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CIVIL APPEAL NO. 193 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012] M/s. Kailash Nath Associates …Appellant Versus Delhi Development Authority & Anr. …Respondents

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
…Appellant
Versus
Delhi Development Authority & Anr.
…Respondents

J U D G M E N T

R.F. Nariman, J.

Leave granted.

2. The present appeal arises out of a public auction conducted by the
Delhi Development Authority (“DDA”) wherein 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 Eight Lakhs), being 25%
of the bid amount, with the DDA, 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 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” in favour of the Delhi
Development Authority. If the earnest money is not paid, the auction held
in respect of that plot will be cancelled.

(iii) The highest bid shall be subject to the acceptance of Vice-Chairman,
DDA or such other officer(s) as may be authorized by him on his behalf. The
highest bid may be rejected without assigning any reason.

(iv) In case of default, breach or non-compliance of any of the terms and
conditions of the auction or mis -representation by the bidder and/or
intending purchaser, the earnest money shall be forfeited.

(v) The successful bidder shall submit a duly filled-in application in the
form attached immediately after the close of the auction of plot in
question.

(vi) When the bid is accepted by the DDA, the intending purchaser shall be
informed of such acceptance in writing and the intending purchaser shall,
within 3 months thereof, pay to the Delhi Development Authority, the
balance 75% amount of the bid, in cash or by Bank Draft in favour of the
Delhi Development Authority or by Cheque guaranteed by a Scheduled Bank as
“good for payment for three months” in favour of the Delhi Development
Authority. If the bid is not accepted, the earnest money will be refunded
to the intending purchaser without any interest unless the earnest money is
forfeited under para 2 (iv) above.”
3. On 18.2.1982, the DDA acknowledged the receipt of Rs.78,00,000/-
(Rupees Seventy Eight Lakhs), accepted the 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 DDA set up a High Powered
Committee to look into these representations. The High Powered Committee
on 21.7.1982 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 DDA extended time for
payment upto 28.10.1982 with varying rates of interest starting from 18%
and going upto 36%.

4. Another High Powered Committee was also set up by the DDA 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 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 DDA accepted the recommendations of the
second High Powered Committee, nothing happened till 1.12.1987. Several
letters had been written by the appellant to DDA from 1984 to 1987 but no
answer was forthcoming by the DDA.

6. Vide a letter dated 1.12.1987, which is an important letter on the
basis of which the fate of this appeal largely depends, the DDA stated as
follows:
“WITHOUT PREJUDICE’
DELHI DEVELOPMENT AUTHORITY
VIKAS SADAN
I.N.A.

New Delhi-23……198… .

No.F.32(2)/82/Impl.-I/4

From: DIRECTOR (C.L)

DELHI DEVELOPMENT AUTHORITY

To,

M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
18, Bara Khamba Road,
New Delhi-110001.

Sub: Regarding payment of balance premium in respect
of Plot No.2-A situated in Bhikaji Cama Place
Distt. Centre.

Sir,

With reference to the above subject, I am directed to inform 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 Development, you are
requested to give your consent for making payment of balance amount of 75%
premium within the period as may be fixed alongwith 18% interest charges
p.a. on the belated payment. Further the schedule of payment and conditions
if any will be as per the directions issued by the Ministry of Urban
Development, Govt. of India. It is, however, made clear that this letter
does not carry any commitment.

Your consent should reach to this office within 3 days from the date of
issue of this letter.

Dated 1.12.87
Yours faithfully,

Sd/
DIRECTOR (C.L)”

7. The appellant replied to the said letter on the same day itself in
the following terms:
“KAILASH NATH & ASSOCIATES

Tel.: 3312648, 3314269
1006, KANCHENJUNGA,
18, BARAKHAMBA ROAD,
NEW DELHI-II0001

Regd. Ack. Due.
December 1, 1987.

The Director (C.L.),
Delhi Development Authority,
Vikas Sadan, I.N.A.,
New Delhi-l 10023.

Subject: Payment of balance premium in respect of plot No.2-A Bhikaji
Cama Place Distt. Centre, New Delhi.

Dear Sir,

We are thankful to you for your letter No. F.30(2)/82-Impl.- I/4 dated nil
received by us this afternoon, on the above subject.

We hereby give our consent that we shall make the payment of the balance
amount of 75% premium within the 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.

We now request you to kindly convey us your formal approval to our making
the said payment in installments as requested for.

