M/S. Rama Associates (P) Ltd. vs Delhi Development Authority & ...
2012 Latest Caselaw 4184 Del

*                  IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                 CS(OS) Nos.993/1983 and 1633/1983

%                                                            16th July, 2012

1.

CS(OS) Nos.993/1983

M/S. PRAGATI CONSTRUCTION COMPANY (P) LTD. ...... Plaintiff Through: Mr. Amit P. Deshpande, Advocate.

                                  VERSUS

DELHI DEVELOPMENT AUTHORITY               ...... Defendant
                Through: Ms. Maldeep Sidhu, Advocate.

1.       CS(OS) Nos.1633/1983

M/S. RAMA ASSOCIATES (P) LTD.                  ...... Plaintiff
                  Through:    Mr. Ramesh Vats, Advocate with Mr.
                             Ashok Gurnani, Advocate.


                                  VERSUS

DELHI DEVELOPMENT AUTHORITY & ANR.        ...... Defendants
                Through: Ms. Maldeep Sidhu, Advocate.



CORAM:
HON'BLE MR. JUSTICE VALMIKI J.MEHTA

    To be referred to the Reporter or not?     Yes





 VALMIKI J. MEHTA, J (ORAL)

1. These suits are being disposed of by this common judgment inasmuch

as facts and issues in both the cases are almost identical. The basic issue revolves

around the entitlement of the defendant/Delhi Development Authority (DDA) to

forfeit the amount of 25% price deposited by the plaintiff pursuant to an auction.

Forfeiture has been affected by DDA on account of the plaintiff having committed

default in having failed to deposit the balance amount. For the sake of

convenience, facts of CS(OS) No.993/1983 are stated. At the end of judgment, the

directions/decree which will be specifically required with respect to CS(OS)

No.1633/1983 shall be passed.

CS(OS) No.993/1983

2. The facts of the case are that the defendant was seeking to auction

commercial plots. Auction notice was inserted in the newspaper for such plots

situated at Asaf Ali Road, New Delhi. The subject matter of the present suit

pertains to auction of plot No.8, Asaf Ali Road having an area of approximately

351 sq. mts. Defendant conducted the auction on 12.3.1982. The plaintiff was the

successful bidder quoting the price of ` 1.92 crores. At the fall of hammer, the

plaintiff deposited 25% of the amount viz ` 48 lacs, as per the terms and conditions

of the auction. Though many issues were framed in this case pertaining to the

relevant pleadings of the respective parties including as to who is guilty of breach

of contract, however, I need not refer to such facts and issues inasmuch as this case

has been argued and predicated by the plaintiff on the ground that even if the

plaintiff is guilty of breach of contract, yet, the defendant cannot forfeit the huge

amount of ` 48 lacs, and, at best, can only forfeit a reasonable amount inasmuch as

the liquidated damages amount of ` 48 lacs is only the upper limit of damages and

the defendant having failed to plead and prove the loss caused to it, therefore, in

terms of the law as laid down under Section 74 of the Contract Act, 1872, the

plaintiff is entitled to refund of the amount of ` 48 lacs less a reasonable amount

which can only be forfeited by the defendant. This reasonable amount, as argued

by the plaintiff, can be at the very best, considering the huge amount which has

been deposited by the plaintiff, 10% of the amount deposited of ` 48 lacs.

3. Before this Court, counsel for the defendant could not dispute that as

per the record on behalf of the defendant, neither are there any pleadings, nor any

evidence led as to any loss which was suffered by the defendant on account of

default committed by the plaintiff. The defendant claims the entitlement to forfeit

the amount of ` 48 lacs only on the ground that such a term of forfeiture exists in

the terms and conditions of the auction, being clause No.2(iv). The said terms have

been proved and exhibited as Ex.P1.

4. In this case, the following issues were framed on 1.12.1983:-

"1.Whether the plaint has been signed, verified and instituted by a duly authorized and competent person?

2. Whether the present suit is barred under Order II Rule 2 of the Code of Civil Procedure?

3. Whether the present suit is not maintainable as alleged in the preliminary objections?

4. Whether plaintiff has waived its right to sue as alleged in para 3 of the preliminary objections in written statement?

