Delhi High Court
Praveen Talwar vs Naresh Kumar Mittal & Ors. on 26 November, 2018
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA No. 678/2006
% 26th November, 2018
PRAVEEN TALWAR
..... Appellant
Through: Mr. Rajat Navet, Mr. Kushagra
Pandit and Mr. Mukul Gupta,
Advocates (9811177277)
versus
NARESH KUMAR MITTAL & ORS.
..... Respondents
Through:
CORAM:
HON'BLE MR. JUSTICE VALMIKI J.MEHTA
To be referred to the Reporter or not? YES
VALMIKI J. MEHTA, J (ORAL)
1. This Regular First Appeal under Section 96 of the Code
of Civil Procedure, 1908 (CPC) is filed by the defendant no. 3 in the
suit impugning the Judgment of the trial court dated 28.09.2006 by
which the trial court has decreed the suit filed by the respondent no.
1/plaintiff against the appellant/defendant no. 3 for recovery of double
the amount of earnest money paid by the respondent no.1/plaintiff to
RFA No. 678/2006 Page 1 of 17
the appellant/defendant no. 3 under the Agreement to Sell dated
16.05.1997.
2. The facts and issues need not be narrated in detail, noting
that there was admittedly an Agreement to Sell dated 16.05.1997
whereby the appellant/defendant no. 3 agreed to sell to the respondent
no.1/plaintiff the subject/suit property being Flat No. B-41, Lawyers'
Co-operative Group Housing Society, Manu Apartments, Mayur Vihar
Phase-1, Delhi-110091. The total sale consideration was fixed at Rs.
30,25,000/-, out of which the respondent no.1/plaintiff paid a sum of
Rs. 2,00,000/- to the appellant/defendant no. 3. Pleading that it was
the appellant/defendant no. 3 who was guilty of breach of contract and
that the respondent no.1/plaintiff always ready and willing to perform
his part of the contract including by making the balance payment of
Rs. 28,25,000/, the subject suit was filed for seeking double the
amount of earnest money as is provided in the last clause of the
Receipt-cum-Agreement dated 16.05.1997, and which reads as under:-
"Both the parties have agreed upon the above agreement, further the
seller is liable to pay Rs.4,00,000/- if he fails to fulfil the above
commitments as well as the amount paid by the buyer will be forfeited if
he fails to fulfil the above commitments"
RFA No. 678/2006 Page 2 of 17
3. Learned counsel for the appellant/defendant no. 3 has
argued that the mere fact and assuming that the appellant/defendant
no. 3 was guilty of breach of contract, that in itself would not entitle
the respondent no. 1/plaintiff to double the amount of earnest money,
inasmuch as the law is that damages fixed of a sum of Rs. 2,00,000/-
i.e. the amount of Rs. 2,00,000/- over and above the price paid of Rs.
2,00,000/-, are liquidated damages falling under Section 74 of the
Indian Contract Act, 1872, and that under Section 74 of the Contract
Act there cannot be a claim for liquidated damages in case the nature
of contract is such that damages can otherwise be assessed and the
same are thereafter proved. It is argued that in case of breach of an
agreement to sell, specific amount of damages caused can always be
proved by the buyer by showing the higher price of the property on the
date of the breach, and the difference in the contract price with the
higher price on the date of breach would be the specific amount of
damages which can be awarded in case the seller is found guilty of
breach of contract, but in the present case, the respondent no.
1/plaintiff has failed to prove the specific amount of damage caused
and hence the respondent no. 1/plaintiff is not entitled to damages for
RFA No. 678/2006 Page 3 of 17
an amount of Rs. 2,00,000/- merely because a contractual clause
provides so. Reliance in support of the argument urged on behalf of
the appellant/defendant no. 3 is placed upon the judgment delivered by
this Court in the case of Ram Mehar v. Murari Lal (2011) 183 DLT
769 which is argued to be on all fours with the facts and issues in the
present case. Reliance is also placed upon the judgment passed by this
Court in the case of M.C. Luthra v. Ashok Kumar Khanna (2018)
248 DLT 161, which in detail lays down the ratio that there cannot be
a claim of damages unless and until damages are pleaded to have been
caused and proved in accordance with law during trial. The facts in
the case of M.C. Luthra (supra) were that a seller wanted to forfeit
the earnest money, a position which is exactly opposite to the facts of
the present case, wherein the seller is not forfeiting the money by
applying the principles of liquidated damages under Section 74 of the
Contract Act, but the buyer is seeking double the amount of earnest
money paid as liquidated damages. An SLP filed against the judgment
in the case of M.C. Luthra (surpa) has been dismissed by the Hon'ble
Supreme Court vide Order dated 15.05.2018 in SLP (C) 11702/2018.