Thanking you,

Yours faithfully
For KAILASH NATH & ASSOCIATES,
Sd/
Partner

Advance copy sent through Special Messenger.”
8. The Central Government informed the DDA 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 filed Writ Petition No.2395 of 1990 in the Delhi
High Court in which it claimed that persons similar to the appellant,
namely, M/s. 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. 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 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 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:-
“REGD.A.D.

DELHI DEVELOPMENT AUTHORITY
VIKAS SADAN
I.N.A.

New Delhi-23, 6.10.1993

No.F.32(2)/82/CL/3816

From: DY. DIRECTOR (CL).

To,

M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
18, Bara Khamba Road,
New Delhi-l10001.

Subject: Plot No.2-A in Bhikaji Cama Place Distt. Centre.

Sir,

Consequent upon your failure to deposit the balance 75% premium of the
aforesaid plot and dismissal of C.W.P. No. 2395 of 1990 by the Hon’ble High
Court, Delhi, I am directed to inform you that the bid/ allotment of the
said plot in your favour has been cancelled and earnest money amounting to
Rs.78,00,000/- deposited by you at the time of auction has been forfeited.

Yours faithfully,
Sd/
(JAGDISH CHANDER)
DEPUTY 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 23.2.1994, the DDA 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 dated 10.9.2007
dismissed the appellant’s suit for specific performance and damages but
ordered refund of the earnest money forfeited together with 9% per annum
interest. The learned Single Judge held:-
“65. Defendant No.1 instead of following the aforesaid course, found merit
in the 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 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, 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 and 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 made its recommendations which were accepted by defendant
no.1 vide its resolution dated 14.5.1984 (Ex. DW2/P-4). Having accepted
the recommendations, in the case of the plaintiff defendant no.1 was
required to do nothing further but mistakenly referred the case to UOI for
its approval assuming the case to be one of Nazul land. Plaintiff sent
repeated reminders vide letters dated 9-12-1985 (Ex.P-11), 20-10-1986 (Ex.P-
12), 10-12-1986(Ex.P-13), 10-02-1987 (Ex.P-14), 11-04-1987(Ex.P-16), 10-08-
1987(Ex.P-17) and 10-10-1987 (Ex.P-18) calling upon defendant no.1 to give
an offer of deposit of balance 25% of the premium so as to bring the total
payment equivalent to 50% of the total premium and for release of the
possession of the land to the plaintiff for purpose of construction.
Defendant no.1 vide its letter received on 1.12.1987 by the plaintiff (Ex.P-
19) sought the consent of the plaintiff to abide by the recommendations of
the high-powered committee and the consent was duly given on the even date
(Ex.P-20). Thereafter no offer was made to the plaintiff and without any
notice of compliance for payment, the letter of cancellation dated
6.10.1993 (Ex.P-26) was issued. It 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 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 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 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.”

12. DDA 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 DDA
was in order.

13. Shri Paras Kuhad, learned Senior Advocate appearing on behalf of the
appellant, urged that time may have been 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 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 DDA sold the plot for 11.78 Crores (Rupees Eleven Crores Seventy
Eight Lakhs), there was no loss caused to the DDA and, hence 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 DDA, rebutted these contentions and added that the case was covered by
the judgment in Shree 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 contract and the forfeiture
of earnest money are completely in order as the appellant was in breach.
The fact that the DDA ultimately sold the plot for a much larger sum,
according to learned counsel, would be irrelevant inasmuch as the
contractual term agreed upon between parties would entitle him to forfeit
earnest money on breach without any necessity of proving actual loss.
15. Having heard learned counsel for the parties, it is important at the
very outset to notice that earnest money can be forfeited under sub-clause
(iv) set out hereinabove, only in the case of default, breach, or non-
compliance of any of the terms and conditions of the auction, or on
misrepresentation by the bidder. It may be noted that the balance 75% which
had to be paid within three months of the acceptance of the bid, was not
insisted upon by the DDA. On the contrary, after setting up two High
Powered Committees which were instructed to look into the grievances of the
appellant, the DDA extended time at least twice. It is, therefore, very
difficult to say that there was a breach of any terms and conditions of the
auction, as the period of three months which the DDA could have insisted
upon had specifically been waived. It is nobody’s case that there is any
misrepresentation here by the bidder. Therefore, under sub-clause (iv),
without more, earnest money could not have been forfeited.