5. What were the terms and conditions for the auction of the plot in suit held on 12th March, 1982?

6. Whether plaintiff has been ready and willing to perform the various terms and conditions of the auction?

7. Whether the architectural control drawings were not exhibited and/or furnished as per requirement of the terms and conditions of the auction as contained in Annexure „A‟ to the plaint?

8. Whether any erasure referred to in para 15 of the plaint was unilaterally made by the defendant after the auction? If so, to what effect?

9. Whether the architectural control drawings must necessarily conform to the municipal bye-laws, master plan, zonal plan, Delhi Development Act or the building bye-laws thereunder?

10. Whether there is any trade practice of making payment of balance auction money by instalments dependent on the plaintiff negotiating with its prospective purchaser?

11. Whether the plea covered by issue No.10 is not contrary to the terms and conditions of the auction and is available to the plaintiff?

12. Whether defendant violated any of the terms and conditions of the auction?

13. Whether clause 2(iv) of the terms and conditions detailed in Annexure „A‟ to the plaint is not enforceable?

14. Whether defendant is entitled to forfeit the sum of ` 48,00,000/- or any other sum?

15. Whether plaintiff is entitled to damages? If so, to what amount?

16. Whether plaintiff is entitled to interest? If so, at what rate and to what amount?

17. Relief."

5. I may note that at an earlier stage the suit CS(OS) No.1633/1983 was

decreed by a learned Single Judge of this Court, however, the appellate Court

remanded the matter back for rehearing inasmuch as the appellate Court found that

the Single Judge had not dealt with all the issues in the case.

At the outset therefore I put on record that none of the issues which

were framed on 1.12.1983, and which pertained to the issue that defendant is guilty

of breach of contract and its consequential and related issues of which onus was on

the plaintiff are not pressed by the plaintiff, except issue Nos.13 and 17. These

issues are accordingly decided against the plaintiff. The other issues upto issue

No.12 of which onus was on the defendant in view of the detailed discussion below

were not pressed by the defendant and are thus decided against the defendant. At

one stage counsel for the defendant had sought to place reliance upon Section 65 of

the Contract Act, 1872, however, in view of the law as laid down by the Supreme

Court under Section 74 of the said Act, that aspect was not argued further. I would

also like to further note that there in any case cannot be any issue of acquiescence

or estoppel against the plaintiff in view of Section 74 of the Contract Act, 1872 and

that there cannot be an estoppel against law.

6. The only issues which I am thus called upon to decide are issue Nos.

13 to 17 above. The main issues are, issue No.13 as to validity of Clause 2(iv) of

Ex.P1 being the terms and conditions of the auction and the related issue No.14

with respect to entitlement of the defendant to forfeit the amount of ` 48 lacs or

any other lesser sum. I now deal with them and also the issue of interest.

7. The law with respect to entitlement of a proposed seller to forfeit an

amount or part of the amount has been dealt with by the Constitution Bench

judgment of the Supreme Court no less than 50 years back. The celebrated

decision of the Supreme Court in this regard is the judgment in the case of Fateh

Chand Vs Balkishan Dass, (1964) 1 SCR 515; AIR 1963 SC 1405. The relevant

paras of the judgment of the Supreme Court in the said case are 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 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)

8. In the case of Fateh Chand Vs Balkishan Dass (supra), the facts

before the Supreme Court were that the proposed buyer under an agreement to sell

paid two amounts, first the earnest money amount of ` 1,000/- and second another

amount of ` 24,000/- which was given towards part price paid in advance. In the

agreement to sell there were clauses of forfeiture of both the amounts of ` 1,000/-

and also of the advance price paid of ` 24,000/- if there was a breach by the

proposed buyer. The Supreme Court has held that Section 74 provides only the

upper limit of damages/amounts which are allowed to be forfeited by a proposed

seller in case of breach of contract by the proposed buyer, and in case the seller

wants to forfeit an unduly large amount which is paid by the proposed buyer to the

proposed seller, it is necessary that the proposed seller pleads and proves the loss

which is caused to him. The underlined portions of the paras of the judgment of

the Supreme Court in the case of Fateh Chand Vs Balkishan Dass (supra) bring

out the following salient points:-

(i) Huge amounts which are deposited by the proposed buyer with the

proposed seller, and which in terms of covenants of the agreement can be forfeited,

then, such covenants are in the nature of penalty and are hit by Section 74 of the

Contract Act, 1872.

