Sh. Ram Mehar vs Murari Lal & Others
2011 Latest Caselaw 4577 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                         RFA No.177/1999

%                                                    16th September, 2011

SH. RAM MEHAR                                               ...... Appellant
                                   Through:       Mr.S. K. Vashisht, Advocate.

                          VERSUS

MURARI LAL & OTHERS                                        ...... Respondents
                                   Through:       Mr. Ajay Kumar Aggarwal,
                                                  Advocate.


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

judgment of the trial Court dated 11.1.1999, and by which judgment the

Court below while holding the appellant/defendant guilty of breach of

contract however did not award specific performance of the contract,

but passed a money decree for double the amount of price paid of

Rs.50,000/-, i.e. a sum of Rs.1 lakh with interest @ 18% per annum

pendente lite and future.      Learned counsel for the appellant in the

appeal confines his relief to the aspect that the trial Court has fallen into


RFA No.177/1999                                                  Page 1 of 10
 an error in granting double the amount of advance price paid inasmuch

as before an additional sum of Rs. 50,000/- could be awarded as

damages, it was necessary for the respondents/plaintiffs to plead and

prove that the loss was caused on account of the breach. It is argued

that the trial Court could not have on the basis of a clause in the

Agreement to Sell entitling payment of double the amount passed such

a decree inasmuch as the same would be violative of the Section 74 of

the Contract Act, 1872 as the clauses such as the subject clause are

clauses in terrorem.


2.     Learned counsel for the respondents has however pleaded with

the Court that at least some damages ought to be granted.             This

request made by the learned counsel for the respondents, is a request

which I cannot accept inasmuch as before damages can be granted, the

damages have to be pleaded and proved in accordance with law.

Counsel for the respondents does not dispute that there is no pleading

or proof with respect to any loss having been caused to the

respondents/plaintiffs.   I have had an occasion to consider the issue

with respect to entitlement to damages and validity of a clause entitling

double the payment as being violation of Section 74 of the Contract Act,

1872 in the judgment of Dilip Kumar Bhargava Vs. Urmila Devi

Sharma & Ors. decided on 31.3.2011 in RFA No.129/2011. Paras 3 to 7

of this judgment are relevant and the same read as under:-


       "3.   Learned counsel for the appellant relies upon the
     Constitution Bench decision of the Supreme Court in the case of
RFA No.177/1999                                              Page 2 of 10
   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.

      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
RFA No.177/1999                                                Page 3 of 10
       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

RFA No.177/1999                                                Page 4 of 10
       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

      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 :

RFA No.177/1999                                                 Page 5 of 10
       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." (U

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."

3. Accordingly, since the trial Court has granted double the

amount of earnest money/advance price paid without any pleading and

proof of damages, the appeal deserves to be allowed to a limited

extent that the decree which will be passed in favour of the

respondents/plaintiffs will not be for Rs.1 lakh but will be for

Rs.50,000/-. The trial Court has granted interest @ 18% per annum

pendente lite and future. In the facts and circumstances of the case

and in the interest of justice where the appellant/defendant has taken

benefit of retaining with him the amount of Rs.50,000/-, it is necessary

that interest be granted from the date of payment of the amount of

Rs.50,000/- i.e. 22.1.1989 and therefore I grant interest @ 18% per

annum simple in favour of the respondents/plaintiffs and against the

appellant/defendant from 22.1.1989 till payment.

4. Accordingly, the appeal is allowed by modifying the

impugned judgment and decree whereby a decree of Rs.50,000/- is

passed in favour of the respondents/plaintiffs and against the

appellant/defendant alongwith interest @ 18% per annum simple from

22.1.1989 till payment. In case, the payment under the subject money

decree is not made within a period of three months from today, then,

the interest will become 24% per annum simple from 22.1.1989 till

payment inasmuch as already 21 years have passed and appellant has

still retained this amount with him. Parties are left to bear their own

costs. Decree sheet be prepared. Trial Court record be sent back. The

bank guarantee will be discharged in favour of the appellant/defendant

once the amount in terms of today's judgment is paid to the

respondents/plaintiffs.

SEPTEMBER 16, 2011                            VALMIKI J. MEHTA, J.
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