16. The other noticeable feature of this case on facts is that DDA
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 reason why the letter is marked “without
prejudice” and the DDA 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 DDA. If, however, the Central Government was willing to condone the
delay, DDA 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 Section 20 of the Contract Act. We are
afraid we are not able to accept this plea. Long after the Central
Government informed DDA (on 1.3.1990) that the property involved in the
present case is not Nazul land, the DDA 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 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 that 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 DDA 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, DDA could not be heard to say that despite this having been
done, DDA 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 DDA is a public authority bound by Article
14 and cannot behave arbitrarily.

18. It now remains to deal with the impugned judgment of the Division
Bench.

19. The Division Bench followed the judgment of Tilley v. Thomas, (1867 3
Ch.A 61) and distinguished the judgment in Webb v. Hughes, V.C.M. 1870. It
further went on to follow Anandram Mangturam v. Bholaram Tanumal, ILR 1946
Bom 218 and held:
“The decision holds that the principle of law is that where, by agreement,
time is made of the essence of the contract, it cannot be waived by a
unilateral act of a party and unless there is consensus ad-idem between the
parties and a new date is agreed to, merely because a party to a contract
agrees to consider time being extended for the opposite party to complete
the contract, but ultimately refuses to accord concurrence would not mean
that the party has by conduct waived the date originally agreed as being of
the essence of the contract.” (At para 32)

20. In our judgment, Webb’s case would directly apply to the facts here.
In that case, it was held:
“But if time be made the essence of the contract, that may be waived by
the conduct of the purchaser; and if the time is once 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 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.”

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.
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 Bom 218, two
separate judgments were delivered, one 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 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 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 cannot effect
delivery from our suppliers and until we do so we cannot deliver the goods
to you”. There was never in my judgment 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 of the 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 promisee is given the option
to avoid the contract where the promisor fails to perform the contract at
the time fixed in the contract. It is open to the promisee not to exercise
the option or to exercise the option at any time, but it is clear to my
mind that the promisee cannot by the mere fact of not exercising the option
change or alter the date of performance fixed under the contract itself.
Under 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 he may extend the time for such performance. But it is
clear again that such an extension of time cannot be a unilateral extension
on the part of the promisee. It is only at the request of the promisor that
the promisee may agree to extend the time of performance and thereby bring
about an agreement for extension of time. Therefore it is only as a result
of the operation of 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)
24. The aforesaid judgment would apply in a situation where a promisee
accedes to the request of the promisor 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:-
“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 may
be agreed upon by the parties has been the subject-matter of some argument
at the Bar in the present appeal. There can be no doubt, we think, that
both the buyer and the seller must agree to extend time for the delivery of
goods. It would not be open to the promisee by his unilateral act to extend
the time for performance of his own accord for his own benefit.”

25. However, such is not the position here. In the present case, the
appellant is the promisor and DDA is the promisee. In such a situation,
DDA can certainly unilaterally extend the time 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:
“50. Under Section 63, unlike Section 62, a promisee can act unilaterally
and may

(i) dispense with wholly or in part, or

(ii) remit wholly or in part,

the performance of the promise made to him, or
(iii) may extend the time for such performance, or

(iv) may accept instead of it any satisfaction which he thinks fit.”
26. Similarly in S. Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764 the
Supreme Court held:
“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 Lallubhai Patel v. Lalbhai
Trikumlal Mills Ltd., 1959 SCR 213 : AIR 1958 SC 512, para 8. See also in
this connection Saraswathamma v. H. Sharad Shrikhande, AIR 2005 Kant 292
and K. Venkoji Rao v. M. Abdul Khuddur Kureshi, AIR 1991 Kant 119,
following the judgment in Keshavlal Lallubhai Patel (supra).] Thus, in this
case there was a variation in the date of performance by express
representation by the defendants, agreed to by the act of forbearance on
the part of the plaintiffs. What was originally covered by the first part
of Article 54, now fell within the purview of the second part of the
article. Pazhaniappa Chettiyar v. South Indian Planting and Industrial Co.
Ltd. [AIR 1953 Trav Co 161] was a similar instance where the contract when
initially made had a date fixed for the performance of the contract but the
Court was of the view that “in the events that 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 contract,
therefore, became one in 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)
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. Daver v. Lodge Victoria 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 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 fair-
play in a modern society, alone then can the action be 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 VST Industries Ltd. [(2001) 1
SCC 298 : 2001 SCC (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 SCC (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
considering such argument, this Court held that when an authority has to
perform a public function or a public duty, if there is a failure a writ
petition under Article 226 of the Constitution is maintainable. In the
instant case, as to the fact that the respondent is an instrumentality of a
State, there is no dispute but the question is: was the first respondent
discharging a public duty or a public function while repudiating the claim
of the appellants arising out of a contract? Answer to this question, in
our opinion, is 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 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 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.”