(ii) In case of breach of contract, a seller under an agreement to sell can

only forfeit a reasonable amount out of the amount which has been paid by the

proposed seller, the liquidated damages clauses or the forfeiture clauses only

provide an upper limit.

(iii) In the absence of loss having been pleaded and proved by the

proposed seller to have been caused to him, merely because there is a clause in the

contract which allows forfeiture of a huge amount, the said huge amount cannot be

forfeited unless to that extent of the said huge amount the proposed seller pleads

and proves that loss in fact has been caused to him.

(iv) Even on the loss being pleaded and proved by the proposed seller, the

proposed seller can in such a case forfeit amounts lying with him of the proposed

buyer, however, what can be forfeited is to the upper limit of the amount of

liquidated damages provided i.e. the amounts of liquidated damages are the upper

limit of damages and Courts cannot award more than the amount of liquidated

damages provided for.

9. I have had an occasion to consider an issue similar to the issue in the

present case in the judgment in the case of Bhuley Singh Vs. Khazan Singh and

Ors. in RFA No.422/2011 decided on 9.11.2011. I have in Bhuley Singh's case

referred to the judgment of the Supreme Court in the case of Fateh Chand Vs

Balkishan Dass (supra) and a later judgment of the Supreme Court following the

judgment of Fateh Chand Vs Balkishan Dass (supra) viz. V.K. Ashokan Vs. CCE

2009 (14) SCC 85. As per the conspectus of the legal position emerging, I held

that in the facts in Bhuley Singh's case out of the total amount of ` 5 lacs which

was lying with the proposed seller he could only be allowed to forfeit an amount of

` 50,000/- once the proposed buyer is found guilty of breach of contract i.e. failing

to perform his part of obligations under the agreement to sell since the seller failed

to plead and prove the actual loss caused to him. The facts of the present case are

similar inasmuch as the contract of sale could not go through because the plaintiff

for various reasons failed to deposit the balance amount of the agreed price. The

observations made by me in paras 5 to 7 of the judgment in the case of Bhuley

Singh are relevant and the same read as under:-

"5. In my opinion, the appeal deserves to be allowed as the appellant/plaintiff has rightly claimed a lesser relief of Rs.5,00,000/- instead of a sum of Rs.10,00,000/- as claimed in the plaint and which he is surely entitled to under Order 7(7) CPC. The Trial Court had framed a specific issue being issue no.2 as to whether plaintiff was entitled to recover Rs.5,00,000/- from the respondents/defendants paid against the receipt dated 5.1.2007 and therefore the argument of the counsel for the respondents/defendants that no issue was framed has no force. Once there was a specific issue, this issue could well have been urged so that the appellant/plaintiff could claim a sum of Rs.5,00,000/- from the respondents/defendants which was paid under the agreement to sell as an earnest amount on the basis of the undisputed position that the respondents/defendants did not plead or prove that loss had been caused to them so as to entitle them to forfeit the amount paid to them under the Agreement to Sell. The Constitution Bench of the Supreme Court in the case of Fateh Chand (supra) makes it more than clear that a mere breach of contract by a buyer does not entitle the seller to forfeit the amount as received, unless, loss is proved to have been caused to the prospective sellers/defendants/respondents. The Supreme Court in the judgment of Fateh Chand (supra) allowed forfeiture of amount of Rs.1,000/- out of the amount paid of Rs.25,000/-. I may also note that nomenclature of a payment is not important and what is important is really the quantum of price which is paid. In the present case, the total price payable for the suit property is Rs.20,00,000/- and therefore 25% of the payment made stricto sensu cannot be an earnest money, though it has been called so. Only a nominal amount can be an earnest money, inasmuch as, the object of such a clause is to allow forfeiture of that amount to a nominal extent as held in the case of Fateh Chand (supra). For example can it be said that 100% of the price or 75%/80% of the price or 50% of the price is earnest money so that it can be forfeited. The answer surely is in the negative. Such high amounts called earnest money will be in the nature of penalty and

thus hit by Section 74 of the Indian Contract Act, 1872 in view of Fateh Chand's case. The principles laid down in Fateh Chand's case; that forfeiture of a reasonable amount is not penalty but if forfeiture is of a large amount the same is in the nature of penalty attracting the applicability of Section 74; have been recently reiterated by the Supreme Court in the case of V.K.Ashokan vs. CCE, 2009 (14) SCC 85.

