Shailesh Mudgil vs Smt. Vijay Arora
2011 Latest Caselaw 5351 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                         RFA No.469/2011

%                                                    4th November, 2011

SHAILESH MUDGIL                                      ...... Appellant
                          Through:    Mr. Varun Goswami, Adv.


                          VERSUS


SMT. VIJAY ARORA                                            ...... Respondent

                          Through:        Mr. Nikhil Malhotra, 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?                         Yes

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


VALMIKI J. MEHTA, J (ORAL)

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

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

judgment and decree of the Trial Court dated 4.6.2011. By the impugned

judgment and decree, the suit of the appellant/plaintiff for recovery of an

amount of Rs.4,50,000/- paid under an agreement to sell has been

dismissed.

2. The facts of the case are that the appellant/plaintiff as a buyer

entered into an agreement to sell dated 26.8.2009 with the

defendant/proposed seller with respect to entire built up third floor with

terrace roof rights of the property bearing no.24/75, West Patel Nagar,

New Delhi-8 situated in a plot of 100 square yards. The total sale

consideration was fixed at Rs.42,50,000/-. The appellant/plaintiff paid a

total sum of Rs.4,25,000/- to the respondent/defendant, being a sum of

Rs.2,50,000/-on 26.8.2009, Rs.1,00,000/- on 19.9.2009 and Rs.75,000/- on

2.10.2009. These payments made to the respondent/defendant totalling

to Rs.4,25,000/-is not disputed.

3. Disputes and differences arose between the parties because

the appellant/plaintiff alleged that the suit property was already

mortgaged with Punjab & Sind Bank, Naraina Branch, Delhi and thus

respondent/defendant was guilty of breach of contract. The

respondent/defendant, on the contrary, charged the appellant/plaintiff

with breach of contract and averred that she had entered into an

agreement on the basis of the subject agreement to sell, and which is in

the danger of cancellation on account of default of the appellant/plaintiff.

It was alleged that it was the appellant/plaintiff who was guilty of the

breach of contract.

4. By the impugned judgment, the Trial Court has held the

appellant/plaintiff guilty of breach of contract and consequently dismissed

the suit.

5. Learned counsel for the appellant/plaintiff has argued that

even if the appellant/plaintiff is assumed to be guilty of breach of

contract, yet, the respondent/defendant cannot forfeit the huge amount of

Rs.4,25,000/- received as advances under the agreement to sell. It is

argued that at best a nominal amount can be forfeited out of the total

advance price paid. Reliance for this argument is placed 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

which holds that merely because a buyer under the agreement to sell of

immovable property commits a breach of contract, the seller cannot

forfeit the entire advance price received. The relevant paras of decision in

the case of Fateh Chand (supra), which are relied upon, 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.

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 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)

6. Learned counsel for the respondent, on the other hand,

argued that the total amount received of Rs.4,50,000/- comprises two

parts. It is argued that the amount of Rs.2,50,000/- was earnest money

and the balance amount of Rs.2,00,000/- was the advance price. It is

argued that the amount of earnest money of Rs.2,50,000/- can, in fact, be

forfeited in terms of the decision in Fateh Chand's (supra) case.

7. In my opinion the arguments, as raised by the counsel for the

appellant merit acceptance and the appeal deserves to be allowed. It is

not disputed that the respondent/defendant has neither pleaded, nor got

an issue framed and nor has led evidence as to any loss caused to her on

account of the stated breach of contract by the appellant/plaintiff. Once

that is so, the respondent is only entitled to forfeit a nominal amount out

of total price received. In my opinion, the respondent/defendant can

therefore at best forfeit a sum of Rs.50,000/- out of the total amount of

Rs.4,25,000/- received. The argument that an amount of Rs.2,50,000/- be

treated as earnest money, is an argument which I am not ready to accept

inasmuch as "earnest money" can only be a reasonable amount. A

substantial part of the price which is paid cannot be said to be an earnest

money. The nomenclature of a payment makes no difference and it is

substance of the payment which is to be seen. In the case of Fateh

Chand (supra), the Supreme Court allowed forfeiture of amount of

Rs.1,000/- out of an amount of Rs.25,000/- which was paid. I therefore

feel in the facts and circumstances of the present case, the

respondent/defendant should only be allowed to forfeit an amount of

Rs.50,000/- out of the amount of Rs.4,25,000/- received.

8. Accordingly, the appeal is allowed. The suit of the

appellant/plaintiff will be decreed in a sum of Rs.3,75,000/- along with

interest at 12% per annum simple from 2.10.2009 till the date of payment

and which will include pendent lite and future interest.

9. Parties are left to bear their own costs. Decree sheet be

prepared. Trial Court record be sent back.

NOVEMBER 04, 2011                                 VALMIKI J. MEHTA, J.
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