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 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 writ court can issue suitable directions to set right the
arbitrary actions of the first respondent.”
29. Based on the facts of this case, it would be arbitrary for the DDA to
forfeit the earnest money on two fundamental grounds. First, there is no
breach of contract on the part of the appellant as has been held above. And
second, DDA not having been put to any loss, even if DDA could insist on a
contractual stipulation in its favour, it would be arbitrary to allow DDA
as a public authority to appropriate Rs.78,00,000/- (Rupees Seventy Eight
Lakhs) without any loss being caused. It is clear, therefore, that Article
14 would apply in the field of contract in this case and the finding of the
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:
“38. The learned Single Judge has held that the property was ultimately
auctioned in the year 1994 at a price which fetched DDA a handsome return
of Rupees 11.78 crores and there being no damages suffered by DDA, it could
not forfeit the earnest money.

39. The said view runs in the teeth of the decision of the Supreme Court
reported as AIR 1970 SC 1986 Shree Hanuman Cotton Mills & Anr. V. Tata
Aircraft Ltd. which holds that as against an amount tendered by way of
security, amount tendered as earnest money could be forfeited as per terms
of the contract.

40. We may additionally observe that original time to pay the balance bid
consideration, as per Ex.P-I was May 18, 1982 and as extended by Ex. P-8
was October 28, 1982. That DDA could auction the plot in the year 1994 in
the sum of 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 breach, the party complaining of the
breach is entitled, whether or not actual damage or loss is proved to have
been caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named.”

32. By an amendment made in 1899, the Section was amended to read:
“74. Compensation for breach of contract where penalty stipulated for.-
When a contract has been broken, if a sum is named in the contract as the
amount to be paid in case of such breach, or if the contract contains any
other stipulation by way of penalty, the party complaining of the breach is
entitled, whether or not actual damage or loss is proved to have been
caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case
may be, the penalty stipulated for.

Explanation.-A stipulation for increased interest from the date of default
may be a stipulation by way of penalty.

Exception.-When any person enters into any bail-bond, 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.

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.”

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 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 contract under Section 74 only
where damage or loss is caused by such breach.

34. In Fateh Chand v. Balkishan Das, 1964 SCR (1) 515, 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 and stipulations
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.”(At page 530)
35. Similarly, in Maula Bux v. Union of India (UOI), 1970 (1) SCR 928, it
was held:
“Forfeiture of earnest money under a contract for sale of property-
movable or immovable-if the amount is reasonable, does not fall within
Section 74. That has been decided in several cases :Kunwar Chiranjit Singh
v. Har Swarup, A.I.R.1926 P.C.1; Roshan Lal v. The Delhi Cloth and General
Mills Company Ltd., Delhi, I.L.R. All.166; Muhammad Habibullah v. Muhammad
Shafi, I.L.R. All. 324; Bishan Chand v. Radha Kishan Das, I.D. 19 All. 49.
These cases are easily explained, for forfeiture of a reasonable amount
paid as earnest money does not amount to imposing a penalty. But if
forfeiture is of the nature of penalty, Section 74 applies. Where under the
terms of the contract the party in breach has undertaken to pay a sum of
money or to forfeit a sum of money which he has already paid to the party
complaining of a breach of contract, the undertaking is of the nature of a
penalty.
Counsel for the Union, however, urged that in the present case Rs. 10,000/-
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 suffer as a result of breach of contract, and the plaintiff was not
entitled to any relief against forfeiture. Reliance in support of this
contention was placed upon the expression (used in Section 74 of the
Contract Act), “the party complaining of the breach is entitled, whether or
not actual damage or loss is proved to have been caused 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 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” 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
established rules. Where the Court is unable to assess the compensation,
the sum named by the parties if it be regarded as a genuine pre-estimate
may be taken into consideration as the measure of reasonable compensation,
but not if the sum named is in the nature of a penalty. Where loss in terms
of money can be determined, the party claiming compensation must prove the
loss suffered by him.
In the present case, it was possible for the Government of India to lead
evidence to prove the rates at which potatoes, poultry, eggs and fish were
purchased by them when the plaintiff failed to deliver “regularly and
fully” the quantities stipulated under the terms of the contracts and after
the contracts were terminated. They could have proved the rates at which
they had to be purchased and also the other incidental charges incurred by
them in procuring the goods contracted for. But no such attempt was
made.”(At page 933,934)
36. In Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Limited, 1970
(3) SCR 127 it was held:
“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 is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in
other words, ‘earnest’ is given to bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the
default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract,
on default committed by the buyer, the seller is entitled to forfeit the
earnest” (At page 139)
“The learned Attorney General very strongly urged that the pleas covered by
the second contention of the appellant had never been raised in the
pleadings nor in the contentions urged before the High Court. The question
of the quantum of earnest deposit which was forfeited being unreasonable or
the forfeiture being by way of penalty, were never raised by the
appellants. The Attorney General also pointed out that as noted by the High
Court the appellants led no evidence at all and, after abandoning the
various pleas taken in the plaint, the only question pressed before the
High Court was that the deposit was not by way of earnest and hence the
amount could not be forfeited. Unless the appellants had pleaded and
established that there was unreasonableness attached to the amount required
to be deposited under the contract 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.
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 SCC 705, it was
held:

“64. It is apparent from the aforesaid reasoning recorded by the Arbitral
Tribunal that it failed to consider Sections 73 and 74 of the Indian
Contract Act and the ratio laid 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,
thereby to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named. Section 74 emphasizes that
in case of breach of contract, the party complaining of the breach is
entitled to receive reasonable compensation whether or not actual loss is
proved to have been caused by such breach. Therefore, the emphasis is on
reasonable compensation. If the compensation named in the contract is by
way of penalty, consideration would be different and the party is only
entitled to reasonable compensation for the loss suffered. But if the
compensation named in the contract for such breach is genuine pre-estimate
of loss which the parties knew when they made the contract to be likely to
result from the breach of it, there is no question of proving such loss or
such party is not required to lead evidence to prove actual loss suffered
by him.

67……..In our view, in such a contract, it would be difficult to prove
exact loss or damage which the parties suffer because of the breach
thereof. In such a situation, if the parties have pre-estimated such loss
after clear 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
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 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 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 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 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/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.
(3) Section 74 is to be read along with Section 73 and, therefore, in every
case of breach of contract, the person aggrieved by the breach is not
required to prove actual loss or damage suffered by him before he can claim
a decree. The court is competent to award reasonable compensation in case
of breach even if no actual damage is proved to have been suffered in
consequence of the breach of a contract.
(4) In some contracts, it would be impossible for the court to assess the
compensation arising from breach and if 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).

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
sustained by them. (See: 1970 (3) SCR 127 at Page 132). This being the
fact situation, only two questions were argued before the Supreme Court:
(1) that the amount paid by the plaintiff is not earnest money and (2) that
forfeiture of earnest money can be legal only if the amount is considered
reasonable. (at page 133). Both questions were answered against the
appellant. In deciding question two against the appellant, this Court held:-

“But, as we have already mentioned, we do not propose to go into those
aspects in the case on hand. As mentioned earlier, the appellants never
raised any contention that the forfeiture of the amount amounted to 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 Maula Bux’s [1970]1SCR928 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 consideration, were paid as earnest money. It is under
those circumstances that this Court proceeded to consider the applicability
of Section 74 of the Contract Act. (At page 143)”
40. From the above, it is clear that this Court held that 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 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 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 therefore be correct to say that as earnest money
is an amount to be paid in case of breach of contract and named in the
contract as such, it would necessarily be covered by Section 74.

41. It must, however, be pointed out that in cases where a 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”.

42. In the present case, forfeiture of earnest money took place long
after an agreement had been reached. It is obvious that the amount sought
to be forfeited on the facts of the present case is sought to be forfeited
without any loss being shown. In fact it has been shown that far from
suffering any loss, DDA has received a much higher amount on re-auction of
the same plot of land.

43. On a conspectus of the above authorities, the law on compensation for
breach of contract under Section 74 can be stated to be as follows:-
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.

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 DDA
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. 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 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 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 DDA having
chosen to fight the present appellant tooth and 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 order of the
Single Judge is restored. Parties will bear their own costs.

……………………..J.
(Ranjan Gogoi)

……………………..J.
(R.F. Nariman)
New Delhi;
January 09, 2015.

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