TMI Blog2015 (1) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown. In fact it has been shown that far from suffering any loss, DDA has received a much higher amount on re-auction of the same plot of land. The expression whether or not actual damage or loss is proved to have been caused thereby means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application. The Division Bench has gone wrong in principle. As has been pointed out above, there has been no breach of contract by the Appellant. Further, we cannot accept the view of the Division Bench that the fact that the DDA made a profit from re-auction is irrelevant, as that would fly in the face of the most basic principle on the awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cancelled. (iii) The highest bid shall be subject to the acceptance of Vice-Chairman, DDA or such other officer(s) as may be authorized by him on his behalf. The highest bid may be rejected without assigning any reason. (iv) In case of default, breach or non-compliance of any of the terms and conditions of the auction or mis-representation by the bidder and/or intending purchaser, the earnest money shall be forfeited. (v) The successful bidder shall submit a duly filled-in application in the form attached immediately after the close of the auction of plot in question. (vi) When the bid is accepted by the DDA, the intending purchaser shall be informed of such acceptance in writing and the intending purchaser shall, within 3 months thereof, pay to the Delhi Development Authority, the balance 75% amount of the bid, in cash or by Bank Draft in favour of the Delhi Development Authority or by Cheque guaranteed by a Scheduled Bank as good for payment for three months in favour of the Delhi Development Authority. If the bid is not accepted, the earnest money will be refunded to the intending purchaser without any interest unless the earnest money is forfeited under para 2(iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Govt. of India, Min. of Urban Development, you are requested to give your consent for making payment of balance amount of 75% premium within the period as may be fixed alongwith 18% interest charges p.a. on the belated payment. Further the schedule of payment and conditions if any will be as per the directions issued by the Ministry of Urban Development, Govt. of India. It is, however, made clear that this letter does not carry any commitment. Your consent should reach to this office within 3 days from the date of issue of this letter. Dated 1.12.87 Yours faithfully, Sd/ DIRECTOR (C.L.) 7. The Appellant replied to the said letter on the same day itself in the following terms: KAILASH NATH ASSOCIATES Tel.: 3312648, 3314269 1006, KANCHENJUNGA, 18, BARAKHAMBA ROAD, NEW DELHI-110001 Regd. Ack. Due. December 1, 1987. The Director (C.L.), Delhi Development Authority, Vikas Sadan, I.N.A., New Delhi-110023. Subject: Payment of balance premium in respect of plot No. 2-A Bhikaji Cama Place Distt. Centre, New Delhi. Dear Sir, We are thankful to you for your letter No. F. 30(2)/82-Impl.-I/4 dated nil received by us this afternoon, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. Sir, Consequent upon your failure to deposit the balance 75% premium of the aforesaid plot and dismissal of C.W.P. No. 2395 of 1990 by the Hon'ble High Court, Delhi, I am directed to inform you that the bid/allotment of the said plot in your favour has been cancelled and earnest money amounting to ₹ 78,00,000/- deposited by you at the time of auction has been forfeited. Yours faithfully, Sd/ (JAGDISH CHANDER) DEPUTY DIRECTOR (C.L.) 10. The Appellant then filed a suit for specific performance on 17.2.1994 and in the alternative for recovery of damages and recovery of the earnest amount of ₹ 78,00,000/- (Rupees Seventy Eight Lakhs). Shortly after the suit was filed, on 23.2.1994, the DDA re-auctioned the premises which fetched a sum of ₹ 11.78 Crores (Rupees Eleven Crores Seventy Eight Lakhs). 11. The learned Single Judge by a judgment and order dated 10.9.2007 dismissed the Appellant's suit for specific performance and damages but ordered refund of the earnest money forfeited together with 9% per annum interest. The learned Single Judge held: 65. Defendant No. 1 instead of following the aforesaid course, found merit in the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmittees constituted by Defendant No. 1 made its recommendations which were accepted by Defendant No. 1 vide its resolution dated 14.5.1984 (Ex. DW2/P-4). Having accepted the recommendations, in the case of the Plaintiff Defendant No. 1 was required to do nothing further but mistakenly referred the case to UOI for its approval assuming the case to be one of Nazul land. Plaintiff sent repeated reminders vide letters dated 9-12-1985 (Ex. P-11), 20-10-1986 (Ex. P-12), 10-12-1986 (Ex. P-13), 10-02-1987 (Ex. P-14), 11-04-1987 (Ex. P-16), 10-08-1987 (Ex. P-17) and 10-10-1987 (Ex. P-18) calling upon Defendant No. 1 to give an offer of deposit of balance 25% of the premium so as to bring the total payment equivalent to 50% of the total premium and for release of the possession of the land to the Plaintiff for purpose of construction. Defendant No. 1 vide its letter received on 1.12.1987 by the Plaintiff (Ex. P-19) sought the consent of the Plaintiff to abide by the recommendations of the high-powered committee and the consent was duly given on the even date (Ex. P-20). Thereafter no offer was made to the Plaintiff and without any notice of compliance for payment, the letter of cancellation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. If it is