M/S Kailash Nath Associates v. Delhi Development Authority & Anr.

A B ## [2015] 1 S.C.R. 627 ## M/S. KAILASH NATH ASSOCIATES _v._ DELHI DEVELOPMENT AUTHORITY & ANR. (Civil Appeal No. 193 of 2015) JANUARY 09, 2015 ## **[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 reauction 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. 7 _4_ - _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 A 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; 651H; 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 - 0[received a much ][higher ][amount on re-auction ][of ][the same ] 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 F G H 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. ## 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 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] [664D-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, V.C.M._ 1870 - referred to. E ## Case Law Reference: F G H |_Tilley_(1867 3<br>_V.C.M._1870 - referred to.<br>Case|(1867 361);<br>referred to.<br>LawReference:|_Hughes,_| |---|---|---| |1970(3)SCR127|Referredto|Para14| |ILR1946Born218|Referredto|Para19| |1959SCR213|Referredto|Para24| |2003 (4)Suppl. SCR489Referredto||Para25| |2005 (4)Suppl. SCR461Referredto||Para26| |1964(1)SCR1|Referredto|Para28| |(2004) 3sec553|Referredto|Para28| |1964SCR(1)515|Referredto|Para33| |1970 (1)SCR928|Referredto|Para35| 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 SUPREME COURT REPORTS [2015] 1 S.C.R. 634 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. B (iii) The highest bid shall be subject to the acceptance of Vice-Chairman, DOA or such other officer(s) as may be authorized by him on his behalf. The highest bid may be rejected without assigning any reason. c (iv) In case of default, breach or non-compliance of any of the terms and conditions of the auction or mis - representation by the bidder and/or intending purchaser, the earnest money shall be forfeited. D > (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. E F (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% amount of the bid, in cash or by Bank Draft in favour of the Delhi Development Authority or by Cheque guaranteed by a Scheduled Bank as "good for payment for three months" in favour of the Delhi Development Authority. If the bid is not accepted, the earnest money will be refunded to the intending purchaser without any interest unless the earnest money is forfeited under para 2 (iv) 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 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. E Your consent should reach to this office within 3 days from the date of issue of this letter. Dated 1.12.87 F Yours faithfully, Sd/ DIRECTOR (C.L)" 7. The appellant replied to the said letter on the same day. itself in the following terms: "KAILASH NA TH & 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 plot No.2-A Bhikaji Gama Place Distt. Centre, New Delhi. B Dear Sir, We are thankful to you for your letter No. F.30(2)/82-lmpl.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 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 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 G 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 SUPREME COURT REPORTS [2015) 1 S.C.R. 640 A B c D E F G H _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 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 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_ · _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 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 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 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_ ## 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), 10-121986(Ex.P-13), 10-02-1987 (Ex.P-14), 11-04-1987(Ex.P16), 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 SUPREME COURT REPORTS [2015] 1 S.C.R. 642 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 subclause (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 SUPREME COURT REPORTS [2015] 1 S.C.R. 644 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."_ D 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 of contract on the part of the appellant and consequently earnest money cannot be forfeited. F 22. _Tilley v. Thomas,_ (1867 3 Ch.A 61) would not apply for the reason that the expression "without prejudice" was only 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 ## 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 _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 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)_ A B c 24. The aforesaid judgment would apply in a situation 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 subjectmatter 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."_ F 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 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_ c _(iv) may accept instead of it any satisfaction which he thinks fit."_ 26. Similarly in S. _Brahmanand v. K.R. Muthugopa/,_ (2005) 12 SCC 764 the Supreme Court held: D E F G H _"34. Thus, this_ was _a situation where the original 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 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 performance of the contract. Such an agreement to extend time need not necessarily be reduced to writing, but may be proved by oral evidence or, in_ some cases, _even by evidence of conduct including forbearance on the part of the other party. [See in this connection the observations of this Court in Keshavlal 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 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)_ D 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 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 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_ F G H SUPREME COURT REPORTS [2015] 1 S.C.R. 650 A B c D E F G H _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 guides that where_ a _private affair i.e._ a _contract is so perverted by_ a _party that it offends the concept of_ a _fairplay 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 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 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 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 filed was not_ a _State or an instrumentality of_ a _State_ as _contemplated under Article 12 of the Constitution, hence, in the normal course, no writ could have been issued against the said industry. But it was the contention of the writ petitioner in that case that the said industry was obligated under the statute concerned to perform certain public functions; failure to do so would give rise to_ a _complaint under Article 226 against_ a _private body. While 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_ 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"_ F 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 D _"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 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._ F G _40. We may additionally observe that original time to pay the balance bid consideration, as per Ex.P-1 was May 18, 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 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 been caused thereby, to receive from the party who has broken the contract_ reasona~ble _compensation not exceeding the amount so named."_ A 32. By an amendment made in .1899, the Section was amended to read: 8 _"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._ D _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, 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 liable, upon breach of any condition of any such instrument, to pay the whole sum mentioned therein._ E F _Explanation.-A person who enters into_ a _contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested."_ G 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 75 654 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 D E F _"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 /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 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._ G H _Section_ 7 _4 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_ 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_ E _which the parties knew when they made the contract, to be likely to result from the breach. "(At page 526, 527)_ B c E _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 F G 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 E F G _"Forfeiture of earnest money under a contract for sale of property-movable or immovabfe··if the amount_ is _reasonable, does not fall within Section_ 7 _4. That has been decided in several cases ·Kunwar Chiranjit Singh v. Har Swarup,_ A _I. R. 1926 PC 1, Roshan Lal v. The Delhi 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. forfeiture_ is _of the nature of penalty. Section_ 7 _4 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 of the nature of a penalty._ H _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 pre-estimates of damages which the Union was likely to_ _.1:_ ## 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_ 7 _4 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 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_ F _of_ a _penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him._ F _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 G 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)_ 8 36. In _Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Limited,_ 1970 (3) SCR 127 it was held: _"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 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 deposit was not by way of earnest and hence the amount_ G H ## KAILASH NATH ASSOCIATES _v._ DELHI DEVELOPMENT 659 AUTHORITY [R.F. NARIMAN, J.] _could not be forfeited. Unless the appellants had pleaded and established that there was unreasonableness attached to the amount required to be deposited under the contract 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 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._ A B 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 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 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 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)_ 37. And finally in _ONGC Ltd. v. Saw Pipes Ltd.,_ (2003) 5 sec 705, it was held: D E F G _"64. Jt is apparent from the aforesaid reasoning recorded by the Arbitral Tribunal that it failed to consider Sections 73 and_ 7 _4 of the Indian Contract Act and the ratio laid_ H SUPREME COURT REPORTS (2015) 1 S.C.R. 660 c A B D E F G H _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 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 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 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 reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him._ _67 ........ In our view, in such_ a _contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach thereof In 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_ 7 _4_ 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._ c _(4) In_ some _contracts, it would be impossible for the court to_ assess _the compensation arising from breach and if 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."_ 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). D 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:- H _"But,_ as _we have already mentioned, we do not propose to go into those aspects in the case on hand._ As _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_ 7 _4 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. F G 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. 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 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. G 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.