Supreme Court of India
M/S. KAILASH NATH ASSOCIATESversusDELHI DEVELOPMENT AUTHORITY & ANR.
- Citation
- 2015 INSC 22
- Decided
- 9 January 2015
- Disposal
- Appeal(s) allowed
- Bench
- RANJAN GOGOI
Holding
The earnest money could not be forfeited as there was no breach of contract and such forfeiture would be arbitrary, violating Article 14, so the refund order was restored.
Summary
M/s. Kailash Nath Associates, the highest bidder in a Delhi Development Authority (ODA) public auction, deposited 25% earnest money (Rs 78 lakhs) and was later asked to pay the balance 75% with interest. ODA extended the payment deadline twice, but eventually cancelled the allotment and forfeited the earnest money, citing a letter marked "without prejudice". The appellant sued for specific performance and recovery of the earnest money. The Supreme Court held that the earnest money could not be forfeited because ODA had waived the original time limit, gave no notice of breach, and suffered no loss; forfeiture would be arbitrary and violative of Article 14. Consequently, the Single Judge’s order refunding the earnest money with interest was restored. The appeal was allowed.
Issues considered
- The validity of forfeiture of earnest money under sub‑clause (iv) of the auction conditions when the deadline for balance payment was waived.
- Whether Section 74 of the Indian Contract Act applies to the forfeiture of earnest money and permits forfeiture without proof of loss.
- Whether the "without prejudice" letter created a binding contractual obligation to pay the balance.
- The applicability of Article 14 of the Constitution to a public authority’s arbitrary forfeiture of earnest money.
- Whether ODA can appropriate the earnest money without suffering any loss.
Legislation cited
- Constitution of Indias. 14
- Indian Contract Act, 1872s. 20, s. 63, s. 74
Subjects
public auctionearnest moneyforfeiturecontract breachSection 74Article 14Delhi Development Authorityliquidated damagespenaltyextension of time
Judgment
[2015] 1 S.C.R. 627
M/S. KAILASH NATH ASSOCIATES A
v.
DELHI DEVELOPMENT AUTHORITY & ANR.
(Civil Appeal No. 193 of 2015)
JANUARY 09, 2015
B
[RANJAN GOGOi AND R.F. NARIMAN, JJ.]
Contract Act, 1872 - Public auction - Earnest money -
Forfeiture of - Appellant, highest bidder for plot deposited 25%
of the bid amount-earnest money (Rs 78 lakhs) with ODA - C
Balance 75% was to be deposited within three months -
Extension of time for payment by DOA twice - Thereafter,
several letters written by the appellant to DOA but no response
- Subsequently, letter written by ODA to the appellant that his
case was referred to UOI for its approval for condoning the D
delay, case being one of Nazul land, which was later declared
by the Central Government as non-Nazul land - On DDA's
request, appellant consented to making payment of the
balance amount with interest charged - After few years
cancellation of allotment of the plot by ODA and consequent E
forfeiture of the earnest money - Suit for specific performance
and damages and recovery of earnest amount by the'
appellant - Subsequently DOA re-auctioned the premises
fetching Rs. 11. 78 crores - Dismissal of suit by the Single
Judge of the High Court but ordered refund of the earnest F
money forfeited with 9% interest p.a. - However, Division
Bench upheld forfeiture of the earnest money - On appeal,
held: It was arbitrary for the DOA to forfeit the earnest money
- In the absence of notice to deposit the balance 75% amount
within a certain stated time, there is no breach of contract on G
the part of the appellant and consequently earnest money
could not be forfeited - ODA not having been put to any loss,
even if ODA could insist on a contractual stipulation in its
favour, it would be arbitrary to allow DOA as a public authority
627 H
628 SUPREME COURT REPORTS [2015] 1 S.C.R.,
A to appropriate Rs. 78 lakhs without any loss being caused -
Article 14 would apply - In fact, DOA made huge profit on re-
auction of the plot - If damage or loss is not suffered, the law
does not provide for a windfall - Thus, the judgment of the
Single Judge of the High Court restored - Constitution of
B India, 1950 - Article 14.
s. 74 - Compensation for breach of contract where
penalty stipulated for under - General principles -
Enunciated.
C Allowing the appeal, the Court
HELD: 1.1. The earnest money can be forfeited under
sub-clause (iv) of the conditions of auction, only in the
case of default, breach, or non-compliance of any of the
o terms and conditions of the auction, or on
misrepresentation by the bidder. The balance 75% which
had to be paid within three months of the acceptance of
the bid, was not insisted upon by the DOA. On the
contrary, after setting up two High Powered Committees
E which were instructed to look into the grievances of the
appellant, the DOA 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 which the DOA could have insisted upon
had specifically been waived. It is nobody's case that
F there is any misrepresentation by the bidder. Therefore,
under sub-clause (iv), without more, earnest money could
not have been forfeited. [Para 15] [643-B-D]
1.2. Long after the Central Government informed
G ODA (on 1.3.1990) that the property involved "in the
instant case is not Nazul land, the ODA by its letter of
6.10.1993 cancelled the allotment of the plot because the
appellant had failed to deposit the balance 75%. DDA's
understanding, therefore, was that what was important
H
KAI LASH Nfo:TH ASSOCIATES v. DELHI DEVELOPMENT 629
AUTHORITY
was payment of the balance 75% which was insisted A
upon by the letter and which was acceded to by the
respondent immediately on the same date. Further it
cannot be accepted that since the letter was "without
prejudice" and since no commitmenf had been made,
they were not bound by the terms of the letter. The letter B
was without prejudice and no commitment could have
been given by the ODA because the Central Government
may well not relax the Nazul Rules. On the other hand, if
the Central Government had, later on, relaxed the Nazul
Rules, DOA could not be heard to say that despite this c
having been done, DOA would yet cancel the allotment
of the plot. That this could not have been done is clear
because of the construction of the letter and also
because DOA is a public authority bound by Article 14
and cannot behave arbitrarily. [Para 17] [644-A-E] D
1.3. The Single Judge was correct in observing that
the letter of cancellation dated 6.10.1993 and consequent
forfeiture of earnest money was made without putting the
appellant on notice that it has to deposit the balance 75%
premium of the plot within a certain stated time. In the E
absence of such notice, there is no breach of contract on
the part of the appellant and \:Onsequently earnest money
could not be forfeited. It would be arbitrary for the DOA
to forfeit the earnest money on two fundamental
grounds. First, there is no breach of contract on the part F
of the appellant. And second, ODA not having been put
to any loss, even if DOA could insist on a contractual
stipulation in its favour, it would be arbitrary to allow DOA
as a public authority to appropriate Rs.78,00,000/-
(Rupees Seventy Eight Lakhs) without any loss being G
caused. Therefore, Article 14 would apply in the field of
contract in the instant case. [Para 21, 29] [645-E-F; 651-
H; 652-A-B]
