Delhi High Court
Yogesh Aggarwal & Anr vs Vikas Goyal & Anr on 8 July, 2014
$~22
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CS(OS) 2259/2013 & I.A. 18582/2013
% Judgment dated 08.07.2014
YOGESH AGGARWAL & ANR ..... Plaintiff
Through: Mr.J.M. Bari, Advocate
versus
VIKAS GOYAL & ANR ..... Defendant
Through: Mr.Rishi Pal Singh, Advocate
CORAM:
HON'BLE MR. JUSTICE G.S.SISTANI
G.S.SISTANI, J (ORAL)
1. Plaintiffs have filed the present suit for recovery of money and in the
alternative for specific performance of the contract dated 29.1.2013.
Pleadings are complete and admission / denial of documents has been
carried out. All the documents stand admitted by the parties.
2. Mr.Bari, counsel for the plaintiffs submits that he wishes to give up relief
of specific performance and restricts his relief only to recovery of Rs.45.0
lacs paid as part payment for the purchase of the suit property i.e entire
second floor without roof rights of property bearing No.G-202, area
measuring 211 sq. yrds. situated at Pushkar Enclave, Paschim Vihar, New
Delhi along with proportionate free hold rights of land underneath
installed with lift for common use along with 1/4 th undivided share in stilt
parking with one servant room. Counsel for the plaintiffs further submits
that it is not necessary to frame issues as the only defence raised by the
defendant is that the earnest money stands forfeited in terms of the
agreement to sell, whereas in accordance with law the defendant should
CS(OS)No.2259-2013 Page 1 of 14
have given details of loss suffered in order to succeed. Reliance is placed
on a decision in the case of Airports Authority of India Vs. Shri R.K.
Singhal [RFA No.576/2002 decided on 16.11.2011].
3. As per the plaint, parties entered into an agreement to sell and purchase
(BAYANA Agreement) on 29.1.2013 with respect to the entire second
floor without roof rights of property bearing No.G-202, area measuring
211 sq. yrds. situated at Pushkar Enclave, Paschim Vihar, New Delhi
along with proportionate free hold rights of land underneath installed with
lift for common use along with 1/4th undivided share in stilt parking with
one servant room. The sale consideration was fixed at Rs.2.45 crores, but
the proposed sale deed was to be executed only at the circle rate of
Rs.16.1 lacs approximately.
4. Defendant no.1 received a sum of Rs.45.0 lacs from the plaintiffs on
29.1.2013. It has also been pleaded that besides the written agreement
dated 29.1.2013 the parties had also entered into a separate oral agreement
/ understanding between themselves that the required conveyance / sale
deed would be executed and registered by defendant no.1 in favour of the
plaintiff at the circle rate. It is for this reason, according to the plaintiffs
that the agreement dated 29.1.2013 was silent on this aspect.
5. It has also been pleaded that the oral agreement with respect to the sale
consideration at which the sale deed was to be executed and registered
was not inconsistent with the terms of the written agreement dated
29.1.2013. The property was to be constructed strictly in accordance with
the sanctioned building plans and building bye laws. It is not in dispute
that the agreement could not be completed, as the plaintiff did not pay the
balance sale consideration, which according to the plaintiff was for the
reason that the building was not being constructed in accordance with the
sanctioned plan.
CS(OS)No.2259-2013 Page 2 of 14
6. It is the case of the defendants that the plaintiffs did not have the means to
pay the balance sale consideration, thus in terms of clause 5 of the
agreement, advance / earnest money was forfeited by the defendants.
Reliance is placed by counsel for the defendant on the legal notices issued
by the defendants calling upon the plaintiff to complete the transaction,
however, the plaintiffs refused to make the balance payment and in
response thereto it was stated that only Rs.16.0 lacs was ready and
available with them. Clause 5 of the agreement reads as under:
"5. That if the Second Party fails to pay the balance amount at
the time of possession, the Second Party shall pay the interest @2%
per month to the First Party on remaining amount. If the Second
Party fails to pay the balance amount at least by October, 2013, the
earnest money paid by the Second Party to the First Party will stand
forfeited."
7. According to counsel for the plaintiffs, the defendants have failed to plead
any loss suffered by the defendants. Counsel for the defendants, however,
submits that the defendants have so stated in the written statement that the
earnest money paid by the plaintiffs would be forfeited in terms of the
contract and further the defendants had suffered losses on account of sale
transaction not being completed by the plaintiffs.