ignored, then the termination of the contract and the forfeiture of earnest money are completely in order as the Appellant was in breach. The fact that the DDA ultimately sold the plot for a much larger sum, according to learned Counsel, would be irrelevant inasmuch as the contractual term agreed upon between parties would entitle him to forfeit earnest money on breach without any necessity of proving actual loss. 15. Having heard learned Counsel for the parties, it is important at the very outset to notice that earnest money can be forfeited Under Sub-clause (iv) set out hereinabove, only in the case of default, breach, or non-compliance of any of the terms and conditions of the auction, or on misrepresentation by the bidder. It may be noted that the balance 75% which had to be paid within three months of the acceptance of the bid, was not insisted upon by the DDA. On the contrary, after setting up two High Powered Committees which were instructed to look into the grievances of the Appellant, the DDA extended time at least twice. It is, therefore, very difficult to say that there was a breach of any terms and conditions of the auction, as the period of three months ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DDA is a public authority bound by Article 14 and cannot behave arbitrarily. 18. It now remains to deal with the impugned judgment of the Division Bench. 19. The Division Bench followed the judgment of Tilley v. Thomas (1867 3 Ch. A 61) and distinguished the judgment in Webb v. Hughes V.C.M. 1870. It further went on to follow Anandram Mangturam v. Bholaram Tanumal ILR 1946 Bom 218 and held: The decision holds that the principle of law is that where, by agreement, time is made of the essence of the contract, it cannot be waived by a unilateral act of a party and unless there is consensus ad-idem between the parties and a new date is agreed to, merely because a party to a contract agrees to consider time being extended for the opposite party to complete the contract, but ultimately refuses to accord concurrence would not mean that the party has by conduct waived the date originally agreed as being of the essence of the contract. (At para 32) 20. In our judgment, Webb's case would directly apply to the facts here. In that case, it was held: But if time be made the essence of the contract, that may be waived by the conduct of the purchaser; and if the time is once al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. (at 226 227) Chagla, J. in a separate judgment held: Under Section 55 of the Indian Contract Act, the promisee is given the option to avoid the contract where the promisor fails to perform the contract at the time fixed in the contract. It is open to the promisee not to exercise the option or to exercise the option at any time, but it is clear to my mind that the promisee cannot by the mere fact of not exercising the option change or alter the date of performance fixed under the contract itself. Under Section 63 of the Indian Contract Act, the promisee may make certain concessions to the promisor which are advantageous to the promisor, and one of them is that he may extend the time for such performance. But it is clear again that such an extension of time cannot be a unilateral extension on the part of the promisee. It is only at the request of the promisor that the promisee may agree to extend the time of performance and thereby bring about an agreement for extension of time. Therefore it is only as a result of the operation of Section 63 of the Indian Contract Act that the time for the performance of the contract can be extended and that time can only be extended by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement had a fixed date. Section 63 of the Contract Act, 1872 provides that every promisee may extend time for the performance of the contract. Such an agreement to extend time need not necessarily be reduced to writing, but may be proved by oral evidence or, in some cases, even by evidence of conduct including forbearance on the part of the other party. [See in this connection the observations of this Court in Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd. 1959 SCR 213 : AIR 1958 SC 512, para 8. See also in this connection Saraswathamma v. H. Sharad Shrikhande AIR 2005 Kant 292 and K. Venkoji Rao v. M. Abdul Khuddur Kureshi AIR 1991 Kant 119, following the judgment in Keshavlal Lallubhai Patel (supra).] Thus, in this case there was a variation in the date of performance by express representation by the Defendants, agreed to by the act of forbearance on the part of the Plaintiffs. What was originally covered by the first part of Article 54, now fell within the purview of the second part of the article. Pazhaniappa Chettiyar v. South Indian Planting and Industrial Co. Ltd. [AIR 1953 Trav Co 161] was a similar instance where the contract when initially made had a date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above judgment in VST Industries Ltd. [(2001) 1 SCC 298 : 2001 SCC (L and S) 227] supports the argument of the learned Counsel on the question of maintainability of the present writ petition. It is to be noted that VST Industries Ltd. [(2001) 1 SCC 298 : 2001 SCC (L and S) 227] against whom the writ petition was filed was not a State or an instrumentality of a State as contemplated Under Article 12 of the Constitution, hence, in the normal course, no writ could have been issued against the said industry. But it was the contention of the writ Petitioner in that case that the said industry was obligated under the statute concerned to perform certain public functions; failure to do so would give rise to a complaint Under Article 226 against a private body. While considering such argument, this Court held that when an authority has to perform a public function or a public duty, if there is a failure a writ petition Under Article 226 of the Constitution is maintainable. In the instant case, as to the fact that the Respondent is an instrumentality of a State, there is no dispute but the question is: was the first Respondent discharging a public duty or a public function while repudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.78 crores and there being no damages suffered by DDA, it could not forfeit the earnest money. 