RFA No. 678/2006 Page 4 of 17
4. Since the judgment in the case of Ram Mehar (supra) is
a short judgment of four paragraphs, and would wholly cover the issue
in question with regard to the disentitlement to double the amount of
earnest money, simply because a clause in the agreement to sell
provides that entitlement, in favour of the appellant/defendant no. 3,
the said judgment is reproduced as under:-
"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 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.
RFA No. 678/2006 Page 5 of 17
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
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
RFA No. 678/2006 Page 6 of 17
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
RFA No. 678/2006 Page 7 of 17
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)
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. 678/2006 Page 8 of 17
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."
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."
5. In the facts of the present case, it is seen that the
respondent no.1/plaintiff has not led any evidence whatsoever as to the
damages, which if and would have been suffered by the respondent
no.1/plaintiff on account of the stated breach of the agreement to sell
by the appellant/defendant no. 3. The nature of the contract of the
agreement to sell is such that liquidated damages cannot be claimed
under Section 74 of the Contract Act because first damages have to be
caused and such damages then have to be proved, and once there is no
evidence led by the respondent no. 1/plaintiff with respect to the loss
caused to the respondent no. 1/plaintiff on account of the stated breach
of the agreement to sell by the appellant/defendant no. 3, consequently
the respondent no. 1/plaintiff would only be entitled to return of the
earnest money of Rs. 2,00,000/-, but not for an amount of Rs.
4,00,000/- which would include a sum of Rs. 2,00,000/- as damages.
6. This Court would further note that with respect to the
aspect of loss having been caused for entitlement of forfeiture of an
amount of advance price paid, which was the subject matter of the
decision in the case of M.C. Luthra (supra), is on the identical
principle that there cannot be a claim for loss under a contract being
an agreement to sell, unless and until the loss is pleaded and proved,
and a fixed figure of liquidated damages therefore cannot be claimed
simply because the same is provided under an agreement to sell.
7. This Court may also note that whether the case falls
under Section 73 or Section 74 of the Contract Act, depends on the
nature of the contract. In case the contract is of such a nature where
damages cannot be proved, and on this count there are pre-fixed
liquidated damages, then the liquidated damages provided the same
are not in the nature of penalty are awarded if loss has been caused but
this loss cannot be assessed and quantified in view of the nature of the
contract. If however the loss can be quantified, then the case falls
under Section 73, and not under Section 74 of the Contract Act,
though parties may choose to label the clause as a clause of liquidated
damages falling under Section 74 of the Contract Act. This aspect has
also been dealt with by this Court in the case of Airports Authority of
India v. R.K. Singhal, AIR 2012 Delhi 51; 2011 (185) DLT 648, and
the relevant portion from para 3 and 7 to 9 of this judgment read as
under:-
"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.
forfeiture can take place. The relevant observations of the Supreme
Court in the aforesaid judgment of Fateh Chand (supra) are as
under:-
xxx xxx xxx
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."
(Underlining Added)
8. In view of the aforesaid discussion, the impugned judgment
awarding double the amount of earnest money paid, is illegal and at best,
the trial court could have only passed a money decree for recovery of the
earnest money being Rs. 2,00,000/-. The counsel for the
appellant/defendant no. 3 does not dispute that the appellant/defendant
no.3 is ready to pay the amount of Rs. 2,00,000/- to the respondent
no.1/plaintiff.
9. This appeal is accordingly allowed. The impugned
Judgment of the trial court dated 28.09.2006 is set aside. The respondent
no.1/plaintiff is held entitled to a money decree only for a sum of Rs.
2,00,000/-.
10. It is noted that the trial court has not granted any interest to
the respondent no.1/plaintiff and he has not filed any appeal against that
part of the judgment which has not granted any interest to the respondent
no.1/plaintiff.
11. The appellant/defendant no. 3 has already deposited a sum
of Rs. 2,00,000/- in this Court, and therefore this amount deposited in
this Court alongwith the accrued interest be released to the respondent
no.1/plaintiff in full and final satisfaction of the impugned judgment and
decree dated 28.09.2006.
12. The appeal is accordingly allowed and disposed of as stated
above.
NOVEMBER 26, 2018/ib VALMIKI J. MEHTA, J