1.4. As earnest money is an amount to be paid in
H
case of breach of contract and named in the contract as
630 SUPREME COURT REPORTS [2015) 1 S.C.R.
A such, it would necessarily be covered by Section 74. In
cases where a public auction is held, forfeiture of earnest
money may take place even before an agreement is
reached, as ODA is to accept the bid only after the earnest
money is paid. In the instant case, under the terms and
B conditions of auction, the highest bid (along 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". In the instant case, forfeiture
c 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 instant case is sought to be
forfeited without any loss being shown. In fact it has
been shown that far from suffering any loss, DOA has
received a much higher amount on re-auction of the same
0
plot of land. [Para 40, 41, 42) [663-G-H; 664-A-D]
1.5. The law on compensation for breach of contract
under Section 74 can be stated to be as follows:-
E 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
F 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 stated. Similarly, in cases
where the amount fixed is in the nature of penalty,
G
only reasonable compensation can be awarded not
exceeding the penalty so stated. In both cases, the
liquidated amount or penalty is the upper limit
beyond which the Court cannot grant reasonable
compensation.
H
KAILASH NATH ASSOCIATES v. DELH(DEVELOPMENT 631
AUTHORITY
2. Reasonable compensation would be fixed on well A
known principles that are applicable to the law of
contract, which are to be found inter alia in Section
73 of the Contract Act.
3. Since Section 74 awards reasonable 8
compensation for damage or loss caused by a
breach of contract, damage or loss caused is a sine
qua non for the applicability of the Section.
4. Section applies whether a person is a plaintiff or a
defendant in a suit. C
5. The sum spoken of may already be paid or be
payable in future.
6. The expression "whether or not actual damage or
0
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, E
can be awarded.
7. Section 74 would apply to cases of forfeiture of
earnest money under a contract. Where, however,
forfeiture.. takes place under the terms and conditions F
of a public auction before agreement is reached,
Section 74 would have no application. [Para 43] [664-
D-H; 665-A-F]
1.6. The Division Bench has gone wrong in principle. G
There has been no breach of contract by the appellant.
Further, the view of the Division Bench that the fact that
the ODA made a profit from re-auction is irrelevant, as
that would fly in the face of the most basic principle on
the award of damages - namely, that compensation can
only be given for damage or loss suffered cannot be H
632 SUPREME COURT REPORTS [2015] 1 S.C.R.
A accepted. If damage or loss is not suffered, the law does
not provide for a windfall. The judgment and order of the
Single Judge is ~estored. [Para 44, 47] [665-G-H; 666-A,
E]
Shree Hanuman Cotton Mills & Anr. v. Tata Aircraft Ltd.
8
1970 (3) SCR 127; Anandram Mangturam v. Bholaram
Tanumal, ILR 1946 Born 218; Keshav/al Lallubhai Patel and
Ors. v. La/bhai Trikumla/ Mills Ltd 1959 SCR 213; Citi Bank
N.A. v. Standard Chartered Bank 2003 (4) Suppl. SCR 489:
C (2004) 1 SCC Page 12; S. Brahmanand v. K.R. Muthugopal
2005 (4) Suppl. SCR 461 :(2005) 12 SCC 764; TP. Daver
v. Lodge Victoria No. 363, S.C. Belgaum 1964 (1) SCR 1;
ABL International Ltd. v. Export Credit Guarantee Corpn. of
India Ltd. (2004) 3 SCC 553; Fateh Chand v. Balkishan Das
1964 SCR (1) 515; Mau/a Bux v. Union of India (UOI) 1970
D (1) SCR 928; Shree Hanuman Cotton Mills and Anr. v. Tata
Aircraft Limited 1970 (3) SCR 127; ONGC Ltd. v. Saw Pipes
Ltd 2003 (3) SCR 691: (2003) 5 SCC 705 - referred to.
Tilley v. Thomas, (1867 3 Ch.A 61); Webb v. Hughes,
E V.C.M. 1870 - referred to.
Case Law Reference:
1970 (3) SCR 127 Referred to Para 14
ILR 1946 Born 218 Referred to Para 19
F
1959 SCR 213 Referred to Para 24
2003 (4) Suppl. SCR 489 Referred to Para 25
2005 (4) Suppl. SCR 461 Referred to Para 26
G
1964 (1) SCR 1 Referred to Para 28
(2004) 3 sec 553 Referred to Para 28
1964 SCR (1) 515 Referred to Para 33
H 1970 (1) SCR 928 Referred to Para 35
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 633
AUTHORITY
1970 (3) SCR 127 Referred to Para 36 A
2003 (3) SCR 691 Referred to Para 37
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 193
of 2015.
B
From the Judgment & Order dated 28.05.2012 of the High
Court of Delhi at New Delhi in RFA (OS) No. 10 of 2008 in CS
(OS) 396 of 1994.
Paras Kuhad, Manmeet Arora, Kaveeta Wadia, Vipin
Tyagi, Apporv Tripathi, Shashank Tripathi, Jatin for the C
Appellant.
Amarendra Sharan, Dhruv Tamta, Binu Tamta, Rekha
Pandey, S. Ush,a Reddy, Sushma Suri for the Respondents.
D
The Judgment of the Court was delivered by
R.F. NARIMAN, J. 1. Leave granted.
2. The present appeal arises out of a public auction
conducted by the Delhi Development Authority ("ODA") wherein E
the appellant made the highest bid for Plot No.2-A, Bhikaji
Cama Place, District Centre, New Delhi for 3.12 Crores
(Rupees Three Crores Twelve Lakhs). As per the terms and
conditions of the auction, the appellant, being the highest
bidder, deposited a sum of Rs.78,00,000/- (Rupees Seventy F
Eight Lakhs), being 25% of the bid amount, with the ODA, this
being earnest money under the terms of the conditions of
auction. The relevant provisions in the conditions of auction read
as follows:
"(ii) The highest bidder shall, at the fall of the hammer, pay G
to the Delhi Development Authority through the officer
conducting the auction, 25% of the bid amount as earnest
money either in cash or by Bank Draft in favour of the Delhi
Development Authority, or Cheque guaranteed by a
Scheduled Bank as "good for payment for three months" H
634 SUPREME COURT REPORTS [2015] 1 S.C.R.
A in favour of the Delhi Development Authority. If the earnest
money is not paid, the auction held in respect of that plot
will be cancelled.
(iii) The highest bid shall be subject to the acceptance of
Vice-Chairman, DOA or such other officer(s) as may be
B
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 -
c representation by the bidder and/or intending purchaser,
the earnest money shall be forfeited.