8. I have heard counsel for the parties and carefully perused the pleadings.
Assuming that the plaintiffs are guilty of breach of contract, the short
question which comes up for consideration before this court is whether
the amount of Rs.45.0 lacs paid by the plaintiffs to the defendants as
earnest money can be forfeited by the defendants and that too when the
defendants have failed to plead any loss which was suffered. Counsel for
the plaintiff submits that it is settled law that mere breach of a contract
does not entitle the aggrieved party to claim damages unless losses have
CS(OS)No.2259-2013 Page 3 of 14
been pleaded and proved, whereas, a reading of the written statement in
the present case would show that the defendant has merely taken a stand
that on account of non-fulfilment of the contract by the plaintiff, earnest
money paid, stands forfeited, without proving any loss being caused to
them. In the case of Airports Authority of India (Supra), a Single Judge
of this court has discussed in detail the legal position based on three
Judgments of the Supreme Court. Relevant paragraphs of the judgment
read as under:
"4. The law in this regard is well settled and three premier
judgments of the Hon'ble Supreme Court are the judgments in the
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:-
CS(OS)No.2259-2013 Page 4 of 14
"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
CS(OS)No.2259-2013 Page 5 of 14
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
CS(OS)No.2259-2013 Page 6 of 14
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
CS(OS)No.2259-2013 Page 7 of 14
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:-
"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.
CS(OS)No.2259-2013 Page 8 of 14
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 : [1964] 1 SCR 515 : [1964] 1
SCR 515. 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)"
9. The present case is to be decided on the touchstone of the law laid down
by the Supreme Court. A careful reading of the written statement would
show that nothing has been pleaded except for the plea raised that on
account of the fact that the plaintiff did not comply with his part of the
contract, the defendant was liable to forfeit the earnest money. The
relevant paragraphs of the written statement read as under:
"Preliminary Objections:
1. That the present suit filed by the plaintiffs is abuse of the
process of the law hence deserves to be dismissed at the first
instance and hearing itself. It is submitted that despite repeated
opportunities accorded to the plaintiffs by the defendant, he failed
to perform his part of contract i.e. to make balance payment and get
the sale deed registered in terms with sale agreement dated
29.1.2013. It is submitted that the plaintiffs cannot be permitted to
take benefit of his own wrong and deliberate / intentional
omission to perform his part of contract. The contract stood
discharged on account of frustration due to none performance by
the plaintiffs and as such nothing survives thereafter. The earnest
money paid by the plaintiffs, hence stood forfeited in accordance
with the terms of the contract and the law governing the issue.
2. That there is no cause of action in favour of the plaintiffs
once he failed to perform his part of contract. The rights and
obligations of the parties are governed by the terms of the contract
which is sale agreement dated 29.1.2013. Once a party defaults the
consequences as agreed in the agreement would follow. Since
admittedly the plaintiffs opted not to purchase the property i.e. flat
in property bearing No.G-202, Pushkar Enclave, Paschim Vihar,
New Delhi, the earnest money should forfeited hence, there is no
cause of action survives in favour of the plaintiffs seeking money
decree of Rs.90,00,000/- (Rupees Ninety Lacs Only) with interest
@18% or alternatively performance of the agreement to sell /
purchase at a fictitious sale consideration of Rs.61,00,000/- (Rupees
Sixty One Lacs only) only while the agreed sale consideration in
the agreement dated 29-01-2013 is Rs.2,45,00,000/- (Rupees Two
crores and forty five lacs only). In the absence of any cause of
action, the suit does not survives."
10. In response to paragraph 3 of the plaint, the defendant has stated as under:
"3. ....... In the event the plaintiffs failed to perform his part of
contract, the initial amount of Rs.45,00,000/- (Rupees Forty Five
Lacs Only) termed as earnest money liable to be forfeited as per the
specific term of sale agreement."
11. It may also be noticed that in paragraph 28 of the written statement the
defendant has taken a stand that the loss suffered by the defendant no.1 is
explicit and expressed in the notice dated 10.9.2013.
12. During the course of hearing counsel for the defendant was asked whether
a copy of the notice dated 10.9.2013 was filed, to which he submitted that
in fact there was no notice of 10.9.2013, but there are two notices of
10.07.2013 and 2.9.2013.
13. Perusal of both these notices show that the defendant has failed to state
the amount of losses which have been suffered. It may also be noticed
that the present agreement is an agreement to sell and in case the plaintiff
did not comply with his part of the agreement, the defendant would have
well been in a position to quantify the damages suffered by him, if at all
he had suffered any damages. In the absence of any pleadings to this
effect in the written statement or any document, which has been placed on
record, the defendant cannot claim forfeiture of Rs.45.0 lacs which cannot
be termed as earnest money. Resultantly the present suit is decreed in the
sum of Rs.45.0 lacs with interest @8%, as all other reliefs are given up.
Decree sheet be drawn up accordingly.
I.A. 18582/2013
14. In view of order passed in the suit, the present application stands disposed
of.
G.S.SISTANI, J
JULY 08, 2014
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