39. The said view runs in the teeth of the decision of the Supreme Court reported as AIR 1970 SC 1986 Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Ltd. which holds that as against an amount tendered by way of security, amount tendered as earnest money could be forfeited as per terms of the contract. 40. We may additionally observe that original time to pay the balance bid consideration, as per Ex. P-I was May 18, 1982 and as extended by Ex. P-8 was October 28, 1982. That DDA could auction the plot in the year 1994 in the sum of ₹ 11.78 crore was immaterial and not relevant evidence for the reason damages with respect to the price of property have to be computed with reference to the date of the breach of the contract. 31. Section 74 as it originally stood read thus: 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, 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 reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of earnest money under a contract for sale of property-movable or immovable-if the amount is reasonable, does not fall within Section 74. That has been decided in several cases: Kunwar Chiranjit Singh v. Har Swarup A.I.R. 1926 P.C. 1; Roshan Lal v. The Delhi Cloth and General Mills Co. Ltd. Delhi I.L.R. All. 166; Muhammad Habibullah v. Muhammad Shafi I.L.R. All. 324; Bishan Chand v. Radha Kishan Das I.D. 19 All. 49. These cases are easily explained, for forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty. Counsel for the Union, however, urged that in the present case ₹ 10,000/- in respect of the potato contract and ₹ 8,500 in respect of the poultry contract were genuine pre-estimates of damages which the Union was likely to suffer as a result of breach of contract, and the Plaintiff was not entitled to any relief a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. (3) It is part of the purchase price when the transaction is carried out. (4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. (5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest (At page 139) The learned Attorney General very strongly urged that the pleas covered by the second contention of the Appellant had never been raised in the pleadings nor in the contentions urged before the High Court. The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty, were never raised by the Appellants. The Attorney General also pointed out that as noted by the High Court the Appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was that the deposit was not by way of earnest and hence the amount could not be forfeited. Unless the Appellants had pleaded and established that there was unreasonableness attached to the amount required to be deposited under the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual 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. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. 67...In our view, in such a contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach thereof. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsation contemplated is not by way of penalty or unreasonable, the court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation. 38. It will be seen that when it comes to forfeiture of earnest money, in Fateh Chand's case, counsel for the Appellant conceded on facts that ₹ 1,000/- deposited as earnest money could be forfeited. (See: 1964 (1) SCR Page 515 at 525 and 531). 39. Shree Hanuman Cotton Mills and Anr. which was so heavily relied by the Division Bench again was a case where the Appellants conceded that they committed breach of contract. Further, the Respondents also pleaded that the Appellants had to pay them a sum of ₹ 42,499/- for loss and damage sustained by them. (See: 1970 (3) SCR 127 at Page 132). This being the fact situation, only two questions were argued before the Supreme Court: (1) that the amount paid by the Plaintiff is not earnest money and (2) that forfeiture of earnest money can be legal only if the amount is considered reasonable. (at page 133). Both questions were answered against the Appellant. In deciding question two against the Appellant, this Court held: But, as we have alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with which earnest money has to be paid) may well have been rejected. In such cases, Section 74 may not be attracted on its plain language because it applies only when a contract has been broken . 42. In the present case, forfeiture of earnest money took place long after an agreement had been reached. It is obvious that the amount sought to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown. In fact it has been shown that far from suffering any loss, DDA has received a much higher amount on re-auction of the same plot of land. 43. On a conspectus of the above authorities, the law on compensation for breach of contract Under Section 74 can be stated to be as follows: 1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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