.10 lacs deposited in this Court pursuant to the order

dated 30.5.2002 alongwith accrued interest, if any. Since the appellant is

allowed refund of the earnest money, interim orders with respect to

respondent not auctioning the subject plot will stand vacated.

9. The appeal is therefore allowed to the extent of refund of the

earnest money alongwith pendente lite and future interest as stated

above. Decree sheet be prepared. Trial Court record be sent back.

AUGUST 30, 2011                                   VALMIKI J. MEHTA, J.
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