(v) The successful biddfr shall submit a duly filled-in
application in the form attached immediately after the close
of the auction of plot in question.
D
(vi) When the bid is accepted by the DOA, the intending
purchaser shall be informed of such acceptance in writing
and tbe intending purchaser shall, within 3 months thereof,
pay to the Delhi Development Authority, the balance 75%
E 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
F to the intending purchaser without any interest unless the
earnest money is forfeited under para 2 (iv) above."
3. On 18.2.1982, the DOA acknowledged the receipt of
Rs.78,00,000/- (Rupees Seventy Eight Lakhs), accepted the
G appellant's bid and directed the appellant to deposit the
remaining 75% by 17.5.1982. However, as there was a general
recession in the industry, the appellant and persons similarly
placed made ·representations sometime in May, 1982 for
extending the time for payment of the remaining amount. The
DOA set up a High Powered Committee to look into these
H
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 635
AUTHORITY [R.F. NARIMAN, J.]
representations. The High Powered Committee on 21.7.1982 A
recommended granting the extension of time to bidders for
depositing the remaining amount of 75%. Based on the High
Powered Committee's report, by a letter dated 11.8.1982, the
ODA extended tjme for payment upto 28.10.1982 with varying
rates of interest starting from 18% and going upto 36%. B
4. Another High Powered Committee was also set up by
the DOA in order to find out whether further time should be given
to the appellant and persons similarly situate to the appellant.
5. The second High Powered Committee recommended C
that the time for payment be extended and specifically
mentioned the appellant's name as a person who should be
given more time to pay the balance amount. Despite the fact
that on 14.5.1984 the ODA accepted the recommendations of
the second High Powered Committee, nothing happened till
0
1.12.1987. Several letters had been written by the appellant to
ODA from 1984 to 1987 but no answer was forthcoming by the
ODA.
6. Vide a letter dated 1.12.1987, which is an important
letter on the basis of which the fate of this appeal largely E
depends, the DOA stated as follows:
"WITHOUT PREJUDICE'
DELHI DEVELOPMENT AUTHORITY
VIKAS SADAN
l.N.A. F
New Delhi-23 ...... 198 ...
No. F.32(2)/82/lmpl.-l/4
From: DIRECTOR (C.L)
DELHI DEVELOPMENT AUTHORITY
To, G
M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
18, Bara Khamba Road,
New Delhi-110001.
Sub: Regarding payment of balance premium in respect H
636 SUPREME COURT REPORTS [2015] 1 S.C.R.
A of Plot No.2-A situated in Bhikaji Cama Place Distt.
Centre.
Sir,
With reference to the above subject, I am directed to inform
B you that your case for relaxing the provisions of Nazul
Rules, 1981, to condone the delay for the payment of
balance premium in installments was referred to the Govt.
of India, Min. of Urban Development. Before the case is
further examined by the Govt. of India, Min. of Urban
c 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
D 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.
E
Dated 1.12.87
Yours faithfully,
Sd/
DIRECTOR (C.L)"
F
7. The appellant replied to the said letter on the same day.
itself in the following terms:
"KAILASH NATH & ASSOCIATES
Tel.: 3312648, 3314269
G 1006, KANCHENJUNGA,
18, BARAKHAMBA ROAD,
NEW DELHl-110001
Regd. Ack. Due.
H
'
KAI LASH !NATH ASSOCIATES v. DELHI DEVELOPMENT 637
AUTHORITY [R.F. NARIMAN, J.]
December 1, 1987. A
The Director (C.L.),
Delhi Development Authority,
Vikas Sadan, l.N.A.,
New Delhi-I 10023.
Subject: Payment of balance premium in respect of B
plot No.2-A Bhikaji Gama Place Distt. Centre, New
Delhi.
Dear Sir,
We are thankful to you for your letter No. F.30(2)/82-lmpl.-
c
l/4 dated nil received by us this afternoon, on the above
subject.
We hereby give our consent that we shall make the
payment of the balance amount of 75% premium within the D
period as may be fixed as per the schedule of payment
and conditions, if any imposed, as per the directions
issued by the Ministry of Urban Development, Govt. of
India, alongwith 18% interest charges per annum on the
belated payment. E
We now request you to kindly convey us your formal
approval to our making the said payment in installments
as requested for.
Thanking you, F
Yours faithfully
For KAILASH NATH & ASSOCIATES,
Sd/
Partner
G
Advance copy sent through Special Messenger."
8. The Central Government informed the DOA vide a letter
dated 1.3.1990 that the land auctioned to the appellant was not
Nazul land and, therefore, the Central Government would have
nothing further to do with the matter. Meanwhile, the appellant H
638 SUPREME COURT REPORTS [2015] 1 S.C.R.
A filed Writ Petition No.2395 of 1990 in the Delhi High Court in
which it claimed that persons similar to the appellant, namely,
Mis. Ansal Properties and Industries Private Limited and M/s
Skipper Tower Private Limited had been allowed to pay the
balance 75% premium and were in fact allotted other plots.
B Pleading Article 14, the appellant stated that they were entitled
to the same treatment.
9. By a judgment and order dated 2.9.1993, the Delhi
High Court held that as the auction was held as per terms and
C conditions of the auction, a dispute regarding the same is a
matter of contract and cannot be gone into in proceedings
under Article 226 of the Constitution. It was further observed
that on facts, the Court found no force in the contention raised
on behalf of the appellant regarding discrimination. An SLP
D against this order was also dismissed on 16.12.1993 by the
Supreme Court stating that the appellant is at liberty to take
whatever steps are permitted to the appellant under law to
challenge forfeiture of earnest money, which had been done by
a letter of 6.10.1993. This letter is also important for the correct
determination of this appeal and is set out hereinbelow:-
E
"REGD.A.D.
DELHI DEVELOPMENT AUTHORITY
VIKAS SADAN
1.N.A.
New Delhi-23, 6.10.1993
F
No.F.32(2)/82/CL/3816
From: DY. DIRECTOR (CL).
To,
M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
G 18, Bara Khamba Road,
New Delhi-110001.
Subject: Plot No.2-A in Bhikaji Cama Place Distt. Centre.
Sir,
H
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 639
AUTHORITY [R.F. NARIMAN, J.]
Consequent upon your failure to deposit the balance 75% A
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 Rs.78,00,000/- deposited by you at the time B
of auction has been forfeited.
Yours faithfully,
Sd/
(JAGDISH CHANDER) c
DEP.UTY DIRECTOR (CL)"
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 Rs.78,00,000/- (Rupees
Seventy Eight Lakhs). Shortly after the suit was filed, on D
23.2.1994, the DOA re-auctioned the premises which fetched
a sum of Rs.11. 78 Crores (Rupees Eleven Crores Seventy
Eight Lakhs).
