Can the arbitrator allow forfeiture of the substantial amount of consideration without proof of actual loss, considering it to be Earnest Money?

As noted above, in the present case, the respondent has neither pleaded nor established that it had suffered any loss. The respondent’s case that it was entitled to forfeit the sum of ₹60,00,000/- paid by the petitioner rested solely on the ground that it was earnest money and therefore, it could be forfeited in terms of the Agreement. However, as noticed above, in Kailash Nath Associates (supra), the Supreme Court had in unambiguous terms held that Section 74 of the Indian Contract Act would apply in cases of forfeiture of earnest money under the contract. The Court had further held that where it is possible to prove actual damages of loss, such proof is not dispensed with. {Para 42}

43. In the given circumstances, without the respondent establishing that it had suffered any loss whatsoever on account of the petitioner failing to close the transaction for purchase of the Property would be impermissible for the respondent to forfeit the amount of ₹60,00,000/-, which admittedly is not a nominal amount, and constitutes substantial portion of the consideration.

44. In view of the above, the impugned award to the extent that it accepts that the respondent was entitled to forfeit the amount of ₹60,00,000/- is set aside.

IN THE HIGH COURT OF DELHI AT NEW DELHI

 O.M.P. (COMM) 121/2020

MR. RAJESH GUPTA  Vs SH. RAM AVTAR 

CORAM

HON’BLE MR JUSTICE VIBHU BAKHRU

Dated: 19.05.2022

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Whether Breach Of Contract U/S 74 of The Contact Act is Applicable At Pre-Formation of contract Stage?

The writ petitioner has approached this Court aggrieved by the action of the second respondent in forfeiting the bid security which was submitted by it in the course of a process for award of contract initiated by that respondent. The challenge essentially is to the communication of 18 March 2019 & 28 May 2019 pursuant to which the second respondent apprised the petitioner of its decision to forfeit the bid security which had been submitted.

 40. In the light of the foregoing discussion, we are of the considered opinion that the appellant did not commit any breach of the term(s) and condition(s) of the notice inviting bids and on the other hand, it was the respondents who committed breaches. In these circumstances, the State had no right to forfeit the security amount and instead it should have been returned when demanded by the appellant.”

 Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.”

 IN THE HIGH COURT OF DELHI AT NEW DELHI

Judgment pronounced on: 31 March 2022 

 W.P.(C) 8779/2019, 

CM APPLs. 36308/2019 & 44738/2019

 THE INDIAN HOTELS COMPANY LTD. Vs  UNION OF INDIA AND ORS.

CORAM:  MR. JUSTICE YASHWANT VARMA 

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Whether seller can forfeit earnest amount on breach of contract without pleading and proving loss?

In view of the above and having regard to the fact that a huge amount has been paid under the Agreement to Sell, it cannot be treated as earnest money. Besides in Kailash Nath (supra), the Supreme Court has held that forfeiture of earnest money has to be in accordance with Section 74 of the Indian Contract Act. The Court has held that without any loss, forfeiture of a huge amount would be arbitrary. Under Section 74, forfeiture of entire earnest money can be upheld only if the damage or loss is difficult or impossible to prove. This is not the case here. Defendants claim that they are entitled to forfeit as the Plaintiff is in breach and the terms of the contract allow forfeiture. The earnest money cannot also be considered to a genuine pre-estimation of damages, as it cannot be said that damage or loss is incapable of being proved. Notably, damage or loss has not even been pleaded and therefore, even if the amount received by the Defendants is accepted to be earnest money, the forfeiture of the entire amount is impermissible. The Defendants contention that the question of damage and loss requires to be proved by leading evidence, cannot be accepted. It is settled law that evidence can be permitted only for the facts stated in the pleadings. Since, the Defendants have not pleaded any loss caused to them on account of breach of Contract by the Plaintiff; there is no ground for framing issues in the present case and affording an opportunity to the Defendants to lead evidence.

IN THE HIGH COURT OF DELHI

CS (OS) 143/2018

Decided On: 22.04.2019

 Versatile Commotrade Private Limited  Vs. Kesar Devi and Ors.

Hon'ble Judges/Coram:

Sanjeev Narula, J.

Citation: AIR 2019 Delhi 155

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Whether a plea can be taken in argument in appeal in absence of pleading?

As far as argument of discrimination is concerned, there are no foundational facts in support of this argument. No such plea was taken either before the AFT or in the instant appeal. Only with the additional documents, communication dated February 6, 2014 is enclosed which the Appellant has received under the Right to Information Act, 2005 in respect of Surg Cdr Haresh Maini. On the basis of this document, oral submission was made at the time of arguments. It is not known as to under what circumstances recovery of proportionate cost was made in his case. Moreover, in the absence of pleadings, the Respondents did not have any opportunity to explain the same. Therefore, such a plea cannot be allowed in the facts of this case.

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 1491 of 2018 (Arising out of Diary No. 35797 of 2017)

Decided On: 01.02.2018

Ashwini Kumar Handa Vs. Union of India (UOI) and Ors.