6. I also cannot accept the argument as raised on behalf of the respondents/defendants that it was the duty of the appellant/plaintiff to plead that no loss was caused to the respondents/defendants and therefore the amount could not have been forfeited because once it is admitted that the respondents/defendants have received an amount, and it was their/defendants‟/respondents‟ case that they were entitled to forfeit such amount, it was for the respondents/defendants therefore to plead and prove that they could forfeit such an amount. Thus unless, there are pleadings and proof as to entitlement to forfeit the amount on account of loss being caused there cannot be a forfeiture in view of the ratio of Fateh Chand's case.

7. Since in the facts of the present case, the Trial court has held the appellant/plaintiff guilty of breach of contract, therefore, the respondents/defendants are entitled to only forfeit a reasonable amount. In my opinion, a reasonable amount of Rs.50,000/- can, at best, be allowed to be forfeited out of an amount of Rs.5,00,000/- paid by the appellant/plaintiff to the respondents/defendants. At this stage, I also reject the argument of the respondents/defendants that they only received a sum of Rs.4 lacs because the agreement to sell dated 5.1.2007 itself mentions in so many words that the respondents/defendants have received Rs. 5 lacs and thus no evidence to contradict the terms of a written document is permissible vide Section 92 of the Indian Evidence Act, 1872."

An S.L.P. was preferred against the judgment of Bhuley Singh and

which S.L.P.(Civil) No.8689/2012 was dismissed by the Supreme Court on

26.3.2012.

10. The issue therefore boils down to the fact that what should be the

amount which the defendant should be allowed to forfeit out of the 25% price

deposited of ` 48 lacs. Applying the ratio of the Supreme Court in the case of

Fateh Chand Vs Balkishan Dass (supra) and my judgment in the case of Bhuley

Singh, I hold that in the facts and circumstances of the present case an amount of `

5 lacs should be considered as sufficient for being forfeited by the defendant on

account of breach committed by the plaintiff, the proposed buyer. At the cost of

repetition, it is stated that the defendant having failed to plead and prove the loss

on account of failure by the plaintiff to perform his part of the contract, it cannot be

allowed to forfeit an amount except a reasonable amount of ` 5 lacs. Though the

counsel for the plaintiff, at one stage, sought to rely upon letter dated 6.11.1989 of

the defendant to show that actually the defendant has subsequently sold the plot for

a higher amount of ` 1.99 crores, however, since this document is not proved and

exhibited, I am not looking into this document. In any case, I have already noted

that the plaintiff has agreed to forfeiture of a reasonable amount.

11. The plaintiff will also be entitled to pendente lite and future interest @

9% per annum simple till realization. I may state that actually this rate of interest

would not even cover inflation cost to the plaintiff. Also, the defendant would have

also earned (taken benefit) of the amount of the plaintiff deposited with it by

earning a return thereon.

12. In view of the above, the suit of the plaintiff is decreed for a sum of `

43 lacs in favour of the plaintiff and against the defendant-DDA alongwith

pendente lite and future interest @ 9% per annum simple. Plaintiff is also allowed

proportionate costs of the suit. Decree sheet be prepared.

CS(OS) No.1633/1983

13. The facts of the present case are more or less identical to suit

No.993/1983 except that plaintiff has deposited an amount of ` 46.5 lacs. I

therefore allow the defendant No.1/DDA to forfeit a sum of ` 4.5 lacs in the facts

and circumstances of the present case. The plaintiff therefore will be entitled to a

decree for a sum of ` 42 lacs and against the defendant -DDA alongwith pendente

lite and future interest @ 9% per annum simple till realization. Plaintiff will also

be entitled to proportionate costs of the suit. Decree sheet be prepared.

JULY 16, 2012                                        VALMIKI J. MEHTA, J.
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