11. The learned Single Judge by a judgment and order E
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 F
course, found merit in the representations received not
only from the plaintiff but such similar situated parties. It
is in view thereof that the matter went as far as setting up
of two committees to repeatedly examine the matter and
to come to a conclusion. The case of defendant no. 1 was G
that the material produced by the plaintiff and such
similar persons gave rise to a cause to extend the time
for making the payment subject to certain terms and
conditions. However, in view of the perception of
defendant no.1 that the consent of UOI, defendant no.2, H
640 SUPREME COURT REPORTS [2015) 1 S.C.R.
A would be required, the land being Nazul land, the file was
forwarded to defendant no. 2. The matter did not rest at
this since thereafter UOI did grant such consent but sent
back the file of the plaintiff only on account of the fact that
the land in question was not Nazul land. The net effect
B of this is that there was no permission required from the
UOI and the decision taken by defendant no. 1 to extend
the time period for making the payment, thus, stood as
it is.
-66. In my considered view, it is not open for defendant
c no. 1 to state that while it recommended the case of other
similarly situated parties in case of Nazul land to the
Government and obtained permission for grant of
extension of time, in case of non-Nazul land where such
permission was not required, a different parameter was ·
D required to be followed. It may be mentioned at the cost
of repetition that the plaintiff was a party which
volunteered to pay interest @18% per annum unlike
some of the other parties. There is merit in the contention
of learned Counsel for the plaintiff that defendant no. 1
E after treating the contract as subsistent having extended
time for making the payment was at least required to give
a notice to the plaintiff to perform the agreement prior to
terminating the agreement ~:wd could not straightaway
terminate the same. This conclusion can draw strength
F from the observations in Halsbury Laws of England
(supra) referred to aforesaid as also in Webb v. Hughes
(supra). It is clearly a case where there has been waiver
of the time being essence of the contract by conduct of
the parties and, thus, defendant no. 1 was required to give
G notice on the day appointed for completion of the contract
failing which only termination could take place.
67. There were numerous communications exchanged
between the parties. The recommendations of the two
high-powered committees constituted by defendant no. 1
H
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 641
AUTHORITY [R.F. NARIMAN, J.]
made its recommendations which were accepted by A
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 B
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 c
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 D
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 dated 6.10. 1993 (Ex.P-26) was issued. It E
appears that defendant no. 1 itself was not aware of the
land being non-Nazul land as the first communication
was addressed to the plaintiff only on 1.3.1990.
68. The present case is one where defendant no. 1 has F
not even suffered a loss. The plot was to be purchased
by the plaintiff at Rs. 3. 12 crores and it was finally sold to
a third party at Rs. 11.78 crores, i.e. almost three and a
half times the price. During this period defendant no. 1
continued to enjoy the earnest money of the plaintiff of G
Rs. 78.00 lacs.
69. In view of the prolonged period, exchange of
communications, the plaintiff making various offers but
not complying with the initial terms, defendant no. 1 taking H
642 SUPREME COURT REPORTS [2015] 1 S.C.R.
A its own time in the decision making process, I am of the
considered view that the plaintiff is entitled to the refund
of the earnest money of Rs. 78.00 lacs but no further
amount is liable to be paid to the plaintiff."
B 12. DOA appealed against the Single Judge's judgment
to a Division Bench of the Delhi High Court._The Division Bench
set aside the judgment of the Single Judge holding that the
forfeiture of the earnest money by the ODA was in order.
· 13. Shri Paras Kuhad, learned Senior Advocate appearing
C on behalf of the appellant, urged that time may have be-en of
the essence under the original terms and conditions of the
auction. However, time had been extended on several
occasions and, therefore, ceased to be of the essence. In
answer to the letter dated 1.12.1987, the appellant promptly
D replied and said it would be willing to pay the entire 75% with
18% interest and, therefore, there was no breach of contract
on the part of the appellant. Further, since the ODA sold the
plot for 11.78 Crores (Rupees Eleven Crores Seventy Eight
Lakhs), there was no loss caused to the DOA and, hence
E forfeiture of earnest money would not be in accordance with the
agreement or in accordance with law.
14. Shri Amarendra Sharan, learned Senior Advocate
appearing on behalf of the ODA, rebutted these contentions
and added that the case was covered by the judgment in Shree
F Hanuman Cotton Mills & Anr. v. Tata Aircraft Ltd., 1970 (3)
SCR 127. He argued further that since the letter of 1.12.1987
had been issued under a mistake of fact, it would be void under
Section 20 of the Contract Act and the said letter should,
therefore, be ignored. If it is ignored, then the termination of the
G contract and the forfeiture of earnest money are completely in
order as the appellant was in breach. The fact that the ODA
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
H
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 643
AUTHORITY [R.F. NARI MAN, J]
to forfeit earnest money on breach without any necessity of A
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 B
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 DOA. On the contrary, after setting up C
two High Powered Committees which were instructed to look
into the grievances of the appellant, the DOA 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 which the ODA could have insisted upon had
specifically been waived. It is nobody's case that there is any D
misrepresentation here by the bidder. Therefore, under sub-
clause (iv), without more, earnest money could not have been
forfeited.
16. The other noticeable feature of this case on facts is E
that DOA specifically requested the appellant to give their
consent to make the balance payable along with 18% interest
charges on belated payment. This was on the footing that the
Nazul Rules of 1981 would be relaxed by the Central
Government. The rea·son why the letter is marked "without F
prejudice" and the DOA made it clear that the letter does not
carry any commitment, is obviously because the Central
Government may not relax the provision of the Nazul Rules, in
which case nothing further could be done by the DOA. If,
however, the Central Government was willing to condone the G
delay, ODA would be willing to take 75% of the outstanding
amount along with 18% interest.
17. Mr. Sharan argued that since the Central Government
ultimately found that this was not a Nazul land, the letter was
obviously based on a mistake of fact and would be void under H
644 SUPREME COURT REPORTS [2015] 1 S.C.R.
A Section 20 of the Contract Act. We are afraid we are not able
to accept this plea. Long after the Central Government informed
ODA (on 1.3.1990) that the property involved in the present
case is not Nazul land, the ODA by its letter of 6.10.1993
cancelled the allotment of the plot because the appellant had
B failed to deposit the balance 75%. DDA's understanding,
therefore, was that what was important was payment of the
balance 75% which was insisted upon by the letter dated
1.12.1987 and which was acceded to by the respondent
immediately on the same date. Further, Mr. Sharan's argument
c theai since the letter was "without prejudice" and since no
commitment had been made, they were not bound by the terms
of the letter also fails to impress us. The letter was without
prejudice and no commitment could have been given by the
ODA because the Central Government may well not relax the
Nazul Rules. On the other hand, if the Central Government had,
0
later on, relaxed the Nazul Rules, DOA could not be heard to
say that despite this having been done, ODA would yet cancel
the allotment of the plot. That this could not have been done is
clear because of the aforesaid construction of the letter dated
1.12.1987 and also because DOA is a public authority bound
E
by Article 14 and cannot behave arbitrarily.
