On the second question, i.e whether the defendant was entitled to
forfeit the amount of ` 1 crore, the single judge analyzed the terms of the
agreement (Ex. PW-1/2) especially Clause 2 which was the forfeiture
condition. The defendant’s argument that all the amounts paid by the
plaintiff constituted earnest money, was rejected:
“Nowhere in the agreement is it stipulated that payment made after
the execution of the agreement would also be covered by the forfeiture
clause. The Earnest Money/Part Payment of Rs. 1,01,00,000/ - as
stipulated in clause 1 would alone be liable to be forfeited.”
Thereafter, the single judge recorded the following finding:
“73. The Defendant is thus entitled to forfeit the amount of Rs.
1,01,00,000/- and is liable to refund the balance amount of Rs.
1,60,00,000/-. I have already held that the Plaintiffs have not been
able to prove the payment of Rs.5,00,000/-. Since the Plaintiffs have
been held liable for committing the breach of the contract, in my view
ends of justice would be met if the Defendant were directed to refund
the balance amount with interest only @ 8% per annum from the date
of filing of the suit.”
29. In such cases, where a party alleges that a forfeiture clause constitutes
a genuine pre-estimate of damages, two considerations have to be weighed
by the court. One, the task of scrutinizing whether the condition is in reality
one that parties envisioned to be a genuine pre-estimate of damage likely to
be suffered is to be viewed in the context of some proof of “reasonable
damage” that Section 74 of the Contract Act mandates; two, that there might
be cases where the likely damage is one which cannot be estimated with
precision, given the nature of the contract, in which event, the court might
consider if the amount stipulated was one foreseen as reasonable
compensation payable to the aggrieved party without proof of damage or
loss.
30. Kailash Nath Associates v. Delhi Development Authority (2015) 4
SCC 136 is a recent authority on the question of liquidated damages
specified in a contract. The Supreme Court considered the law in Fateh
Chand v Balkishan Dass AIR 1963 SC 1405and several other decisions, and
held as follows:
"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 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…
43. On a conspectus of the above authorities, the law on
compensation for breach of contract under Section 74 can be stated to
be as follows:
1. Where a sum is named in a contract as a liquidated amount
payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if it
is a genuine pre-estimate of damages fixed by both parties and found
to be such by the Court. In other cases, where a sum is named in a
contract as a liquidated amount payable by way of damages, only
reasonable compensation can be awarded not exceeding the amount
so 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 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."
In Fateh Chand (supra), the Supreme Court had articulated the applicable
principle as follows:
“In all cases, therefore, where there is a stipulation in the nature of
penalty for forfeiture of an amount deposited pursuant to the terms of
contract which expressly provides for forfeiture, the court has
jurisdiction to award such sum only as it considers reasonable, but
not exceeding the amount specified in the contract as liable to
forfeiture.”
31. In the present case, the defendant did not show how it was put to loss
or damage. The record clearly establishes that though the attachment order
was vacated sometime in 2007, the Bank was pursuing the matter. It is not
disputed that the pendency of the Bank’s claim in DRT and the likely cloud
on the property was never pointed out to the plaintiff. What is more, the
defendant did not even reveal that an attachment order was issued in 2009.
The plaintiff virtually stumbled upon that fact, as it were. It is doubtful
whether the defendant would have been able to convey title for the amount
agreed, either to the plaintiff or to anyone else, had the reality been
disclosed. Having regard to this conduct, even though the plaintiff is held
disentitled to a decree for specific performance, this court holds that the
defendant cannot claim “reasonable compensation”. Besides, no evidence of
any kind to show that he was put to loss was led. As a result, it is held that
the forfeiture of the amount of `One crore was not justified. Although the
plaintiff sought refund repeatedly his conduct in insisting that the contract
was nevertheless enforceable and the sale deed had to be executed to some
extent disentitles him to interest from October, 2008. However, the record is
clear that from May, 2009 (after he filed a police complaint seeking refund)
he did not intend to go through with the contract; this court has also
recorded that he did not prove his readiness and willingness. In these
circumstances, in the interests of justice, it would be appropriate to direct the
defendant to refund the sum of `One crore to the plaintiff and also pay 9%
interest on that amount, with effect from the date of filing of the suit, till
date of payment.
