Delhi High Court
Airports Authority Of India vs Shri R.K. Singhal on 16 November, 2011
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA No.576/2002
% 16th November, 2011
AIRPORTS AUTHORITY OF INDIA ...... Appellant
Through: Mr.Sunil Ahuja, Adv.
VERSUS
SHRI R.K. SINGHAL ...... Respondent
Through: Mr. S.K.Sharma with
Mr. Aashish Gambhir, Advs.
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 the Civil Procedure (CPC), 1908 is to
the impugned judgment of the Trial court dated 30.5.2002. By the
impugned judgment and decree, the Trial Court decreed the suit of
the respondent/plaintiff for recovery of the advance price paid of
Rs.1,35,000/- which was given pursuant to an auction held by the
appellant/defendant on 19.12.1998 for a Konica Nice Print System.
The Trial Court held that the advance price paid cannot be forfeited
even though the respondent/plaintiff was guilty of breach of
RFA No.576/2002 Page 1 of 14
contract because mere breach of contract does not entitle the
aggrieved person viz. appellant/defendant for damages, unless
losses have been pleaded and proved and which admittedly was not
done.
2. The facts of the case are that the respondent/plaintiff
participated in an auction held on 19.12.1998 conducted by the
appellant/defendant. The respondent/plaintiff gave a bid for
Rs.4,00,000/- for a Konica Nice Print System Machine and deposited
an amount of Rs.1,35,000/- on the same day. Since the balance
amount was not deposited by the respondent/plaintiff, the
transaction fell through and the appellant forfeited the amount of
Rs.1,35,000/- on the ground that this payment which was made was
an earnest money deposit, and by its very nature, earnest money
deposited can be forfeited once breach of contract is established.
3. The only issue therefore which is required for
determination by this Court is whether taking as correct that the
respondent/plaintiff was guilty of breach of contract can the amount
paid of Rs.1,35,000/- be forfeited by the appellant/defendant on the
ground that the same was an earnest money deposit without
pleading and proving that any loss was caused to the
appellant/defendant.
4. The law in this regard is well settled and three premier
judgments of the Hon'ble Supreme Court are the judgments in the
RFA No.576/2002 Page 2 of 14
cases of Fateh Chand Vs Balkishan Dass, (1964) 1 SCR 515;
AIR 1963 SC 1405, Maula Bux Vs. UOI, 1969 (2) SCC 554 and
Union of India Vs. Raman Iron Foundry (1974) 2 SCC 231 . It
has been held in these judgments that clauses of forfeiture of
liquidated damages by their very nature are hit by Section 74 of the
Contract Act, 1872 inasmuch as such clauses are in the nature of
penalty and at best only provide for the upper limit for claim of
damages, and which if capable of being proved, have to be proved
before the amount paid as earnest money can be forfeited. It is the
ratio of these Supreme Court judgments that mere breach of
contract eo instanti does not entitle the aggrieved party to forfeit
the amount. The Constitution Bench in the case of Fateh Chand
(supra) has specifically referred to the fact that the fine distinctions
drawn in English law have been obliterated by Section 74 of the
Contract Act, and as per which all clauses of liquidated damages are
to be treated as bad, once losses otherwise can be established, and
only on establishing of which forfeiture can take place. The relevant
observations of the Supreme Court in the aforesaid judgment of
Fateh Chand (supra) are 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
RFA No.576/2002 Page 3 of 14
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
RFA No.576/2002 Page 4 of 14
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
RFA No.576/2002 Page 5 of 14
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)
5. To the same effect are the observations in Maula Bux
Vs. UOI, 1969 (2) SCC 554, and para 4 of which reads as under:-
RFA No.576/2002 Page 6 of 14
"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
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)
6. 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)
7. In view of the ratio of the decisions of the Supreme Court
in the aforesaid judgments, it is trite that if losses can be proved,
then, a clause of liquidated damages is void. I may hasten to add
that there are two types of contracts. One set of contracts are those
contracts where it is not possible to estimate and prove the losses.