18. It now remains to deal with the impugned judgment of
the Division Bench.
F 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 Born
218 and held:
G "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
H
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 645
AUTHORITY [R.F. NARIMAN, J.]
party to a contract agrees to consider time being extended A
-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
3~ B
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 C
if the time is once allowed to pass, and the parties go on
negotiating for completion of the purchase, then time is
no longer of the essence of the contract. But, on the other
- hand, it must be borne in mind that a purchaser is not
bound to wait an indefinite time; and if he finds, while the D
negotiations are going on, that a long time;,Will elapse
before the contract can be _completed, he may in a
reasonable manner give notice to the vendor, and fix a
period at which the business is to be terminated."
E
21. Based on the facts of this case, the_ Single Judge was
correct in observing that the letter of cancellation dated
6.10.1993 and consequent forfeiture of earnest money was
made without putting the appellant on notice that it has to
deposit the balance 75% premium of the plot within a certain
stated time. In the absence of such notice, there is no breach F
of contract on the part of the appellant and consequently earnest
money cannot be forfeited.
22. Tilley v. Thomas, (1867 3 Ch.A 61) would not apply
for the reason that the expression "without prejudice" was only G
used as stated above because the Central Government may
not relax the Nazul Rules.
23. In Anandram Mangturam v. Bholaram Tanumal, ILR
1946 Born 218, two separate judgments were delivered, one
H
646 SUPREME COURT REPORTS [2015] 1 S.C.R.
A by Chief Justice Stone and the other by Chagla,J. as he then
was. Stone C.J. held:-
"In my judgment, reading the correspondence as
a whole, it at no stage passed from the melting pot of
negotiations to crystallize as an agreement to extend the
B
time for the performance of the contract. The attitude of
the purchaser throughout the correspondence was:
"Satisfy us that you are doing your best to obtain the
goods from your suppliers and we will then consider
fixing a new date for delivery of the goods to us". On the
c other hand the attitude of the vendors throughout the
correspondence was to avoid the purchaser's demand
and to simply say: "You know that we c;mnot effect delivery
from our suppliers and until we do so we cannot deliver
the goods to you". There was never in my judgment
D any consensus ad-idem, no agreement, express or
implied, to extend the time either to any particular date
or to the happening of some future event. Mere
forbearance in my opinion to institute proceedings or to
give notice of rescission cannot be an extension ·or the
E time for the performance of a contract within the meaning
of s. 63 of the Contract Act." (at 226 & 227)
Chagla, J. in a separate judgment held:-
"Under s. 55 of the Indian Contract Act, the
F
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
G fact of not exercising the option change or alter the date
of performance fixed under the contract itself Under s.
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
H he may extend the time for such performance. But it is
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 64 7
AUTHORITY [R.F. NARIMAN, J.]
clear again that such an extension of time cannot be a 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 s. 63 of the Indian B
Contract Act that the time for the performance of the
contract can be extended and that time can only be
extended by an agreement arrived at between the
promisor and the promisee." (at 229)
24. The aforesaid judgment would apply in a situation
c
where a promisee accedes to the request of the promiser to
extend time that is fixed for his own benefit. Thus, in Keshavlal
Lallubhai Patel and Ors. v. Lalbhai Trikumlal Mills Ltd 1959
SCR 213, this Court held:-
D
"The true legal position in regard to the extension of time
for the performance of a contract is quite clear under
s. 63 of the Indian Contract Act. Every promisee, as the
section provides, may extend time for the performance
of the contract. The question as to how extension of time E
may be agreed upon by the parties has been the subject-
matter of some argument at the Bar in the present
appeal. There can be no doubt, we think, that both the
buyer and the seller must agree to extend time for the
delivery of goods. It would not be open to the promisee F
by his unilateral act to extend the time for performance
of his own accord for his own benefit."
25. However, such is not the position here. In the present
case, the appellant is the promiser and ODA is the promisee.
In such a situation, ODA can certainly unilaterally extend the time G
for payment under Section 63 of the Contract Act as the time
for payment is not for DDA's own benefit but for the benefit of
the appellant. The present case would be covered by two
judgments of the Supreme Court. In Citi Bank N.A. v. Standard
Chartered Bank, (2004) 1 SCC Page 12, this Court held: H
648 SUPREME COURT REPORTS [2015] 1 S.C.R.
A "50. Under Section 63, unlike Section 62, a
promisee can act unilaterally af!d may
(i) dispense with wholly or in part, or
(ii) remit wholly or in part,
B
the performance of the promise made to him, or
(iii) may extend the time for such performance, or
(iv) may accept instead of it any satisfaction which he
c thinks fit."
26. Similarly in S. Brahmanand v. K.R. Muthugopa/,
(2005) 12 SCC 764 the Supreme Court held:
"34. Thus, this was a situation where the original
D
agreement of 10-3-1989 had a "fixed date" for
performance, but by the subsequent letter of 18-6-1992
the defendants made a request for postponing the
performance to a future date without fixing any further date
for performance. This was accepted by the plaintiffs by
E their act of forbearance and not insisting on performance
forthwith. There is nothing strange in time for performance
being extended, even though originally the agreement
had a fixed date. Section 63 of the Contract Act, 1872
provides that every promisee may extend time for the
F 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
G observations of this Court in Keshavlal Lal/ubhai
Patel v. La/bhai Trikumlal Mills Ltd., 1959 SCR 213: AIR
1958 SC 512, para 8. See a/so in this
connection Saraswathamma v. H. Sharad Shrikhande,
AIR 2005 Kant 292 and K. Venkoji Rao v. M. Abdul
H Khuddur Kureshi, AIR 1991 Kant 119, following the
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 649
AUTHORITY [R.F. NARIMAN, J.]
