Delhi High Court
Dilip Kumar Bhargava vs Urmila Devi Sharma & Ors. on 31 March, 2011
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA No.129/2011
% 31st March, 2011
DILIP KUMAR BHARGAVA ...... Appellant
Through: Mr. Siddharth Bamba, Adv.
VERSUS
URMILA DEVI SHARMA & ORS. ...... Respondents
Through: Mr. S.K.Jha, Adv.
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. The challenge by means of this regular first appeal under Section 96 of
the Code of Civil Procedure,1908 is to the impugned judgment and decree
dated 7.1.2011 passed by the trial court which has dismissed the suit for
recovery of the advance payment of Rs.10,00,000/- made by the
appellant/plaintiff to the respondent no.1/defendant no.1 given under an
Agreement to Sell dated 12.5.2006 with respect to the suit property bearing
No.F-223, Mangal Bazaar, Laxmi Nagar, Delhi. The appellant/plaintiff also in
the suit had claimed Rs.6 lacs as damages /mesne profits. Respondents no.2
RFA 129/2011. Page 1 of 11
and 3/defendants no.2 and 3 did not appear in the suit and hence were
proceeded ex parte.
2. Learned counsel for the appellant, in appeal, confines his prayer only
to the return of the advance amount paid of Rs.10 lacs. Interest is also
prayed inasmuch as the respondent no.1 has enjoyed the benefit of a sum of
Rs.10 lacs from the year 2006.
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:-
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.
RFA 129/2011. Page 2 of 11
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.
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
RFA 129/2011. Page 3 of 11
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 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"
RFA 129/2011. Page 4 of 11
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
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." (Underlining added)
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.
8. Learned counsel for the respondent no.1/defendant no.1, however
argues that out of the amount of Rs.10 lacs, the sum of Rs.5 lacs was
received as earnest money and the other sum of Rs.5 lacs was received as
advance price, and therefore, he argues that the respondent no.1/defendant
no.1 may not be entitled to forfeit advance price as Rs.5 lacs, but he is
entitled to forfeit a sum of Rs.5 lacs given as earnest money. I do not agree.
The label of payment is not material in law and it is the substance which has
to be seen. An amount of around 10% of the total price payable cannot be
said to be nominal earnest money of which forfeiture can be made. The said
payment is either in reality is a part of advance price or at best a Clause in
the nature of penalty/ in terrorem. The Supreme Court in the case of Fateh
Chand (supra) has allowed forfeiture of a sum of Rs.1,000/- out of a total
amount of Rs.24,000/- in the facts of the said case. The Supreme Court has
observed that only a reasonable compensation can be awarded. In the facts
of the present case, I deem it fit that the respondent, inasmuch as no loss
has been pleaded or proved, can forfeit at best a sum of Rs.50,000/- on
account of the breach by the appellant/plaintiff and consequently and the
respondent no.1/defendant no.1 is bound to refund the sum of Rs.9,50,000/-
received under the Agreement to Sell dated 12.5.2006. I also find that while
on the one hand, the respondent no.1 is unreasonably withholding the
monies of the appellant, on the other hand the value of his property is bound
to have increased. I can take judicial notice of the fact that values of the
property in a city like Delhi are always on the upswing and surely from 2006
till 2011, a period of five years, the value of the property of the respondent
no.1/defendant no.1 would have appreciated considerably. Since the
respondent no.1/defendant no.1 has enjoyed the monies illegally of the
appellant/plaintiff for this period from 2006 to 2011, I deem it fit that the
commercial rate of interest should be awarded in favour of the
appellant/plaintiff and against the respondent no.1/defendant no.1.
Commercial rates of interest vary as per the facts of each transaction,
however, I deem it appropriate to take judicial notice of Section 80 of the
Negotiable Instruments Act, 1881 which allows interest at 18% in case of
dishonor of a Negotiable Instrument for the facts and circumstances of the
present case where the value of property of the respondents would have
increased. In the present case I am also making reference to Section 80 of
the Negotiable Instruments Act, inasmuch as, what is payable is the
admitted amount which is received by the respondents/defendants and
which has been obdurately withheld.
9. In view of the above, the appeal is accepted. The impugned judgment
and decree is set aside. A money decree is passed in favour of the
appellant/plaintiff and against the respondent no.1/defendant no.1 for a sum
of Rs.9,50,000/- with interest at the rate of 18% per annum simple from
1.10.2006 till actual payment. Since this is a commercial litigation, I also
deem it fit to award costs of Rs.25,000/- in favour of the appellant/plaintiff
and against the respondent no.1/defendant no.1 in terms of para 37 of the
Division Bench judgment of three judges of the Supreme Court in the case of
Salem Advocate Bar Association Vs. Union of India (2005)6 SCC 344,
read with Punjab High Court Rules and Orders (as applicable to Delhi)
Chapter VI Part I Rule 15 which vests discretion in this court to award costs
as per the circumstances of each particular case. Decree sheet be prepared.
Trial court record be sent back.
CM No.4325/2011 (Stay)
No orders are required to be passed in this application as the main
appeal itself is disposed of and this application is disposed of accordingly.
MARCH 31, 2011 VALMIKI J. MEHTA, J.
ib