One of such contracts was the contract which was the subject matter
of a Constitution Bench decision of the Supreme Court in the case of
Sir Chunilal V. Mehta & Sons Ltd. Vs. Century Spinning and
Manufacturing Co. Ltd. AIR 1962 SC 1314 (1) wherein the
Supreme Court allowed liquidated damages where the contract was
as managing agents with a return of percentage of profits of 21
years and on which managing agency agreement having been
wrongly terminated it would not have been known that how much
would have been earned as share of profits over 21 years once the
contract was found to be illegally terminated. Therefore claim of
liquidated damages was allowed. Other set of contracts are those
contracts which were 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 wherein with respect to contract for construction of an
oil rig, the Supreme Court said that liquidated damages can be
claimed because it cannot be estimated and proved that what would
be the loss on account of the delayed construction of an oil rig
because what would have been the losses were dependent on
factors such as amount of production (including prices of crude oil
at different times) of oil which could not be exactly estimated. In
the case of O.N.G.C. Vs. Saw Pipes Ltd. (supra) the Supreme
Court has also referred to a case of delay in construction of a toll
road and said that in such contracts again there is an entitlement to
liquidated damages because what would have been the loss caused
by number of days of delay in construction of toll roads cannot be
estimated as how many vehicles which would have passed cannot
be exactly arrived at and hence therefore the clause with respect to
liquidated damages is not in the nature of penalty.
8. In the present case, surely losses which were caused to
the appellant/defendant, with respect to the sale of machine in
question could very well have been proved because if the
appellant/defendant was forced to sell the machine for an amount
lesser than Rs.4,00,000/- (the price at which the respondent/plaintiff
agreed to buy the same) then, by difference of receipt of lesser price
such loss could have been pleaded and proved and hence, subject to
the upper limit of the earnest money deposited, such loss could well
have been claimed by the appellant/defendant. Admittedly, the
appellant/defendant in the facts of the present case has neither
pleaded nor proved any loss having been caused to it on account of
breach of contract by the respondent/plaintiff.
9. The Trial Court has therefore rightly held that since such
loss has not been pleaded and proved, the appellant/plaintiff was
bound to refund the earnest money/advance price which was
received by the appellant in the auction conducted on 19.12.1998.
The relevant observations of the Trial Court in this regard are
contained in para 13, and the same reads as under:-
"13. The question that arises next is whether the
defendant could have legally forfeited the earnest
money. Needless to say that the clause providing for
forfeiture of earnest money was a penal clause. A
clause in the nature of penalty could not have been
enforced in its entirety by reason of Section 74 of the
Indian Contract Act. There is nothing to suggest that
the amount of penalty was a genuine pre-estimate of
damages likely to be suffered by the defendant in the
event of breach of contract on the part of bidder.
Section 74 lays down that the party complaining of
breach is entitled, whether or not actual damages or
loss is proved to have been caused thereby, to receive
from the defaulting party a reasonable compensation
not exceeding the amount of penalty stipulated for.
The words "whether or not actual damages or loss is
proved to have been caused thereby" have been
considered in several case and it has been held that
these words merely exempt the complaining party
from proving the actual loss or damage. These words
do not at all covey that compensation is to be
awarded in all cases whether some loss or damage
has been occasioned or not. Thus, a compensation
can be awarded only when the complaining party has
suffered some loss or damage as a result of breach of
contract by the other party. It is another matter that
it is not obligatory to adduce positive evidence of such
damage or loss. If there has been no damage or loss
in consequence of breach of contract, the question of
awarding or claiming compensation does not arise. In
the present case, the defendant has nowhere alleged
in the Written Statement that it suffered any loss as a
result of plaintiff's failure to deposit the balance
auction money. Therefore, the forfeiture of earnest
money cannot be justified."
10. In view of the above, there is no illegality or perversity in
the impugned judgment which calls for interference by this court.
The appeal being devoid of merit is accordingly dismissed, leaving
the parties to bear their own costs.
11. The appellant has deposited the decretal amount in this
Court. The amount deposited in this Court along with accrued
interest, if any, be released to the respondent/plaintiff in full and
final satisfaction of the claim of the respondent/plaintiff under the
subject money decree. Trial Court record be sent back.
VALMIKI J. MEHTA,J
NOVEMBER 16, 2011
ak