judgment in Keshavlal Lallubhai Patel (supra).] Thus, in A
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 secqnd part of the B
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 fixed for the performance of the contract but
the Court was of the view that "in the events that c
happened in this case, the agreement in question though
started with fixation of a period for the completion of the
transaction became one without such period on account
of the peculiar facts and circumstances already
explained and the co~tract, therefore, became one in D
which no time was fixed for its performance" and held that
what was originally covered by the first part of Article 113
of the Limitation Act, 1908 would fall under the second
part of the said article because of the supervening
circumstances of the case. "(at Page 777)
E
27. Coming to the application of Article 14, the Division
Bench in paragraph 37 stated:-
"37. Now, in India, reasonableness in State action is a
facet of Article 14 of the Constitution of India and in the F
field of contract would have a considerable play at the
precontract stage. Once parties have entered into a
contractual obligation, they would be bound by the
contract and the only reasonableness would be of the
kind envisaged by the Supreme Court in the decision G
reported as AIR 1963 SC 1144 T.P. Oaver v. Lodge
Vict6ria No.363 SC Belgaum & Ors. On the subject of a
member of a club being expelled, and the relationship
being a contract as per the rules and regulations of the
club, adherence whereto was agreed to by he who
H
650 SUPREME COURT REPORTS [2015] 1 S.C.R.
A became a member of the club and the management of
the club, the Supreme Court observed that in such private
affairs, it would be good faith in taking an action which is
rooted in the minds of modern men and women i.e. in a
modern democratic society and no more. The decision
B guides that where a private affair i.e. a contract is so
perverted by a party that it offends the concept of a fair-
play in a modern society, alone then can the action l)e
questioned as not in good faith and suffice would it be to
state that anything done not in good faith would be
c unreasonably done."
28. It will be noticed at once that T.P. Daver v. Lodge
Victoria No. 363, S.C. Belgaum, 1964 (1) SCR 1, is not an
authority on Article 14 at all. It deals with clubs and the fact that
rules or bye-laws which bind members of such clubs have to
D be strictly adhered to. On the other hand in ABL International
Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3
SCC 553 at paras 22 and 23, the Supreme Court held:
"22. We do not think the above judgment in Y.ST
E Industries Ltd. {(2001) 1 sec 298: 2001 sec (L&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 sec (L&S) 227] against whom the writ petition was
F 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
G
public functions; failure to do so would give rise to a
complaint under Article 226 against a private body. While
cpnsidering 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
H
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 651
AUTHORITY [R.F. NARIMAN, J.]
Constitution is maintainable. In the instant case, as to the A
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 repudiating the claim of the appellants arising out
of a contract? Answer to this question, in our opinion, is B
found in the judgment of this Court in the case of Kumari
Shrilekha Vidyarthi v. State of U. P. [(1991) 1 SCC 212 :
1991 SCC (L&S) 742] wherein this Court held: (SCC pp.
236-37, paras 22 & 24)
"The impact of every State action is also on public C
interest. . .. It is really the nature of its personality
as State which is significant and must characterize
all its actions, in whatever field, and not the nature
of function, contractual or otherwise, which is
decisive of the nature of scrutiny permitted for D
examining the validity of its act. The requirement
of Article 14 being the duty to act fairly, justly and
reasonably, there is nothing which militates
against the concept of requiring the State always
to so act, even in contractual matters." E
23. It is clear from the above observations of this Court,
once the State or an instrumentality of the State is a party
of the contract, it has an obligation in law to act fairly,
justly and reasonably which is the requirement of Article F
14 of the Constitution of India. Therefore, if by the
impugned repudiation of the claim of the appellants the
first respondent as an instrumentality of the State has
acted in contravention of the abovesaid requirement of
Article 14, then we have no hesitation in holding that a G
writ court can issue suitable directions to set right the
arbitrary actions of the first respondent"
29. Based on the facts of this case, it would be arbitrary
for the DOA to forfeit the earnest money on two fundamental
grounds. First, there is no breach of contract on the part of the H
652 SUPREME COURT REPORTS (2015] 1 S.C.R.
A appellC\_nt as has been held above. And second, ODA not
having "been put to any loss, even if ODA could insist on a
contractual stipulation in its favour, it would be arbitrary to allow
DOA as a publiq authority to appropriate Rs.78,00,000/-
(Rupees Seventy Eight Lakhs) without any loss being caused.
B It is clear, therefore, that Article 14 would apply in the field of
contract in this case and the finding oqhe Division Bench on
this aspect is hereby reversed. ,.
30. We now come to the reasoning which involves Section
74 of the Contract Act. The Division Bench held:
c
"38. The learned Single Judge has held that the property
was ultimately auctioned in the year 1994 at a price which
fetched DOA a handsome return of Rupees 11. 78 crores
and there being no damages suffered by ODA, it could
D 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. & Anr. V. Tata Aircraft Ltd. which
holds that as against an amount tendered by way of
E
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-1 was May 18,
F 1982 and as extended by Ex. P-8 was October 28, 1982.
That DOA could auction the plot in the year 1994 in the
sum of Rupees 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
G 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
H breach, the party complaining of the breach is entitled,
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 653
AUTHORITY [R.F. NARIMAN, J.]
whether or not actual damage or loss is proved to have A
been caused thereby, to receive from the party who has
broken the contract reasona~ble compensation not
exceeding the amount so named."
32. By an amendment made in .1899, the Section was
8
amended to read:
"74. Compensation for breach of contract where penalty
stipulated for. - 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 C
other stipulation by way of penalty, the party complaining
of the breach is entitled, whether or not actual damage
or loss is proved to ilave been caused thereby, to
receive from the party who has broken the contract
reasonable compensation not exceeding the amount so D
named or, as the case may be, the penalty stipulated for.
Explanation.-A stipulation for increased interest from
the date of default may be a stipulation by way of penalty.
Exception.-When any person enters into any bail-bond, E
recognizance or other instrument of the same nature, or,
under the provisions of any law, or under the orders of
the Central Government or of any State Government,
gives any bond for the performance of any public duty
or act in which the public are interested, he shall be F
liable, upon breach of any condition of any such
instrument, to pay the whole sum mentioned therein.
Explanation.-A person who enters into a contract with
Government does not necessarily thereby undertake any G
public duty, or promise to do an act in which the public
are interested."
33. Section 74 occurs in Chapter 6 of the Indian Contract
Act, 1872 which reads "Of the consequences of breach of
contract". It is in fact sandwiched between Sections 73 and 75 H
654 SUPREME COURT REPORTS [2015] 1 S.C.R.
A which deal with compensation for loss or damage caused by
breach of contract and compensation for damage which a party
may sustain through non-fulfillment of a contract after such party
rightfully rescinds such contract. It is important to note that like
Sections 73 and 75, compensation is payable for breach of
B contract under Section 74 only where damage or loss is caused
by such breach. ·
34. In Fateh Chand v. Balkishan Oas, 1964 SCR (1) 515,
this Court held:
C "The section is clearly an attempt to eliminate 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
D /aw 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
E 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
F penalty.