Hon'ble Judges/Coram:

A.K. Sikri and Ashok Bhushan, JJ.

Citation: 2018(6) MHLJ 25

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Whether court should grant compensation for breach of contract if there is no loss to other side?

 In my opinion there is also a legal issue on the basis of which this appeal has to be allowed and the suit for recovery filed by the appellant/plaintiff has to be decreed. This is because of the provisions of Sections 73 and 74 of the Indian Contract Act, 1872. In law merely because there is a breach of contract such breach is not actionable unless because of the breach loss is caused to the aggrieved party. There can be forfeiture of an amount paid under a contract only when the aggrieved party is caused loss. Two relevant judgments in this regard are the judgments of the Constitution Bench of the Supreme Court in the case of Fateh Chand Vs. Balkishan Dass AIR 1963 SC 1405 and the recent judgment of the Supreme Court in the case of Kailash Nath Associates Vs. Delhi Development Authority and Another, (2015) 4 SCC 136. The relevant paras in the judgment in the case of Kailash Nath Associates (supra) are paras 34, 43 and 43.1 to 43.7 and these paras read as under:-

"34. In Fateh Chand v. Balkishan Das, this Court held: "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 andstipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.....

* * * 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 the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or 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 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 stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a Plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a Plaintiff or a Defendant in a suit. Use of the expression "to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the Plaintiff is entitled from the Defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach."

xxxxx xxxxx xxxxx

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:

43.1. 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 stated. Similarly, in cases where the amount fixed is in the nature of penalty, 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.

43.2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

43.3. Since Section 74 awards reasonable 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.

43.4. The Section applies whether a person is a Plaintiff or a Defendant in a suit.

43.5. The sum spoken of may already be paid or be payable in future.

43.6. 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. 43.7. 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."

(underlining added)

8. In the present case as is seen from the admitted facts on record that the respondent/defendant neither as per its written statement nor as per its evidence led, ever pleaded and proved that any loss has been caused to the respondent/defendant on account of the failure by the appellant/plaintiff to take dealership of the respondent/defendant. Therefore even assuming that there is some breach of contract on the part of the appellant/plaintiff, yet since no loss has been caused to the respondent/defendant which is pleaded and proved, therefore in accordance with the ratio of the judgments of the Supreme Court in the cases of Fateh Chand (supra) and Kailash Nath Associates (supra), the respondent/defendant could not have forfeited the total amount of Rs.6,25,000/- deposited by the appellant/plaintiff with the respondent/defendant.

Delhi High Court

M/S Grover Tankers Investment vs M/S Otc Exchange Of India on 15 October, 2018

CORAM:

HON'BLE MR. JUSTICE VALMIKI

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Whether person aggrieved by breach of contract is required to prove that actual loss or damage was suffered by him?

 It can thus be seen that, in every case of breach of a contract, the person aggrieved by the breach, is not required to prove the actual loss or damage suffered by him, before he can claim a decree and the 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 contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby", as appearing in the said section is intended to cover different types of contracts, which come before the Courts. In case of some contracts, it may be impossible for the Courts to asses compensation, arising from such breach. In such cases, the section dispenses with the proof of such loss or damage and the Court can grant the compensation in terms of the liquidated damages, if the sum named by the parties is regarded as a genuine pre-estimate of such loss. 

IN THE HIGH COURT OF BOMBAY AT GOA

Appeal Under Arbitration Act No. 8 of 2016

Decided On: 10.04.2018

Titagarh Wagons Limited Vs. Chowgule and Company Private Limited

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What are basic principles for grant of compensation S 74 of contract Act?

 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 stated. Similarly, in cases where the amount fixed

is in the nature of penalty, 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.

2. Reasonable compensation will be fixed on well 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 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.

5. The sum spoken of may already be paid or be payable in

future.

6. 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.

7. 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.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 193 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012]

M/s. Kailash Nath Associates  V  Delhi Development Authority & Anr.  

Dated:January 09, 2015.

Citation:AIR 2015 SC(Supp)780

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Whether S 74 of contract Act is applicable when contract has been broken?

It must, however, be pointed out that in cases where a public

auction is held, forfeiture of earnest money may take place even

before an agreement is reached, as DDA 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) 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”.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 193 OF 2015

M/s. Kailash Nath Associates V Delhi Development Authority & Anr. .

Dated:January 09, 2015.

Citation:AIR 2015 SC(Supp)780

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Whether earnest amount can be forfeited when there is no loss or damage to seller?

If damage or loss is not suffered, the law does not provide for a windfall.

 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:- 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 stated. Similarly, in cases where the amount fixed is in the nature of penalty, 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.

Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

Since Section 74 awards reasonable 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.

The Section applies whether a person is a plaintiff or a defendant in a suit.

The sum spoken of may already be paid or be payable in future.

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.

Supreme Court of India

M/S. Kailash Nath Associates vs Delhi Development Authority & Anr on 9 January, 2015

Bench: Ranjan Gogoi, Rohinton Fali Nariman

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