Section 74 of the Indian Contract Act deals with the
measure of damages in two classes of cases (i) where
G 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
H first class. The measure of damages in the case of
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 655
AUTHORITY [R.F. NARIMAN, J.]
breach of a stipulation by way of penalty is by A
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 B
case. Jurisdiction of the Court to award compensation in
case <!Jf 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 c
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
0
damages"; 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 E
be likely to result from the breach. "(At page 526, 527)
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 F
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 G
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 H
656 SUPREME COURT REPORTS [2015] 1 S.C.R.
A circumstance of the party in default being a plaintiff or a \
defendant in a suit. Use of the expression "to receive
from the pqrty 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
B 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
c having regard to the conditions existing .on the date of
the breach. "(At page 530)
35. Similarly, in Mau/a Bux v. Union of India (UOI), 1970
(1) SCR 928, it was held:
D "Forfeiture of earnest money under a contract for
sale of property-movable or immovabfe··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 PC 1, Roshan Lal v. The Delhi
E Cloth and General Mills Company Ltd., Delhi,JLR.
Alf. 166; Muhammad Habibullah v. Muhammad
Shafi, IL R. All. 324; Bishan Chand v. Radha Kishan
Das, l.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.
F
forfeiture is of the nature of penalty. Section 74 applies.
V\.'here 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
G
of the nature of a penalty.
Counsel for the Union, however, urged that in the present
case Rs. 10, 0001- in respect of the potato contract and
Rs. 8, 500 in respect of the poultry contract were genuine
H pre-estimates of damages which the Union was likely to
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 657
AUTHORITY [R.F. NARIMAN, J.]
suffer as a result of breach of contract, and the plaintiff A
was not entitled to any relief against forfeiture. Reliance
in support of this contention was placed upon the
expression (used in Section 74 of the Contract Act), "the
party complaining of the breach is entitled, whether or not
actual damage or loss is proved to have been caused B
thereby, to receive from the party who has broken the
contract reasonable compensation". It is true that in every
case of breach of contract the person aggrieved by the
breach is not required to prove actual loss or damage
suffered by him before he can claim a decree, and the c
Court is competent to award reasonable compensation
in case of breach even if no actual damage is proved to
have been suffered in consequence of the breach of
.1: contract. But the expression "whether or not actual
damage or loss is proved to have been caused thereby" 0
is intended to cover different classes of contracts which
come before the Courts. In case of breach of some
contracts it may be impossible for the Court to assess
compensation arising from breach, while in other cases
compensation can be calculated in accordance with
E
established rules. Where the Court is unable to assess
the compensation, the sum named by the parties if it be
regarded as a genuine pre-estimate may be taken into
consideration as the measure of reasonable
compensation, but not if the sum named is in the nature
of a penalty. Where loss in terms of money can be F
determined, the party claiming compensation must prove
the loss suffered by him.
In the present case, it was possible for the Government
of India to lead evidence to prove the rates at which G
potatoes, poultry, eggs and fish were Pli!Chase.d bY-them
when the plaintiff failed to cJeliver ,,regularly and fully" the
quantities stipulated under the terms of the contracts and
. ~fer the· contracts were terminated. They could have
proved the rates at which they had to be purchased and H
658 SUPREME COURT REPORTS [2015] 1 S.C.R.
A also the other incidental charges incurred by them in
procuring the goods contracted for. But no such attempt
was made. "(At page 933, 934)
36. In Shree Hanuman Cotton Mills and Anr. v. Tata
Aircraft Limited, 1970 (3) SCR 127 it was held:
8
"From a review of the decisions cited above, the following
principles emerge regarding "earnest":
(1) It must be given at the moment at which the contract
c is concluded.
(2) It represents a guarantee that the contract will be
fulfilled or, in other words, 'earnest' is given to bind the
contract.
D (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.
E (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
F 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
G 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
H deposit was not by way of earnest and hence the amount
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 659
AUTHORITY [R.F. NARIMAN, J.]
could not be forfeited. Unless the appellants had pleaded A
and established that there was unreasonableness
attached to the amount required to be deposited under
the contract or that the clause regarding forfeiture
amounted to a stipulation by way of a penalty, the
respondents had no opportunity to satisfy the Court that B
no question of unreasonableness or the stipulation being
by way of penalty arises. He further urged that the
question of unreasonableness or otherwise regarding
earnest money does not at all arise when it is forfeited
according to the terms of the contract. c
In our opinion the learned Attorney General is well
founded in his contention that the appellants raised no
such contentions covered by the second point, noted
above. It is therefore unnecessary for us to go into the
question as to whether the amount deposited by the D
appellants, in this case, by way of earnest and forfeited
as such, can be considered to be reasonable or not. We
express no opinion on the question as to whether the
element of unreasonableness can ever be considered
regarding the forfeiture of an amount deposited by way E
of earnest and if so what are the necessary factors to be
taken into account in considering the reasonableness or
otherwise of the amount deposited by way of earnest. If
the appellants were contesting the claim on any such
grounds, they should have laid the foundation for the F
same by raising appropriate pleas and also led proper
evidence regarding the same, so that the respondents
would have had an opportunity of meeting such a
claim. "(At page 142)
G
37. And finally in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5
sec 705, it was held:
"64. Jt is apparent from the aforesaid reasoning recorded
by the Arbitral Tribunal that it failed to consider Sections
73 and 74 of the Indian Contract Act and the ratio laid H
660 SUPREME COURT REPORTS (2015) 1 S.C.R.
A down in Fateh Chand case [AIR 1963 SC 140: (1964) 1
SCR 515 at p. 526] wherein it is specifically held that
jurisdiction of the court to award compensation in case
of breach of contract is unqualified except as to the
maximum stipulated; and compensation has to be
B reasonable. Under Section 73, when a contract has been
broken, the party who suffers by such breach is entitled
to receive compensation for any loss caused to him
which the parties knew when they made the contract to
be likely to result from the breach· of it. This section is to
c be read with Section 74, which deals with penalty
stipulated in the contract, inter alia (relevant for the
present case) provides that 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 breach is entitled, whether or not actual loss is proved
D
to have been caused, thereby4o 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
E 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
F 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
G 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
H because of the breach thereof In such a situation, if the
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 661
AUTHORITY [R.F. NARIMAN, J.]
parties have pre-estimated such loss after clear A
understanding, it would be totally unjustified to arrive at
the conclusion that the party who has committed breach
of the contract is not liable to pay compensation. It would
be against the specific provisions of Sections 73 and 74
of the Indian Contract Act. There was nothing on record B
that compensation contemplated by the parties was in
any way unreasonable. It has been specifically mentioned
that it was an agreed genuine pre-estimate of damages
duly agreed by the parties. It was also mentioned that the
liquidated damages are not by way of penalty. It was also c
provided in the contract that such damages are to be
recovered by the purchaser from the bills for payment of
the cost of material submitted by the contractor. No
evidence is led by the claimant to establish that the
stipulated condition was by way of penalty or the
0
compensation contemplated was, in any way,
unreasonable. There was no reason for the Tribunal not
to rely upon the clear and unambiguous terms of
agreement stipulating pre-estimate damages because of
delay in supply of goods. Further, while extending the time E
for delivery of the goods, the respondent was informed
that it would be required to pay stipulated damages.
68. From the-aforesaid discussions, it can be held that:
(1) Terms of the contract are required to be taken into· F
consideration before arriving at the conclusion whether
the party claiming damages is entitled to the same.
(2) If the terms are clear and unambiguous stipulating the
liquidated damages in case of the breach of the contract
unless it is held that such estimate of damages! G
compensation is unreasonable or is by way of penalty,
party who has committed the breach is required to pay
such compensation and that is what is provided in
Section 73 of the Contract Act. ' ;
H
662 SUPREME COURT REPORTS [2015] 1 S.C.R.
A (3) Section 74 is to be read along with Section 73 and,
therefore, in every case of breach of contract, the person
aggrieved by the breach is not required to prove actual
loss or damage suffered by him before he can claim a
decree. The court is competent to award reasonable
B compensation in case of breach even if no actual
damage is proved to have been suffered in consequence
of the breach of a contract.
(4) In some contracts, it would be impossible for the court
to assess the compensation arising from breach and if
c the compensation 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."
D 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 Rs.1,000/- deposited as earnest money
could be forfeited. (See: 1964 (1) SCR Page 515 at 525 and
531).
E
39. Shree Hanuman Cotton Mills & Another 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 Rs.42,499/- for loss and damage
F 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
G 133). Both questions were answered against the appellant. In
deciding question two against the appellant, this Court held:-
"But, as we have already mentioned, we do not propose
to go into those aspects in the case on hand. As
H mentioned earlier, the appellants never raised any
KAI LASH NATH ASSOCIATES v. DELHI DEVELOPMENT 663
AUTHORITY [R.F. NARIMAN, J.]
contention that the forfeiture of the amount amounted to A
a penalty or that the amount forfeited is so large that the
forfeiture is bad in law. Nor have they raised any
contention that the amount of deposit is so unreasonable
and therefore forfeiture of the entire amount is not
justified. The decision in Mau/a Bux's [1970]1 SCR928 B
had no occasion to consider the question of
reasonableness or otherwise of the earnest deposit
being forfeited. Because, from the said judgment it is
clear that this Court did not agree with the view of the
High Court that the deposits made, and which were under c
consideration, were paid as earnest money. It is under
those circumstances that this Court proceeded to
consider the applicability of Section 74 of the Contract
Act. (At page 143)"
40. From the above, it is clear that this Court held that D
Maula Bux's case was not, on facts, a case that related to
earnest money. Consequently, the observation in Maula Bux
that forfeiture of earnest money under a contract if reasonable
does not fall within Section 74, and would fall within Section
74 only if earnest money is considered a penalty is not on a E
matter that directly arose for decision in that case. The law laid
down by a Bench of 5 Judges in Fateh Chand's case is that
all stipulations naming amounts to be paid in case of breach
would be covered by Section 74. This is because Section 74
cuts across the rules of the English Common Law by enacting F
a uniform principle that would apply to all amounts to be paid
in case of breach, whether they are in the nature of penalty or
otherwise. It must not be forgotten that as has been stated
above, forfeiture of earnest money on the facts in Fateh
Chand's case was conceded. In the circumstances, it would G
therefore be correct to say that as earnest money is an amount
to be paid in case of breach of contract and name ... in the
contract as such, it would necessarily be covered by Section
74.
41. It must, however, be pointed out that in cases where a H
664 SUPREME COURT REPORTS [2015] 1 S.C.R.
A public auction is held, forfeiture of earnest money may take
place even before an agreement is reached, as DOA is to
accept the bid only after the earnest money is paid. In the
present case, under the terms and conditions of auction, the
highest bid (along with which earnest money has to be paid)
B 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
C 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, DOA
has received a much higher amount on re-auction of the same
plot of land.
D
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
E
amount payable by way of damages, the party
complaining of a breach can receive as reasonat?le
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
F 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 stated. Similarly, in cases
where the amount fixed is in the nature of penalty,
G only reasonable compensation can be awarded not
exceeding the penalty so stated. In both cases, the
liquidated amount or penalty is the upper limit
beyond which the Court cannot grant reasonable
compensation. -
H
KAILASH NATH ASSOCIATES v. DELHI DEVELOPMENT 665
AUTHORITY [R.F. NARIMAN, J.]
2. Reasonable .compensation will be fixed on well A
known principles that are applicable to the law of
contract, which are to be found inter alia in Section
73 of the Contract Act.
3. Since Section 74 awards reasonable B
compensation for damage or loss caused by a
breach of contract, damage or loss caused is a
sine qua non for the applicability of the Section.
4. The Section applies whether a person is a plaintiff
or a defendant in a suit. C
5. The sum spoken of may already be paid or be
payable in future.
6. The expression "whether or not actual damage or
0
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 E
damage or loss, can be awarded.
7. Section 74 will apply to cases of forfeiture of
earnest money under a contract. Where, however,
forfeiture takes place under the terms and F
conditions of a public auction before agreement is
reached, Section 74 would have no application.
44. 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 G
of the Division Bench that the fact that the ODA made a profit
from re-auction is irrelevant, as that would fly in the face of the
most basic principle on the award of damages - namely, that
compensation can only be given for damage or loss suffered.
H
666 SUPREME COURT REPORTS [2015] 1 S.C.R.
A If damage or loss is not suffered, the law does not provide for
a windfall.
45. A great deal of the argument before us turned on
notings in files that were produced during cross-examination
of various witnesses. We have not referred to any of these
8
notings and, consequently, to any case law cited by both parties
as we find it unnecessary for the decision of this case.
46. Mr. Sharan submitted that in case we were against
him, the earnest money that should be refunded should only be
C refunded with 7% per annum and not 9% per annum interest
as was done in other cases. We are afraid we are not able to
agree as others were offered the refund of earnest money way
back in 1989 with 7% per annum interest which they accepted.
The DOA having chosen to fight the present appellant tooth and
D nail even on refund of earnest money, when there was no
breach of contract or loss caused to it, stands on a different
footing. We, therefore, turn down this plea as well.
47. In the result, the appeal is allowed. The judgment and
E order of the Single Judge is restored. Parties will bear their own
costs.
Nidhi Jain Appeal allowed.
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